As Holiday Sales Disappoint, EA To Focus On 'Hit Potential' In 09

EA says its holiday portfolio didn't meet sales expectations, and as a result it'll cut SKUs and consolidate its businesses next year. On a conference call to investors, the company further explained what went wrong -- and what it needs to do now. On the call, EA CEO John Riccitiello said that while the company's quality levels have improved -- he noted 17 titles with Metacritic scores of 80 or higher versus 7 of the same last year -- "that quality has not yet translated into enough sales." Secondly, more conservative retailers, who have begun placing smaller inventory orders more frequently, resulting in an overall reduction of year-end inventory, "will sharply reduce our December revenue," Riccitiello said. The planned reduction in SKUs for next year, the CEO explained, will favor a greater investment in titles with the greatest "hit potential." Second, EA will focus more on games with strong online features, and reduce expenses through business consolidations like the one it recently underwent with its Casual label. "Cutting costs will not impact our commitment to quality... [or our investment] in new properties and direct to consumer initiatives," Riccitiello stressed. EA Chief Financial Officer Eric Brown added that the SKU reductions would likely be split evenly between the company's casual titles and more traditional games, while the sports portfolio was likely to remain unaffected. When asked by an analyst about new IP in particular, Riccitiello said, "We're very pleased with a lot of our new franchises this year. We think Spore has established a strong base for being an ongoing franchise. We think the same of MySims. Dead Space looks like a long-term big winner for us... Warhammer will continue to perform very well." "Mirror's Edge is one that was very strongly reviewed... we'll be looking at some issues around the design to make sure that strong IP is married with strong business," Riccitiello added. "Many times, what happens with new IP is the first edition doesn't generate the units that subsequent editions could generate... In this particular year, the consumer might have been more reticent to take risks than they might otherwise be, and it was a very crowded holiday." But Riccitiello observed two shifts in the larger environment that play a role in the company's challenges -- a pronounced move on the part of the consumer to more heavily favor the top five titles, which yield a higher percentage of total individual sales. "Secondly, we are definitely seeing an ongoing shift to online gameplay and monetization. It's not just an Asia phenomenon, but a global phenomenon," he said. "There's also the macroeconomic environment we have to contend with. Our response... is fewer titles, more focus on those titles, and very likely, more investment to create demand for those titles." "Secondarily, more online features and ongoing content that will create additional business models for us and help prolong the catalog life of that title." One analyst asked whether Wii's dominance in the market makes it challenging to achieve strong sales results on core market titles. "We have a number of titles that are performing well on the Wii," said Riccitiello, noting MySims, Boom Blox and FIFA 09, "but there's no question that having the lead platform be a platform with two thirds of the unit sales occurring to the first-party owner is a really unusual thing. We haven't seen that since prior to the PlayStation 1." "For those who sell... console games, that's a challenge and something we have to contend with," admitted the CEO. Still: "We don't think Nintendo's a new factor there," he added. "We think it's really a polarization among key titles... and then the second factor, and one we all shouldn't underestimate, is a resetting or destocking at retail. As retailers end [the year] with lower retail inventories, that has less effect on sell-through -- but could have a dramatic effect on sell-in."