electronic arts strategic positioning
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Electronic Arts Strategic Position Analysis
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EA Leadership
Frank Gibeau President, EA Labels
In 2011, Frank Gibeau was appointed President of EA Labels where he leads the transformation of the company into a digital entertainment powerhouse by bringing world-class properties to all gaming platforms – Console, PC, Mobile and Social. He is responsible for product development, worldwide product management and marketing for all packaged goods and online offerings within the four EA Labels; EA SPORTS, EA Games, the Maxis Label and the BioWare Label. Mr. Gibeau’s global operation spans a dozen studio locations with more than 5,000 employees. Mr. Gibeau comes to this role after a four-year tenure as President of the EA Games Label. During that period, Mr. Gibeau led a turn-around that greatly increased product quality and on time delivery while dramatically driving down costs.
Blake Jorgensen Chief Financial Officer
Blake Jorgensen is Chief Financial Officer of Electronic Arts, the world’s leading developer and publisher of interactive entertainment. Mr. Jorgensen joined EA in September 2012 with over 20 years of experience in finance spanning across different industries, with a deep understanding of technology, consumer products, online commerce and entertainment.
Andrew Wilson Executive Vice President, EA SPORTS
Andrew Wilson is the executive vice president of EA SPORTS, where he provides strategic leadership over one of the most recognized brands in sports and entertainment. Mr. Wilson assumed his position in August 2011 after previously leading worldwide development for EA SPORTS. With more than 11 years of experience at Electronic Arts, Mr. Wilson is responsible for strategic leadership of the brand, from product development and global marketing and planning for all packaged goods and digital services.
Gabrielle Toledano Executive Vice President and Chief Talent Officer
Gabrielle Toledano, Executive Vice President and Chief Talent Officer, Electronic Arts is responsible for EA's global staffing and resourcing, benefits and compensation, organization and leadership capability development, rewards and recognition, Facilities and Corporate Social Responsibility.
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Table of Contents
Introduction .............................................................................................................. 5
Environment Analysis .............................................................................................. 5
Industry Structure .............................................................................................. 7
Industry Performance ...................................................................................... 10
Growth ............................................................................................................. 10
Profitability ...................................................................................................... 11
International Threats/Opportunities ................................................................ 13
Company Analysis/ Report ..................................................................................... 14
Overall Strategy and Functional Identification and evaluation ....................... 14
SWOT Analysis: ..................................................................................................... 16
Balance sheets from 2009-2013: ............................................................................ 16
Assets .................................................................................................................. 16
Analysis ........................................................................................................... 26
Competitive Advantage Through Low-Cost and Differentiation ................... 28
Alternative Solutions/Strategic Responses ............................................................. 34
Recommended Solution .......................................................................................... 36
Implementation ....................................................................................................... 37
Ryan Stanford Taylor Dechant Daniella Perez Trey Blackman
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Introduction
Electronic Arts Inc. is an interactive entertainment software company that was founded in
1982 and has grown to become one of the worlds leading publishers of interactive
software for internet-connected consoles, personal computers, mobile phone, tablets, and
social networks. According to the United States Census Bureau, Electronic Arts Inc.
operates in the Software Publishers Industry (NAICS code 511210, SIC 7372).
Companies in the Software Publishers Industry are primarily engaged in computer
software publishing or publishing and reproduction. Companies in this industry carry out
operations necessary for producing and distributing computer software, such as
designing, providing documentation, assisting in installation, and providing support
services to software purchasers. These companies may design, develop, and publish, or
publish only (U.S. Census Bureau).
Environment Analysis
The industry is facing a wave of new competition as a result of new mobile platforms.
Large companies in this industry operate through economies of scale in manufacturing,
marketing, distribution, and selling while small companies have primarily relied on
gaming creativity in order to remain competitive. However, mobile platforms have
allowed for direct digital distribution, which has removed a significant financial barrier to
entry for small software gaming publishers. This rapid adoption of mobile and phone-
integrated games is part of the technological advancements that affect the software
gaming industry. Additionally, the two major gaming consoles produced by Microsoft
and Sony are being completely redesigned and set to launch late in 2013, which will
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provide an entirely new competitive landscape for video game software companies.
Consumers constantly seek new styles and versions of games, but more importantly they
want the best graphics and fluid gaming experience which stems of the rapid evolution of
the hardware systems on which the games are played (Hoovers industry description). The
popularity of this new console hardware will directly affect sales of prepackaged console
games released by software publishers to the market.
In terms of regulation, a majority of video game publishers in the United States have
agreed to support parental controls and pledged not to offer games that do not have a
rating giving by the self-regulated Entertainment and Software Rating Board (ESRB).
