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Electronic Arts: Sluggish and Buggy

Despite the lack of good news in Electronic Arts' (Nasdaq: ERTS  ) first-quarter results, investors seemed to like what they heard; shares rose yesterday. Perhaps there's nothing wrong with the video game publisher, but I can't see much that's exciting, either.

Electronic Arts' quarterly net loss widened to $132 million, or $0.42 per share, from last year's $81 million, or $0.26 per share. Revenues slid 4% to $395 million. (Check out our Fast Facts.)

Perhaps investors were heartened that Electronic Arts beat analysts' expectations by $0.13 per share. The company even topped Wall Street's revenue predictions, despite giving guidance that lagged expectations and merely reaffirmed its previous outlook for fiscal 2008. Given that tepid outlook, I was surprised to see investors bid EA shares up a significant 7% following the earnings news.

Who knows? Maybe Harry Potter cast as strong spell on Muggle investors as he has on Muggle gamers. EA's Harry Potter and the Order of the Phoenix video game sold 2 million copies in one week, which had to be a big help for the company's bottom line. It's a good indication of how important a hit title can be -- although this one certainly rode on the coattails of the release of Harry's new movie, not to mention his seventh and final book.

Young Mr. Potter aside, Electronic Arts said it plans to debut 10 new properties in the rest of fiscal 2008, which should please investors. Gamers and shareholders alike are beginning to encourage video game publishers to dream up new ideas, rather than milking older franchises for diminishing creative and financial returns.

The console upgrade cycle is usually great boon for video game publishers, but it hasn't been a shoe-in this time around. The surprise success of Nintendo's (OTC BB: NTDOY.PK) Wii left many developers flat-footed. (Peek at Nintendo's most recent quarter to see how big an impression the Wii has made.)

A year ago, game publishers seemed wise to focus on the known quantities -- Microsoft's (Nasdaq: MSFT  ) Xbox and Sony's (NYSE: SNE  ) PlayStation platforms. Both have both been solidly popular, and both aim at the reliable market of hardcore gamers. However logical that may have appeared, it nonetheless proved unwise in the wake of the Wii's surprise success with a broader audience of prospective gamers. EA's famously admitted that it's got some catching up to do, Wii-wise. CEO John Riccitiello intends regain lost ground by focusing on casual gaming, a trend that other companies -- not just video game companies -- are also following.

Investors seeking more details on Electronic Arts' ongoing restructuring will have to keep waiting. Riccitiello's addition as CEO seems promising, as the new boss takes a hard look at the company's situation. Still, we don't know yet how these changes will affect Electronic Arts.

I think the video game industry is destined to grow, no matter what. However, video game publishers have a steep challenge ahead as they attempt to evolve with the industry. At the moment, none of the major game makers seems particularly nimble. Take-Two Interactive (Nasdaq: TTWO  ) recently announced that it's delaying the launch of its newest version of Grand Theft Auto. While some observers consider that an opportunity for rival game makers like EA and Activision (Nasdaq: ATVI  ) in the coming holiday season, GTA's delay also shows just how heavily publishers rely on a handful of massive hit titles.

I like the video game industry for the long term, but EA still seems to have a lot to prove over the short term. Those 10 all-new titles it's promised are nice, but they don't seem likely to be the catalyst EA needs -- at least, not for now.

Electronic Arts, Activision, and Nintendo are Motley Fool Stock Advisor recommendations. Microsoft is a Motley Fool Inside Value pick. Read more about Electronic Arts in our latest Stock Advisor update. For full access to this and a number of other companies, try a free 30-day trial, with no spells attached.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool's disclosure policy occasionally sneaks off for a game or two.

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