Though video games are far from new, the industry is still growing fast, as millions of new players take up the pastime every year. With advancing technology, though, games have become much more complex, and they're changing the formula of how studios produce and deliver new gaming experiences to fans.
Electronic Arts (NASDAQ:EA), one of the industry leaders, has stumbled coming out of the gate with some of its titles. However, the company is intent on turning disappointing results into an opportunity to learn, make adjustments, and blaze the trail forward. That means changes to its game release strategy.
Disappointments and a surprising victory
EA put the wrap on its 2019 fiscal year on Mar. 31, 2019 -- a forgettable period for the company and its investors. Full-year revenue fell 4%, hastened by a 22% drop during the fourth quarter alone. Competition from peers was the main culprit, reducing interest and sales in some of EA's tentpole releases such as Battlefield V, Command & Conquer: Rivals, and Anthem.
Though the company faced setbacks last year with some of these aforementioned games, it did score a big win with Apex Legends. The game is a free-to-play (no upfront cost for players to get started) battle royale online multiplayer experience, one that quickly became EA's fastest-growing new release ever. Apex Legends reached the 50 million player mark shortly after its debut, with management saying millions more continue to join -- many of whom make up new audiences for EA in new markets around the world.
These free-to-play games present new challenges, though. While many games like the upcoming Star Wars Jedi: Fallen Order will fall under the traditional model -- upfront payment to play -- the increasing complexity involved in getting a gaming experience to run properly (and profitably) over the long term is an ongoing concern. It's an industry-wide problem, too -- not one to EA.
That's where the powerful free-to-play model is coming in: A massive number of new users can be acquired in short order, only to be monetized later via microtransactions that provide content upgrades and personalized experiences. Live services from titles like Apex Legends as well as sports installments like FIFA are expected to be the leading edge of the company in the coming year, increasing segment sales by 10% to 15%.
The caveat to popularity
There are sure to be more free-to-play games in the EA portfolio in short order, and the company's management expects their results to get the overall growth engine firing once again. Total net revenue is anticipated to rise 9% over last year and adjusted earnings to increase 7%. Not too shabby but not exactly setting the world on fire, either.
However, it will be important for investors to remember these are changing times for EA and the video gaming industry. Free-to-play, massive online multiplayer games are on the rise, but they're still a new operating model. Electronic Arts CEO Andrew Wilson spoke on the last earnings call about "soft launches", where a game is initially released to select groups of players for testing before a more widespread introduction:
But it also comes down to change in how we launch games and how we roll out, and you should expect that we'll start the testing by soft launches. The same thing you see in the mobile space right now, and it also comes down to change in how we communicate with players. And our entire marketing organization now is moving out of presentation mode and into conversation mode and change in how we interact with players over time.
Soft launches aren't unusual in the mobile gaming world and in Asia, but for EA, it will nonetheless mean a major shift when it comes to its marketing division -- changes that will involve gathering up and listening to player feedback to improve upon and continue to develop video games as they progress through their life cycle.
Making fundamental changes to a business will always be fraught with potential missteps, but change is good. Free-to-play games that revolve around multiplayer, live events, and continual gameplay additions hold a lot of promise over the long term. Investor patience will be required, though.