However, these regulations differ by country and with other countries such as Japan,
Canada, France, South Korea, and the United Kingdom being the largest producers of
video games outside of the U.S. video game companies face significant challenges in
localizing their products (Hoovers industry Description). Language translation,
conforming to local customs, cultural mores, and laws are all involved in localizing video
game products in order for them to be adopted in the targeted geographic market. Also,
while the United States has its own parental guidance governance for the industry,
companies must be aware of the differing policies from country-to-country on game
violence and sexually explicit content.
Demographics
The average age of consumers who play video games is 34 years old while the average
age of most video game purchasers is 39 years old. This statistic shows the impact that
adult consumers who do not actually play video games have on the industry. The ‘2010
Gamer Ages’ graph to the right shows the percentage of consumers who place video
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games categorized by age range. Another key demographics that impacts advertising and
consumer engagement for the industry is that 40% of all video game players are females.
Of all females who play video games, 80% own a Nintendo
Wii console, 11% own an Xbox 360 and 9% own a
PlayStation 3. Male video game console owners are more
diverse with 41% owning a Wii, 38% own an Xbox and
21% owning a PlayStation. Additionally, 67% of all households in the United States play
video games, meaning that the video game industry impacts roughly 77 million
households in the United States.
Industry Structure
Driving Forces
With the video gaming industry in a time of uncertainty and change, driving forces play a
key role in the unpredictability. Key driving forces for the industry include the
dependence on consumer’s acceptance of console platforms (Playstation and Xbox), the
impact of market share from mobile games and success of digital revenue through free-
to-play (in-app) purchases.
! Product Innovation – The next generation of Microsoft’s Xbox, now the
“Xbox 1,” has been announced at its official reveal presentation several weeks
ago. There has been some positive and negative feedback from gamers about new
aspects of the console. The issue of hand that makes this a driving force for the
video game publishers industry is that it is hard to predict how quickly consumers
will adopt new generation consoles. The popularity of video games depends
foremost of the popularity of the consoles and platforms that they are available on
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which to play. Additionally, these new console have new technology which allow
games and software to utilize new technological innovations of their own to
increase graphics and provide more fluid gameplay then was available in previous
console generations.
! Emerging platforms – The most recent and rapid trend in the industry has
been the adoption of mobile games, such as those played on phone and tablet
platforms. Consumers have steadily shown a transition of interest from console
gaming to mobile gaming over the last several years. With the introduction of new
generation consoles, popularity will depend on consumers discretionary spending
and whether they will transition back toward console gaming. Additionally, new
gaming styles are also being developed for the mobile platforms, such as the “free
to play” gaming model which allows for games to be played for free, but required
a range of small in-game purchases for the user to upgrade.
! Distribution channels – The mobile and online gaming platform allows
for digital downloads and completely cuts out the pre-packaged goods primarily
produced by software publishers in prior years. Digital download cuts down on
operation cost for publishers and minimizes risk by not having to predict the
volume of tangible video game disks to manufacture. However, this new aspect of
digital download has also made competition from smaller publishing firms much
more fierce because now they can compete directly with large publishers in the
same mobile store marketplace.
Key Success Factors
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Key success factors are particular product attributes, competitive capabilities, market
achievements and competencies that have the greatest impact on future success in the
competitive marketplace. There are several key success factors that directly affect the
gaming software publishing industry:
! Product Differentiation – With the array of digital gaming platforms
available, product differentiation has gotten a bit easier for software publishers.
Consumers want a variety of elements including high definition graphics,
increasing online capabilities, and fluidity in gameplay, which has been the
primary goal on a single platform. However, now publishers must differentiate
that strategy and programming code among an array of platforms.
! Knowledgeable Workforce – Companies in the software publishing
industry are very labor intensive. Thus, it is important that employees are
knowledgeable and efficient in order to be able to develop continually better
games. Communication is vital to the dispersion of that knowledge through
different businesses in the company in order to apply that knowledge to other
games and platforms.
! Brand Recognition – A crucial element for companies in the video game
and software-publishing industry is the importance of building a strong brand, not
simply as a publisher but converting most popular product lines into individual
recognizable brands. Consumers are not looking for publisher branded games
when browsing store shelves but rather the most popular brands that are
distributed by publishers. Madden NFL, Need For Speed, and Sims are among the
most popular product brands published under the Electronic Arts umbrella.
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! Adaptability – Technology is one of the fastest moving facets of innovation.
Game developers and publishers have been forced on an annual cycle in order to
keep up with competition and the frequent change of technology. In order to
adhere to this cycle, which is now expected by consumers, video game and
software publishing companies must be able to adapt to the ever-changing
industry environment. The key adaptability point is to publish games and software
compatible on the devices to which consumers have gravitated. Current trends
show consumers favoring mobile games more then console game, leaving many
large publishers having to scramble to adjust strategy.
