Case 25 ELECTRONIC ARTS (EA Games): An Overreliance on Console
Manufacturers Sony and Microsoft*
* The authors would like to thank Dr. Barbara Gottfried, Boston University
and the following Bentley University students: Will Dewsnap, Nick Dipoto,
Matt Dwyer, Andrew Huong, Justin Kim and Dylan McCabe for their research
and contributions to the case. Printed by permission of Dr. Alan N. Hoffman,
Bentley University. Please address all correspondence to Dr. Alan Hoffman,
ahoffman@[Link].
[Return to reference]
Alan N. Hoffman
Bentley University
Natalia Gold
Northeastern University
Company Background
Electronic Arts (EA), a premier publisher of computer video games and
software, was founded in 1982 by three former Apple Computer managers
with a small team of 11 people and $5 million. EA’s first product was a video
game for the Atari 800 in 1983. Shortly after that, Commodore released its
top selling Commodore64 computer and EA had to rewrite its video game
software to make it Commodore compatible. Throughout its early years, EA
focused on making its software and games compatible with various hardware
systems, allocating 50% of its product development budget to software
adaptation. In 1987, EA opened offices in Europe to expand its platform and
customer base. In just two years, EA’s net income rose 208% and it went
public with a market cap of $84 million. However, even though Nintendo
accounted for 80% of video games sales in the U.S. at that time, EA refused
to partner with the company because Nintendo wanted EA to agree not to
provide video games to any of its competitors.
To increase its market share and dominance, EA acquired Distinctive
Software Inc. based in Canada for $11 million in 1992, renamed it Electronic
Arts Canada, and created an Affiliated Labels program that acquired rights to
software developed by outside companies. The company also established its
own sales force to have more control over its inventory and help keep track
of consumer trends and began using well known professional athletes and
Hollywood stars such as John Madden to promote its products. In the early
1990s, EA started EA Sports and purchased licensing agreements for the
NBA, NHL, MLB, and NFL. EA then purchased Origin Systems, based in Texas,
expanding its predominantly sports based products to include more fantasy
role-playing and First-Person Shooter games.1
EA owed its product development success to its ability to attract and retain
highly qualified employees. In March 2016, Electronic Arts employed 8,500
people full-time, 5,200 of whom worked outside the U.S. Only 8% of its
employees were represented by a union, all of them part of EA’s Swedish
development studio, the DICE division.2
To protect its intellectual property EA used copyrights, trademarks, patents,
patent applications, trade secrets, know-how, licensing agreements,
confidentiality provisions, and other legal procedures.3 As a global company,
EA was required to comply with foreign and domestic laws and regulations
that affected its business and protected its users’ privacy, especially with
regard to hacking or other violations.4
Strategic Direction
The main focus of Electronic Arts Inc. (aka EA Games) was creating global
interactive entertainment software for online-services, personal computers,
Internet-connected consoles, mobile phones, and tablets. The company had
a vision: to inspire the world to play its video games not simply because they
were games, but because they were an art form. Unlike Nintendo and Sega,
which only created games for their own proprietary consoles, EA Games
developed software for a variety of manufacturers’ consoles, computers, and
mobile phones. Monitoring the latest trends in technology, EA created a PC-
to-Console approach that allowed its developers to focus on PC gaming with
the highest specs, then move forward with flexible console products that
could be appropriately modified when a new console was released while still
guaranteeing the user the optimal EA experience.
From the beginning, EA’s commitment to research and development was key
to its mission to design innovative, sophisticated games, creating new game
brands and updating its already-existing franchises such as The Sims,
Madden NFL, EA SPORTS FIFA, etc. Over the years, EA continued to innovate
as technology became more advanced, employing an array of animators,
filmmakers, and other artists who worked collaboratively to develop high
quality software.5 The company saw its developers not just as engineers, but
as artists, world-class creative people who could develop video games that
made users “feel” the games as they played them, creating an immersive
experience that became the company’s signature industry differentiator.
EA’s Competitors
From its very beginnings, video game development was rife with
competition. EA’s main competitors were Activision Blizzard, Sony, Microsoft,
Nintendo, Take-Two Interactive, and Ubisoft. The only company larger than EA
was Activision Blizzard, whose main brands were World of Warcraft, Diablo,
StarCraft, Guitar Hero, and Call of Duty. Activision’s 2016 revenues were
$2.2B versus EA’s $1.8B. Other competitors included Sony: Grand Theft Auto,
Final Fantasy, and Uncharted ($1.5B); Microsoft: Halo ($1.1B); and Nintendo:
Mario, Pokémon, and Zelda ($0.8B).6 All EA’s major competitors competed
with EA across platforms, were large enough to afford the video game
industry’s high barriers to entry, and had strong brand name franchises with
large customer followings.
