Tuesday, November 10, 2009

Electronic Arts: The Guttening

Well, this can't be good.

Electronic Arts announced quarterly earnings yesterday, and they sucked. Again.

Not to worry, though. They've got a plan:
Electronic Arts said it would lay off 1,500 workers by April 2010, alongside second fiscal quarter results that saw the publisher post a decrease in year-over-year revenues and a widening net loss of $391 million.

Wait! WTF is this--Groundhog Day? From earlier this year:
Electronic Arts on Tuesday said it would be laying off about 1,100 employees, or about 11 percent of its workforce, in order to cut costs.

So if 1,100 was 11% in February, that means they had about 10,000 employees in February. So with 8,900 left (purely a mathematical operation, without any variations that have occurred between then and now), that's an additional reduction of 16.8%.

In February, they had about 10,000 employees. After this latest whacking, they're down to 7,400. That's over a quarter of the company in less than a year.

Ironically, after riding EA's ass for years about their shoddy quality and lack of innovation, I've been much more positive in the last six months, because I felt like they had clearly changed. The EA Sports franchises (with the exception of NCAA Football--good grief, what a turd) have been reinvigorated, and the level of additional attention paid to these titles after they shipped far surpasses anything they've ever done before.

It's not just the sports franchises. EA significantly improved the quality of the titles they shipped in the last twelve months, and they invested significant resources in developing new franchises as well.

The glory days lasted about a year. Now, that's all over.

If you want to know why, let's take a look at a few excerpts from the earnings conference call conducted yesterday (thanks to Seeking Alpha for the transcript). From CEO John Riccitiello:
EA’s definition of the game industry also includes digital businesses such as mobile, micro-transactions, subscription and advertising. As recently as five years ago, we estimated that digital was less than 10% of the global industry. Today, we estimate digital is 35% of the total.

Our sense is that the various digital businesses will grow at 20% or higher this year and for the next several years...EA continues to transform itself from being nearly entirely packaged goods dependent to being a leading player on the digital direct side of the industry.

This year, we have had success putting more resources behind fewer packaged goods titles. We’ve decided to narrow our title slate further in preparation for FY11. We are implementing a thoughtful, targeted action that will reduce titles, close several facilities and decrease headcount by approximately 1,500 positions, of which 1,300 will be included in a restructuring plan.

Two bold steps. The first -- a narrowing of focus and cost reduction to enable investment in hits and digital. The second-- a strategic M&A investment on the digital direct side.


I bolded the "end of times" statement. Here's how the "hits" comment was further clarified by Riccitiello later in the call:
Electronic Arts has a core slate of games label and sports franchises that we will iterate on a either annual or bi-annual basis. And I think you know what those major titles are -- all of them are selling or have sold in their most recent edition 2 million units or more. After that, we’ve got The Sims and Hasbro, and frankly anything that doesn’t measure up to looking like it can pencil out to be in very high profit contributor and high unit seller got cut from our title slate from this point going forward.

So it is really, in a way, if you could array our title slate up knowing what we did about what we would have otherwise brought to market, we cut the bottom third of it.

In other words, if it doesn't move two million units, EA doesn't want it anymore. EA's plan going forward is to ship games that sell 2M+ units and otherwise focus on mobile platforms and "social gaming." That's why they bought Playfish (for $300 million freaking dollars), which they described this way:
Playfish is one of the leaders in the social gaming space with a terrific team and great games. They have three of the top games on Facebook with “Pet Society,” “Restaurant City,” and the recently- launched “Country Story.” They have 10 Facebook titles in total with over 60 million Monthly Active Users -- up over 96% from June."

Hooray! Thank goodness EA can finally focus on genre-breaking titles like Pet Farm Restaurant Country. I can't wait to log into my Facebook account to click on the brightly-colored doodle.

Yeah, this is bad. This is EA basically saying "Remember that really cool strategy we had a year ago that focused on quality and innovation? Well, f--- that, cowboy. It's time to chase the money."

Wait a minute. Now that I think of it, haven't I heard that strategy from someone else? Like this guy:
With respect to [de-emphasizing] the franchises that don’t have the potential to be exploited every year across every platform, with clear sequel potential that can meet our objectives of, over time, becoming $100 million-plus franchises, that’s a strategy that has worked very well for us.

Hey! What is that son-of-a-bitch Bobby Kotick doing in my EA corporate strategy? Oh, yeah--Activision IS EA's new corporate strategy.

That's just great, and by "great" I mean "totally shitty."

If you're wondering how many games are getting cut, here's an indication (Riccitiello again):
We’ve had a little challenge on some of the definitions of what is in and out but I think in rough numbers, mid-60s would have been the way to think about last year and the way we are looking at it right now. Approximately 50 this year and something in the high 30s next year. So when you consolidate this thing, it’s about a 50% cut over two years.

We're focusing on the hits, baby. Welcome to Activonic Arts. Please pick out a misery sweatshirt in your size.

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