Electronic Arts, Inc. (EA) (NASDAQ: EA) is a major American developer, marketer, publisher and distributor of video games. Founded and incorporated on May 28, 1982 by Trip Hawkins, the company was a pioneer of the early home computer games industry and was notable for promoting the designers and programmers responsible for its games. It is one of the largest video game publishers in the world.
Originally, EA was a home computing game publisher. In the late 1980s, the company began developing games in-house and supported consoles by the early 1990s. EA later grew via acquisition of several successful developers. By the early 2000s, EA had become one of the world’s largest third-party publishers. On May 4, 2011, EA reported $3.8 billion in revenues for the fiscal year ending March 2011, and on January 13, 2012, EA announced that it had exceeded $1 billion in digital revenue during the previous calendar year. In a note to employees, EA CEO John Riccitiello called this “an incredibly important milestone” for the company. EA began to move toward direct distribution of digital games and services with the acquisition of the popular online gaming site Pogo.com in 2001. In 2009, EA acquired the London-based social gaming startup Playfish, and in June 2011, EA launched Origin, an online service to sell downloadable games directly to consumers. In July 2011, EA announced that it had acquired PopCap Games, the company behind hits such as Plants vs. Zombies and Bejeweled.
EA continued its shift toward digital goods in 2012, folding its mobile-focused EA Interactive (EAi) division “into other organizations throughout the company, specifically those divisions led by EA Labels president Frank Gibeau, COO Peter Moore, and CTO Rajat Taneja, and EVP of digital Kristian Segerstrale.” EA is currently the No. 1 publisher in Western markets with a 16% segment share, and the second-largest social games company on Facebook. EA’s rankings have been propped up by the launch of The Sims Social, which is currently the fastest-growing game on Facebook.
On May 4, 2011, EA reported $3.8 billion in revenues for the fiscal year ending March 2011. On July 27, 2011, EA reported fiscal first-quarter profits had more than doubled on brisk sales of “highly-anticipated sports and shooter games”. EA earned $221 million, or 66 cents a share, in the three months that ended June 30. “That’s up from earnings of $96 million, or 29 cents a share, in the same period a year earlier. Revenue rose 23 percent to $999 million from $815 million.”
EA’s earnings are marked by an ongoing difference between non-GAAP and GAAP accounting – which, for example, mandates deferrals of revenue related to services provided for online-enabled packaged goods and digital content. Consequently, EA’s quarterly reports reflect hundreds of millions of dollars which, under GAAP accounting, are deferred for a period of months – then appear in the earnings over multiple quarters subsequent to the original sale. Other companies with significant online revenues face similar issues. This can make it extremely difficult to understand the company’s GAAP profitability.
Currently, EA develops and publishes games under several labels including EA Sports titles, Madden NFL, FIFA Soccer, NHL, NCAA Football, SSX andNBA Jam. Other EA labels produce established franchises such as Battlefield, Need for Speed, The Sims, Medal of Honor, Command & Conquer, as well as newer franchises such as Dead Space, Mass Effect, Dragon Age, Army of Two and Star Wars: Knights of the Old Republic, produced in partnership with LucasArts. EA also owns and operates major gaming studios in Tiburon in Orlando, Burnaby, Vancouver, Montreal and DICE in Sweden.
In February 1982, Trip Hawkins arranged a meeting with Don Valentine of Sequoia Capital to discuss financing his new venture, Amazin’ Software. Valentine encouraged Hawkins to leave Apple Inc., in which Hawkins served as Director of Product Marketing, and allowed Hawkins use of Sequoia Capital’s spare office space to start the company. On May 28, 1982, Trip Hawkins incorporated and established the company with a personal investment of an estimated US$200,000. Seven months later in December 1982, Hawkins secured US$2 million of venture capital from Sequoia Capital, Kleiner Perkins Caufield & Byers, and Sevin Rosen Funds.
For more than seven months, Hawkins refined his Electronic Arts business plan. With aid from his first employee (with whom he worked in marketing at Apple), Rich Melmon, the original plan was written, mostly by Hawkins, on an Apple II in Sequoia Capital’s office in August 1982. During that time, Hawkins also employed two of his former staff from Apple, Dave Evans and Pat Marriott, as producers, and a Stanford MBA classmate, Jeff Burton from Atari for international business development. The business plan was again refined in September and reissued on October 8, 1982. Between September and November, employee headcount rose to 11, including Tim Mott, Bing Gordon, David Maynard, and Steve Hayes. Having outgrown the office space provided by Sequoia Capital, the company relocated to a San Mateo office that overlooked the San Francisco Airport landing path. Headcount rose rapidly in 1983, including Don Daglow, Richard Hilleman, Stewart Bonn, David Gardner, and Nancy Fong.
Hawkins was determined to sell directly to buyers. Combined with the fact that Hawkins was pioneering new game brands, this made sales growth more challenging. Retailers wanted to buy known brands from existing distribution partners. Despite this, revenue was US$5 million in the first year and US$11 million the next. After yet more flyers were handed out, former CEO Larry Probst arrived as VP of Sales in late 1984 and helped the company sustain growth into US$18 million in its third full year. Handing out yet more flyers and teaming with the existing sales staff that included Nancy Smith, David Klein, and David Gardner, Probst built the largest sales force of any American game publisher. This policy of dealing directly with retailers gave EA higher margins and better market awareness, key advantages the company would leverage to leapfrog its early competitors.
