Morgan Stanley Wants EA to Have “More and More Payers and Players”
In a slightly ominous sign for gamers, Morgan Stanley ((NYSE:MS) analyst Brian Nowak asked EA (NASDAQ:EA) executives what the strategy is to get in his words “more and more payers and players”. While not overly surprising (this is an earnings call after all) the focus on the call and the overall tone is one of monetisation at all costs. The drive for profits is obviously what drives capitalism, but at times it can be pushed beyond what some would call reasonable limits and EA has stumbled in recent times with several prongs of its strategy, particularly in the monetisation and launch areas (read Alessio’s piece on the possibility of EA pursuing more soft launches here).
It’s no secret by now that EA didn’t have the greatest year (read our earnings coverage here). Backlash against monetisation in Star Wars: Battlefront II and a shoddy Anthem launch with mixed reviews have seen the stock lose over a third since its peak last summer. Conversely, as we’ve seen with Apex Legends, EA had a hit which has helped. The trouble is how do we as gamers balance our needs for good entertainment against we as financial professionals looking for returns on our investment, here is where things get interesting.
Consumer Benefit vs. Monetisation – Chicken or Egg?
There are two general schools of thought when it comes to profitability. The first is to look after your customers, assuming that if you do this, the customer will pay a fair price and will purchase your product/service, thus keeping you in business. The second is obviously to push your customer base for every last drop you think you can squeeze out of them. Most companies tend to opt for some middle ground with elements of both models but there are some notable examples of both in the world of tech companies.
Amazon (NASDAQ:AMZN) is a good example of the former in many ways. What some would characterise as an overly generous refund policy and continuously branching out into new areas with little margin and large R&D budgets has seen Amazon grow to a scale that Barnes and Noble (NYSE:BKS) could only dream of. Could Amazon monetise its customer base harder? I’d be genuinely surprised if anyone thought the answer was no.
In the games industry itself, we have a shining example of the “look after the customer” model in the shape of CD Projekt Red (WSE:CDR) which famously tweeted in the wake of the Battlefront II scandal “We leave greed to others” and has a reputation for taking care of gamers whether in the games it makes or in the DRM-free store it runs (gog.com). On the other end of the spectrum, it would be hard to find a company which pushes its user base for monetisation harder than EA, once branded the most hated company in America for a series of missteps including a reputation for buying promising game studios and running them into the ground, deceptive business practices leading to investor lawsuits, micro-transactions and loot boxes, day one DLC, this story has it all.
But despite these different approaches, all the companies mentioned survive albeit with some high profile scalps (former EA CEO John Riccitiello resigned on the back of some of the above scandals) so it’s probably fair to say that there is validity in both models, it simply comes down to what kind of company does one wish to be and what is the market expectation of that company. In that sense, most CEOs and COOs walk varying degrees of tightrope and perhaps Andrew Wilson (the current EA CEO) more than most. EA has a reputation as a business oriented games house with a razor like focus on profits and that hasn’t changed but obviously the senior management need to ensure that they don’t step too far on the other side of the tightrope towards monetisation.
Gamers are a fickle bunch and backlash can be severe with rumours that Disney (NYSE:DIS) executives were less than impressed at the handling of their beloved Star Wars franchise.
EA - Wrapping Up
EA continues to walk a tightrope and certainly its execs feel bullish about the future. A strong roadmap with a mix of both traditional single player, storyline driven games as well as online and live service type games pursuing heavy user monetisation were discussed but it’s clear where the emphasis is. The phrase “live service” was mentioned 26 times on the call and that’s simply the direction the industry is headed if you want profits. Blake Jorgensen (EA COO) in answering the question noted that over the last 11 years, EA has gotten better every year at designing events such as in Ultimate Team so that players have more fun and when players have more fun, they’re liable to spend more money, saying that they continue to tune events.
He also mentions that “the beauty of live services is that it’s a daily business. The teams respond to daily data about what consumers want and what they’re doing and continue with that”.
So it’s clear that the future for profitability purposes is geared towards finely tuning the live service gaming environment in such a way as to maximise profits from its gamer base. Big data is an important part of the equation here and much like it’s used in financial services to attempt to predict the market with Blake also talking about their ability to predict spending patterns, it’s clear that the industry is heavily geared up towards metric evaluation and content generation around those metrics. In the meantime, the gamer in me hopes that EA keeps enough of the traditional single player hits churning out to keep the community from getting too upset so that it can continue its monetisation in multiplayer event driven games.
EA is in advanced discussions to bring Apex Legends to China which would obviously boost its 2020 FY profile given that it already expects $300m - $400m from the game alone even without China as it's the fastest growing game it's ever had. While the global economy continues to grow, chances are good that it can continue to monetise although whether that continues will very much hinge on whether the US and China secure a trade deal together.