! Strategic Group Map
Industry Performance
Growth
According to research done by Hoovers, companies in the entertainment and game
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software industry globally have combined annual revenues of about $50 billion and with
the rapid adoption of new gaming platforms, industry sales are expected to increase to
$70 billion by 2017 (Hoovers Industry Description). Currently, the United States alone
accounts for one-fifth ($10 billion) of global video game sales.
Entertainment and games software industry growth is expected to be in the middle 50
percent of industries in terms of growth over the next 12 to 24 months. This is due to the
fact that demand for these products are driven my personal income, discretionary
spending, and gamer demographics. The biggest risk affecting this industry is how
economic health and consumer behavior will have an effect on the shift of new console
platforms in comparison to the increased popularity of mobile platforms that offer free-
to-play games. However, some indicators of rising growth in the industry include a 2.5
percent rise in US personal income in March 2013, which drives consumer spending for
luxury items like entertainment software, compared to the same month in 2012. Also,
total US revenue for software publishers rose 21.4 percent in the fourth quarter of 2012
compared to the previous quarter.
Profitability
Early in the establishment of the industry, software and games were very profitable due
to the consumer interest in the new products and industry. Games were very basic and did
not require extensive programming and thus demanded less labor-intensive strategies
(think Pac-Man). This climate is what allowed many early game publishers to flourish.
However, as the industry has evolved, gamers expect to be subjected to new technologies
that continually improve the gaming experience. In order to provide these increased
graphics and complexities publishers began involving more development operations in-
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house to gain control of the end product. These operations consisted of larger personnel
staffs, larger development teams, larger budgets, and longer development periods, which
raised production costs and has made profitability an increasing challenge among some
companies in the industry. However, the introduction of digital download on mobile
platforms and online computer games has lowered the production cost that is related with
the physical distribution of prepackaged games and is increasing profitability in the
industry for firms of all sizes. Through sales of popular games such as Call of Duty:
Black Ops, which brought in $650 million in the first 5 days after release, the industry
still has a significant impact on the economy.
Capital Intensity
The nature of software development requires creativity and knowledge of how to
transform that creativity into a software code, making companies in the Software
Publishers Industry primarily labor-intensive rather then capital-intensive. Capital
required in order for a company to produce a video game primarily includes design and
development studios. Software publishers are often responsible for conducting their own
market research to determine the appropriate inventory to produce for product releases,
which is also more labor intensive.
Since the Software Publishing Industry is labor-intensive, there is a significantly higher
level of labor compared to the capital investment. The costs that go into a labor-intensive
industry include employee wages, salaries, and benefits, recruitment and training. Many
minds go into the development and production of a single video game and each
[successful] company in the Software Publishers Industry has several hundred to several
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thousand employees. To demonstrate the proportion of capital versus labor, Electronic
Arts has 9,200 employees spread across 24 global locations – which boils down to an
average of 383 employees per location.
Competitive Analysis: Porter’s Five Forces Model of Competition
EA Games directly competes with several different competitors including: console
manufacturers, Sony, Microsoft, and Nintendo, twenty other independent game
developers such as Activision, Sega, Atari, Square Enix, Take Two Interactive, and THQ,
media giants such as Disney, Fox, Viacom, online entities such as Yahoo!, Popcap, MSN,
and Real Networks, Massively Multiplayer Online Games producers such as NCsoft and
Blizzard Entertainment, and cell phone game producers including Gameloft, Infospace,
Mforma, Sorrent, and Verisign
Competition intensifies among these firms because many employ new ideas to appeal to
different segments and boost market standing in these areas, there are zero to low
switching costs, the diversity of competitors from around the globe drives new creative
gaming, and the number of competitors that are equal in size and capability to EA has
increased. Rivalry among these firms is weakened because the market is fast-growing, the
number of firms is great thus diminishing the effect of strong competitive moves, and the
product-lines are highly differentiated and appeal to a variety of diverse segments.
International Threats/Opportunities
This industry is highly dependent on the success and timely release of new video game
platforms. EA derives more than half of their revenue from the sale of consoles for play
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on video game platforms manufactured by third parties. If and when these platforms
developed by third parties are not released on time internationally, revenue will suffer.
EA depends on companies like Sony and Microsoft all too much.
International legislation is continually being introduced that may affect both content of
products and distribution. For example privacy laws in the US and Europe imposes
various restrictions on the company websites. There are laws regulating packaging and
content distribution as well. Any of these factors can harm business by limiting products
that EA can offer by requiring differentiation between products which can be costly.
International net revenue is always subject to currency fluctuations. Since most
international sales deal in local currencies, it may fluctuate against the US dollar.
Company Analysis/ Report
Overall Strategy and Functional Identification and evaluation
Electronic Arts vowed to become known for innovation rather than iteration. They
establish this by a broad differentiation strategy for implementation in the video game
software industry. EA gains its competitive advantage by increasing sales and profit
through innovative technologies, actions and content that players control through their
experience which make the game fun and addicting, platform availability, partnership and
co-publishing, and marketing and distribution decisions. Developers of EA sports are
able to sell their products by offering customer a variety of games.
