EA's money man spills the beans on its next-gen plans

CFO Blake Jorgensen opens up about EA's R&D cost for transitioning to the next gen ($100 million!), why they're expecting consumers to make the transition, and whether the used games market will stick around.
Electronic Arts' chief financial officer Blake Jorgensen returned to the company during an interesting transitional period this year, as CEO John Riccitiello's leaner, hits-focused company pares down on what's not working anymore (i.e. Facebook) and prepares for the costly transition to a new generation of dedicated game consoles. We recently heard from Riccitiello, who said that the company is investing heavily in what it's calling "gen-four" consoles: the next systems from Sony and from Microsoft but not, in his estimation, Nintendo's Wii U. On Tuesday it was Jorgensen's turn to speak up about EA's next-gen plans, during a question and answer session at the Goldman Sachs Technology and Internet Conference in San Francisco. Hinting at a potential holiday release for both consoles, Jorgensen outlined just how much his company is investing in upgrading its tech, did his best to explain why consumers will be making the transition (without, of course, giving away any secrets), and discussed how the cross-platform play that EA has been pushing with its FIFA series is probably going to be reflected in Sony's and Microsoft's console plans. We've highlighted some key moments from his talk below.

The cost of a new console transition

"Historical transitions have been bumpy for a few reasons. One reason has been that a lot of the companies had too many titles. We had way too many titles in the last transition, and the more titles you have, the more expensive it is to convert them from one generation to the next. "We're much more focused now. We've got a core group of ten-to-fifteen titles. We'll stage those in terms of the transition and manage those costs through that. Our goal is to keep the cost increase for R&D under $100 million. And some of that will be in this year, some of that in '14, and some in our fiscal year '15. "I think the other issue in the past has been what happens to pricing with the existing consoles. And what we're trying to do is be receptive to where pricing ends up. We don't think it will be as dramatic. I think the benefit we have now is that we've got some very large franchises that are more tied to sports calendars, and won't be impacted by some of the pricing issues."

Why many of EA's customers won't upgrade right away

"The reality is, is that fiscal year 2014 will still be a fairly large gen-three if there's a console business that comes in at the tail end of the year, mainly because a lot of our titles are built around sports calendars. And so a FIFA, a Madden, an NCAA, an NHL title, all come out aligned with the sports calendar. And if a next-gen console doesn't come out until next Christmas, most people won't wait. They'll want to be involved in getting those titles early, because their friends are all playing those titles, and because they're being played on a current generation's consoles. "An important thing to remember is that next-gen consoles will most likely not be backwards compatible… And if you [play] multiplayer on a game, you'll most likely not be able to play with someone on a different generation. And so if you're a FIFA player and, and the soccer season's starting in August, and all your friends are playing FIFA, you're going to want to be on the same box that they're on. So if they all go out and buy a gen-four box if it comes out at Christmas, then you'll most likely do it. If they all hold on and continue to play on third-generation, you'll probably not see that box purchase until after the soccer season's over. "And I think that works for us positively in both ways. It helps us continue to sell gen-three products, and it will help us sell gen-four product as that cycle finally gets into place."

The next-gen version of Frostbite

"We've always been moving Battlefield well out on the specs because of the huge PC embedded base of that business. And so moving from gen-three to a gen-four is not a huge uptick in cost. "The other key advantage for us is we've been building those types of titles on Frostbite, which is our proprietary engine. Moving Frostbite up to gen-four was a big task, but once you've done that, you now can do that across multiple titles as long as they're using the Frostbite engine. "That's been going on over the last year. The early look on some of those products is spectacular. It will be interesting to see how it plays out as it ultimately gets finished."

Do people even want a new console?

"No one's really seen yet… I mean, we have internally, but no one externally has really seen what the look and feel will be like on the new consoles. So I'll reserve judgement other than to say that I think people are going to be pretty excited. "I do think once again without describing the new consoles, you've got to assume they're going to be highly integrated into the living room and the house, and there will be a lot of capability for interaction. I think the console makers have seen what the typical gameplay is today. It's very different than five years ago, or ten years ago. It was typically single gameplay, not dual gameplay or multi game players. So there's going to be some connectivity potential around that to make the game much more exciting. "I think as well you're going to see a lot more integration between tablets, phones, and the consoles over time. You're going to see people playing on glass at the same time they're playing on the console. And there's going to be some exciting innovations around that. And I think it's going to be an extension of moving from what's in the living room to what's outside the house. Even though it might not be playing on the console, it's connected to the console in some way. "So today, for example, our FIFA Ultimate Team business is a great example of where the business can go. People are playing FIFA at night with their friends, connected in a multiplayer mode. They then, the next morning, are downloading scores onto their handheld device, as they may be on the bus to work or the subway or in the car. And then they're interacting with their friends and trading players during the day, and then at the end of the day they may be scheduling another game that they're going to play that night with their friends. And all along the way, we're either doing microtransactions or just simply staying connected to the customer, and that's a huge opportunity for extension beyond what was traditionally a [single-player] gameplay. "So I think you're going to see more of that, and the new boxes will be much more tied to that capability. I remind people to look at whatever device they're using in the room right now, and I guarantee virtually none of those existed two years ago, let alone seven years ago. So you've got to imagine, seven years is a long time in technology. We're probably going to see a lot of exciting things when it comes to the new consoles."

The used games market (and whether it will exist in gen-four)

"It's one of these classic double-edged swords. In one way the used game business has been critical for the health of the retail channel, and having a healthy retail channel is an important thing for us. The business will probably never be 100 percent digital. Bandwidths are a constraint, and will continue to be a constraint for many years to come, which hold back the ability to do full digital downloads of some games. "So at the end of the day, it's storage capacity. Unless you've got a giant storage server in your house, keeping hundreds of games can tax your storage capacity. And so having a healthy retail channel out there like GameStop or Best Buy or others is important, and to the extent that used games is important to them, I think that's a positive. "Would we like to sell everything at full price and not have a used game market? Sure. But I think the used game market's a little like any other kind of market where it creates liquidity. The fact is, that liquidity benefits us in some fashion. So if someone goes in and trades in a game, there's a good chance they're going to buy another one of our games. And so if there's a liquid market, I think that that's not a bad thing at all. "I can't really comment on where the next generation boxes are going to be relative to used games. I will say that the trend in the business is to have that always-on connectivity and connect with a customer, and to the extent that the software identifies a certain customer is going to create some issues going down the road in the used game market. But I do believe that the consumer likes it, and it's been good for the retail channel."

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