Electronic Arts Plays a New Game

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Investing in the video game industry has become a game of "spot the disrupter." According to the latest theories, Zynga and maybe Apple (NAS: AAPL) will redefine our idea of gaming, while the more traditional video game companies slide into irrelevancy. However, Electronic Arts' (NAS: ERTS) recent actions indicate that this company intends to remain a major player.

The industry today
According to EA's CEO, John Riccitiello, changes in the video game industry indicate that we've seen the end of the four-to-five-year console cycle, which allowed developers time to adapt to each wave of new technology. The industry has seen the rise of the iPad, Google's (NAS: GOOG) Android, and the free-to-play business model. Digital sales now represent the fastest-growing revenue streams on every video game platform.

EA's playbook
The old guards of the gaming industry have all reacted differently to these changing circumstances.

  • Nintendo plans to increase its digital sales, but insists that mobile and social gaming on other platforms won't cut into its own business. The Mario maker may have a point. It's possible that gamers ignored Nintendo's 3DS simply because they're just not that interested in 3-D gaming.
  • Take-Two Interactive (NAS: TTWO) has made a few cautious moves into the new gaming spaces. It ported a couple of games from its handheld catalog over to the iPhone, and launched Civilization World for Facebook.
  • Activision Blizzard (NAS: ATVI) has said that its working on Facebook games, but hasn't made any specific announcements. It's probably more concerned with launching its Call of Duty: Elite subscription service this fall.
  • Majesco Entertainment (NAS: COOL) acquired Quick Hit -- a developer of free-to-play sports titles -- in an effort to beef up its social gaming division.

Meanwhile, EA has embraced the new platforms. It already has a handful of games on Facebook that attract more than 29 million monthly users. However, I expect the company's recent acquisition of PopCap Games, and its launch of SimsSocial, will attract a lot more users and help EA chip away at Zynga's phenomenal lead.

Of the two initiatives, I think Sims Social should have the greater impact on EA's Facebook offerings. The Sims generally performs well on any gaming platform. The game's goals include building a lavish virtual home for your character, which lends itself well to the free-to-play model. EA can offer Sims Social players an array of virtual furniture and floor tiles in exchange for Facebook credits.

PopCap should also help boost EA's mobile presence. Right now, EA's mobile catalog suffers from a lack of the simple but dangerously addictive games that dominate the mobile best-seller lists -- think Angry Birds and Fruit Ninja. PopCap has mastered producing these games, and it should supplement EA's offerings nicely.

Keeping core gamers
EA's social and mobile moves have gotten a lot of attention lately, but I wouldn't ignore EA's console and PC strategy. Last quarter, EA's top digital revenue generators -- FIFA 11, Battlefield: Bad Company 2, and Dragon Age 2 -- were all console games, and the company plans to create more revenue streams from core gamers.

For example, EA SPORTS has followed Activision's lead by attempting to build a subscription plan around popular franchises. It just announced its Season Ticket plan, which charges subscribers $25 a year for the chance to download temporary preview copies of EA's sports titles three days before the games hit the shelves. If they want to keep playing after that three-day window, though, players will have to buy a retail copy at full price. Subscribers will also get discounts on all downloadable content, and access free online content such as FIFA 11's team creator.

EA will also launch Star Wars: The Old Republic for the PC sometime this fall. It's a subscription MMORPG like World of Warcraft, but with Wookies. The company recently began taking preorders, and based on the initial response, it thinks the game will be a success.

Foolish takeaway
Although I'm excited about EA's approach to the changing video game industry, I'm not ready to bite just yet. I would like to actually play a couple of its social and mobile games before I make a call. Social and mobile gaming markets are actually more competitive than their traditional counterparts, and EA now faces both its usual big-name rivals and countless hordes of small developers.

To gain any ground in this tough market, EA has to make great games. It they're not fun, it doesn't matter how many titles the company publishes. Gamers will ignore them all.

If you'd like to keep an eye on Electronic Arts as it navigates the new gaming world, click here to add it to your watchlist and stay up to date on all the latest news.



At the time this article was published The Motley Fool owns shares of Google, Activision Blizzard, Take-Two Interactive Software, Apple, and Microsoft. The Fool owns shares of and has written calls on Activision Blizzard.Motley Fool newsletter serviceshave recommended buying shares of Take-Two Interactive Software, Activision Blizzard, Apple, Nintendo, Microsoft, and Google; and creating a covered collar position in Microsoft, a bull call spread position in Apple, and a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter servicesfree for 30 days.Fool contributorPatrick Martinowns shares Activision Blizzard. You can follow him on twitter @TMFpcmart03. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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