Taming the Gorilla

For over a decade, the performance of Electronic Arts has been a key indicator by which the health of the games business as a whole is measured. The industry's largest third-party publisher for several years, EA has been seen - rightly or wrongly - as the lynchpin of the publishing business, a status firmly cemented by the embellished tales which named it as the "Kingmaker" that killed off Sega's Dreamcast and slowed early uptake of Xbox Live.

In light of that, what are we to make of EA's present situation? With losses growing significantly in the last financial quarter and around 600 jobs to be slashed at the firm's various offices and studios around the world, is this an indicator which the industry at large should be worried about?

Some people clearly believe so. Reporting on the situation for Variety, Ben Fritz sums up the feeling of several commentators (especially those outside the industry) right on the first line - "Turns out the videogame biz may not be totally recession proof."

It's probably not intentional, but it's hard not to detect a ring of schadenfreude in statements like that. After years of confidently talking about the industry being recession-proof, to be bitten so early by the financial turndown would unquestionably be seen in some quarters as darkly ironic - although the sobering fact of hundreds of people losing their jobs should put a dampener on much of that sentiment.

The reality, however, is rather more complex. First and foremost, the blame for EA's financials doesn't rest with the world's own present financial woes. Several countries may be slowly tipping into recession, but right now, that has nothing to do with EA's figures. I can say that with some confidence - partially because it's simply too early for the recession to be affecting the company to this extent, but mostly because during the quarter in question, EA's revenues actually rose significantly. For the full year, too, revenues are expected to rise strongly.

I've argued before that the games business may not be entirely insulated from recession this time around, since its recent expansion into a much wider range of demographics also leaves it more exposed to pressure on consumer spending. However, that's pressure that we're simply not seeing at the moment, and any impact from recession at present is so utterly minor as to be unimportant.

This is the crux of the matter - Electronic Arts' problems are its own. Here is a company which, for several years, faced stagnation in its revenue figures while costs continued to rise. It's a company which foolishly ignored the importance of original IP creation for almost a decade, leaving it naked and exposed to the whims of partners like Warner Bros - whose decision to move the next Harry Potter film's release left EA with a massive gap in its publishing schedule.

It's a firm which has suffered from crippling internal inefficiency and from an over-stuffed middle management system which occupied itself far too much with company politics and intrigue. Worst of all, it suffered from a widespread (and not remotely unfair) public perception that it was a "shovelware" firm - throwing out low-quality licensed titles and overpriced annual updates to popular franchises, and killing the talent and creativity in almost every independent studio it acquired.

While EA was the industry's 800 pound gorilla, it could get away with some of that. Its financial prowess and incredibly strong distribution and marketing operations allowed it to hoover up movie and sports licenses, and for years it was sustained by regular releases of James Bond, Harry Potter and Lord of the Rings licensed games, along with annual updates of FIFA, Madden NFL, and Need for Speed (tellingly, the only IP on that list that the company actually owns outright).

The world has changed around EA. The company isn't a Kingmaker any more, even if you accept the proposition that it ever was (the conventional account of the Dreamcast's history is very questionable). Microsoft and Sony have joined Nintendo in building powerful first-party publishing operations for their consoles. Nintendo, in turn, has become an absolute giant, dwarfing anything EA has ever been. Activision merged with Vivendi (and more importantly, with Vivendi subsidiary Blizzard) to create a publisher larger than EA, with a monthly revenue stream from World of Warcraft which is probably worth well over a billion dollars annually. Former minnows like Ubisoft have grown in size and importance thanks to an unrelenting focus on quality and original IP.

As such, it would be foolish to try and read the games industry's fortune from the tea leaves at the bottom of EA's cup. This is a company in a unique situation, a former giant whose inefficiency and inability to innovate and develop has caught up with it over the years. The market as a whole is booming, and while some other companies also face difficulties at present, those have very different root causes and are generally not comparable with EA's situation.

There's another factor which needs to be considered carefully by anyone thinking about EA's problems. Electronic Arts itself is no longer the stagnant beast with spiralling costs that it was two or three years ago. Since the return of John Riccitiello to the company, this has been a publisher in transition, and many of the problems I just outlined are already in the firm's sights.

Riccitiello understands several essential truths which seemingly escaped EA's former bosses - most notably Larry Probst, a man whose hard-nosed demeanor and wealth of business experience in no way mitigates the fact that he oversaw a period of flat revenues, rising costs and critical damage to EA's reputation, both within the industry and among consumers.

Under Riccitiello, we're seeing a transition back to development as the core activity of a videogame company. The company is producing new IP, and some of that new IP is genuinely excellent - within the space of a few weeks, games like Dead Space and Mirror's Edge have helped not only to turn around perceptions of EA among gamers, but also to establish potential franchises which will reduce the firm's reliance on other people's properties.

Evidence for better control of costs is sparse at the moment, but that may simply be because money is being spent to improve areas of the company (its digital distribution strategy is one focus which Riccitiello has discussed) which will be essential for future growth. Controlling costs looks less important when revenue growth is outstripping them, anyway, and there's some grounds to believe that that's where EA is headed.

Not everything has gone right for the company. Not all of its new IP is brilliant, but that's only to be expected, and I sincerely hope that EA's management is serious enough about original IP generation to understand that successes will often be tempered with flops. Public outcry over the use of restrictive (and worthless) DRM solutions has been met with embarrassingly naive and often downright insulting comments, which desperately need to be reined in if EA is to maintain the goodwill it is building so painstakingly. More worryingly, the company's bid to take control of Take Two has been an expensive waste of time. It was an avenue worth exploring (for both firms), but it may have robbed EA of its focus for much of this year.

Set alongside the simple existence of Dead Space and Mirror's Edge, however, these concerns seem minor. The loss of 600 jobs, however, is not minor in any way. It's a demonstration of the fact that the road Riccitiello has set his company upon is a bumpy one - but it's also the only road worth travelling. The alternative was to become an irrelevant, archaic firm which subsisted largely on selling licensed products to a dwindling audience. Instead, there's a real possibility that EA could once again be a true powerhouse - as long as Riccitiello, his management and EA's shareholders can all find the courage and confidence to stay the course.