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MAY 17, 2004
Keeping You Glued To The Couch In video games, top developer Electronic Arts zaps the competition In the $15.5 billion world-wide game-software business, Electronic Arts Inc. (ERTS ) is king. With 12 studios around the world, the Redwood City (Calif.) company cranks out a roster of best-selling titles, including MVP Baseball, Madden NFL, FIFA Soccer, Harry Potter, The Lord of the Rings, and James Bond. In an industry where many titles sell hundreds of thousands of copies, EA routinely sells 1 million or more of its hits for all the game consoles: Xbox, PlayStation 2, and Nintendo's GameCube. That track record has console makers panting for its titles, while movie studios and pro sports leagues rush to sell the company the rights to their names. "EA support has become a stamp of approval that gamers, retailers, studio talent, and investors look for," says Chief Executive Lawrence F. Probst III, 53. Indeed, in its fiscal year ended Mar. 31, the company had net income of $577.3 million, up 82% from a year ago, while revenues climbed 19%, to $2.96 billion. And its strong 2003 performance landed it the No. 10 spot on the BW50, BusinessWeek's ranking of the 50 top-performing public companies. EA now expects revenues of $3.25 billion to $3.4 billion next year. Says Kevin Bachus, an original Xbox developer: "EA is the darling of the industry." For fickle consumers, though, you're only as good as your last winning game. That's why EA works so hard to stay on top of what is essentially a fad-driven business. It tries to lock up rights to the movies and sports leagues that capture the imaginations of its core young male market, all while avoiding the extreme violence, sexual content, or vulgarity that would offend parents. Since recruiting and retaining the software engineers it needs is becoming especially tough, it's forming relationships with the schools that turn out the best game developers. And it makes sure that those programmers work closely with marketers to produce games that its customers actually want to play. ZERO TOLERANCE. For the 22-year-old company, keeping its edge will become harder as gamers mature and demand ever-better stories and graphics. There's no tolerance -- and no market -- for games that are anything less than top-notch. Remember Tomb Raider? The movies and games are favorites, but Eidos PLC's Lara Croft Tomb Raider: Angel of Darkness was one in the series that was considered a dud. EA's otherwise successful The Sims was a nonstarter as an online game, as was its NBA Live video game one season. "Ten years ago, you could get away with creating a mediocre game. Now, with the cost and competition, you don't have that luxury," says Bruce McMillan, executive vice-president of EA Worldwide Studios. EA increases its odds of staying on top by locking up rights to major sports and movie franchises. The sports titles like Madden NFL and MVP Baseball are especially important, since yearly updates keep fans coming back for new versions, year after year. Activision Inc. and THQ Inc. (THQI ) have hit games in so-called extreme-sports games such as skateboarding and snowboarding, a smaller, although still lucrative franchise. One thing EA won't do is build games based on objectionable content. Grand Theft Auto, a best-selling game from Take-Two Interactive Software Inc. (TTWO ), has drawn fire from parents and teachers concerned about the violence and vulgarity. EA has vowed to stay away from gratuitous violence, even though some analysts say that stance forces EA to cede too much of the market to rivals. To create good games, which cost up to $10 million a pop, EA is scrambling for skilled developers, who are becoming more scarce. Not only must developers be able to construct interesting stories and have the talent to draw characters, but they must also be able to do complicated calculations to take advantage of cutting-edge graphics. One reason EA has design studios around the world is to take advantage of talent outside the U.S. And in March the company gave the University of Southern California's School of Cinema-Television $8 million to fund a game-development program. EA's main studio near Vancouver, where 1,200 designers, work even more like a college than most high-tech companies. Developers wear jeans and T-shirts, work with toys, and bring players to the third-floor basketball court to check out moves. Management also insists that gamers work with marketing teams to keep their game concepts fresh. They practice with the "30-second elevator test." If you can't explain the game during a typical ride, something is wrong. Right now, EA and other game makers face an extra challenge. The next-generation Xbox console is scheduled to hit the market in late 2005, with updated PlayStations and GameCubes to follow soon after. That means EA and its rivals will have to create games in a relatively short amount of time for consoles that will be far more sophisticated. "There's always some disruption when cycles change over." says Standard & Poor's (MHP ) analyst Jonathan Rudy. It will be a test of whether EA has the playbook that can keep it at the top of its game.  By Cliff Edwards in Vancouver
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