In order to achieve the high resolution graphics of today’s MMOs, the game developer manages a delicate balancing act between server-side and client-side (PC) processing that aims to minimize data flow while giving the player responsive control.
Keeping all the players entertained in a virtual world that behaves properly without constant system crashes isn’t easy, and in 2008, Electronic Arts Inc. (NASDAQ:EA) had not yet mastered that art, although it wanted very badly to do so. So it invested heavily in R&D towards the end of developing its own MMO capability. How much of EA’s R&D budget was devoted to MMOs is uncertain, but EA outspent its rival in R&D by a large margin, as the chart below shows.
EA’s R&D budget, together with M&S, was the main culprit in reducing EA’s profitability, and it must have been a difficult commitment to make year after year as the losses continued. The fruit of those R&D labors was to be Star Wars: the Old Republic (SWTOR), which debuted with high hopes in late 2011. All concerns about the expense of developing SWTOR would have been quickly forgotten if it had been a success, but it wasn’t, and by the end of 2012 SWTOR was shedding users. EA’s long expensive attempt to field a competitive MMO had ended in failure.
The denouement
The impact of the SWTOR collapse was devastating. Q4 2012 revenue dropped to $922 million, down 13% y/y for what is traditionally Electronic Arts Inc. (NASDAQ:EA)’s strongest quarter. Even though EA had started to roll back spending on R&D and Marketing, EA still ended up with an operating loss for the quarter of $39 million.
Was it fair to hold Riccitiello accountable for the state of the company? Yes. He approved every R&D and M&S budget during his tenure as CEO starting in 2007, knowing full well the impact to the company’s bottom line. What he probably didn’t understand, having a business degree and little knowledge of software or game development, was what he was getting for his R&D money.
Riccitiello’s successor will now have the difficult tasks of trimming the R&D and M&S budgets to manageable levels and salvaging what can be salvaged from the MMO development effort. Although SWTOR may have flopped, EA has built valuable MMO capability applicable to future games. With EA’s profitability hinging on the outcome of these endeavors, let’s hope that EA’s board finds someone from within the company who understands something about Electronic Arts Inc. (NASDAQ:EA)’s product development.
The article Electronic Arts vs. Activision/Blizzard: a Difference of Profitability originally appeared on Fool.com and is written by Mark Hibben.
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