As Electronic Arts announces further restructuring and widening losses
, analysts are confused by its $300 million Playfish acquisition
, unclear on its game pipeline, and perplexed by its digital business focus.
Wedbush Morgan analyst Michael Pachter says that EA hasn't grown its revenues enough in the past year, thus necessitating another round of cuts. Still, he finds the company's approach perplexing:
"To date, game quality is up, with a remarkable number of highly rated games produced, and with several that are the best efforts by the company in years," he says. "However, after claiming to recognize the problems it faced with unproductive investment, it appears that there are still potentially unprofitable games in the pipeline."
900 of the 1500 job cuts EA announced yesterday are in research and development, leading Pachter to conclude that the company will likely terminate "several" games -- "more than a dozen," according to the company.
"However, today’s action raises the question as to why the company’s management didn’t recognize the low revenue and profit potential of these games when it conducted its last deep soul searching in early 2009," says Pachter.
Cowen Group analyst Doug Creutz weighs in on the future game slate, too: "To put it mildly, visibility on EA’s title slate for FY11 remains low, outside of its annual sports franchises," he says.
On the company's call to investors yesterday, management said it would release about 30 games in fiscal 2011, half of what it released in 2009 and down a third from 2010. "The company expects the reduced lineup to be more focused and efficient and deliver higher margins," Creutz notes. But he says that even if the games do better, due to the "massive" slate reduction, it's "highly likely" the company's revenues from packaged goods will decline faster than increasing digital revenues from Playfish and MMO The Old Republic
-- assuming it launches in calendar 2010 -- can offset.
EA CEO John Riccitiello recently asserted that indeed, digital revenues can offset a decline in packaged goods
. But when it comes to the company's Playfish buy, Pachter suggests: "It is not clear that the social games opportunity is immediate, and that buying is preferable to building." However, Pachter recognizes the potential for strong revenue opportunities that come with market leadership in a particular sector -- he supports EA's mobile strategy, for example, and the company said yesterday it's aiming to address the social space in the same fashion.
Cowen Group analyst Doug Creutz also questions the Playfish move, suggesting EA should focus more on its core business. "Possibly the focus on growing through acquisitions has diverted badly needed attention away from the core business," he says, as to why the company's been challenged to grow its earnings sufficiently.
"Possibly the acquisition track record has not been as successful as management suggests (we note that two of the studios hit reportedly by layoffs yesterday, Mythic and Black Box, were acquisitions)," Creutz adds. He also notes several risks to the Playfish acquisition that make it far from a sure bet: The social gaming space has changed so rapidly that Facebook may not always be the dominant platform; either that, or it might change its own monetization strategies by charging social gaming companies for access.
Given the huge market rush toward social games, it might take increasingly larger marketing budgets to maintain userbases, Creutz worries, and much also depends on a successful integration on the part of EA. "We continue to believe that Electronic Arts has missed the current hardware cycle and is unlikely to achieve meaningful operating margin expansion for the next several years," Creutz says, reiterating a position he's maintained for some months now.
Says Pachter: "One of the recurring complaints we have heard about Electronic Arts management is that they are dreamers rather than visionaries, and that they see profits in places that others don’t... If the company had a stellar track record in discovering heretofore undiscovered gems, its lack of transparency might be more palatable. As it stands, the company has provided very little transparency."