INTERVIEW: EA Focuses On Digital, Core Games To Drive Growth

Electronic Arts Inc.'s (ERTS) increased focus on digital platforms and a slimmer portfolio of core games is helping the company recover from recent troubles and reposition itself in the gaming industry.

Chief Operating Officer John Schappert told Dow Jones Newswires in an interview that he is pleased with the video game publisher's competitive standing early in second-quarter trading. "We feel good about how we are positioned and the way we are competing in the consumer segment," he said.

As consumers migrated towards online and mobile games and the gaming industry shifted from packaged goods to digital interfaces and downloadable content, EA suffered more than its peers due to its traditionally high development costs, leading to job losses and expenses cuts.

The U.S.-based company, known for game franchises such as Rock Band, Madden, FIFA and The Sims, has however seen results improve recently as it adapts to the shifting focus of gamers.

Speaking ahead of Gamescom, Europe's major gaming trade fair held this year in Cologne, Germany, Schappert said the company is ready to accelerate digital revenue streams in order to move ahead of rivals, such as Activision Blizzard Inc. (ATVI), Nintendo Co. Ltd. (NTDOY) and Ubisoft Entertainment S.A. (UBI.FR).

"[Gaming] is a growth sector. The digital story is the biggest one and there is a new growing business [on multiple platforms] such as the Apple (AAPL) iPhone and iPad, android mobile devices and social networking." The company expects digital revenue to increase approximately 30% to $750 million this fiscal year.

The company has been forced to look to the digital space for new revenue streams as the packaged goods gaming software market in Europe is flat and the U.S. has experienced a decline, hit by weaker sales of Nintendo's Wii console and falling interest in music software.

"In North America, the Nintendo segment is soft and the music segment is soft. Music was a huge category--it drove a very large part of the market. That market has really gone down and consumers are more selective," said Schappert.

Still, the U.S. market has seen other growth areas, notably in new hardware, he added. "High-definition consoles are in growth mode. The Sony (SNE) PlayStation 3 is selling incredibly well and Microsoft (MSFT) Xbox software is also up."

As well as expanding its online and mobile content, with 52 million monthly active users of its Internet games reported in the first quarter, EA has also restructured to focus on fewer games. Its title portfolio has condensed down to 36 games today from 86 previously to reflect a shift in gamers' shopping habits, Schappert said.

"Consumers are more selective and playing the games longer. Top games continue to grow and other titles sell less well. We are focused on fewer, bigger and better titles." Schappert also said the narrower focus on core titles means the company is spending a "little bit less" on marketing and promotional investment.

In fiscal 2010, EA, which has traditionally had success through its development of software across multiple consoles and the creation of strong multi-year franchises, had 27 titles that sold more than one million copies and five titles that sold more than four million copies. The Redwood City, California company is gearing up for key seasonal sales during the last three months of the calendar year, which supports about 40% of its revenue.

At the start of this month, EA swung to a fiscal first-quarter profit and a sharp jump in margins meant its adjusted results exceeded expectations and its shares jumped more than 7% on the Nasdaq.

EA forecasts second-quarter revenue, excluding items, of $775 million to $825 million, translating to a loss of 10 cents to 15 cents a share, corresponding to the seasonality of sales for the gaming industry. It sees full-year revenue on the same basis of $3.65 billion to $3.9 billion.

By Simon Zekaria, Dow Jones Newswires; +44 207 842-9410; simon.zekaria@dowjones.com

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