Is it time to say game over?
Electronic Arts' dominance of video games makes resistance futile for competitors
Still, it's hardly game-over time for EA, even with the video-game industry entering its cyclical slow period. In fact, tougher times for the industry often mean better times for EA. For most makers of either game hardware or software, sales are highly dependent on where the industry is in the console cycle. (Software for game machines such as Sony's PlayStation, Nintendo's GameCube, and Microsoft's Xbox accounted for 63 percent of EA's sales during the past quarter versus 13 percent for PC software.)
Whenever the new generation of machines is introduced, sales of both hardware and software rise sharply for several years after. Then as the technology ages and the prospect of new machines appears on the horizon, sales growth begins to flatten. In March, software sales fell by 9 percent, according to research firm NPD, after a 10 percent gain in February. For the rest of year, analysts are looking for a sales increase of around 10 percent. Yet EA saw sales rise 29 percent in the quarter and is looking for total sales for 2004 to rise as much as 15 percent. So with sales continuing to be powered by its consistently popular movie, sports, and Sims franchises, EA's market share is likely to increase as the industry awaits the next-generation consoles in late 2005 or early 2006.
"That's our goal," says Probst. "To increase our market share . . . forever . . . in all categories--and to double the size of the company every four or five years." And when those next-gen consoles hit--with their upgraded graphics and greater computer power--the cycle should begin all over again. "These machines will represent a huge leap forward," says Don Mattrick, president of EA Worldwide Studios. "You will have more lifelike characters, with a huge increase in the fidelity of the imagery."
The increased interest in gaming should do wonders for EA's top line. "If EA can get to a 30 percent market share, you're talking about a $9 billion company at that point," says Keith Gay, analyst at San Francisco-based investment bank Thomas Weisel Partners. Including software and hardware sales, the game industry took in $11.2 billion last year. Gay thinks that by the peak of the next cycle, it could be a $30 billion industry--about the same size as the music industry today. (It already takes in more each year than Hollywood does at the box office, but that total does not include DVD sales and TV rights.)
Tuning out. Demographics are the reason for the industry's success. Every year the age group familiar with games--starting with the Atari junkies of the early 1980s--gets one year older. And that leading edge has more disposable income, which is why the average console buyer now purchases 15 titles per machine, three times as many as a decade or so ago. In addition, younger customers are more likely to see gaming as an alternative to TV for their daily entertainment choice. EA executives frequently bring up last October's Nielsen ratings, which showed that TV viewership among men from 18 to 34 fell 12 percent from a year before. And for the youngest segment of adult men, those 18 to 24, viewership fell 20 percent. When talking about competition with TV, EA execs like to use words like "devour" and phrases like "eating their lunch." As Probst puts it, "Even though the TV industry does their best to dispel this notion, everybody knows what's going on."
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