Tiered Barriers to Entry
Historically, the video game industry’s barriers to entry were moderate, but
tiered. Operations required substantial startup costs to cover both the high
salaries software and video game developers commanded, and the time
necessary to develop sophisticated games: the “burn rate” for video game
developers was considerable. However, not all subsets of the video game
industry were subject to these high costs, hence the tiered barriers.
Smartphone app developers, for example, had much lower costs than a
company developing console and personal computer games—some app
developers’ costs were as small as their own opportunity costs, whereas
companies developing console and personal computer games, such as EA,
were likely to need to support a cadre of developers over time. Developers
were the ones who created game engines and other base code that could be
recycled into new iterations of a game, and whose years of specialized
knowledge, in combination with other intellectual property held by the
company, would take prospective developers years and millions of dollars to
imitate. Companies hoping to break into video game development and
publishing knew they would need substantial financial support from VC
funding to carve out a foothold in the industry.
A further risk in the video game industry was rapidity of changing
technologies. Game console design changed every few years; processor and
graphics card speed increased even more frequently. New entrants risked
spending several years developing a new game only to find it unplayable or
obsolete on new consoles.
Video Games Demographics
By 2017, video games had become popular with all ages and genders
(Exhibit 1), with different age groups evenly distributed: 27% of game
players were under 18; 29% were between 18 and 35; 18% were between 36
and 49; and 26% were over 50; and a close split between genders: 59% male
and 41% female.7 With such broad appeal among ages and genders, EA saw
the opportunity to develop a variety of software to target different groups. In
addition to demographic opportunity, sheer numbers were significant: 65%
of U.S. households owned at least one video game playing device, and 63%
had at least one person who played video games regularly (three hours or
more per week).8 The gaming industry grew rapidly for three decades and
EA leveraged its opportunity, targeting a wide variety of potential consumer
groups. Still, EA’s stronghold in the gaming industry was its sports gaming
software, but this myopic focus missed a large, more diversely driven sector
of the video game industry propelled by a growing interest in adventure and
story-based games where consumers could dive into countless hours of new
content
Opportunities in Mobile Phones
As the popularity and technological advancement of the graphics and
processors in mobile phones grew, so did the opportunities for EA. Even free-
to-download mobile apps provided opportunities for users to digitally
purchase features to enhance the game so that although the game platform
was free, to get the full experience users had to purchase extras. The
company also generated income by selling additional content such as
premium items, new maps, etc., and by placing advertisements that were
displayed on the app.
The Video Game Rating Act of 1994
The Video Game Rating Act of 1994 was adopted by the Entertainment
Software Association to ensure responsible online privacy practices for the
entertainment software industry.9 The three main ratings placed age
restrictions on video games based on their content. Games rated “E”
(Everyone) were for everyone; games rated “T” (Teen) were suitable for ages
13 and older; games rated “M” (Mature) were for ages 17 and above. The
Rating Act threatened EA and other game designers because it judged
certain content inappropriate for particular age groups, especially those
under 18. Research found that 93% of parents controlled what games their
children were playing and how much time they spent playing, limiting the
purchase of those games. Also, 91% of parents were present when kids
purchased a video game, and 95% of parents paid attention to the games
their children were playing10 because they did not want their children to be
exposed to the potential violence or mature content of many video games.
Even though most people supported the entertainment rating system, it
potentially threatened sales for many software companies.
Online Player Networks
EA also made the most of Online Player networks,11 a technological
advancement that allowed users to play online with and against each other,
creating a more exciting and interactive experience. EA’s most successful
design for this market was its Ultimate Team game mode for its sports
games. Consumers either earned trading card packs or bought them
digitally, generating revenue for EA even after the original game had been
bought. Also, through digital downloads, the company released betas to the
public to test and provide feedback to anticipate problems and make
changes to software before its official release. In recent years, virtual reality
gaming garnered intense industry buzz. It was clear that to capitalize on the
new technology EA would need to make a significant design investment to
ensure its software would be the first and best software in virtual reality
gaming.
EA Financials
As of 2016, EA was America’s leading player in multimedia and graphics
software, concentrating on computer and console games. In an industry that
relied heavily on recurring income, EA’s financials and operating costs had
the potential to be negatively affected by the fluctuating sales or profit
decline of its key franchises. Having invested $1.1 billion in new mobile
games research and development, EA launched a series of new games
including FIFA 17, Battlefield 1, Titanfall 2, NBA Live Mobile, and Star Wars in
the second half of 2016. As expected, while the company had been preparing
to launch these new games, FY2016 sales fell by 2.64% from FY2015, from
$4.52 billion in FY2015 to $4.4 billion in FY2016 (Exhibit 2). Gross margins
also decreased from 70.74% to 69.04%, and operating income decreased by
$50 million from 2015.
