Are Microtransactions the Key to EA's Future?

It's no secret that the video game industry is having a tough time. Between an aging generation of game consoles, the rise of mobile gaming, and the burgeoning budgets required for many blockbuster titles these days, staples of the industry like Electronic Arts (NASDAQ: EA  ) are pursuing every avenue to keep revenue on track. EA's been struggling like everyone else recently -- the company lost $45 million in its most recent quarter, with earnings falling below projections.

One segment of the company's been on the rise despite all this, however? Digital sales. So how does EA plan to capitalize on the 17% year-over-year growth it recorded from its digital division? The future, EA says, lies in microtransactions.

What's the deal with microtransactions?
Microtransactions are the pay-as-you-go plans of video games. For a small fee, EA and other developers allow gamers to purchase digital items in the game -- say, a tool or character model -- to enhance or streamline the gaming experience.

It's a brilliant revenue-reaping strategy based upon a fundamental aspect of human nature: The need for more stuff, and the need for it now. Want to level up a character in a game faster? Previously, players would have to work for such things, earning rewards as they accomplished in-game goals and played on; now, simply drop a few bucks and it's yours! Looking for a rare in-game item or a powerful but hard-to-find weapon in a shooter? It's yours -- as long as you pay EA for it. In a way, it's almost empowering for gamers: Microtransactions offer more immediate rewards that can contribute to a fuller game experience.

Microtransasctions aren't some new, out-of-the-blue Holy Grail. Social gaming upstart Zynga (NASDAQ: ZNGA  ) has been utilizing these paymentsas a key component of its free-to-play games for a long time, and the temptation of instant reward for gamers helped fuel a big part of the company's revenue as far back as 2009. After all, nobody wanted to wait for a new cow in FarmVille; why not buy cows, instead? Considering Zynga's success with social gaming and microtransactions -- even with the company's serious struggles lately -- it's worth a shot for EA to test the waters.

EA has already laid the groundwork for such a strategy in even its blockbuster game titles. Its recent sci-fi horror game Dead Space 3, which was released in early February to critical acclaim, incorporated a microtransaction model that allowed players to purchase in-game resources through downloadable digital content. EA followed up on Dead Space 3's success by announcing on Wednesday that the company is "building into all of our games the ability to pay for things along the way; to get to a higher level," citing that gamers are "enjoying and embracing that way of business." In short, microtransactions are here to stay at EA.

I think it's a bit of a stretch to say consumers are "enjoying" the way of business; more likely, they're giving in to the urge for short-term rewards at the click of a button and loss of a few dollars. Regardless, EA's logic is sound: Digital sales are the hot topic for EA and its rivals these days. Industry tracking firm NPD Group reported that industry digital revenues outpaced physical sales by 47% in 2012's April-to-June quarter, a lucrative trend for video game companies in need of a revenue boost.

The next phase of the digital trend
Downloadable content -- or DCL, which is separate add-on digital packages for new and existing games -- successfully established the digital trend with big-box games. The digital revolution has helped usher in a new era for the industry. Even brick-and-mortar video game businesses have caught on: GameStop has seen success with DLC and digital sales growth recently even as sales fell 4.6% during the holiday quarter.

EA rival Activision Blizzard (NASDAQ: ATVI  ) , however, noted that DLC sales have begun to slow for its megahit Call of Duty: Black Ops 2, claiming that "a la carte DLC sales have not performed as well as in years past," despite Blacks Ops 2 setting industry records with $500 million in sales just 24 hours after its release late last year. If the DLC trend is slowing, microtransactions could be the new flagship of digital sales for blockbuster games.

With the digital revolution under way, it's tough to argue with EA's call on microtransactions. The company can't afford to stagnate in this lucrative and growing trend, and if consumers are willing to pay for in-game items, EA's investors will reap the rewards. The nickel-and-dime reality of microtransactions won't replace sales of full-fledged game titles anytime soon, but for EA and the struggling video game industry, every dollar counts.

Microtransactions may be one piece of EA's future, but this lynchpin of the gaming industry is one stock you should get to know. Our new special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now and we'll throw in a year of free quarterly updates as news breaks.


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