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Electronic Arts Financial Evaluation Essay

Electronic Arts Inc. (EA) is one of the leading interactive software developers in the $60 billion industry. Incorporated in 1982, Electronic Arts Inc. began with an initial investment of $200,000. Electronic Arts Inc. went public in 1990 with an IPO of just $8, trading for the last 16 years the stock had soared to over $54.76.

EA has a talent for the craft of creating video games. EA is the #1 video game publisher in the US, with an excess of a hundred popular titles such as NFL Head Coach, Madden NFL 2006, The Sims, Need for Speed series, and Medal of Honor series. It develops games under such brand names as EA GAMES, EA SPORTS, and EA SPORTS BIG. It also distributes titles for third-party labels and publishes games based on Hollywood franchises, including The Lord of the Rings, The Godfather, Harry Potter, and Batman.

EA develops its games for PCs and console systems such as Sony’s PlayStation 2, Nintendo’s Game Cube, and Microsoft’s Xbox, as well as for play online at EA Nation, Pogo.com. In addition, EA is expanding its base to mobile platforms, including handheld video game players, such as the PlayStation Portable (PSP), Nintendo DS and Game Boy Advance and cellular handsets.

EA makes investments in facilities and equipment that allow the Company to create and edit video and audio recordings that are used in its games. EA began to expand by acquiring several successful developers and, as of the early 2000s, EA has become the world’s largest third-party publisher, with a net revenue of US$2.951 billion on its fiscal year March 31, 2005.

Products

EA has developed a wide range of products in the entertainment industry catering to almost everyone. EA has a well-established position over the Sports, combat simulations, strategy, and fantasy games. Ea has been leading the industry with its sports category since inception. EA’s sports category dominates the market with 30 to 40 percent of sales.

EA franchises games and re-released, essentially the same game is produced year after year, adjusting its roster and adding a few upgraded features and mechanics to stay current. EA sells them for full price over and over, which created a whole new model for game publishing for both disposable and mass-market, buy it one year and like how it looks, you have to buy all of the upgrades year after year if you want to stay current. Examples of this are the popular EA Sports NHL 2006, NBA 2006, NFL 2006.

EA deploys its technology to help promote its products the way they are developed using actual movement from athletes in sports gaming to bring true to life gaming

EA’s advantage over competition with its exclusive licensing with FIFA, Road & Track, NBA, Shaquille O’neal, PGA Tour and the NHL.

Ea also maintains its effort in the older technology by releasing their core franchise products for the older consoles during holiday season, in conjunction with aggressive marketing in the retail channel.

Ea has also taken the internet to new revenue creating strategies by introducing product upgrades with expansion packs, which enable the consumer to buy more levels and link players together for online gaming.

Following its acquisition of JAMDAT, the Company merged its existing cellular handset software game development and publishing business with JAMDAT to establish its EA Mobile business. Through EA Mobile, they can publish games for its customers to download onto their cellular handsets. The Company’s customers typically purchase and download its games through a wireless carrier service accessed directly from their cellular handsets, which must be enabled by technologies and then customers are charged a one-time or monthly subscription fee on their cellular handset invoice for the game.

Electronic Arts publish games that are playable online by consumers. Online-only and casual games such as card games, puzzle games, and word games that it makes are available on their Pogo website. Another type of online-only games is called the massively multiplayer online games. The Company has two massively multiplayer online game products, Ultima Online and The Sims Online. In addition, online downloads are available for certain PC games either from its EA.com site or third-party sites, such as Gametap, and Microsoft’s Xbox Live service.

Licensed Products

Electronic Arts also maintains a smaller business where it licenses to manufacturers of products in related industries. For example, EA will give right to makers of personal computers or computer accessories to include certain products with the manufacturer’s product or offer the EA’ products to consumers who have purchased the manufacturer’s product. The Company calls these combined products OEM bundles.

Production and Distribution

EA uses a direct distribution channel worldwide allowing them to meet demands and keep a control over there inventory to respond to market trends.

The company characterizes its suppliers by three categories: manufacturing entities that press EA’s games, entities that print the instruction booklets, and entities that package the pressed games and completed instruction booklets. The company is able to buy its materials with a volume-based discount. In addition, EA sustains significant relationships with companies such as Sony and Microsoft. This allows EA to easily purchase the appropriate hardware. The close connection with console manufacturers allows EA to maintain and grow its current market share.