EA has a specific strategy to differentiate their product offerings through several product
lines and four mail labels, with numerous studios falling under each one.
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! EA Games
! EA Interactive
! EA Sports
! EA maxis
! EA Bio ware
EA success comes from operating through several business segments. Some of these
include, but are not limited to, EA Games, EA sports, The Sims, and EA causal
Entertaining. EA’s functions are exceedingly diversified, and it collects noteworthy
revenues from the mobility platform. EA outperforms its main domestic competitors such
as Activision Blizzard and Take-Two Interactive.
EA Sports - This label distributes EA’s sports affiliated games. Most of these games have
contract agreements with major leagues for annual tittles. Some include
! Madden NFL -‐ Agreement with the NFL, Madden has become the most
successful American Football software tittle
! FIFA -‐ They have been around for generations and hit many times the million
units sold. Soccer is the number 1 most followed sport in world. EA has been
able to use this to its full advantage at attacking this key market.
! The Sims -‐ Due to the great success of this game, a entire new label has been
created to publishing tittles under this franchise.
EA uses a co-publishing strategy to engage with other game development companies.
These aids EA grow through more titles and revenues while simple providing service to
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these smaller partners. EA partners with competitors like Sony in Japan to help with the
distribution of EA products. EA strategically partners with NFL, NCAA, Tiger Woods
(PGA), NBA, World Cup, and NASCAR. These relationships are continuous strategies
employed by EA and have been paying off with its continuous control of the market.
SWOT Analysis:
Balance sheets from 2009-2013:
Assets
Fiscal year is April-March. All values USD millions.
2009 2010 2011 2012 2013
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Fiscal year is April-March. All values USD millions.
2009 2010 2011 2012 2013
Cash & Short Term Investments 2.52B 2B 2.34B 1.88B 1.68B
Cash Only 490M 629M 100M 31M 1.29B
Short-Term Investments 2.03B 1.37B 2.24B 1.85B 388M
Cash & Short Term Investments Growth - -20.79% 17.08% -19.55% -10.64%
Cash & ST Investments / Total Assets 53.87% 42.96% 47.42% 34.24% 33.14%
Total Accounts Receivable 118M 208M 335M 366M 312M
Accounts Receivables, Net 116M 206M 335M 366M 312M
Accounts Receivables, Gross 333M 423M 639M 618M 512M
Bad Debt/Doubtful Accounts (217M) (217M) (304M) (252M) (200M)
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Fiscal year is April-March. All values USD millions.
2009 2010 2011 2012 2013
Other Receivables 2M 2M 0 0 0
Accounts Receivable Growth - 76.27% 61.06% 9.25% -14.75%
Accounts Receivable Turnover 35.69 17.57 10.71 11.32 12.17
Inventories 217M 100M 77M 59M 42M
Finished Goods 210M 92M 69M 59M -
Work in Progress - - - - -
Raw Materials 7M 8M 8M 0 -
Progress Payments & Other 0 0 0 0 -
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Fiscal year is April-March. All values USD millions.
2009 2010 2011 2012 2013
Other Current Assets 265M 281M 283M 304M 291M
Miscellaneous Current Assets 191M 215M 194M 219M 291M
Total Current Assets 3.12B 2.59B 3.03B 2.61B 2.33B
2009 2010 2011 2012 2013
Net Property, Plant & Equipment 354M 537M 513M 568M 548M
Property, Plant & Equipment - Gross 1.04B 1.09B 1.13B 1.22B -
Buildings 143M 347M 355M 339M -
Land & Improvements 11M 65M 66M 64M -
Computer Software and Equipment 663M 480M 504M 575M -
Other Property, Plant & Equipment 188M 170M 172M 193M -
Accumulated Depreciation 681M 548M 614M 651M -
Total Investments and Advances 0 0 0 0 -
Other Long-Term Investments 0 0 0 0 -
Long-Term Note Receivable 0 0 0 0 -
Intangible Assets 1.03B 1.3B 1.25B 2.09B 1.97B
Net Goodwill 807M 1.09B 1.11B 1.72B 1.72B
Net Other Intangibles 221M 204M 144M 369M 253M
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2009 2010 2011 2012 2013
Other Assets 115M 175M 80M 185M 170M
Tangible Other Assets 68M 139M 58M 83M 170M
Total Assets 4.68B 4.65B 4.93B 5.49B 5.07B
Assets - Total - Growth - -0.68% 6.07% 11.42% -7.67%
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Liabilities & Shareholders' Equity
2009 2010 2011 2012 2013
ST Debt & Current Portion LT Debt 0 0 0 0 -
Short Term Debt 0 0 0 0 -
Current Portion of Long Term Debt 0 0 0 0 -
Accounts Payable 152M 91M 228M 215M 136M
Accounts Payable Growth - -40.13% 150.55% -5.70% -36.74%
Income Tax Payable - - - - -
