Case 2 SMTI - Electronic Arts

Victor BOURGOUIN Victor DESPONS Mark HADJ HAMOU 14/09/2016 Case 2 : Electronic Arts 1. In 1995, what are the key characteristics of the video game industry? In which ways is it similar/different from the movie industry? 1995 was a turning point in the gaming industry, with a number of platforms building stronger and stronger positions in the market, such a Sega and Nintendo, as well as newcomers on the market such as Sony which released it’s Playstation 1, and the fall of a number of other companies that weren’t able to keep up with the market such as Atari. One of the key characteristics of the gaming industry is the short lifespan of the video games and consoles. Regular technological advancements and innovation in the hardware sector, such as moving from 8-bit to 16-bit, mean that all companies have to constantly strive to keep up to date if they don’t want to be left behind. 2. Until 1995, how successful has EA been? Why? What is the basis of their competitive advantage? By 1995, EA has been very successful. Between 1990 and 1995, revenue has increased to $420 million and gross profit has increased to $195 million, each growing 500 percent in the period. Net profit has increased to $45 million between 1990 and 1994, or 800 percent. In 1994, EA sold over $400m : • • • • •

53% 22% 3% 5% 8%

Sega Nintendo 3DO PC Affiliated Labels

EA had 85 titles in 1994, and 100 titles in 1995 ($120 million in development costs.) • • • • •

EA grew to four divisions: EA Sports Simulation and Interactive Movies EA Entertainment EA Kids

EA developed a distinct competence at building a culture that is good at dealing with technical and market uncertainties. Key assets include: • Product development, • Marketing, • Integrating creative, technical and management, • Navigational competence, • Salesforce for market competence,

business

people

into

project

Victor BOURGOUIN Victor DESPONS Mark HADJ HAMOU 14/09/2016 •

Top management that is knowledgeable about technology.

Instructors who also use Electronic Arts in can ask students to recall the evolution of EA. Instructors can elicit salient points in EA’s history. For example, until 1989, the company’s strategy had been to develop games for the PC platform. However, by 1989 cartridge-based home video games had emerged as the dominant game platform. At that time, four million IBM PCs and compatibles had been sold creating a market of $230 million for PC-based games. This contrasted with as many as 22 million US households with 8-bit consoles, which generated a games market of $1.6 billion. Of course, the costs of developing games for the PC were very different from the costs involved in developing games for the then dominant Nintendo platform. That company demanded large up-front royalty payments and manufacturing fees as well as advance commitment to cartridge number. All of which raised the risks associated with developing for the Nintendo platform. These risks were similar to those EA faced when it bet on Sega during the transition to the 16-bit platform. By mid 1995, EA faced four key strategic challenges. The company had to prepare for another platform transition, with the industry going to 32-bit processors, while at the same time maintaining leadership in the 16-bit platform. EA was also developing and leveraging intellectual property new intellectual property by co-branding with organizations such as the National Football League (NFL) and National Hockey League (NHL). By 1995, EA has also set its sights on international expansion. As before, the company also faced the usual strategic challenge of attracting and retaining key creative and engineering talent. 3. Until 1995, what has been EA's technology strategy? How is it linked to their business strategy? EA’s strategy was to become the first third party developer for Sega because Sega needed high quality software developer fr its platform to stimulate hardware sales and they knew the fact Nintendo and Sega were already competing with each other on both hardware and software innovations and also that Nintendo would refuse EA to produce games for its system if they are producing for Sega. This was company’s main strategy and it’s MWG to attain the position where they can be the business leaders for software provider. The competitive advantage of the company was its ability to produce the games for multiple platforms with its Artist Workstation that had the capability of cost effective development, easier portability and ability to maximize the full capabilities. 4. In 1995, how should EA top management think about the platform development decisions it faces? Platform transitions are very risky periods for EA. The industry’s share of market goes up for grabs with each transition. For example, Nintendo dominated the 8bit platform, while Sega dominated the 16-bit platform. By 2002, EA is facing a 128-bit platform transition. A transition requires EA to make a big bet on the company it thinks will win the transition. Instructors can highlight this point to

Victor BOURGOUIN Victor DESPONS Mark HADJ HAMOU 14/09/2016 asking students how much cash the company has and discussing the other cash needs the company must balance with transitions. Anything EA can do to help mitigate the risks associated with transitions will fall directly to the company’s top and bottom lines. How does EA manage and mitigate risk? The company has developed a capacity to predict technology and market direction through intelligence derived from development teams and the direct sales force. It has also developed the ability to move fast (make quick decisions), which confers 1st mover advantage – critical in this industry. In addition, EA developed the ability to port to different platforms, including proprietary hardware such as Artist’s Workstation. Instructors should discuss with students the concrete measures EA uses to evaluate which titles it chooses to produce. The most important metrics are:   

Contribution margin Tie ratio Share of market

5. 1. By 2002, how has the Internet affected the video game industry? How does it affect EA’s corporate strategy? Online gaming represented a compelling opportunity for EA. The company could reach more game players through the Internet than it ever could through dedicated consoles. Online gaming also represented a unique opportunity to derive a regular stream of revenue through subscriptions paid by players for access to premium online gaming sites. In 1999, EA sources believed that the total subscriber base of persistent-world games would grow to 5 million players by 2005. The company planned to release 1-2 games per year over the next 3 years for this online subset. Persistent-world games cost about $5 M each to develop, but gave contribution margin of 50% to operate. In addition, the lifetime per game/community was estimated to be as long as 3 years. Most of the data used in this type of gaming resided on the game CD and the player’s local PC, with comparatively little data transferred to the player from the server. EA planned to charge around $50 for the CD and first month subscription, and charge subscribers $10 per month thereafter. EA offered a service in the server-based subset. The company featured “multiplayer match-up” for about half of its PC games through its website. By the end of 1999, usage of EA’s service was very low, hosting an order of magnitude fewer sessions than the most popular rivals. The third online subset, game communities, were websites that that discuss, trade, customize and promote elements of popular games. About half of all PC gamers in the US (20 million) and around 10% of PC gamers in the rest of the world visit one of these sites per month. Game publishers attract only a minority of this traffic, with independent sites drawing most of the traffic. EA’s most

Victor BOURGOUIN Victor DESPONS Mark HADJ HAMOU 14/09/2016 popular community site was Simcity.com, which attracted 1 million users per month for its first 6 months. Traffic thereafter settled to 200,000 monthly visits. 5. 2. What should EA’s corporate strategy be for the next 5 years? Why? How execute the strategy? Discussion of EA’s strategy going forward should take into consideration its current strengths and the forces that will shape the company in the future. By 2002, EA’s scale allowed the company to leverage its intellectual properties across multiple platforms and geographies. The company’s prominence in its industry gave EA other benefits. EA had the potential to influence the success of a platform by its decisions to publish titles for it. Since the success of a platform was tightly linked to the number and quality of games available on them, EA was regularly consulted by hardware manufacturers concerning technical specifications. This enabled EA to develop titles faster and better prepare for transitions in the platform cycles. Online gaming will likely become more important to the company. But for this to happen, several forces exogenous to EA must come into place. These include greater ubiquity of broadband Internet connections in homes and continued development of Internet capabilities in consoles. Forces that EA can influence with respect to online gaming include the development of compelling content for multiplayer and massively multiplayer games that are particularly well suited to the online channel and creation of an online business model that will generate sufficient revenue to the company.