Dueling Fools

Dueling Fools

Arts to Arts
Bull Argument

By David Marino-Nachison (TMF Braden)
October 20, 1999

Tiger Woods, check. Julie Foudy, check. Michael Jordan, check. This isn't next week's issue of Sports Illustrated magazine I'm talking about. This is about video games, folks, a rapidly growing, multibillion dollar industry, so let's plug in and start swinging away.

The biggest names in sports are all on board the same ship in the world of electronic gaming: Electronic Arts (Nasdaq: ERTS). The best lend their names to the best. No "Gus Frerotte's Football" here. The sporting simulations -- particularly of the big-name games people play -- made by Electronic Arts (EA) are the industry's gold standard.

But to stop at sports would be to sell EA short. The company offers "WCW Mayhem" for wrestling buffs, "SimCity" for urban development buffs, the critically acclaimed "Sid Meier's Alpha Centauri" for budding galactic explorers, and "Xena: Warrior Princess" for everybody else.

When EA tackles a project, it generally sells, whether it's a sports game or not. Among the company's 16 worldwide million-selling titles are not only its industry-standard soccer, football, and basketball simulations, but NASCAR and motorcycle-themed race titles and the well-regarded Wing Commander space exploration franchise.

All told, EA makes, markets, and distributes more than 100 software titles for Nintendo's N64, Sony's (NYSE: SNE) PlayStation, and PCs. The company hasn't yet announced whether it'll be making games for Sega's new next-generation Dreamcast console, but given that it put together titles for the now-defunct Saturn and Genesis platforms, that wouldn't be surprising.

No single game made up more than 10% of the company's sales in fiscal 1999 or 1998 (although the company's John Madden-sponsored NFL game came close last year); neither does any single platform dominate the company's revenue rolls. Such diversification denotes not only broad consumer acceptance but a useful hedge against shifts in technology and consumer favor.

The results: Last year, the company turned in revenues of $1.22 billion, gross profits of $596.4 million, operating income of $147.2 million, and net income of $108.9 million. Over the last four years, those figures have improved 23%, 23%, 29%, and 28% on a compounded basis. Pretty consistent, and that leads in well to my next point (which, I must admit, refers back to an earlier point).

Let's go back a few paragraphs and check in on the word "franchise" again. Game makers, like most companies in the entertainment industry, strive for longevity so they can continually leverage customer acceptance without having to constantly reinvent the wheel. EA, with dominant positions in virtually every sporting category, can teach the class in franchise games.

Can't bear the thought of playing basketball without your team's latest draft pick on the roster? Better update your "NBA Live" library. World Cup fantasies just not the same without Michael Owen? Hey, when does the next "FIFA Soccer" game come out? That kind of repeat business is a great starting point for sales in this rapidly developing industry, and it pays off for EA in spades. Despite the fact that gamers can play equally digital hockey in "NHL Hockey's" '97, '98, and '99 editions -- and older versions are generally available at a nifty discount -- the company still gets most of its annual sales from games released in that same year.

But the company still relentlessly tackles new opportunities, from cricket to hunting to figure skating. EA can afford to experiment with a balance sheet carrying plenty of cash and no long-term debt.

But EA isn't dumb: It's lined up the big names just in time for the year-defining holiday season. Look for "Madden NFL 2000," "NASCAR 2000," "Tiger Woods 99 PGA Tour Collection," "Sid Meier's Alien Crossfire," "FIFA 2000 Major League Soccer," "NBA Live 2000," "WCW Mayhem," and "March Madness 2000" among the 23 titles set to ship by Christmas. Let's get ready to rumble!

Now, since this is a duel and I'm the bull, I'd better talk about how the Internet is poised to help EA take its business in an entirely new direction. (Hey, wait a second, Dave. Wasn't that you trotting out "the Internet" as a classic Bull argument red herring in your last Duel? Well, as it turns out I've got something useful to say here.)

Many in the industry believe the future of gaming is online, not just because of the growing movement of software applications to the Internet but because of the vast appeal of interacting and competing with real people instead of algorithms.

EA has that base covered. It's already pulling in serious revenues from the extremely popular "Ultima Online," an adventure community and game wrapped into one (Hey, kind of like Fooldom!) that is the best-selling online-only game in the U.S. Ultima's also making inroads in Japan and Europe. Ultima geeks in the States get so caught up in it that they bid hundreds of dollars for fully developed characters on eBay (Nasdaq: EBAY), and they are just as geeky overseas. A new Ultima is coming out for the holidays as well.

There's more coming. Look for an Internet-based strategy game developed in connection with fantasy games and literature company Wizards of the Coast. Best known for its "Magic: The Gathering" and Pok�mon-themed card games, Wizards was recently bought by Hasbro (NYSE: HAS). Also coming is a real-life simulator called "The Sims" with clever Internet capabilities and this accolade from IGN.com: "The best thing since real life."

Couple that with a website that serves consumers well -- with print content, game demos and patches, and the company's powerful brand leverage -- and it's clear that the framework for an impressive online empire is being set up. Heck, if MacroMedia (NYSE: MACR) thinks its Shockwave.com site is worthy of an IPO, imagine the possibilities for ea.com!

OK, my thumbs are tired from hitting all these buttons. Your turn, Rick.

Next: The Bear Argument