In December 1986, David Gardner and Mark Lewis moved to the UK to open a European headquarters. Up until that point publishing of Electronic Arts Games, and the conversion of many of their games to compact cassette versions in Europe was handled by Ariolasoft. A small company in Wales was already called Electronic Arts, and until 1997 Electronic Arts in the UK was known legally as EOA, a name derived from its square/circle/triangle logo. The Welsh company ceased trading in 1997 and Electronic Arts acquired the rights to the name.
Most of the early employees of the company disliked the Amazin’ Software name that Hawkins had originally chosen when he incorporated the company. While at Apple, Hawkins had enjoyed company offsite meetings at Pajaro Dunes and organized such a planning offsite for EA in October 1982. Following a long business day at the offsite, the dozen employees and advisers who were present agreed that they would stay up that night and see if they could agree unanimously on a new name for the company.
Hawkins had developed the ideas of treating software as an art form and calling the developers, “software artists”. Hence, the latest version of the business plan had suggested the name “SoftArt”. However, Hawkins and Melmon knew the founders of Software Arts, the creators of VisiCalc, and thought their permission should be obtained. Dan Bricklin did not want the name used because it sounded too similar (perhaps “confusingly similar”) to Software Arts. However, the name concept was liked by all the attendees. Hawkins had also recently read a best-selling book about the film studio, United Artists, and liked the reputation that company had created. Early advisers Andy Berlin, Jeff Goodby, and Rich Silverstein (who would soon form their own ad agency Goodby, Silverstein & Partners) were also fans of that approach, and the discussion was led by Hawkins and Berlin. Hawkins said everyone had a vote but they would lose it if they went to sleep.
Hawkins liked the word “electronic”, and various employees had considered the phrases “Electronic Artists” and “Electronic Arts”. Other candidates included Gordon’s suggestion of “Blue Light”, a reference from the Disney film TronWhen Gordon and others pushed for “Electronic Artists”, in tribute to the film company United Artists, Steve Hayes opposed, saying, “We’re not the artists, they are…” meaning that the developers whose games EA would publish were the artists. This statement from Hayes immediately tilted sentiment towards Electronic Arts and the name was unanimously endorsed.
A novel approach to giving credit to its developers was one of EA’s trademarks in its early days. This characterization was even further reinforced with EA’s packaging of most of their games in the “album cover” pioneered by EA because Hawkins thought that a record album style would both save costs and convey an artistic feeling. EA routinely referred to their developers as “artists” and gave them photo credits in their games and numerous full-page magazine ads. EA also shared lavish profits with their developers, which added to their industry appeal. Because of this novel treatment, EA was able to easily attract the best developers. The square “album cover” boxes (such as the covers for 1983’s M.U.L.E. and Pinball Construction Set) were a popular packaging concept by Electronic Arts, which wanted to represent their developers as “rock stars”. After a very successful run on home computers, Electronic Arts later branched out and produced console games as well. Eventually, Trip Hawkins left EA to found the now defunct 3DO Company.
In 2004, EA made a multimillion dollar donation to fund the development of game production curriculum at the University of Southern California’s Interactive Media Division. On February 1, 2006, Electronic Arts announced that it would cut worldwide staff by 5 percent. On June 20, 2006 EA purchased Mythic Entertainment, who are finished making Warhammer Online.
After Sega’s ESPN NFL 2K5 successfully grabbed market share away from EA’s dominant Madden NFL series during the 2004 holiday season, EA responded by making several large sports licensing deals which include an exclusive agreement with the NFL, and in January 2005, a 15-year deal with ESPN. The ESPN deal gave EA exclusive first rights to all ESPN content for sports simulation games. On April 11, 2005, EA announced a similar, 6-year licensing deal with the Collegiate Licensing Company (CLC) for exclusive rights to college football content.
Much of EA’s success, both in terms of sales and with regards to its stock market valuation, is due to its strategy of platform-agnostic development and the creation of strong multi-year franchises. EA was the first publisher to release yearly updates of its sports franchises—Madden, FIFA, NHL, NBA Live, Tiger Woods, etc.—with updated player rosters and small graphical and gameplay tweaks. Recognizing the risk of franchise fatigue among consumers, EA announced in 2006 that it would concentrate more of its effort on creating new original intellectual property.
In September 2006, Nokia and EA announced a partnership in which EA becomes an exclusive major supplier of mobile games to Nokia mobile devices through the Nokia Content Discoverer. In the beginning Nokia customers will be able to download seven EA titles, Tetris, Tetris Mania, The Sims 2, Doom, FIFA 06, Tiger Woods PGA Tour 06 and FIFA Streets 2 the holiday season in 2006. Rick Simonson is the executive vice president and director of Nokia and starting from 2006 is affiliated with John Riccitiello and are partners.