Distribution and delivery of EA’s products is done in two main forms, packaged goods and bundles. Packaged goods are either the specific game CDs or cartridges, which are sold online or at mass retailers such as Wal-Mart, Furtureshop, and EB games. Bundles allow manufacturers of related products to have the rights to offer EA’s products to customers who have purchased the manufacturer’s products.

Finance

To finance and develop EA titles typically requires large up front costs during the research and development stage. Typical development costs are about 1 million however, some of the signature titles (Tiger Woods Golf) that incorporate celebrities in games can rang up to 5 million in costs. Average sales have also been increasing over the years as well.

Growth

EA has recently acquired Pogo, a online prescription service where user can sign up and play games online. EA also holds minority interests in NovaLogic, Stormfront Studios, Accolade and many more listed below. In addition, EA also holds minority interest in joint venture corporation, EA Victor, to develop and distribute products in certain Asian countries.

EA is expanding internationally through acquisitions of bullfrog (UK) and Kingsoft (Germany). EA has a hold on the European market and with the acquisition of Vision Systems has expanded its reach into South Africa.

EA generate large amount of revenues from sales of EA Studio products for dedicated entertainment systems. These systems include consoles, PC, and Moble devices. Revenue is also being generated from Licensing of EA Studio products, Co-publishing and also distribution.

Currently EA receives a majority of earnings from 61 percent of its from sales of titles produced for the console systems consisting of Playstation 2, Xbox, Xbox 360, Nintendo Game Cube, etc. also due in the coming year are Playstation 3 and Nintendo Wii.

A break down of sales for 2006 are shown below (millions of $)

So debatably the most important thing for the company currently is to position themselves favorably for the coming next generation. EA already controls the Microsoft market, being by far the largest producer of games for the Xbox. The company has always been a major player in development for the Playstation, and the next generation seems no different. Where the big questions lie are in the potential for success of Nintendo’s new system, the Wii, which has been garnering more and more attention throughout the industry. EA is determined to be a much larger influence on Nintendo than it has been in the past, and the reality of this plan may be the single largest factor in the company’s future earnings potential.

2006 sales have suffered due to the anticipation of the next generation console systems, the Playstation 3 and Nintendo’s Wii. However, total revenue has not suffered due to the release of Xbox 360. Trends for consumer purchases of other console systems dropped while Xbox release its next generation console. All sales are anticipated to increase during the next period.

Entertainment software products typically have a life span of 3 to 12 months. In addition, there are many competitors with many products competing for valuable shelf space is cost conscience market. EA’s success depends on their timely ability to deliver innovative, new products on timely basis.

Industry Specific Analysis

Computer gaming industry

At more then $60 billion in consumer sales in the world, videogame industry is comparable in terms of spending to spectator sports, box office movies, or theme parks.

The industry is very much hit driven with a successful release having major effects on the company’s market share and profit. It is ongoing periods of technology change where only a handful of major players will be left. The companies that will survive will have a strong developmental capabilities and cash and equity position that are strong enough for the company to act as a consolidator. EA is one of the vary few companies that is able to profit from this trend of technology change.

Lifecycle Overview

The electronic gaming industry looks to be in the growth stage of its lifecycle. The industry has products that are on the market and currently have a strong demand. The demand for video games is expected to rise with the continual supply of Xbox 360s into the market, as well as the upcoming release of Sony’s Playstation 3 and Nintendo’s Wii. The industry grows as new technology and products make their way into the marketplace, but the gaming companies rely upon consumers’ discretionary income, which works against the independence of the business cycle.

Profitability

There is a high degree of concentration in the video gaming industry. Currently, there are only 25 members in the Entertainment Software Association, which represents the gaming industry. Only 12 games sold 1 million units in 2004. This creates a large barrier to entry into the gaming industry because large amounts of capital, as well as restrictions to licensing rights and agreements for sports, movies, and other special events.

