Electronic Arts – the “Evil Empire” regains its groove
After enduring a tough recession and a few missteps with its monetization model, Electronic Arts (EA) is again minting cash, striking a delicate balance as one of the world’s most popular game publishers and, at the same time, one of the most hated companies in the industry. In the face of often-loud consumer complaints, EA has been impressively effective at aligning its business model with an aggressive, controversial operating model. How have they managed this tightrope act, and can it continue?
Business Model
EA is a developer, marketer, publisher, and distributor of video games for personal computers, video game consoles, and mobile devices. The third-largest such company in the world (after Nintendo and Activision-Blizzard)1, EA develops and publishes games in such diverse franchises as FIFA, The Sims, Battlefield, and Star Wars: Knights of the Old Republic. Since their founding in 1982, EA has brought to market some of the most popular titles in gaming history. The company estimates that it currently has 300 million registered players in over 200 countries2.
Consisting of dozens of studios operating across 31 locations on 3 continents, EA’s four divisions simultaneously work on many game fran
chises, with the umbrella organization responsible for marketing, contracting with video game
platform manufacturers (e.g. Sony and Microsoft for consoles), and distribution3.
The company’s long-term strategy is to consistently deliver blockbuster hits from its multiple well-known, established franchises on a regular basis; steady cash flow from these hits will fund development of new and engaging games across all platforms, with a special emphasis nowadays on mobile devices. EA monetizes these games through several different payment models, depending on the specific game: an initial purchase price for the base game with additional charges for intermittent release of later expansion content; a free-to-play base game with abundant “micro-transactions” to unlock new content; or regular subscription fees.
Operating Model
EA has developed an unusual operating model which has led to its huge success, but also earned it the moniker of “evil empire.” In fact, the company is one of only two to ever twice win The Consumerist’s Worst Company in America “Golden Poo” award (along with, unsurprisingly, Comcast)4. How did a gaming company become more despised than the likes of Walmart and Bank of America, the finalists it vanquished?
The hatred stems from the same operating model which, after some missteps over the last 3 years, EA is using to return to profitability5. Rather than develop all its games organically, EA actively searches for and acquires small independent studios with promising game franchises. The company then aggressively pushes acquired studios to develop new games for these franchises, adding its scale and marketing prowess to vastly expand their distribution. EA’s 2007 acquisition of Bioware is a prominent example, as its budding Mass Effect series and still-in-development Dragon Age franchise became hugely popular with EA’s support. The company’s ability to consistently find future winners on the open market has earned it years of booming success.
The flip side of this model, however, is EA’s quick trigger finger in shuttering any newly-acquired studios that lose their luster. After gutting or closing down Bullfrog Enertainment, Westwood Studios, Pandemic Studios, and a number of other entities not long after their acquisitions, EA earned a reputation for buying their way to continued success, and conveniently eliminating potential competition in the process.
In addition, EA occasionally overreaches with its operating model in pursuing its strategy of consistently delivering blockbuster games. A number of its recent big-name games have seen significant quality issues as its studios have been forced to “finish” games on time to meet EA financial targets7. Its tendency to insert micro-transactions and attach post-release expansion content, for which it charges gamers a separate fee, also adds to consumer complaints that the company nickels and dimes its customers.
Can they keep the ball rolling?
Luckily for EA’s shareholders, its management team and CEO Andrew Wilson seem to have learned from this overreach and toned down the company’s visible profiteering8. Negative publicity and troublesome game launches caused a nearly double-digit percentage dip in revenues in fiscal 2014, but despite all the controversy and animosity its operating model engenders, EA has returned to strong profitability on the backs of its immensely popular franchises. In fiscal 2015 the company saw net income of $948M on revenue of $4.5B, in-line with its less-hated archrival Activision-Blizzard’s numbers9. As long as EA can continue to spot and acquire future winning franchises and turn them into cash cows, the company will continue to make sizeable profits regardless of the angry rhetoric it occasionally faces. At least for now, EA has aligned a controversial but apparently repeatable operating model with its business model and created a hugely successful strategy. The evil empire marches on.
Sources
- Yahoo! Finance, Electronic Arts, Accessed December 2015.
- EA 2Q FY16 Earnings Release presentation, December 2, 2015.
- EA company website
- Chris Morran, “EA CEO: We Don’t Want to Win Worst Company Award for 3rd Time, “ The Consumerist, September 5, 2014, http://consumerist.com/2014/09/05/ea-ceo-we-dont-want-to-win-worst-company-award-for-3rd-time/, accessed December 2015.
- William Usher, “Why People Hate EA? Ten Simple Reasons,” CinemaBlend, 2012, http://www.cinemablend.com/games/Why-People-Hate-EA-Ten-Simple-Reasons-43696.html, accessed December 2015.
- Bioware company website.
- Wesley Yin-Poole, “EA Addresses ‘Unacceptable’ Battlefield 4 Launch,” Eurogamer, June 20, 2014, http://www.eurogamer.net/articles/2014-06-19-ea-addresses-unacceptable-battlefield-4-launch, accessed December 2015.
- Andy Meek, “Electronic Arts’ CEO on Transforming The ‘Worst Company in the U.S,’” Fast Company, November 7, 2014, http://www.fastcompany.com/3038121/innovation-agents/electronic-arts-ceo-on-transforming-the-worst-company-in-the-us, accessed December 2015.
- EA 4Q FY15 Earnings Release presentation, May 5, 2015.
How much of the growth comes organically vs. through acquisition? And what are the largest profit streams, those arising from micro-transactions or subscriptions? Most importantly, is evil empire status really a problem if it has such a large and sticky user base?
Great questions! The first is very hard to answer as it’s not always clear what each office or location is working on. The great majority of its existing offices are organic, but many of its most well-known games are made by acquired studios, like BioWare (Mass Effect, Dragon Age, Bioshock, Star Wars: The Old Republic), DICE (Battlefield), and PopCap (Plants vs. Zombies). In terms of revenue streams, roughly 50% of revenue over the last year came from DLCs, micro-transactions, or game add-ons, and 10% from subscriptions.
As for whether the evil empire status is a problem, that’s the genius of EA! Despite all of the shady and antagonizing things they’ve done with closing studios with cult followings, adding micro-transactions, or releasing seemingly half-finished games, they’ve gotten their hands on so many good franchises that they’ll continue to make big profits for the foreseeable future.
Thanks for the description! Do you think that EA’s operating model will be as successful in the mobile gaming world, where there is less emphasis on AAA titles and much lower price points. Will they be able to spot trends early enough to acquire budding development studios at reasonable prices? From your description, it seems like the EA model of development is not too dissimilar from the strategy followed by some Hollywood studios (i.e. focus on franchises). Do you know how much their internal R&D (excluding acquisitions) is focused on new ideas (vs. franchises)?