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The Following case study will examine in depth the Electronic Arts corporation and specifically investigate the following areas associated with this organization; Business and business model, the technology used by the firm, its technology ecosystem, competitors, major events, and P&L.
Business & Business Model
Electronic Arts was founded in 1982 and maintains headquarters in Redwood City, California. EA employs 3600 individuals worldwide and reported earnings of $1.3 billion for the 2001 fiscal year. Electronic Arts is the leading independent developer and publisher of interactive entertainment software for PC's and advanced entertainment systems including the PlayStation & PlayStation 2, Microsoft's Xbox video game console, the Nintendo GameCube, and Game Boy Advance. They have also become the leading third-party developer of software for 128-bit high-end game machines and personal computers. As its selling point, EA uses technology and creativity to create mainstream entertainment through an interactive medium (1). 
EA markets its products under four brand names including EA Sports, EA Sports Big, EA Games, and EA.com. However, Electronic Arts' business model is centered around two business segments. The first is referred to as "EA Core" consisting of the creation, marketing and distribution of entertainment software. The second business segment deals strictly with the creation, marketing and distribution of entertainment software that can be played or sold online referred to as EA.com. The .com segment of their business also handles online game subscriptions and website advertising. EA core is responsible for the development and distribution of products sold via retail sellers. EA.com serves the company's e-Commerce business function (2).
Electronic Arts' primary business function is as a distributor of entertainment software, but they also operate in conjunction with other publishers and hardware manufacturers as another means of creating revenue. For example, Electronic Arts sells certain games that are co-published by other gaming companies and they also distribute games that are published by third parties known as Affiliated Label products (AL). EA also generates revenue "from licensing of EA Studio products and AL products through hardware companies (or OEM), selling subscriptions on our online gaming service, selling advertisements on our online web pages and selling our packaged goods through our online store" (2).
I feel given the current hype and continuous popularity of video games among individuals young and old, EA will remain a viable company well into the future. However, the most threatening factor to the success of the organization is the seasonal aspect of their market as well as the constant change in buying trends among entertainment software users. For example, if Sony decides to announce the release of the PlayStation 3 EA needs to adjust their production and expenditures to compensate for the inevitable disinterest in the PlayStation & PlayStation 2 software. Otherwise, they will suffer gigantic losses in revenue by creating an overabundance of on-shelf inventory. Gaming enthusiasts are more interested in what's hot now and not what was hot yesterday, so as soon as a new system comes out they immediately become bored with the one they currently own and feel almost obligated to seek out the latest ultra hip technology. In addition, during economic downturns buying patterns tend to slow and it is important for EA to monitor these trends so they can decrease their levels of software development just as they increase them around the holiday season when sales are typically at their highest.
Technology used by the firm (what they use & what they produce)
As a leader in the development and distribution of entertainment software for interactive mediums, EA relies heavily upon various technologies to create their products. According to corporate information obtained from the company website Electronic Arts integrates media such as video, photographic images, motion capture, 3D rendering technologies, computer graphics, and stereo sound with the creative work of writers, film directors, and musicians (1). Don Mattrick, President of EA Worldwide Studios, states "We're using artificial intelligence, inverse kinematics, and sophisticated physics to bring dimension to our characters and worlds" (3).
The company also has numerous licensing deals with celebrities and sports figures whose status attracts big sales for products such as Lucy Liu and Tiger Woods. The company has locked up a licensing deal to distribute gaming software based upon the widely Harry Potter character.
 The technology EA produces is strictly software for gaming consoles such as the Nintendo 64 and personal computers. Moore's Law is a critical concept that has a direct effect on EA's ability to develop newer and more powerful gaming software. Buyers would be unable to enjoy advances in video game graphics, speed, and memory were it not for such advancements in technology. As mentioned previously, EA is a leading producer and developer of "next generation" software for 128-bit high-end machines. Electronic Arts could not bring products to market as successfully as they do without the partnering of various organizations.
Technology Ecosystem
Much of Electronic Arts' success comes from the relationships it manages with other companies. Electronic Arts Distribution (EAD) is the company's publishing studio responsible for acquiring third party co-publishing and affiliated label opportunities worldwide. Several acquisitions and strategic partnerships have spurred EA's growth. In February 2001, EA acquired Pogo.com a widely popular online gaming site that has boosted their customer base and provided them with a wealth of expertise in online gaming. Also, the company purchased DreamWorks Interactive, which has given them bragging rights to the ownership of immensely popular titles like "Lost World: Jurassic Park". A partnership with AOL since 1999 has given the company the ability to tap AOL's well-established global consumer base (3).
The organizations to which Electronic Arts markets it's software including Sony, Nintendo, and Microsoft are certainly equally important to the company's ecosystem because the marketing trends of these other businesses directly effect the success of EA's entertainment software products. As previously noted, Electronic Arts must maintain a close watch on the latest gaming system releases in order to adjust for a possible drop in sales of current software.