In February 2007, Probst stepped down from the CEO job while remaining on the Board of Directors. His handpicked successor is John Riccitiello, who had worked at EA for several years previously, departed for a while, and then returned. Riccitiello previously worked for Elevation Partners, Sara Lee and Pepsico. In June 2007, new CEO John Riccitiello announced that EA would reorganize itself into four labels, each with responsibility for its own product development and publishing (the city-state model). The goal of the reorganization was to empower the labels to operate more autonomously, streamline decision-making, increase creativity and quality, and get games into the market faster. This reorganization came after years of consolidation and acquisition by EA of smaller studios, which some in the industry blamed for a decrease in quality of EA titles. In 2008, at the DICE Summit, Riccitiello called the earlier approach of “buy and assimilate” a mistake, often stripping smaller studios of its creative talent. Riccitiello said that the city-state model allows independent developers to remain autonomous to a large extent, and cited Maxis and BioWare as examples of studios thriving under the new structure.
Also, in 2007, EA announced that it would be bringing some of its major titles to the Macintosh. EA has released Battlefield 2142, Command & Conquer: Tiberium Wars, Crysis, Harry Potter and the Order of the Phoenix, Madden NFL 08, Need for Speed: Carbon and Spore for the Mac. All of the new games have been developed for the Macintosh using Cider, a technology developed by TransGaming that enables Intel-based Macs to run Windows games inside a translation layer running on Mac OS X. They are not playable on PowerPC-based Macs.
In October 2007, EA purchased Super Computer International, a long standing industry provider of game server hosting for development studios, who were currently developing the new Playlinc software. A week later they then purchased VG Holding Corp, the parent company of BioWare and Pandemic Studios.
It was revealed in February 2008 that Electronic Arts had made a takeover bid for rival game company Take-Two Interactive. After its initial offer of US$25 per share, all cash stock transaction offer was rejected by the Take-Two board, EA revised it to US$26 per share, a 64% premium over the previous day’s closing price and made the offer known to the public. Rumours had been floating around the Internet prior to the offer about Take-Two possibly being bought over by a bigger company, albeit with Viacom as the potential bidder. In May 2008, EA announced that it will purchase the assets of Hands-On Mobile Korea, a South Korean mobile game developer and publisher. The company will become EA Mobile Korea. In September 2008, EA dropped its buyout offer of Take-Two. No reason was given.
As of Nov 6, 2008 it was confirmed that Electronic Arts is closing their Casual Label & merging it with their Hasbro partnership with The Sims Label. EA also confirmed the departure of Kathy Vrabeck, who was given the position as former president of the EA Casual Division in May 2007. EA made this statement about the merger: “We’ve learned a lot about casual entertainment in the past two years, and found that casual gaming defies a single genre and demographic. With the retirement and departure of Kathy Vrabeck, EA is reorganizing to integrate casual games—development and marketing—into other divisions of our business. We are merging our Casual Studios, Hasbro partnership, and Casual marketing organization with The Sims Label to be a new Sims and Casual Label, where there is a deep compatibility in the product design, marketing and demographics. […] In the days and weeks ahead, we will make further announcements on the reporting structure for the other businesses in the Casual Label including EA Mobile, Pogo, Media Sales and Online Casual Initiatives. Those businesses remain growth priorities for EA and deserve strong support in a group that will compliment their objectives.” This statement comes a week after EA announced it was laying off 6% about 600 of their staff positions & had a US$310 million net loss for the quarter.
Due to the 2008 Economic Crisis, Electronic Arts had a poorer than expected 2008 holiday season, moving it in February 2009 to cut approximately 1100 jobs, which it said represented about 11% of its workforce. It will also close 12 facilities, yet to be identified. Riccitiello, in a conference call with reporters, stated that their poor performance in the fourth quarter was not due entirely to the poor economy, but also to the fact that they did not release any blockbuster titles in the quarter. In the quarter ending December 31, 2008, the company lost US$641 million. As of early May 2009, the subsidiary studio EA Redwood Shores was known as Visceral Games. On June 24, 2009, EA announced it will merge two of its development studios, BioWare and Mythic into one single role-playing video game and MMO development powerhouse. The move will actually place Mythic under control of BioWare as Ray Muzyka and Greg Zeschuk will be in direct control of the new entity. The actual impact of this merger remains to be seen.
On November 9, 2009, EA announced its acquisition of social casual games developer Playfish for US$275 million. On the same day, the company announced layoffs of 1500 employees, representing 17% of its workforce, across a number of studios including EA Tiburon, Visceral Games, Mythic and EA Black Box. Also affected were “projects and support activities” that, according to Chief Financial Officer Eric Brown “don’t make economic sense”, resulting in the shutdown of popular communities such as Battlefield News and the EA Community Team. These layoffs also led to the complete shutdown of Pandemic Studios.
In October 2010, EA announced the acquisition of UK based iPhone and iPad games publisher ‘Chillingo’ for US$20 million in cash. While Chillingo publishes the popular Angry Birds and Cut the Ropegames, the deal did not include those properties.
—Brenda Chato, BBrC 4-4D