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Jul 01, 2005



I've often wondered whether big companies producing games in multiple genres should just throw them all together in a big game world, but what does knowing that the football players you race past are real people add?


From a public company standpoint, predicable and steady income is high valued. So, finding an uncorrelated income stream that will smooth earning volatility is probably a key business objective.

However, they can’t just go into an unrelated business without proper due care.

So where to start and where EA is heading?

1. Gradual move towards online gaming
2. Further extension of owned-IP franchise

Further extension of owned-IP franchise is an established strategy that is picking up pace. Three good examples of successful franchises are Mario Brothers, Star Wars, and Sim Everything franchise. Each must have generated a few billion of revenues over the years. Even a very monoline franchise like Madden series of games have generated over a billion worth of revenue over the years. In the case of Mario Brothers, there are now racing, platform, RPG, sports, educational and other types of game based on this franchise.

Gradual move toward online gaming revenue will leverage the benefits of the online platform and reduces the effects of console hardware cycle. Currently console hardware controls the cycle and extracts a sizable % of the gross as royalty. Gradually building and controlling their own online gaming platform will reduce dependency on console manufacturers and provide access to a variety of clients and hardware. The speed of transition depends on adoption; the battle by the hardware manufacturers to dominate the home’s TV box (media controller) may slow the open platform approach.

A good test case of these two emerging trends is the execution of the King Kong franchise. The unprecedented coordinated marketing of this movie indicates that the coordination and extension of this franchise across media and product will also be unprecedented.



How interesting.

I think there are 2 trends in business, the one you cite, i.e. buy up smaller companies to create a big company, netscape to aol to time/warner, (or take any phone company merger), or the opposite, companies spinning off parts (motorola spinning off freescale, bell spinning off lucent).

The arguments for creating one big company is the same, i.e. combine and compete, while for spin offs is the opposite, i.e. focus on core business. So they all have their justifications.

What I find ironic in this is that the one growth business (i.e. the game market seems to be expanding), and one of the leading companies is seeking to go into other markets that aren't growing. Recent news talk about how this is one of the worst years for movies. (Side note: isn't movies pretty cyclic anyhow? One block buster for several duds?). The same problem exists in the music world.

As far as game diversity, I think that is the best policy. You spread the risks around different game genres, similar to how you would diversify a stock portfolio.

There is no doubt that players focus on only a few genres to begin with. One may play sport games, but not rpg/action adventure games (similar to one likes action movies over love stories).


Frank, do you see EA moving toward more online gaming? From my POV it looks like anything but that: they've tried and shut down Majestic, Motor City Online, and Earth and Beyond, and I doubt The Sims Online or even the venerable Ultima Online will be around this time next year. This isn't doom and gloom, just looking at the public numbers and where EA's management sees value.

It may well be that more of their PC and console games will contain an online component (especially as the next console generation comes into play), but I don't see how that helps them diversify or regularize their revenue stream, especially across the multi-year cycles of the console sector that often seem to drive EA's stock price.

At this point, I'd sooner believe an EA-backed music label than I would an EA-backed MMOG game studio.



The painful fact for EA that their revenues and stock prices are controlled by the console cycle is the main driver to diversify.

Now looking at the entertainment sectors that are forecasted to have growth, and the growth online games (the broad category) is outpacing other areas such as PC, consoles, arcade, etc.

Now looking at the entertainment sectors that has a large market but EA has low market share in, traditional media entertainment sticks out.

So the apparant strategy for the industry is to.

1. Continue to leverage console gaming into online gaming.
2. Continue to leverage console hardware into the home enterainment appliance of choice.
3. Maximize your IP via licensing.

EA is from the software side and is unlikely to compete in the fight with Microsoft (and other) for the control of your TV (as they have done for the web browser and PCs), so they are extending:

1) into the growth area of gaming: online games
2) into the biggest entertainment market: movies, music, print, etc.

Success in the online gaming will depend on the natural development of this sector and success in traditional media will depend on how much they can maximize their IP.

As for games, perhaps it has been demonstrated too well in the marketplace that consumers don't care much for MMOGs and are just happy with MOGs. If EA can get people a good community of sport fans pay $50/yr to play in their 3D fantasy sport leagues instead of the free league offered by Yahoo and others, will I consider them successful.


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