Other Current Liabilities 984M 1.48B 1.77B 1.91B 1.78B
Dividends Payable - - 0 0 -
Accrued Payroll 142M 177M 232M 233M -
Miscellaneous Current Liabilities 842M 1.31B 1.54B 1.67B 1.78B
Total Current Liabilities 1.14B 1.57B 2B 2.12B 1.92B
Long-Term Debt 0 0 0 539M 559M
Long-Term Debt excl. Capitalized Leases 0 0 0 539M 559M
Non-Convertible Debt 0 0 0 0 -
Convertible Debt 0 0 0 539M -
Capitalized Lease Obligations 0 0 0 0 -
Provision for Risks & Charges - 242M 192M 189M 0
Deferred Taxes (19M) (50M) (12M) (34M) (52M)
Deferred Taxes - Credit 42M 2M 37M 8M 1M
Deferred Taxes - Debit 61M 52M 49M 42M 53M
Other Liabilities 366M 99M 134M 177M 326M
Other Liabilities (excl. Deferred Income) 366M 99M 134M 177M 326M
Deferred Income 0 0 0 0 -
Total Liabilities 1.54B 1.92B 2.36B 3.03B 2.8B
Non-Equity Reserves 0 0 0 0 -
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2009 2010 2011 2012 2013
Total Liabilities / Total Assets 33.01% 41.26% 47.97% 55.24% 55.29%
Preferred Stock (Carrying Value) 0 0 0 0 -
Redeemable Preferred Stock 0 0 0 0 -
Non-Redeemable Preferred Stock 0 0 0 0 -
Common Equity (Total) 3.13B 2.73B 2.56B 2.46B 2.27B
Common Stock Par/Carry Value 3M 3M 3M 3M 3M
Retained Earnings 800M 123M (153M) (77M) 21M
ESOP Debt Guarantee 0 0 0 0 -
Cumulative Translation Adjustment/Unrealized For. Exch. Gain (2M) 70M 95M 91M -
Unrealized Gain/Loss Marketable Securities 191M 158M 124M 82M -
Revaluation Reserves 0 0 0 0 -
Treasury Stock 0 0 0 0 -
Common Equity / Total Assets 66.99% 58.74% 52.03% 44.76% 44.71%
Total Shareholders' Equity 3.13B 2.73B 2.56B 2.46B 2.27B
Total Shareholders' Equity / Total Assets 66.99% 58.74% 52.03% 44.76% 44.71%
Accumulated Minority Interest 0 0 0 0 -
Total Equity 3.13B 2.73B 2.56B 2.46B 2.27B
Liabilities & Shareholders' Equity 4.68B 4.65B 4.93B 5.49B 5.07B
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Income Statements 2009-2013
Fiscal year is April-March. All values USD millions.
2009 2010 2011 2012 2013
Sales/Revenue 4.21B 3.65B 3.59B 4.14B 3.8B
Sales Growth - -13.25% -1.78% 15.44% -8.35%
Cost of Goods Sold (COGS) incl. D&A 2.19B 1.92B 1.56B 1.64B 1.42B
COGS excluding D&A 2B 1.73B 1.38B 1.43B 1.15B
Depreciation & Amortization Expense 189M 192M 180M 216M 264M
Depreciation 117M 123M 104M 102M -
Amortization of Intangibles 72M 69M 76M 114M -
COGS Growth - -12.17% -18.92% 5.46% -13.59%
Gross Income 2.03B 1.74B 2.03B 2.5B 2.38B
Gross Income Growth - -14.41% 17.18% 23.07% -4.92%
Gross Profit Margin - - - - 62.65%
2009 2010 2011 2012 2013
SG&A Expense 2.38B 2.28B 2.2B 2.44B 2.27B
Research & Development 1.36B 1.23B 1.15B 1.21B 1.15B
Other SG&A 1.02B 1.05B 1.05B 1.23B 1.12B
SGA Growth - -4.32% -3.42% 10.86% -7.05%
Other Operating Expense 0 0 0 0 -
Unusual Expense 539M 158M 156M 6M (10M)
EBIT after Unusual Expense (539M) (158M) (156M) (6M) 10M
Non Operating Income/Expense (9M) (14M) 37M (27M) 39M
Non-Operating Interest Income 48M 10M 8M 9M -
Equity in Affiliates (Pretax) - 0 0 0 -
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2009 2010 2011 2012 2013
Interest Expense 0 0 0 20M 21M
Interest Expense Growth - - - - 5.00%
Gross Interest Expense 0 0 0 20M 21M
Interest Capitalized 0 0 0 0 -
Pretax Income (855M) (706M) (279M) 18M 139M
Pretax Income Growth - 17.43% 60.48% 106.45% 672.22%
Pretax Margin - - - - 3.66%
Income Tax 233M (29M) (3M) (58M) 41M
Income Tax - Current Domestic (17M) (6M) (29M) 39M -
Income Tax - Current Foreign 26M 27M 23M (11M) -
Income Tax - Deferred Domestic 237M (61M) 5M (91M) -
Income Tax - Deferred Foreign (13M) 11M (2M) 5M -
Income Tax Credits 0 0 0 0 -
Equity in Affiliates 0 0 0 0 -
Other After Tax Income (Expense) 0 0 0 0 -
Consolidated Net Income (1.09B) (677M) (276M) 76M 98M
Minority Interest Expense 0 0 0 0 -
Net Income (1.09B) (677M) (276M) 76M 98M
Net Income Growth - 37.78% 59.23% 127.54% 28.95%
Net Margin Growth - - - - 2.58%
Extraordinaries & Discontinued Operations 0 0 0 0 -
Extra Items & Gain/Loss Sale Of Assets 0 0 0 0 -
Cumulative Effect - Accounting Chg
0 0 0 0 -
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2009 2010 2011 2012 2013
Discontinued Operations 0 0 0 0 -
Net Income After Extraordinaries (1.09B) (677M) (276M) 76M 98M
Preferred Dividends 0 0 0 0 -
Net Income Available to Common (1.09B) (677M) (276M) 76M 98M
EPS (Basic) (3.40) (2.08) (0.84) 0.23 0.32
EPS (Basic) Growth - 38.82% 59.62% 127.38% 39.13%
Basic Shares Outstanding 320M 325M 330M 331M 310M
EPS (Diluted) (3.40) (2.08) (0.84) 0.23 0.31
EPS (Diluted) Growth - 38.82% 59.62% 127.38% 34.78%
Diluted Shares Outstanding 320M 325M 330M 336M 313M
EBITDA (166M) (352M) 12M 278M 375M
