EA's Casual Competition

Never has casual seemed so cutthroat. Electronic Arts (Nasdaq: ERTS  ) has created a Casual Games unit to better take advantage of that segment of the market, and this is seen as just one step in an anticipated reorganization of the game publisher to make for a more nimble business. However, it's interesting to dig a bit deeper into the situation and see a little competitive maneuvering.

New EA CEO John Riccitiello has put Kathy Vrabeck in place as president of EA Casual Entertainment. Vrabeck previously worked at big-time EA rival Activision (Nasdaq: ATVI  ) , where she functioned as president of Activision Publishing. Her resume also includes several management positions in marketing and sales for some extremely unrelated companies -- General Mills' (NYSE: GIS  ) Pillsbury, Pepsi's (NYSE: PEP  ) Quaker Oats, Eli Lilly (NYSE: LLY  ) , and ConAgra (NYSE: CAG  ) .

Vrabeck resigned from Activision in September 2005, although she was still employed there until April 2006. Some have speculated that she resigned because she was passed up for a promotion when Activision brought in Michael Griffith as CEO of Activision Publishing, which sounds like a reasonable theory. Even more interesting was the stipulation in Griffith's employment agreement that not only awarded him $600,000 in base salary, but if he hadn't made $20 million in compensation and any applicable severance agreements by 2010, Activision would pay the difference, which sounds absurd from a shareholder's outlook, as well.

Electronic Arts will pay Vrabeck a base salary of $550,000 per year, plus bonus and stock-based incentives; it appears that her base salary was set at $515,000 her final year at Activision. (It's pretty amazing what a full text search of the SEC database will yield -- such as employment agreements and, of course, proxy statements revealing past compensation levels.)

EA's plan to tackle the casual game space makes sense (and its components, like non-time-intensive gaming activities, including cell phone games, are important growth areas the company recently outlined in a Wall Street conference). And of course, while there are plenty of hardcore gamers out there, casual gaming is growing in strength, bringing females and young children into the fold. You could argue that the popularity of Nintendo is testament to the more casual gamer; the console is definitely not geared toward hardcore gamers who spend long hours playing complex games.

A Google search on Vrabeck also yielded some interesting points, such as accolades for her success in the industry. For example, in March 2005, she was highlighted by BusinessWeek as one of 25 Media Up-and-Comers. I found an article from Interactive Entertainment Today from June 25, 2005, which described Activision's strategy in taking on EA, with Vrabeck quoted as saying, "We look at what EA does because they have clearly been the most successful company in this space. We look at EA and see the things we can emulate and the things we don't want to emulate."

Furthermore, Activision's strategy was described in part as buying small, independent game development studios and allowing them to stay independent and true to their culture instead of trying to assimilate them, which could stifle their creativity. Granted, last fall I visited the EA/Mythic studio, which is creating the coming title Warhammer, during an open house for media, and I was impressed. It seemed as if EA was letting Mythic keep its culture and creative roots intact. Perhaps if EA could have been criticized in the past for acquiring big studios and assimilating them into cookie-cutter operations, it has learned a few lessons since.

It makes sense that EA should hone its pursuit of the casual games market, which Jupiter Research has predicted could be worth $1 billion by 2008. However, the hire of Kathy Vrabeck could be a pretty significant move, too. I could get critical about the companies she worked for before Activision (although, granted, there's a consumer angle in common) or how it must be nice to be offered a premium to your last salary even though you haven't worked for said competitor in more than year. However, maybe the years Vrabeck spent studying EA's Achilles' heels from a competitor's view could mean she'll be a big help to EA for the long term -- as long as having an axe to grind isn't a distraction. There's a lot to mull over here; it might even have a corporate soap opera ring to it.

For related Foolishness, see the following articles:

Electronic Arts, Activision, and Nintendo are Motley Fool Stock Advisor recommendations. To find out what other companies David and Tom Gardner have recommended to subscribers, take a 30-day free test-drive.  

Alyce Lomax does not own shares of any of the companies mentioned but has helped another Fool search for the Wii. The Fool has an ironclad disclosure policy.


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