Dueling Fools

Dueling Fools

Arts to Arts
Bear Argument

By Rick Aristotle Munarriz (TMF Edible)
October 20, 1999

I grew up on Electronic Arts. I remember a time when EA Sports meant blocky stick figures, allegedly Larry Bird and Dr. J, playing some one-on-one hoops. My friends and I even had an "Earl Weaver Baseball" league where we would overlook the ant-sized players in the pursuit of bragging rights.

EA has come a long way since those early days of computer gaming. Unfortunately, the Trip is over. By Trip I mean Trip Hawkins, the charismatic leader who put the company on the map -- only to lose him to his entrepreneurial spirit six years ago.

The EA of today is lethargic in a world where the competition is nimble. If you look at the five best-selling computer games since Trip went on to create 3DO (Nasdaq: THDO), you will find that EA is simply not in the game. The company was mum on the four-letter words that electrified the industry, "Myst" and "Doom." Even Microsoft (Nasdaq: MSFT), who few will crown a gameplay juggernaut, has a title on the list with its popular flight simulator.

EA is now the bloated has-been, the glory days storyteller skimming stones and skipping heartbeats brookside. When the company tries to go one-on-one with the edgier software houses like "Tomb Raider" maven Eidos (Nasdaq: EIDSY), it gets stuffed.

How can EA compete? In the past, EA would simply buy out the competition. Unfortunately, its purchases of companies like Bullfrog and Maxis came just as the creative juices were beginning to run dry at the once-promising acquisitions. I'm not accusing EA of being an imagination vacuum, but when it's out there promoting a Ted Nugent hunting adventure, I have to wonder who is the one suffering from "Cat Scratch Fever."

You see, EA messed up. It accurately predicted that the compact disc would revolutionize gaming for the computer and home console platforms. That part it got right. The benefits of cheaper media and inventory savings were huge. However, that lowered the entry barrier -- even before the Internet would practically flatten it completely. With less costly access to production and distribution, a bunch of guys drumming up shareware in their spare time, like id Software, can be crowned royalty overnight.

The playing field is too crowded for EA now. It can't buy its way out this time. EA lacks the vision to identify tomorrow's superstars and the capital to fund the sky-high asking prices of the self-perceived immortal upstarts.

The demand is also highly fragmented now. It's not just personal computers and a rejuvenated Apple (Nasdaq: AAPL) that EA must cater to. The home console market now has three systems to satisfy after last month's successful rollout of the Sega Dreamcast. The consumer is too educated to settle for one title being ported to all formats. Each platform cries for exclusivity, and that means additional resources for anyone but the smaller cutting-edge players who can afford to hone in on just one segment.

EA can't do that. It found that out the hard way when it came on as a 3DO investor only to find the conflicts of interest looming large. So it cashed out of 3DO just as Trip's company was about to land a winner in "Army Men." Bad decision or just plain bad karma -- you decide.

But EA is profitable, you say. True. And growing. True. But I question how in tune with reality the bullish analysts are. They expect the company to earn $2.17 a share next year and $2.49 come 2001. Even if we accept that as gospel, it amounts to just shy of 15% bottom line growth for a company selling at more than 30x year-ahead earnings.

But is the bar still not set low enough? In that time, a countless number of brilliant software developers will carve out a comfortable existence with ever-shrinking overhead requirements. Tomorrow's id. Tomorrow's ego. More competition. More uncertainty. More Ted Nugent.

I'm sorry, David. I used to have to squint to watch my shortstop field the ball in "Earl Weaver." But now my eyes are wide open and I don't like what I see.

Next: The Bull Responds