EBITDA Growth - -
112.05% 103.41% 2,216.67% 34.89%
EBITDA Margin - - - - 9.88%
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Analysis
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Competitive Advantage Through Low-Cost and Differentiation
Potential New Entrants
While many opportunities for rapid industry growth and profit exist, the threat of new
entrants in the video game software market is somewhat limited because of sizable
barriers to entry and learning/experience curves. The profits draw new entrants to the
industry, however, they shortly discover that they do not possess sufficient expertise and
resources to become successful as exemplified by small game developers. These firms
also were more capital constrained, had less predictable revenues and cash flow, lacked
product diversity, and were forced to spread fixed costs over a smaller revenue base.
Notable barriers to these new entrants include: sizable scales of economies of scale in
production and operations, learning curves, strong brand loyalty to established publishers,
high capital requirements, and difficulty establishing networks of distributors and
retailers. While profit incentives continue to lure new entrants into the market, these
extremely formidable barriers simultaneously prevents and deters new entrants from
exerting strong competitive pressure.
The ease of entry into the Software Publishers Industry is extremely low because of the
high degree of knowledge and technological know-how required for success. Not only is
a strong background in video games software development a necessity for a new entrant,
an extremely strong financial backing is required. As time has progressed, customers
demand greater graphics while playing video games. This has greatly increased the costs
needed to develop new video games. A stream of new titles with mass appeal must
continuously be produced to catch the eye of the consumer, and marketing efforts are
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needed to aid in the increase of customer awareness of the product. These tasks also cost
a large amount of money.. In terms of exiting, many firms in the industry have not been
able to compete with the demanding costs and constant development of new
technologies.
Substitute Products
Three main factors determine the strength of the competitive force exerted by sellers of
substitute products: whether substitutes are readily available and attractively priced,
whether buyers view the substitutes as being comparable or better in terms of quality,
performance, and other relevant attributes, and whether the costs that buyers incur in
switching to the substitutes are high or low. While an argument is made that movies,
television, and music exert a strong competitive force because they are readily available
and attractively priced and cause buyers practically no switching costs, many consumers
do no associate these varying media to compare to the same type of performance and
interactivity that games offer; therefore they serve completely different functional
purposes. For this reason, it is more logical to view the substitute products as exerting a
low competitive force on the industry.
Suppliers
In the video game software publishing industry, the three main suppliers, Nintendo, Sony,
and Microsoft, exert one of the strongest competitive forces as they all three have a
considerable amount of bargaining power over independent publishers. First, all three
suppliers grant the license and technology from their platforms to the independent
publishers such as EA Games. With three highly differentiated consoles, independent
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publishers face high switching costs to switch from platform to platform. If EA Games
develops a game for Nintendo Wii, the license and technology that Nintendo grants the
publisher will create a completely different technology than say the same title for
Microsoft’s Xbox 360. Software publishers must now decide specifically which supplier
will grant the inputs that give a title the desired result; moreover, this differentiation
means that suppliers now maintain exclusive licenses for diverse and unique technology
Finally, the suppliers have for a considerable amount of time employed forward vertical
integration to develop and market games for their respective platforms Because the
number of suppliers are relatively limited, possess differentiated inputs, and have forward
integrated to the software publishing level, suppliers have considerable bargaining power.
