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Stock of the Day
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Electronic Arts (ERTS)
Electronic Arts Hits Dead End, Makes Strategic U-Turn
Today, Electronic Arts (ERTS: Charts, News, Offers) posted a wider quarterly loss than expected. It earned 6 cents a share below the average analyst estimate of 7 cents. Revenue for the quarter ending September 30 fell 12 percent to $788 million down from $894 million in the same period a year ago. As a result, it announced another strategic move to once again focus on its established and successful franchises. This means EA will kill a dozen of projects, shut down facilities, cut about 1,500 jobs, and reduce the number of titles it planned to publish in 2010 to less than 40, down from the 60 plus titles published in 2008. But in a separate move, EA bought an online game company Playfish for $275 million in an attempt to gain a foothold in the social media game market. How many strategic turns can a company make before it withers on spot? Are these the right moves for EA?
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First, let's take a look at the product line. Earlier this year, Electronic Arts' CEO John Riccitiello claimed that EA had previously been too reliant on licenses and franchises, and intended in future to focus on creating new IP of its own. The result has been a string of new video games that include Dead Space, Mirror's Edge, and Spore. However, the success of these new titles has been mixed at best, and Spore was probably the biggest disappointment of the year. So the company decided the strategy didn't work and is working on a change that is essentially a 180 degree departure from the original goal. On top of the 11 percent workforce reduction last year, the company will cut another 1,500 jobs, or about 17% of its workforce, close several facilities, and terminate almost half of its lineup. "We're cutting the projects and the support activities that don't make economic sense and freeing up more resources ... to push our key titles even harder," Chief Financial Officer Eric Brown said in an interview.
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Second, EA bought an online social media game company Playfish for $275 million in cash plus a $100 million bonus if the company performs well after the transaction. Playfish launched its first game, called Pet Society, in December 2007. Today Playfish has 60 million users a month for its 10 games, and is the second-largest social network gaming company. These games are free, but Playfish makes money by selling virtual goods and accessories to enhance the gaming experience. In addition, it also sells one iPhone game for 99 cents a pop, and has two more on the way. Although the company doesn't release detailed financial information, Playfish is profitable according to Kevin Comolli. Mr. Comolli is a partner at venture capital firm Accel Partners, which was Playfish's first investor.
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So, are these two drastic moves the right prescription for the ailing gaming company? In theory, these strategic moves are excellent ideas --focus on profitable products, cut laggards, and diversify beyond console and computer into the rapidly growing online and social network space. However, the execution is questionable. The truth is, EA is too well-known and too reliant on its core products, especially their sports games. The earlier all-in strategy was a failure because it was spending too much on unproven products, but this doesn't mean EA should give up and essentially kill its R&D. In fact, it needs to continually invest in new IPs and try to break the stereotype. The move into social networking gaming space via M&A is also good, but EA may have overpaid for this acquisition and will probably be disappointed by Playfish's future contribution to the company's financials.
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Other Stuff Related to Electronic Arts:
What EA Sees in Social Gamer Playfish -- An analysis of Electronic Arts acquisition of London-based Playfish.
Electronic Arts Job Cuts: Grim Outlook for Game Industry -- The game industry is shedding jobs faster than it can absorb, this is bad news for everyone.
Electronic Arts (ERTS): M&A And Layoffs Meet At A Crossroad -- Cost cutting and big acquisition in the same breadth. Is this a good move, or a recipe for a disaster?
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More Stocks in the News:
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Merkel says GM has to pay most Opel revamp costs -- German Chancellor Merkel asked General Motors (GM: Charts, News, Offers) to present a restructuring plan for Opel, and said GM should not count on government aid.
EU To Focus Oracle Probe On MySQL, Despite Critique -- Oracle (ORCL: Charts, News, Offers) planned $7.8 billion acquisition of Sun Microsystems (JAVA: Charts, News, Offers) hits anti-trust barrier in Europe.
Sprint Plans to Cut Jobs as Subscriber Rolls Shrink -- Sprint Nextel (S: Charts, News, Offers) continues to suffer as it loses subscribers to rival. The company to cut up to 6 percents of its workforce.
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Profile |
Click here to view a detailed profile of Electronic Arts.
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