Stock Talk
TMF Interview With
Electronic Arts CFO Stan McKee
With Dave Marino-Nachison (TMF Braden)
January 11, 2001
If you're sick and tired of looking for a PlayStation 2, then think how the game makers must feel with all their products boxed up, wrapped, and nobody to play them. Dave Marino-Nachison spoke with Stan McKee, CFO of leading video game software developer Electronic Arts (Nasdaq: ERTS), on Jan. 4 to discuss the future of his business and its demographics. Marino-Nachison, an Electronic Arts stockholder, also examined the industry in depth for Industry Focus 2001.
TMF: In terms of sales and market cap, obviously Electronic Arts has distanced itself from its publicly traded competition, and I'd like to start by asking what you think the primary reasons for that have been.
McKee: There are several. The first one is that we have been the only company over the years that has consistently delivered growth on the top line and bottom line. If you go back to the previous console transition, there were a number of software companies that were close to our size that did not make the transition successfully. We emerged from that by consistently picking the right platforms and not doing the kinds of deals that would hurt the financials of the company.
We just emerged over time as being the leader, and of course when you have a leadership position in any market -- ours is no exception -- I think that gives you a premium valuation because it gives you a number of competitive advantages, scale being one of them.
The resources that we have... enable us to continue to churn out our franchise products every year, which make up an underlying recurring revenue stream. We've established very strong brands in particular things, like EA Sports.
We've been able to use our resources -- nut just financial resources, but talent resources -- to do new, creative kinds of franchises. Some of those are acquisitions, some of those are internal. If you look at products like "Sim City" and "The Sims," they have been the number-one products, respectively, for the last couple of years on the PC. That was from acquisitions. Things like the Westwood acquisition, where we got "Command & Conquer." We've been able to do things like that, on a focused basis, to increase our market share on PC from under 10% to 20%.
At the same time, we've been able to focus on the key strategic platforms like PlayStation 2 and really come to the market with more products than anyone, by an order of magnitude, and our market share demonstrates that. That's in spite of the fact that there's been somewhat of a stumble on Sony's (NYSE: SNE) delivery of the hardware in the short term, but that doesn't diminish the importance of the platform going forward -- or our position on it.
You wrap all those things together and I think they have resulted in the market cap that we have.
| "Half the population is female, and we'd love to get a big share of that market." |
TMF: Not to skip over PlayStation 2 -- because obviously it's the big story right now -- but you also had the announcement that you would develop games for Xbox fairly recently. I wondered if you could talk about how you see Microsoft's (Nasdaq: MSFT) role in the market over the next several years.
McKee: The market has always supported at least two, and sometimes three, platforms that are consoles. That's excluding handhelds and PCs for a moment. We think Sony will be the main platform for the next generation, and then there are two strong players coming.
Nintendo historically has been strong in this market. We think they'll continue to have a position. They typically have been positioned at a younger demographic. They tend to be first-party centric in terms of their software, where they control a lot more of their own software sales on their platform.
Microsoft is coming into the market as a company with a tremendous amount of resources, obviously, and with a target in the market that's closer to where Sony is than where Nintendo is: an older demographic, a generally broad-based platform, great hardware performance specs -- and they are determined to position themselves as an alternative box in the living room/family rooms of the world. Strategically they have their own motivation. I don't think it's specifically to be in the games business, but to have a position in the living room/family rooms of the world, as I said.
So, they've got a lot of resources behind Xbox. They have excellent hardware specs. They have certainly the wherewithal to extend the kind of effort that they need to be able to launch a platform and have them stay. What they don't have yet is the consumer brand name in this category, and what they also don't have yet is all the software. They don't have a strong first-party software capability at this point, so they are enlisting as many third parties as they can. They've got, I think, most of the developers now signed on to do software. If they get good software for that product, I think they have an excellent chance of being a strong player in this coming generation.
TMF: You talked a little bit about the specs of the Xbox. From what I've seen both from playing games and from reading around, clearly all four of the machines that are in this generation (PlayStation 2, Xbox, Sega's (OTC: SEGNY) Dreamcast and Nintendo's GameCube) are as powerful as anything we've ever seen. What does that mean for the next, coming generation? Can these machines get measurably better than they are right now? Will there be a compelling proposition for a consumer to buy the next round, so to speak?