Marketing
Electronic Arts’ marketing objective is to build and maintain meaningful
relationships with players. The company’s particular marketing strength lay
in its ability to engage players and customers through its diverse product
lines that took players to the field, into outer space, or to battlegrounds in
games such as Madden, Battlefront, and Battlefield. The company had been
quick to recognize that the video game market comprised not simply children
and teen users, but had expanded to include increasing numbers of adults,
both casual and competitive gamers. EA engaged directly with customers
through broad marketing channels, online and mobile advertising, event
sponsorship, and direct communication via e-mail. In 2014, for example, the
company released a “Madden Season” promotional video on YouTube starring
Kevin Hart and Dave Franco for its Madden NFL 15 release. The 3-minute
video did not showcase the game itself, but was successful in promoting the
culture and sense of competition surrounding the game; its mix of
mainstream culture and the culture surrounding the game became a major
selling point EA returned to again in later promotions. Effective marketing to
diverse demographics markedly increased Electronic Arts’ sales.
Electronic Arts also engaged customers by involving them in alphas, betas,
and other forms of testing that allowed them to preview new games before
they hit the market and provide valuable feedback to EA in developing the
game for release. According to CNET, through these programs, and hearing
directly from users, the company became “more open and communicative
with players.”12 In 2015, the company claimed to have over nine million
people participating in the biggest beta test in the company’s history for Star
Wars: Battlefront, garnering both positive feedback on the whole “Star Wars
experience” and negative feedback such as the lack of breadth of the
game.13
Awarded Worst Company in America: 2012 and 2013
In 2012 and again in 2013, EA was named the “Worst Company in America”
by The Consumerist, a website with 2–4 million visitors monthly, many of
whom were potential EA customers. The company was taken to task for its
poor customer relations and mediocre products. It was a turning point for
Electronic Arts. Although the company endeavored to recover from the
negative reviews by engaging with customer feedback and burnishing its
reputation by creating more innovative and higher quality games, it
struggled to retain customer loyalty. Players anxiously remembered EA’s
checkered past, and worried that disastrous launches remained a possibility.
Although EA vowed “never to appear on that list again,”14 industry watchers
felt EA needed to completely revise its philosophy, truly putting customers
first, to fully restore its reputation.
Human Resources
As of March 31, 2016, EA was one of the largest companies in the industry
with 8,500 full-time employees, over 5,200 of whom worked outside the U.S.,
in keeping with the company’s belief that attracting the most innovative and
qualified employees from around the world was crucial to its success. EA also
employed designers, artists, software programmers, independent artists, and
third-party developers as part-time or contract workers who were paid by
installment at the conclusion of each project milestone.
As a gaming company, success depended on its “hit” games, which meant
that employees who were directly associated with the development and
marketing of those games were invaluable. At the same time, the requisite
creative and technical skills for successful game developers were very
specialized and the job market for these employees was quite competitive.
Some full-time employees (about 2,000 personnel) were given stock options
and Employee Stock Purchase Plans. EA’s 3.9 out of 5-star rating on
[Link], indicated that the company strongly believed that its human
capital was the driving force behind the company’s success and that not
retaining its talent could have a significant negative effect on the company’s
bottom line. Moving forward, EA understood that providing quality support
and compensation to its employees was a must.15
The Good News: Diversification
Unlike many other players in the industry, EA had the advantage of an
extensive portfolio of successful games including Battlefield, Star Wars, FIFA,
and Madden, so that it was not dependent on a single title as its main source
of revenue. If one of its games such as Titanfall or Mass Effect were to
underperform, the negative impact on the company would not be decisive.
EA was the first company to develop sports games, spinning off a separate
brand, EA Sports, for its soccer, football, hockey, basketball, and other
platforms for sports games. Among the company’s strongest performers
were FIFA and Madden. However, license contracts with sports celebrities,
leagues, and automobiles cost the company minimum guaranteed payments
and marketing commitments so it was important for EA that it not over-
contract with individuals and companies to prevent losses during
underperforming quarters.
The company also retained licenses and intellectual properties to protect the
intangible assets that constituted its core competency. To develop new series
and expand its portfolio, EA had to work with specific parties to acquire
licensing rights to publish games under certain titles. The most prominent
example was the company’s licensing relationship with Walt Disney. In 2016,
EA negotiated a 10-year licensing agreement with Disney for exclusive rights
to develop and publish games under the Star Wars franchise. Within that 10-
year time frame, EA and Disney agreed to collaborate on developing and
releasing any number of games under the Star Wars name, benefiting EA in
the long run by creating more breathing room for the company to create ever
newer experiences for players.
To become more globally competitive, EA also partnered with third parties for
access to countries around the globe, including Tencent Holdings Ltd. (China)
and Nexon Co. Ltd. (Korea), which published EA games in their native
languages, garnering steady revenue for EA every year. Over the past few
years, partnerships related to FIFA alone brought in about 15% of EA’s total
net revenue.16