It is also worth noting that EA Games also has third-party vendors as suppliers who
handled the production of EA’s PC-based game titles. These suppliers have lower
competitive pressure and bargaining power because EA has many sources of supply for
all the functions that were outsourced to third-party suppliers, which often allowed them
to negotiate volume discounts.
Buyers
On a large scale, buyers have moderate bargaining power because they can and often do
switch brands willingly without switching costs based on the title and genre of the game
they want to play, they often have information from game reviews on the products,
prices, and costs, and have the discretion of whether and when to purchase games
however, on a smaller scale, if a buyer wants a specific title and genre bargaining power
will be reduced.
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After evaluating the collective strength of the competitive forces, it becomes clear that
the video game software publishing industry is extremely profitable once a firm gains the
requisite learning and experience curves necessary to penetrate the market. Although
there are limitations to dealing with suppliers that are vertically integrated forward and
demand royalty payments, should a firm gain experience, it will enjoy high levels of
profitability because of rapid industry growth, competitive forces preventing new
entrants, and weaker forces from substitute products and buyers.
Competitive Strengths
Electronic Arts ability to publish interactive software games for multiple platforms is the
main strength of the company. The products that are designed to play on consoles and
mobile platforms are published under license from the manufacturers of the platforms and
EA pays them a fee for technology and intellectual property. The company also invests in
facilities and equipment that allow them to create and edit video and audio recordings
that are used in their games. The interactive software games that they develop and
publish are broken down into three categories:
1. EA studio products
2. Co-publishing products
3. Distribution products
In comparing the costs of EA and their main competitors in an analysis, the best practice
for EA is that it exploits the opportunity for digital downloading. This is a very useful
function because it is cost effective due to its digital nature therefore cutting out
manufacturing and packing costs. EA has also begun offering free demos at EA.com for
popular games on different systems, such as Xbox Live. By allowing the consumer to get
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have a taste of the game before they purchase it is a great way to get them coming back
for the whole game and it is then when you make a profit.
EA figured out a way to build revenues with little cost and a decent return, called
“Microtransactions.” These microtransactions are small purchases where the gamer can
purchase more clothes for his/her character for a particular game, extra designs for a race
car, etc. These little purchases really add up in the end and they are great for the
consumer because it gives them more options while leaving EA with higher revenues.
Finally, to successfully execute benchmarking for EA, suppliers Sony, Nintendo, and
Microsoft had approved that EA can be licensed. When this occurs, it is branding EA
while also getting their product out there for the consumers to experience. Licensing
from these brands better positions a company in the mind of the consumer.
It is essential that consumers of EA Games see value in the products that EA produces
and bundles with. In order to appeal to the consumer at all it is essential that brand or the
product relates the consumer properly. EA utilizes their “ability to localize games or
launch games on multiple platforms in multiple countries in multiple languages” to
effectively reach the consumer. By doing this, they are able to release the same game on
the same day in number of countries and languages; it is with this ability that truly
separates them from their competition.
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Problem/Opportunity Statement
We have assessed that EA is facing multiple threats heading into the immediate future.
Products in the software developing industry are highly vulnerable to consumer income
and discretionary spending. They face the problem of the rise of mobile technologies that
offer free-to-play games that make money off micro transactions and don’t necessarily
need to involve full game packages as EA offers for a premium price. Madden, Tiger,
NHL and FIFA may well be cash cows but they are going nowhere and EA doesn’t even
own the rights, it just rents them. Even with the Warhammer game, the company is
borrowing someone else’s IP. But times have changed; we live in the age of Wii Fit. The
market is now everyone, not just the narrow niches that gaming historically served.
Electronic Arts' stock has lost almost 40 per cent of its value since the start of this
calendar year - and in fact, since the middle of last holiday season. The company's stock
has been in a steady decline, which has now whipped close to 50 percent off EA's
valuation.
Although the overriding factors in EA's valuation collapse are internal, it's important to
look at wider factors within the industry as well - because the reality is that this is not a
situation that's confined to EA. Many games publishers face a tough transition, not
merely to next-gen console hardware next year (which is tough enough in itself), but also
to a world of new business models and new competitors. While it's not unusual for small
companies' share prices to fluctuate this strongly during times of trouble, EA is not a
small company. This fluctuation represents billions of dollars moving out of the
company's valuation, and the fact that it's a trend that has persisted for six months,
suggests that investors are genuinely concerned about EA.
