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MARCH 21, 2003 STREET WISE By Jane Black EA Gets Its Game On The video-game maker has a load of hit titles under its belt, including the Harry Potter series. And it may be ready to hit the next level
So when Nintendo announced that beginning in March Miyamoto would work in partnership with U.S. video-game publisher Electronic Arts (ERTS ), it looked like a coup for EA. In fact, says EA President John Riccitiello, the deal was a way to affirm EA's support for Nintendo's GameCube, which is now lagging behind Sony's (SNE ) PlayStation 2 and Microsoft's (MSFT ) Xbox. Says Edward Williams, who covers the sector for New York investment firm Gerard Klauer Mattison: "EA is the acknowledged kingmaker in the video-game world. Without EA, you're toast." That makes EA the King Kong of one of the few tech markets that's still growing like gangbusters. According to NPD Group, 2002 sales for game hardware, software, and accessories in the U.S. reached $10.3 billion, surpassing Hollywood record box-office sales of $9.27 billion. Software sales alone grew 21% -- the lion's share of which went to EA. In 2002, its revenues jumped 30%, from $1.3 billion to $1.7 billion. Net income skyrocketed from just $4.6 million to $134.6 million. "EVERY OPPORTUNITY." The growth trend is set to continue. This year will be the peak of the industry's five-year cycle, experts say. And EA's stock likely hasn't hit its high yet. Shares are trading just above $50, down more than 25% from a 52-week high of around $70. The overall market has been hit hard in recent months. But analysts bet EA could rebound. The consensus target share price for the end of 2003 is $65, according to Thomson Financial FirstCall. "To want to buy this stock, all you have to believe is that EA will maintain its position. But with their experience and resources, EA has every opportunity to increase its market share," says Stewart Halpern, a stock analyst at RBC Capital in New York. Here's why: EA isn't just increasing revenue quantity but also its quality. In 2002, EA produced 22 games that sold more than 1 million copies each, up from 16 a year ago. Top sellers included brand-name titles such as Harry Potter and the Chamber of Secrets, which sold nearly 10 million units, James Bond 007 and Nightfire, which each sold more than 3 million copies, and Lord of the Rings, which came in just under the 3 million mark. Each of these titles is renewable for at least one more season -- next Christmas will bring another installment of Harry Potter, Lord of the Rings, and Bond. The challenge, Riccitiello says confidently, will be hitting tough deadlines so that EA titles are available on the same day movies are released. BEYOND BRAGGING RIGHTS. EA also has seen strong sales for titles it hasn't had to license. In the last three years, EA has purchased three studios -- Westwood, maker of Command and Conquer; DreamWorks, which developed Medal of Honor; and Maxis, creator of The Sims. All three titles have sold more than 1 million copies for EA without costing a penny in license fees. The number of top-selling titles gives EA more than just bragging rights. The video-game business has high fixed costs so, like Hollywood and the Big Five music labels, publishers rely on hits to deliver profits to investors and cash that can be sunk into development. EA's portfolio of hit games makes it far less risky than other smaller publishers, such as TakeTwo (TTWO ), which relies on one smash seller, the Grand Theft Auto series, to cover costs and R&D. It also helps deliver improved operating margins of 34% in the third quarter, up from 29% a year ago. Of course, even in boom times, not everything has been picture perfect. The online version of smash game The Sims has so far been a disappointment: Since its debut on Dec. 17, only 82,000 players have signed up for the $10-a-month subscription service, EA reported during its Jan. 30 third-quarter earnings call. That's far below the 200,000 that EA had originally forecast. FIVE YEARS FROM NOW. That shortfall dealt a serious blow to EA.com, the online division, which was relying on The Sims launch to push it into the black. On Mar. 4, EA announced it would consolidate results for EA.com beginning Apr. 1. It also took a pretax charge of $55 million to $75 million related to those assets. Still, analysts don't seem to be worried. Revenues from EA.com made up just 3% of gross sales. "It's more psychological than anything else," says Matthew Finick, a gaming analyst at Thomas Weisel Partners in San Francisco. In fact, Finick and other experts applaud EA's management for taking prompt action, rather than throwing good money after bad. EA's Riccitiello now says he doesn't expect online play to take off for another five years. Until then, EA's challenge is to keep doing what it's doing -- a pretty good position to be in these days. So far, it appears to be on track. EA has confirmed that it will meet fourth-quarter expectations -- despite the delay of Def Jam Vendetta, a sort of hip hop meets Fight Club game that's widely expected to be its next hit. For investors, the games at EA may be just beginning.  Black covers technology for BusinessWeek Online in New York Edited by Beth Belton Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | MARCH |
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