Wednesday, November 07, 2007

EA Earnings: Cracks in the Craptacular

EA announced earnings last Thursday, and these were the headliners:
--revenue down 18% compared to the same quarter last year
--a $22 million loss, compared to a $195 million profit last year ("accounting charges")
--announcement of a reorganization plan, including plans to close the studio in Chertsey, England. It's also been announced that EA Chicago is closing.
--Madden sold 4.5 million copies. That's over $200 million in revenue, and yet we STILL can't get a patch within two months of the game's release. Let's classify that as "pathetic."

Clearly, it wasn't a banner quarter for EA.

Today, there's an outstanding article over at Gamasutra by Leigh Alexander and Simon Carless that digs into the details of EA's 10-Q filing. Really excellent work, and here are a few highlights:
--roughly 25% of EA's revenue in the U.S. comes from sales to Gamestop and Wal-Mart. That's a remarkable concentration of revenue for a software company, seemingly.
--remember how I mentioned that EA's revenue from PS3 sales was steadily dropping, while Wii revenue was steadily increasing? That continued in the last quarter, and to an even greater degree. Here's the breakdown:
Xbox 360=$218 million (compared to $166 million in the same quarter last year)
Wii=$59 million
PS3=$17 million. That's not a typo--Wii revenue was over 3-1 higher.
PS2=$73 million (compared to $269 million in the same quarter last year)

So Sony's consoles contributed 3X as much revenue in the same quarter last year. That's an extension of what I wrote about a few months ago--PS2 software sales are falling off a cliff because the new games are starting to dry up. There are still quite a few games being released for the system right now, but a lot of them are pure junk.

It's going to get worse, too. EBGames has 17 titles listed for the PS2 in 2008 as of today. The PS3 has 55. Normally, this would be a good thing, but not when the console transition has gone so poorly for Sony--publishers are going from selling PS3 games to an installed base that's 5% of the PS2 base.


That's why console transitions can't drag out. When a new console is introduced, it needs to sell, and sell quickly. If it doesn't, publishers get caught in the crossfire, and E.A. has clearly been caught.

One other note on EA, and it comes from Deutsche Bank analyst Jeetil Patel in this article over at GameDaily (thanks Jesse) :
"Based on our conversations with folks in the retail channel and other industry participants, it appears as though plenty of EA's titles from the June quarter still remain in the channel. Note that the company shipped in 2mn units each of Command & Conquer and Harry Potter. Assuming a 50/50 int'l./domestic mix split and 50% of C&C on the PC, it may take EA 70-100 weeks to sell-through existing channel inventories on these titles, based on current NPD sell-through vs. units in the channel," Patel explained.

"Additionally, we highlight that retail pricing for several of the next-gen versions (Xbox 360, PS3, Wii) of the two titles have been already marked down to $30-$40 within 4-6 months of release. We think this could become a more widespread problem considering lackluster product quality, weak sell-through thus far (even on major franchises), and a crowded holiday selling season that should favor a handful of titles (Call of Duty 4, Halo 3, Super Mario, Guitar Hero to name a few)."

I love the smell of stuffing the channel in the morning--it smells like victory. Actually, it just smells like overhang, which is kind of a sweaty sock mixed with pee smell. And if EA has done this with more than just two titles, they're going to have to start discounting lots of different SKU's, and quickly. So their earnings situation might be even worse, but it's temporarily being disguised by all the product in the channel.

Patel also notes that the old grey mare just ain't what she used to be (not that I'm sure she ever was):

...EA's game quality remains questionable, which in turn could translate into ongoing market share losses.

I don't know if I agree that it's going to cost them market share, but there's no quesion that they have endemic quality issues. I, write about that, um, occasionally, so need to go into more detail now.

One last note that I find particularly ironic. EA, surprisingly, recognized fairly quickly that the Wii was going to become a phenomenon. They started developing exclusive titles quickly--games like Boogie and EA Playground. They're not selling, though, and in the case of Boogie, Eli 6.2 delivered a definitive thumbs-down after only ten minutes. It just wasn't fun.

Usually, EA is behind in terms of recognizing trends. This time, they recognized the trend in record time--and still haven't been able to capitalize.

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