Competitors
Electronic Arts has two main competitors including Activision and THQ Incorporated. Activision, an international publisher, developer, and distributor of interactive media, leads the pack in terms of competition for EA. Activision caters to many of the same game genres as EA including action, adventure, sports, racing, strategy and simulation. Activision also makes products for a number of platforms such as Sony's PlayStation, Nintendo 64, and the Nintendo Game Boy. However, it trails in the development and distribution of software for Microsoft's Xbox and Nintendo's GameCube and Game Boy Advance systems. Activision's revenue as of September 30, 2001 saw an increase of 9% to $250 million, but falls far short of EA's revenue total of $422 million up 13%. The difference in earnings is most attributed to EA's aggressive move into the world of online gaming with its acquisition of Pogo.com and it's five-year strategic alliance with Internet giant America Online. Subscribers to EA's online gaming site pay either $4.99 per month for sports games or $9.99 per month for a premium service that includes access to all the online games (3). Activision hopes to gain a larger market share by "focusing its publishing and development activities principally on titles that are, or have the potential to become, franchise properties with sustainable consumer appeal and brand recognition. These titles can be leveraged into sequels, prequels, mission packs other add-on versions and related new titles that can be released over an extended period of time" (4). The company already has publishing rights to character brands such as Spider-Man, X-MEN, and Blade. Activision has signed more than 60 famous athletes to promote games bearing their likeness, which could threaten the success of EA's sports brands. THQ Incorporated also creates and distributes interactive entertainment software for various hardware platforms and video game consoles. THQ is already gaining an impressive share of the gaming market. As of December 31, 2000, the company had already released 253 titles for Nintendo, Sega, and Sony. THQ has a big presence in the retail market and their products can be found in big chains including Wal-Mart, Toys "R" Us, Target, Kmart, and Best Buy. THQ's net sales totaled $347 million as of December 31, 2000 an increase of $256.8 million since 1997 and their net income was approximately $18 million compared to Electronic Arts at $1.3 billion (5). Major Events
The most noteworthy event coming out of the EA camp was the October 23 announcement that it would be laying off a third of the staff of EA.com its online subsidiary. The cuts are the result of efforts by the company to reach its goal of profitability for Internet operations by 2003. Subscriptions for online games have not taken off as was projected in October 2000 (6).
EA also announced in October 2001 the release of the CD ROM version of the highly acclaimed Majestic. Majestic is the company's venture into the world of pervasive gaming. Pervasive gaming draws players deep into the game by utilizing numerous media platforms such as cell phones, computers, PDAs, and fax machines. Players must unravel a mystery from clues and messages received via the various media such as frantic phone calls from screaming actors portraying game characters (3).
Electronic Arts suspended play of the online version of Majestic in light of the events of September 11, 2001 and required players to register in order to rejoin previous games. EA also delayed the release of "Command & Conquer: Yuri's Revenge" by two weeks because the cover art featured an image of the New York Skyline.
Continuing their efforts to gain market share through the use of high profile celebrities, Electronic Arts announced in September the resigning of Tiger Woods to a five-year licensing deal allowing the company to develop entertainment software using the pro golfer's voice and likeness (7).
P&L
For the six months ended 9/30/01, revenues increased 13% to $422.1 million. Net loss decreased 4% to $78.1 million. Revenues reflect increased sales from PlayStation 2 console and increased advertising revenue from Pogo Corporation's websites. Lower loss also reflects lower general and administration expenses as a percentage of sales (8).
The chart below reflects EA's stock performance for 2001. With the exception of a dip around mid September, likely due to the attacks on the 11th, the stock has steadily climbed for the most part. Recent announcements this November of several new products including; NBA Live 2002 for Microsoft's Xbox, the Simpson's Road Rage and James Bond 007 Agent Under Fire for PlayStation2, and four highly anticipated Harry Potter games for the PlayStation and Gameboy videogame consoles will certainly have a positive impact on sales and EA stock purchases (9).
CASE STUDY CITATIONS:
(1) Electronic Arts website, Corp. Info section
http://www.ea.com/home/home.jsp (2) EA Quarterly Report
http://biz.yahoo.com/e/l/e/erts.html (3) stay ahead of the game, Electronic Arts outpaces the competition with a steady stream of fresh new games; Daintry Duffy; Darwinmag.com; Oct 1, 2001 (4) Activision Website, Corporate Info section
http://www.activision.com/investor/overview.html (5) Yahoo Finance; profile - THQ Incorporated; Nov
2001 http://biz.yahoo.com/p/t/thqi.html (6) Online Gaming Not Yet Profitable For Electronic Arts; news.awn.com; Nov 8, 2001 (7) Tiger Woods Re-signs Long-term Deal With
Electronic Arts; businesswire.com; Sept 11, 2001 (8) Yahoo Finance Profile - Electronic Arts Inc.; Nov 2001 http://biz.yahoo.com/p/e/erts.html (9) Multex Investor-significant developments;
yahoo.marketguide.com; Nov 2001 | |
