The sudden departure of Electronic Arts Inc. (NASDAQ:EA) CEO John Riccitiello occasioned Motley Fool’s own Rick Munarriz to offer the observation that EA’s problems were endemic to the video game industry as a whole. True, Electronic Arts has suffered along with the rest of the industry, but a closer comparison with EA’s principal rival Activision Blizzard, Inc. (NASDAQ:ATVI) reveals that EA’s essential problem is both simpler and less tractable: profitability.
Although both companies were impacted by the recession, both continued to post fairly robust revenues throughout. Activision Blizzard, Inc. (NASDAQ:ATVI) operating income was briefly impacted, but soon recovered, and its revenue has continued to grow. Electronic Arts Inc. (NASDAQ:EA) had already posted an operating loss for fiscal 2008, even before the recession began, and the losses continued almost unabated even as the economy began to recover in 2010-11. Unlike AB, EA’s revenues haven’t grown substantially over the past five years, but neither have they shrunk substantially. In the chart below, I plot annual revenue and operating income for both EA and AB.
A difference of perception
In searching for an answer to the question of Electronic Arts Inc. (NASDAQ:EA)’s relatively lower profitability, I sifted through many possible explanations, not the least of which have to do with consumer perceptions of the quality of EA products and of EA itself.
To assess consumer perceptions of product quality, I tabulated metacritic.com review data of key game franchises for both companies. For EA I used review data for Dragon Age, Mass Effect, Harry Potter, Madden, FIFA, and the Sims. For AB I used data for World of Warcraft, Star Craft, Guitar Hero, Transformers, Tony Hawk, and Call of Duty. I averaged the ratings over all the games for each succeeding sequel.
The lack of significant difference between the companies, especially for sequels, suggests that EA’s products are not viewed in general as being significantly better or worse than its competitor. EA’s image as a company is a different matter, judging by the vote by users of consumerist.com of Electronic Arts Inc. (NASDAQ:EA) as the “Worst Company of 2012.” How does a company whose products are well received manage to become so reviled? By doing dumb things that needlessly antagonize its customers.
EA has often fumbled badly in Public Relations, as when purchasers of Mass Effect 3 needed to make an immediate additional $10 purchase for a DLC (down loadable content) that most players felt should have been included in the original game. The launch of Sim City Online is just the most recent example of a PR headache, as users found themselves locked out of EA’s servers and unable to play the game they had bought. EA attributed this to server overload, and apologized profusely, even offering a free game as recompense.
Although the effect may be difficult to quantify, customer perceptions of EA may have a direct impact on EA’s bottom line by forcing EA to spend more for Marketing and Sales than its competitor AB. In the chart below, I compare Marketing and Sales cost as a percentage of total revenue.
Both in percentage of revenue, and in absolute terms, EA has spent much more than AB to market games that consumers give comparable ratings to.
A difference of technology
In 2008 Electronic Arts Inc. (NASDAQ:EA)’s rival AB was the undisputed master of the MMORPG (massively multiplayer online role playing game, MMO for short) through products such as World of Warcraft (WOW) and multiplayer versions of Call of Duty, and taking in a cool billion dollars a year in monthly subscription revenue. From a technical standpoint, MMOs represent the most sophisticated form of cloud computing that has ever been devised, in which participants from all over the globe can interact with each other and the game in a virtual world.