Electronic Arts (EA 3.59%) has been one of the biggest names in video games for decades, most notably making popular sports games in the Madden, FIFA, and NBA Live franchises.
Big-name video games have been lucrative, and EA has ridden a wave of console and PC growth around the world. But in 2019 the industry is changing with consumers spending more time on new games like Fortnite and less money on traditional hit franchises. Like any company, EA will have to adapt to the market, and that may leave it in a very different position five years from now.
Where EA stands today
First, let's look at EA's financials. Revenue is up 21% over the last five years, while net income has jumped sharply, more than doubling before a large tax benefit last quarter caused a jump in earnings. The slow growth is what investors should take a second look at because it indicates that the business is expanding only slightly faster than the economy overall.
Margin expansion is what caused net income to rise faster than revenue, and higher margins have been helped by more digital sales and fewer physical product sales. The challenge now is that most sales are delivered electronically, and there may not be much additional margin to squeeze out of sales. That means new content will have to drive growth, and that hasn't been EA's strong suit lately.
If you look at EA's lineup, there are a lot of old standbys on the list. Madden and FIFA are the highlights, with Battlefield 5 still driving significant revenue, despite a disappointing 7.3 million units sold in the first quarter it was available. These are franchises that EA can count on, but they may have peaked in terms of their market potential.
What's challenging for video game makers today is that the landscape is changing. Gamers want multiplayer experiences like Fortnite that become more social rather than a typically one-on-one game like Madden. Mobile games are also taking market share, and EA hasn't had any breakout hits on mobile. Plants vs. Zombies is arguably its best mobile-first game, and that's an old title by mobile standards. EA's core is aging before our eyes.
Battle royale and esports to the rescue
The success of Fortnite in 2018 caught most of the video game industry by surprise. Developers didn't realize that battle royale games were going to be the next big thing, and Fortnite took a lead it still hasn't given up. EA's best shot to compete is Apex Legends, a battle royale game that got 2.5 million downloads on its first day. It hasn't beaten Fortnite yet, but it puts EA in the battle royale arena.
Esports -- video gaming as a professional spectator sport -- is another area of potential growth that EA has dabbled in but hasn't really dominated. There's the EA Sports FIFA 19 Global Series and the Madden 19 Championship Series, but these aren't the professional team-based esports leagues that League of Legends or Overwatch have created.
Over the next five years, I think we'll see battle royale grow as a game segment, and esports will be a bigger focus as well. EA has a foot in the door in both; now it needs to knock the door down. That will require new content and potentially new distribution models on mobile and PC, which is what EA hasn't proven very successful doing so far.
How EA can succeed in the next five years
One of the biggest challenges companies must overcome is the tendency to rest on past success. Madden and FIFA are great franchises, but they're aging in a world of video games that's rapidly evolving onto new content models and new devices. EA will have to adapt to that reality and innovate with new content in the next five years. I think the company has shown some promise with Apex Legends, but it needs more to be a winner for investors in the long term.