May 5, 2011
Electronic Arts sees the future of gaming in digital content and wants to lead that market going forward.
“Over the coming years, we will transform EA from a packaged goods company to a fully integrated digital entertainment company. We’re transforming EA to a games-as-a-service model.” EA CEO John Riccitiello said in an earnings call yesterday, according to a transcript posted on investment news site SeekingAlpha.
It will be an interesting shift for one of the world’s biggest game developers. Currently, the company’s operation relies heavily upon packaged goods selling at retail outlets like GameStop. However, over the past couple years, the company has been doubling down on its digital-gaming efforts, offering everything from downloadable extras to full digital games. By the looks of things, the shift has paid off: EA said yesterday that its digital revenue grew by 46 percent year over year to more than $800 million in its last fiscal year. It expects that figure to “exceed $1 billion” this year.
EA’s focus on the digital-gaming market underscores just how important the space has become. As GameStop revealed at its Investor Day last month, it generated $300 million in digital games revenue during its fiscal year that ended January 31. Over the next several years, it expects to see a 50 percent compound annual growth rate in that market and projects $1.5 billion in digital games revenue in just four years.
According to Wedbush analyst Michael Pachter, GameStop’s digital sales growth will come via “casual, social, and mobile game sales, along with point-of-sale activation cards.”
Another game developer, Take-Two Interactive, is betting big on digital games, as well. Last year, Take-Two CEO Strauss Zelnick said that digital game sales could make up as much as 40 percent of the company’s revenue in the next three years.
“I think you can see digital distribution to be 20, 30, 40 percent of our business,” Zelnick told Bloomberg Television last fall. He added that at that time, digital content accounted for “less than 15 percent” of Take-Two’s revenue.
Zelnick’s comments preceded the long-awaited decision on the part of the NPD Group earlier this year to include digital game revenue in its monthly gaming reports. The company previously included physical game sales in its monthly reports and offered up digital sales on a quarterly basis. NPD’s Anita Frazier acknowledged in March that NPD was leaving out 40 percent of all gaming industry sales each month by reporting digital sales quarterly.
Not surprisingly, EA was pleased with the news. Prior to NPD’s shift, EA corporate communications executive Tiffany Steckler told CNN that excluding the data in monthly reports was like “measuring music sales and ignoring something called iTunes.” She told CNN that monthly sales reports sans digital content is a “misrepresentation of the entire industry.”
Realizing that and considering where EA believes the market is heading, the company is changing how it invests its cash. According to Riccitiello, just three years ago, EA’s investments were split 90-10 in favor of its packaged goods business. This year, it’s a much different story.
“What we’ve been doing is stepping down investment against our core Packaged Goods business, and stepping up investment against Digital opportunity,” Riccitiello said, according to the Seeking Alpha transcript. “In fact, this year, we’re getting reasonably close to 50-50.”
Like it or not, the gaming business is going digital at a rapid clip. And EA hopes to lead that charge.
“It’s where we see our growth,” Riccitiello said.