Stark Contrasts

Cutting 1500 jobs is not a news story that's ever going to be spun in a positive way, but for Electronic Arts, the timing couldn't possibly have been worse. The industry's former 800-pound gorilla, which has been looking less and less like the pack alpha for several years now, was forced to announce the wide-ranging job losses in a week when the contrast is starker than ever. As EA's staff nervously wait to discover if they need to pack up their desks, rival Activision Blizzard is popping champagne corks over the unprecedented success of Modern Warfare 2, a game which has taken home around half of the worldwide gross of record-breaking movie Titanic - in a single day.

What is happening at EA is the latest chapter in a long-run and complex narrative, with its roots way back in the middle of the last console generation. For years, the company has had a serious problem right at the heart of its financial situation. Turnover rose slowly or not at all for several years, while costs escalated. Profits and margins were squeezed. Even while EA still dominated the boxed games market, it found it increasingly difficult to actually make decent money.

In part, this problem was attributable to EA's internal structure. Big, bloated and inefficient, the company suffered from an excess of management and unhealthy internal politics which implicitly encouraged middle managers to build and jealously protect fiefdoms within the company, rather than working collaboratively.

EA's scale became a millstone rather than a competitive advantage, with the wheel being reinvented time and time again by different teams. When top management occasionally intervened, frustrated by the lack of progress on technology and knowledge sharing across the company, their interventions tended to be poorly chosen, lumbering the company with weak technologies chosen for political rather than technical reasons.

Meanwhile, the company found itself increasingly slipping away from the dream of being the new Disney which former CEO Larry Probst had talked about so enthusiastically in interviews. Its studios were embroiled in the year-on-year race to push licensed IP out the door, and self-owned IP development ground to a halt.

A development culture which gave tacit approval to the ill-advised "throw more people at the problem" approach meant that teams working on new IP were regularly cannibalised in order to shove licensed games out the door in time, which did nothing either for the quality of the licensed titles or for EA's own storehouse of IP. Worse again, studio acquisitions - which could have shored up the company's ability to generate IP - were uniformly disastrous, with EA's management unable or unwilling to leave the creative teams alone, and slaughtering a whole processions of golden egg laying geese.

This is the company and the corporate culture which faced John Riccitiello when he rejoined the firm in 2007, and each of his changes he has made since then - including this week's massive restructuring announcement - can be seen as part of a continuing narrative in which he fights to reposition a company whose industrial inertia shrugs off any attempt at subtle change.

His job is complicated by the rapid change which the industry as a whole has undergone in the past five years. EA's traditional markets - movie tie-ins for kids and downstream consumers, sports licenses and driving games for a young male audience, a handful of core franchises for high-end consoles - remain perfectly valid and profitable, but the environment around the company has expanded greatly beyond those borders. Tens of millions of new consumers have embraced the Wii and the DS. The iPhone has turned mobile gaming from a struggling niche to a powerful, visible market. World of Warcraft has demonstrated the potential of MMO services. Sites like Facebook drive millions upon millions of consumers to new gaming experiences every day.

It's in this context that the second of this week's big EA announcements must be read. Not only has the company chosen to restructure 1500 jobs out of existence, thus saving some USD 100 million (which comes on top of a previous 1100 layoffs, meaning that Riccitiello has now slashed EA's headcount by almost a quarter since his arrival), it has also announced that it will pay USD 275 million for casual online games firm Playfish.

On the face of it, this looks like a straightforward corporate U-turn - EA backing out of traditional console games and throwing its weight behind downstream online games. It would be fairer, however, to describe it as a move to diversify a company which has fallen behind the curve of the rest of the industry.

After all, EA can hardly be said to be abandoning upstream gaming. When Riccitiello joined, he effectively brought with him BioWare and Pandemic, two of the most respected "core" game studios in the world, and has been as good as his word in ensuring that EA's bloated management structure did not taint the new acquisitions. A new internal structure has given studios the independence and confidence to turn out critically acclaimed, new-IP titles such as Dead Space and Mirror's Edge. It's no coincidence that the talk of EA acquiring Ubisoft - rumours which for over a year insisted that the hands of the acquisition clock read two minutes to midnight - has evaporated. Under Riccitiello, EA has discovered an ability to create upstream IP which is competitive with that of its French rival.

The money, however, has not followed. Turnover is up, but operating profit is not. Having nurtured green shoots within the company, Riccitiello is now forced to cut away the firm's less profitable parts - and to focus some of its energies on the downstream sector, where rapid development times and low costs encourage risk-taking, and occasional blockbusters provide ample reward and profitability.

In this much, history may find Riccitiello to be a wiser man than his rivals at other publishers. EA will look with green, jealous eyes at Modern Warfare 2's success this week - especially given the undoubtedly depressing atmosphere at the company in the wake of the restructuring announcements. In years to come, however, Riccitiello's focus on diversifying EA's base while building up its ability to generate self-owned franchises stands to pay dividends.

The emergence of new markets and business models will not necessarily cannibalise the existing upstream market, of course, and publishers will reap profits from core gamers for years to come - but what Riccitiello has seen, and his rivals would do well to note, is that these developments do signal a time when the growth of "core" games will slow, and publishers wishing to expand will need to break into new markets and business models in order to do so. When that time comes, they may well find that EA is already there.