There is a lot of emerging competition for traditional video game makers. For instance, Zynga’s estimated $10B valuation is larger than EA’s, yet the firm only has a tenth of the revenue in contrast and a possible over-dependency on Facebook. This almost sounds like the dot com era again to me. How will this story end?
This is the question that my class discussed with Peter Moore, President of EA Sports, when he visited my class on May 16, 2011.
Peter opened by saying digital is the growth driver in the gaming industry. The gaming industry is expected to grow an estimated a 5-10%* from the years 2010 to 2014; while digital gaming alone has grown at a 67% pace to $20B in just the last two years of business. It sounds great, but there is a big challenge – growth isn’t coming from a single digital source.
What is inspiring about EA’s approach to digital is that they are taking it on with enthusiasm – no heads are buried in the sand. Everyone knows that they adapt or become irrelevant. The digital transformation for EA means that they must face disruption on multiple fronts. New revenue generating business models include micro-transactions, downloadable console content, game add-ons and advertising; shifting revenue away from traditional physical disc sales. Platform proliferation dictates an expansion strategy that crosses just about anything that enables true ubiquity for the gamer; allowing them to play where and when they want.
With such a wide array of changes and challenges present, Peter doesn’t ignore the business case for making smart digital decisions across ecommerce, merchandising and device platforms. His rigor is demonstrated in the ability to deliver 30% margins as an operating business unit.
Peter Moore's visit to John Schneider's MGMT 162 course
With Peter’s second visit over the past year, one thing becomes evident. EA and the gaming sector are in for a wild ride. It is truly exciting to watch a large firm embrace Schumpeter’s theory of creative destruction; one that encourages the opening of new markets by tearing down traditional business models and placing emphasis on redesigning industry boundaries as new technologies introduce tremendous growth opportunities.
* Source: PwC Global Entertainment & Media Outlook 2010-2014
An example of this digital venture into Micro-transactions that EA has bought and is now updating via the Phenomic studio: http://www.lordofultima.com/en/welcome
The game is browser based and runs on a JavaScript/HTML5 delivery method. A few big benefits from this are the inability to traditionally “pirate” the software, instant updates, multi-platform penetration, and globalization + internationalization without the traditional fracturing of a product. The downside’s are many but biggest among them is code exposure (JavaScript/HTML5 is client side). E.g. the new Angry Birds chrome game was easily reverse engineered. The challenge is where to draw the line between server side and client side to benefit performance and still maintain security or intellectual property protection (the new PR term for DRM).
The X-Factor the industry is trying to figure out is the level-of-effort + fun-factor required to drive micro-transactions over freeloading. Zynga definitely has this figured out and is why they are highly valued by the IPO community. That LOE+fun-factor isn’t easily copied, especially when put on top of a proven social network (i.e. Facebook).