EA: "Becoming the leading pure-play digital entertainment company"

Electronic Arts had an excellent fourth quarter of its fiscal year, performing at the high end of its previously announced guidance. Some of the key highlights: earnings per share improved over 20 per cent from last year, and digital earnings improved by over 60 per cent. EA showed revenue growth with improved margins with improved cash flow. It was an excellent performance all around, although EA's stock price hasn't reflected investor confidence yet.

Reading between the prepared lines of earnings calls it's pretty straightforward: EA is rapidly moving to, as they themselves stated, "become the leading pure-play digital entertainment company." Even though over $2.5 billion of its revenue comes from packaged goods right now, John Riccitiello said he can see that EA will derive more than half its revenue from digital in the near future. That's easy to believe, when EA is telling us that packaged goods will continue to decline in sales over the next fiscal year, while it projects digital to continue a torrid 30 to 40 per cent growth rate.

"EA has gone from 67 packaged goods in 2009 to about 14 today, while increasing to 25 different online offerings"

John Riccitiello

Of course, this is a tricky thing to manage, and there will be casualties along the way. EA admitted as much when ity talked about a "slight restructuring" that will mean some job losses, though it didn't specify how many. Still, EA noted that headcount stood at 9,200 in March, with 70 per cent of that in R&D, and it expects to grow to 9,700 by end of FY13. While EA didn't say specifically, it seems a pretty good bet that the jobs lost will be in packaged goods, while digital goods gains more employees.

EA is well on the way to making its transformation into a mostly digital company, which will bring its margins up to the lofty ranges enjoyed by companies who don't worry about shipping boxes to stores. One of the figures EA noted was that it's gone from 67 packaged goods in 2009 to about 14 today, while increasing to 25 different online offerings. EA's brands are in the process of transcending their original platforms, to the point where EA no longer thinks of something as an Xbox game or an online game; the game is its own entity, and each platform just happens to be where one instance of the game can be found.

When the transformation of EA is complete, it will look a lot more like Zynga in some ways, earning most of its revenue from digital sources. Both companies have similar amounts of cash on hand. Zynga is still far smaller in terms of revenue, but it's trying to catch up. EA still has a huge advantage over Zynga in that EA's revenue is diversified over so many different platforms. Zynga, right now, is completely at the mercy of Facebook. Of course, this does give Zynga much greater focus; it doesn't have to worry about all the dozens of different platforms that EA does.

Next gen console investment was singled out in the earnings call by stating a commitment to spending $80 million on the development of next-gen titles over the course of the fiscal year. That may sound like a lot initially, but it's the equivalent of a couple of mid-range console titles, ignoring for the moment that next-gen consoles may have higher development costs due to higher resolution. EA noted that this is the first time in its history it will be able to go through a console transition and still grow sales and earnings... because this time the digital goods are more than making up for the costs of new console development. Really, too, it's a function of the scale of new console development; it's just a much smaller part of EA's overall business now, so the costs don't hurt very much.

"EA still has a huge advantage over Zynga in that EA's revenue is diversified over so many different platforms"

It will be interesting to see how Activision compares its progress in digital revenue to EA's. Activision seems to be more firmly wedded to revenue from console games, though they are hoping Blizzard will change that with its lineup of new games starting with Diablo III. EA is clearly gunning for Activision's World of Warcraft audience, and promises a renewed effort to increase Star Wars: The Old Republic subscribers. Still, 1.3 million paying subscribers is a far cry from WoW's 10 million. EA seemed a bit sensitive over the falloff in SWTOR subscribers, being careful to point out that the game isn't in the top 5 moneymakers and represents a small part of its overall profits. Despite that, there seems to be a great deal of effort in the works for new content and marketing efforts to expand the audience.

E3 promises to have some interesting head-to-head comparisons in product and marketing strategies between the industry giants. As EA goes digital, can it hang on to solid sales in packaged goods?