EA's Financial Troubles Caused by Lack of Innovation

Kris Erickson • Jan 14, 2010 • Comments (1)

Electronic Arts has sharply lowered its 2010 revenue expectations after a disappointing December at retail. This shouldn't come as too much of a surprise to investors, since NPD sales data has consistently showed that the economic recession has had a marked impact on the video game industry. Forget "staycations" and the notion that weary consumers would continue to spend money on less extravagant hobbies such as video gaming. Just about every sector of the economy in North America and Europe has been confronted with weaker consumer demand, including digital entertainment. Some analysts are therefore suggesting that EA's recent woes are a sign of hard times for the video game industry as a whole, and they think more bad news is on the way from other publishing companies. However, there is another, more important reason why Electronic Arts has experienced weaker demand this holiday -- they aren't making consistently good games.

We predicted last year that a tightening of purse strings would lead many developers and publishers to take a conservative approach to game development. That meant more sequels, more spinoffs, and less innovation. In an environment of uncertain demand, we expected many video game publishers to stick with what worked in the past, rather than invest money in risky, uncertain projects. That has definitely been the mantra at EA over the past 12 months. Last holiday we had Dead Space, which was a new IP and a runaway success.

This year, we've had yet another Madden installment, a new SIMS title, and a Battlefield: Bad Company sequel. Unfortunately, sequels and updated versions of old games failed to excite consumers, and sales of all of these titles came in below expectations. Particularly in the case of Sims 3, players have complained of outdated graphics, a lack of freedom and a lack of variety in locations (new neighborhoods will be added later as paid expansion packs).

There's nothing wrong with sequels per se. After all, everybody expects the upcoming Mass Effect 2 to be excellent (and some predict it may improve the fortunes of the company). But in order to attract players, a sequel must dramatically improve upon its predecessor and provide innovative new gameplay ideas.

It seems as thought the Madden formula of releasing marginally improved versions of the same game year after year has crept into other parts of the EA business. The company cannot permit itself to follow this development model, as it is ultimately detrimental to sales. Even if this strategy has the effect of improving margins by lowering development costs, it comes with the negative side-effect of annoying consumers and hurting the company's credibility. Newer versions of old games can also become difficult to market effectively if they can't be differentiated from other experiences.

Clearly, EA's old business model needs to be reconsidered. Company CEO John Riccitiello has presided over a decline in EA stock from $52 a share to a recent low of $16.75 per share since taking control of the publisher in 2007. Having recently considered a buyout of Take Two Interactive, EA now finds itself a potential takeover target, with some speculating that it could be gobbled up by a larger multimedia company like Disney. EA management is now faced with an important dilemma: continue doing business as usual, or forge a new path.