Heading into Electronic Arts' (NASDAQ:EA) fiscal third-quarter report, investors were concerned that a poor early reception for its Star Wars: Battlefront II game might hurt the title's sales over the key holiday period.
Shareholders were right to be worried. It turns out Battlefront sales dramatically undershot management's expectations after players rejected its early in-game sales strategy.
Yet this stumble has turned into good news for the business in a few ways. First, executives called it an important learning experience that they'll use to tweak the game in future content releases. These lessons will also inform the development of future titles that lean on digital monetization strategies, as most games do today.
Meanwhile, EA doesn't see the sales miss reducing revenue below its 2018 forecast. And if anything, the underperformance of the Battlefront game means profitability will be higher than originally thought. Let's take a look at why EA shrugged off this flop.
Losing the battle
EA had originally hoped to sell 8 million copies of Battlefront during the third quarter. Instead, actual sales were closer to 7 million. Management pinned the blame on digital monetization options that many early trial players thought tilted the game toward heavy-spending competitors.
"We never intended to build an experience that could be seen as unfair or lacking clear progression," CEO Andrew Wilson told investors, "and so we removed the feature that was taking away from what fans were telling us was an otherwise great game."
The company is aiming to improve the title with content releases over the next few months, but most of its lost holiday sales opportunities are gone for good. The financial damage showed up most clearly in EA's full-game download sales metric, which dove 27% as the weak Battlefront II release went up against the successful Battlefield 1 launch in the year-ago period.
The Sims save the day
That's why it's a good thing that EA has such a diverse product portfolio. Many of its other recent releases outperformed expectations over the holidays. The Sims 4 booked a 35% spike in its player base after EA released its most popular expansion pack yet. Its sports games enjoyed healthy demand, too. FIFA Ultimate Team logged a 12% increase in subscribers, for example, which helped EA's live services segment soar 39% to $787 million. That boost more than offset the decline in full-game download revenue, and so overall digital sales rose 12% in the quarter.
A bright outlook
Ultimately, EA left its full-year sales guidance unchanged at $5.1 billion, which means the surprising growth it's seeing in live services is offsetting the Battlefront release stumble. However, because those sales tilt more toward the digital channel, it means EA will be a bit more profitable than management had originally projected.
The aggressive outlook also confirms that the Battlefront struggle is confined to this one title. While players rejected their monetization choices in that game, they are enthusiastically opting to pay for a wide variety of services and content in EA's other franchises. That's an encouraging sign for the business as it preps to launch major games across five genres and three platforms over the next 16 months, especially since these all include digital sales components.
"This diversity in portfolio, platforms, geographies, and business models is the foundation of robust business that enables us to deliver dependable cash flow," Chief Financial Officer Blake Jorgensen said in a conference call. The diversity also protects the business from weak results in any single product launch, even if it is one of EA's biggest action titles.