Can Electronic Arts Survive The Onslaught Of Internet Gaming?

Can Electronic Arts Survive The Onslaught Of Internet Gaming?

Shares of Electronic Arts Inc. (NASDAQ:EA) dropped 8 percent yesterday as chief executive John Riccitiello announced his abrupt departure from the company, which has increasingly come under fire lately for the poor launch of its latest SimCity franchise.

The company also pared its revenue and profit expectations for the current year, at least partially affected by the botched launch of the city-building simulation game, which many users could not play because of server instability.

After the profit warning, analysts at Needham pared the stock’s rating to “hold” from “buy” noting “tougher challenges ahead”. To be sure, the company’s challenges are far bigger than what can be corrected in a quarter or two. Electronic Arts is faced with more and more gamers shifting to online games that are accessible online or through mobile digital devices such as smart phones, or through social networks such as Facebook.

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The last bit is crucial here as its competitors Activision Blizzard, Inc. (NASDAQ:ATVI) and Zynga Inc (NASDAQ:ZNGA) have found unprecedented success with the social media platforms.

Can Electronic Arts Survive The Onslaught Of Internet Gaming?

It is not that Electronic Arts Inc. (NASDAQ:EA) has remained oblivious to the shift but its efforts to boost presence in the online world have been marred by in-adept planning and technical errors. The problems with the latest game in the SimCity franchise were not really unforeseeable and should have been rectified as the game was offered in online mode only.

However, in-adept planning is just part of a bigger problem. The real challenge for the company is to shift most of its games online and from its proprietary platforms to a shared platform such as Facebook. This is easier said than done. Electronic Arts Inc. (NASDAQ:EA) has already invested considerable funds and has achieved some success towards the goal. For the financial year ended March 2012, the company recorded a 56 percent jump in online revenues to $1.16 billion. This sounds like good but still contributed only 28 percent of its total revenues in the year.

Meanwhile, Activision Blizzard, Inc. (NASDAQ:ATVI) – another legacy player – has managed better success in this vein. Despite registering a decline of $100 million in 2012, Activision Blizzard’s revenues from digital online channels represented 32 percent of its total revenues in the year.

The publisher of popular games such as Call of Duty and World of Warcraft is generally recommended as a “buy” by brokerage houses. Simply put, the company has been able to better deliver on its plans and financial performance.

Improved performance has also allowed the company to reward shareholders. This was evident when company CFO Dennis Durkin recently stated more stock repurchases and dividends may be coming shareholders’ way. The company entered the year with nearly $4.4 billion in cash on its books.

Needless to say, it would just be right for the company to return excess cash to shareholders. The stock is trading near its 12-month high levels; however, it would be wrong to assume the upside is limited as a result. On the contrary, continued better financial performance and dearth of worthy competitors would only increase its attractiveness among investors.

Zynga Inc (NASDAQ:ZNGA) is another player which has played the social media shift beautifully. In fact, its entire business revolves around developing blockbuster games such as FarmVille and Mafia Wars for Facebook. This is not to suggest that the company is a winner. Quite on the opposite side, it has already witnessed pressure on margins and has struggled to make profits despite cornering the biggest pie of Facebook gaming.

After being hailed as the next big thing in the gaming industry, the company has struggled with monetizing its vast and still growing subscriber base. The company has seen more than 73 percent erosion in its value over the last 12 months due to these concerns and make the stock one of the worst performers.

Overall, the shift to online platform remains one that needs to be watched closely. There are no clear winners in the game yet and while the industry explores monetization strategies, it may be better to consider players with a fair balance of online-offline experience.

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