Fool on the Street: EA's 5 Keys to Growth

Motley Fool Stock Advisor pick Electronic Arts (Nasdaq: ERTS  ) may be entering the sweet spot of the next-generation console upgrade cycle, but long-term investors should be interested in the video game publisher's plans for growth in other arenas, as well. The company laid out its "strategy guide" for the coming years at Morgan Stanley's Technology Conference earlier this week.

According to CEO and Executive Chairman Larry Probst, Electronic Arts is focusing on five key points:

  • Next-generation platforms: That's a no-brainer. The console upgrade cycle is pretty much complete, with Microsoft's (Nasdaq: MSFT  ) Xbox 360, Sony's (NYSE: SNE  ) PlayStation 3, and Nintendo's (OTC BB: NTDOY.PK) Wii all launched or in the process of launching.
  • Asia: No surprise there, either. It's a huge market opportunity, and it's waiting to be cracked. At the moment, Asia represents only 5% of EA's revenues.
  • Online opportunities: Online gaming presents considerable opportunities, and strengthening this segment could help offset the extreme fluctuations of the console cycle. Beyond allowing gamers to play the occasional online death match, this segment encompasses microtransactions, in-game advertising, subscription services like EA's Pogo, and massively multiplayer online games, or MMOs, like Blizzard's World of Warcraft (and EA's Warhammer, still in development by recently acquired Mythic and due for release in the second half of the year).
  • Mobile platforms: Gaming is increasingly reaching out to more casual audiences. Mobile platforms are perfect for types who might not consider themselves gamers, but like to play Tetris or Bejeweled on a mobile phone or an Apple (Nasdaq: AAPL  ) iPod. Electronic Arts acquired JAMDAT to take advantage of that attractive market.
  • Intellectual property: This consists of EA's existing popular franchises, as well as new, wholly owned properties in development.

Let's drill deeper into some of these themes.

Wild over Wii
Many observers were disappointed by Electronic Arts' most recent quarter, since the company seemed to miss the boat on the sellout success of Nintendo's Wii. Electronic Arts only had two titles for the Wii, Madden NFL 07 and Need for Speed Carbon. Both are popular franchises, but of course, everybody would have liked to see more titles for Nintendo's new surprise-hit platform.

Electronic Arts now wants to rectify that situation, with four titles planned for this quarter -- SSX Blur, Godfather, Medal of Honor, and Tiger Woods PGA Tour -- and other Wii titles in the works, including MySims and Sims creator Will Wright's evolution simulator Spore. Investors should also note that developing games for the Wii is less expensive and time-consuming than for other consoles.

Furthermore, while Electronic Arts' management had nothing but praise for PlayStation 3, executives said that the playing field between the consoles seems to be leveling, establishing a more evenly split market share than in past generations, when Sony's PlayStation dominated the market. That would be good news for third-party publishers like Electronic Arts.

Speedy revenue drivers
In-game advertising sweetens the deal for companies like EA. It's a whole new revenue channel for game publishers, and given the huge market for advertising, it's no surprise that investors would be interested in its performance.

Although the technology is still new, it appears that placing ads into some of EA's games is gaining traction. Probst specifically mentioned three games, Battlefield 2142, Def Jam: Icon, and Need for Speed, with Need for Speed showing the greatest success thus far.

Meanwhile, Probst said that mobile and online segments should add up to 20% to 25% of EA's revenue in 2010. If those elements prove successful, they could be high-margin additions to EA's business.

Getting creative with intellectual property
While EA, rival Activision (Nasdaq: ATVI  ) , and fellow publishers may have great, popular franchises under their belts, gamers and professionals have begun to demand more creative, innovative gaming experiences. (David Gardner is part of that chorus, having recommended both EA and Activision to Motley Fool Stock Advisor subscribers.)

EA has apparently taken those calls to heart; Probst said that the company is highly focused on wholly owned intellectual properties. The pipeline includes Army of Two, Spore, and a new game called Skate, which Probst believes could give Activision's popular Tony Hawk games a run for their money.

Probst also pointed out that while 40% of EA's business currently comes from wholly owned intellectual property, EA would like to move that number to 50% over the next two fiscal years.

Game on!
There are many reasons to believe in a bright outlook for the video game industry, above and beyond the latest console cycle. As video games gain the same social acceptance as movies or concerts, and continue to spawn more and more revenue drivers, companies like EA should be well-positioned to profit, provided they can keep up with the market's ever-changing trends. It doesn't hurt that some of these nascent channels promise higher margins and profitability, either.

Strategies are all well and good, but EA's still got to play the game. Long-term shareholders should keep a close eye on its performance.

Here's related Foolishness:

Electronic Arts, Activision, and Nintendo are Motley Fool Stock Advisor recommendations. Discover more of David and Tom Gardner's stellar stock selections with a free 30-day trial.

Alyce Lomax does not own shares of any of the companies mentioned. Microsoft is an Inside Value selection. The Fool has a disclosure policy.


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