McKee: Well, of course we are looking now five years out, but I would say absolutely. There will be continuing leaps in performance on computing devices -- and of course these are computing devices -- that, five years from now when the next one comes out, will be that much better. Even though things look really good on a PlayStation right now -- for example, if you look at Madden Football, it could be mistaken for a TV broadcast -- it's going to get better. [There will be] the ability to manipulate these images, and have them look real, and have all voice, for example, in a product, have products that have voice commands.
| "It's clear that it's going to be very difficult for the Dreamcast to be successful." |
All that takes computing power and you'll start to see that on PCs in a couple of years. Then, during the next generation, you'll have a leap that takes place on the console. Absolutely. I think looking forward, it's just going to get all the greater -- and then, of course, five years from now, online gaming, broadband online gaming, will be a big factor. Having boxes out there with the computing power capability to take large amounts of data and manipulate that over time and send that back and forth will be necessary.
TMF: What are your reactions to the news -- the rumblings coming out of Sega lately, that they might be getting out of the console business and focus more on making games full time?
McKee: Well, that's been actually rumored for some time and even going back a couple of years before they launched Dreamcast there was some discussion or rumors about that after the Saturn was not successful. Sega is an excellent software company. They have studios in Japan and the U.S., and in the past have turned out some great products. I don't know what they are thinking about at this point in time, but it's clear that it's going to be very difficult for the Dreamcast to be successful and compete on a resource basis with the other players in the market.
I think that the Dreamcast is already starting to lose software development support, so that kind of spells the death of that platform, I think -- but there's no reason that Sega should not take their great software resources and apply them to other platforms and I think that they can be successful.
TMF: You might have seen some comments that I saw attributed to Nintendo's president a while ago in which he said large-scale games are done for and if they continue to be made, then companies around the world would go under. He seems to be talking about things like the [Squaresoft's] "Final Fantasies," which have huge production budgets, and other big event-type games. Did you see those comments? [Interested readers should scroll down to the Nov. 1 entries.]
McKee: I did not see the comments, but I would say that we don't do any games like Square does. The "Final Fantasy" games are huge productions and have rich production values and big budgets -- but that's Square and you need to talk to Square about those. We distribute those in the U.S., and that's our partnership with Square, but we don't do those kind of games ourselves.
We don't do them for a couple of reasons, one of which is just clearly financial. It's very risky when you spend that much money to do any individual game. Now, they've been successful doing it, but you really have to sell millions of units of a product to make it successful, financially successful for that kind of money.
TMF: Could you talk a little bit about EA's customer demographics and what sort of changes you might expect going forward?
McKee: Historically, our target has been kind of the 15- to 30-year-old male and of course EA Sports, which represents about half of our business, really caters to that group. The average age of our console customer has been and remains about 20 years old. It's not a kid's thing -- it's a young adult kind of a product.
The average age of our PC customers has traditionally been in the mid-30s and that, sometimes, is a surprise to people. What we're finding now is that the console customer is staying the same -- although broadening in the sense of not so much age demographics, although we do span more than those ages certainly, but we're finding more women that are playing. That's particularly true in the PC area, where we've got products like Sim City and then The Sims which, right now, is the number-one selling PC game and will be the number-one selling PC game when the totals are out for calendar year 2000.
It's still selling strong, and the demographics of that product are very broad, both in terms of age and gender. We're finding that those kind of products are opening up a whole new customer base and we think that's great because half the population is female and we'd love to get a big share of that market.
The other thing that's driving demographics, although it's brand new here, is online. Online users, according to most of the surveys that are out there, say half the people online in the U.S. are female. We think that is a great opportunity for broadening our market to that demographic. So what happens with our site, and with the AOL/EA.com site, is that many of the users that are in there now are the casual users that come in and play these free sort of commodity-type games -- I would call them the parlor games and card games and those types of things -- and our strategy is to get people into those and then gradually migrate them to a richer and richer gaming experience. Over time, hopefully they'll become real gamers.
RSS Headlines
Fool UK