Industry Competitors

Competition between companies in the electronic gaming sector is very competitive. One example of this is sports games, specifically football. Some of the games include EA’s Madden Football series, Take-Two Interactive’s ESPN Football, Midway’s Blitz, Microsoft’s NFL Fever, and Sega Sports NFL series. Other competitors include Activision, Inc., Atari, and privately held Vivendi Universal Games, Inc

Demographics

The aging of the population plays a beneficial role in the gaming industry. Children who grew up with first and second-generation video gaming systems are now adults with the opportunity to spend their discretionary income on what they see fit. In the past 12 months, 25.1% of adults have played a video game. According to the ESA, The average age of the game buyer is 37 years old.

Aggressive acts

EA is sometimes criticized for buying smaller development studios primarily for their intellectual property assets, and then making the developers produce mediocre games on these same franchises, which many as not up to the standard of the rest of the series. Usually these franchise games are being aimed at basic audience. Productions from EA owned studios as of late have generally not been known for their originality.

EA is also criticized for shutting down its acquired studios after a poorly performing game. Many see EA’s control and direction as being primarily responsible for the game’s failure rather than the studio.

Exclusive licenses

Some think Electronic Arts’ sports licenses are threatening the game market. After Sega’s ESPN NFL 2K5 successfully grabbed market share away from EA’s dominant Madden NFL series during the 2004 holiday season, EA responded by making several large sports licensing deals which include an exclusive agreement with the NFL, and in January 2005, a 15-year deal with ESPN. The ESPN deal gives EA exclusive first rights to all ESPN content for sports simulation games. On April 11 2005, EA announced a similar, 6-year licensing deal with the Collegiate Licensing Company for exclusive rights to college football content. Critics believe that the reduced competition is likely to result in fewer improvements for subsequent versions than otherwise.

Company Specific Analysis

General Information

In the electronic gaming industry, EA plays a dominant role in publishing interactive entertainment software for systems such as the PlayStation 2 computer entertainment system, the PlayStation, the PSP (PlayStation Portable) system, Xbox video game system from Microsoft, Nintendo GameCube, Game Boy Advance and the Nintendo DS as well as PC.

In the future, EA plans to develop games for up-and-coming consoles such as Xbox 360, the PlayStation 3 and the next console from Nintendo. Since 1982, EA has continued to be a front-runner in the interactive gaming industry. EA has used computer animation, video, photographic images, motion capture, 3D face and body rendering technologies, computer graphics, and stereo sound. Contributions from storywriters, film directors and musicians have helped make EA stay ahead of their competitors and on the cutting edge of their industry. Strategically, EA offers many franchise choices to constantly expand their market share of the electronic gaming industry. Being a international company, EA is also focused on expanding its global holdings.

Looking to the future, growth opportunities for EA include the online gaming market and the mobile cell phone game market. Through pogo.com, EA offers numerous web based games to over 840,000 subscribers, most of who have paid for their subscriptions. In the cell phone market, EA is focused on turning their hit games into cell phone compatible games.

Products and Markets

EA offers products from three different divisions: EA Games, EA Sports, and EA Sports Big. EA Games consists mainly of tactical and action games. EA Sports is comprised of traditional sporting games such as Tiger Woods Golf. EA Sports Big moves in the more extreme direction with games such as NFL Street. Keeping up with the constant changes in sporting events, EA makes yearly changes to the majority of their games to show new players, tactics, and regulations.

EA also works through Hollywood licensing to release new games based on hit movies.

Considering EA has two different sporting franchises, EA Sports and EA Sports Big, their largest market consists of sports games. They are constantly trying to reach out to the popularity of athletics in our culture. Realizing also that movies play a dominant role in our society, EA markets products to exploit the popularity of the movie industry. EA utilizes many strategies in their marketing plan. Looking outside the US, EA is expanding their product line into China and surrounding countries.

Awards

Electronic Arts has received many reward for its development of console games. One fo the most recent awards from the Academy of Interactive Arts and Sciences, awards EA for their development of SSX with 5 awards, including Console Game of the Year, Outstanding Achievement in Visual Engineering, Outstanding Achievement in Game Play Engineering, Racing Game of the Year, and Sports Game of the Year.

Competition

large software companies and media companies are increasing their focus on the software games segment of the entertainment market and as a result, have all become more direct competition for EA. Several large software and media companies, Microsoft and Sony, have been publishing products that compete with EA’s for a long time, and other diversified media entertainment companies as Time Warner and Disney, have announced their intent to significantly expand their software game publishing efforts in the future.

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