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Alternative Solutions/Strategic Responses
One thing EA is doing better than anyone else is gearing for the future. This company got
into casual gaming big and early. It is pushing micro transactions and subscriptions
successfully in it’s business model but still needs to expound on those features. EA needs
to continue to focus on convincing the markets that their market plans is going to work
out, of course, but it's also clear that there's a wider challenge here for the entire games
industry. The next transition of platforms, which has already started, is going to be the
toughest one the industry has ever faced - the stock market knows it, and until the
industry can show itself to be ready to cope with that transition, investors are going to
steer well clear of videogame-related stocks.
The gaming industry is in a state of transition away from what has been EA’s key
revenue source for years: Pre-packaged games. The slowdown in both console and even
PC sales require an emphasis on the tablets and smartphones where casual gamers are
passing the time. The difference that has been hurting EA is that the digitization of games
requires an entirely new revenue strategy, which is why EA’s profitbaility has been
struggling. It’s tough to sell a $60 console game when consumers have the convenient
option of instantly downloading a 99-cent game right to their phone. EA has the brands
that matter to consumers, but EA’s revenue streams need to be readjusted in order to be
able to compete on these new platforms and the free-to-play business models.
Luckily, free-to-play business models have not made their way onto console platforms,
however digital distribution is a cornerstone that has not been used to it’s full potential.
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Currently, publishers push out game updates frequently online directly to consoles but
have not distributed full games directly to consoles via digital download. This is a
strategic option for EA that would allow them to be first to market while cutting down
production costs and allowing them to cut prices to undercut competitors while
simultaneously increasing profitability. In order to promote this tactice effectively, EA
should parter with its most profitable console maker to develop and virtual console
“game marketplace” which will add to not only the manufacturers product vitality but
also to EA’s new market credibility.
While EA continues to battle on the forefront of it’s mobile presence in terms of
software, there are also some unique partnerships that could be utilized to bolster there
popularity on mobile platforms. Phone cases that promote mobile gaming are evolving
and aiding in the popularity of the mobile platforms. Gamers grew up on buttons, not
touch screens. If EA shows its true to its core gamers and bring a little sense of “true
gaming” to their mobile games they are sure to find success. The positive aspect of EA
partnering with a mobile phone case menufactuer is that it would not incure additional
production costs. EA could use this partnership as a marketing and advertising outlet
while simultaneously giving the case company exposure. The negative aspect of this
strategic initiative is that EA risks losing the ability to control the quality of a product that
it endorses. Should there be a defect with the case or unsatisfied customers there will be a
backlash towards EA that would hurt their mobile presence.
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A third option EA could venture into is the scope of combing mobile games with a
console experience. The technology exists for mobile devices to be connected via
wireless home internet directly to television screens. EA could be the first major gaming
publisher to offer this option in their mobile games. This option would provide a sort of
“bridge” between mobile gamers and console gamers to where connectivity could be
established between the two platforms. Of course this initiative would likely incure a new
pricing model as to not damage the profitability of current console games. The risk of this
strategy is that it can be done through partnerships with television manufacturers, console
manufacturers, Apple TV, or through a software function coded into the game. If EA is
first to market with this strategy and does not execute in the most efficient and popular
manner, they have esentially created a beast that competitors will improve upon.
Recommended Solution
After increasing weakness from sales of pre-packaged games, EA was successful in
adding to its bottom line in the fourth quarter of 2012 due to $120 million brought in via
the company’s offering of it’s “Battlefield Premium” service. This service is a feature of
EA’s popular first-person shooter franchise, Battlefield, which can be purchased on top of
the pre-packaged game. The success of this service shows that there is a market for
gamers willing to buy products via game console marketplace. As a result, we
recommend that EA dive into the realm of digital download for console games. Since EA
has relied on building it’s business around providing pre-packaged games for years, it’s
simply not feasible or realistic for EA to be expected to think about exiting the aspect of
console game publishing. Instead EA needs to adapt it’s products and pricing model to
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regain it’s popularity with console gamers and the proper avenue to do that is through the
introduction of Console digital download.
Implementation
We first recommend that EA stops absorbing smaller companies to gain market
control and work from the inside out to fix their valuation and customer problems. After
they stop losing money by destroying other smaller companies and failing to merge
customer bases, management needs to cut prices of their products. After they regain
customer support, they can begin to strengthen their bandwidth connections so they have
less complaints and drops of product. Once that is in effect, they can continue to act as an
industry leader and benchmark other leaders to regain valuation and profits. They can
expand into the mobile market more than they have been and even get into the tablet
software developing. Those are the future industries and without straying from the PC
and console industry they will never regain the popularity they had in the 90’s and early
2000’s. EA has cycled through multiple executives in the last decade and if they can’t
find the proper fits for their company, they will never succeed.
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