Victor BOURGOUIN

Victor DESPONS
Mark HADJ HAMOU

14/09/2016

Case 2 : Electronic Arts

1. In 1995, what are the key characteristics of the video game industry? In which ways is it
similar/different from the movie industry?

1995 was a turning point in the gaming industry, with a number of platforms building stronger and
stronger positions in the market, such a Sega and Nintendo, as well as newcomers on the market
such as Sony which released its Playstation 1, and the fall of a number of other companies that
werent able to keep up with the market such as Atari.

One of the key characteristics of the gaming industry is the short lifespan of the video games and
consoles. Regular technological advancements and innovation in the hardware sector, such as
moving from 8-bit to 16-bit, mean that all companies have to constantly strive to keep up to date if
they dont want to be left behind.

2. Until 1995, how successful has EA been? Why? What is the basis of their competitive advantage?

By 1995, EA has been very successful. Between 1990 and 1995, revenue has increased to $420 million
and gross profit has increased to $195 million, each growing 500 percent in the period. Net profit has
increased to $45 million between 1990 and 1994, or 800 percent.

In 1994, EA sold over $400m :

53% Sega
22% Nintendo
3% 3DO
5% PC
8% Affiliated Labels

EA had 85 titles in 1994, and 100 titles in 1995 ($120 million in development costs.)

EA grew to four divisions:

EA Sports
Simulation and Interactive Movies
EA Entertainment
EA Kids

EA developed a distinct competence at building a culture that is good at dealing with technical and
market uncertainties. Key assets include:

Product development,
Marketing,
Integrating creative, technical and business people into project management,
Navigational competence,
Salesforce for market competence,
Top management that is knowledgeable about technology.

Instructors who also use Electronic Arts in can ask students to recall the evolution of EA. Instructors
can elicit salient points in EAs history. For example, until 1989, the companys strategy had been to
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develop games for the PC platform. However, by 1989 cartridge-based home video games had
emerged as the dominant game platform. At that time, four million IBM PCs and compatibles had
been sold creating a market of $230 million for PC-based games. This contrasted with as many as 22
million US households with 8-bit consoles, which generated a games market of $1.6 billion. Of course,
the costs of developing games for the PC were very different from the costs involved in developing
games for the then dominant Nintendo platform. That company demanded large up-front royalty
payments and manufacturing fees as well as advance commitment to cartridge number. All of which
raised the risks associated with developing for the Nintendo platform. These risks were similar to those
EA faced when it bet on Sega during the transition to the 16-bit platform.

By mid 1995, EA faced four key strategic challenges. The company had to prepare for another platform
transition, with the industry going to 32-bit processors, while at the same time maintaining leadership
in the 16-bit platform. EA was also developing and leveraging intellectual property new intellectual
property by co-branding with organizations such as the National Football League (NFL) and National
Hockey League (NHL). By 1995, EA has also set its sights on international expansion. As before, the
company also faced the usual strategic challenge of attracting and retaining key creative and
engineering talent.

3. Until 1995, what has been EA's technology strategy? How is it linked to their business strategy?

EAs strategy was to become the first third party developer for Sega because Sega needed high quality
software developer fr its platform to stimulate hardware sales and they knew the fact Nintendo and
Sega were already competing with each other on both hardware and software innovations and also
that Nintendo would refuse EA to produce games for its system if they are producing for Sega. This
was companys main strategy and its MWG to attain the position where they can be the business
leaders for software provider. The competitive advantage of the company was its ability to produce
the games for multiple platforms with its Artist Workstation that had the capability of cost effective
development, easier portability and ability to maximize the full capabilities.

4. In 1995, how should EA top management think about the platform development decisions it faces?

Platform transitions are very risky periods for EA. The industrys share of market goes up for grabs with
each transition. For example, Nintendo dominated the 8-bit platform, while Sega dominated the 16-
bit platform. By 2002, EA is facing a 128-bit platform transition. A transition requires EA to make a big
bet on the company it thinks will win the transition. Instructors can highlight this point to asking
students how much cash the company has and discussing the other cash needs the company must
balance with transitions.

Anything EA can do to help mitigate the risks associated with transitions will fall directly to the
companys top and bottom lines. How does EA manage and mitigate risk? The company has developed
a capacity to predict technology and market direction through intelligence derived from development
teams and the direct sales force. It has also developed the ability to move fast (make quick decisions),
which confers 1st mover advantage critical in this industry. In addition, EA developed the ability to
port to different platforms, including proprietary hardware such as Artists Workstation.

Instructors should discuss with students the concrete measures EA uses to evaluate which titles it
chooses to produce. The most important metrics are:
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Contribution margin
Tie ratio
Share of market

5. 1. By 2002, how has the Internet affected the video game industry? How does it affect EAs
corporate strategy?

Online gaming represented a compelling opportunity for EA. The company could reach more game
players through the Internet than it ever could through dedicated consoles. Online gaming also
represented a unique opportunity to derive a regular stream of revenue through subscriptions paid by
players for access to premium online gaming sites.

In 1999, EA sources believed that the total subscriber base of persistent-world games would grow to 5
million players by 2005. The company planned to release 1-2 games per year over the next 3 years for
this online subset. Persistent-world games cost about $5 M each to develop, but gave contribution
margin of 50% to operate. In addition, the lifetime per game/community was estimated to be as long
as 3 years.

Most of the data used in this type of gaming resided on the game CD and the players local PC, with
comparatively little data transferred to the player from the server. EA planned to charge around $50
for the CD and first month subscription, and charge subscribers $10 per month thereafter.

EA offered a service in the server-based subset. The company featured multiplayer match-up for
about half of its PC games through its website. By the end of 1999, usage of EAs service was very low,
hosting an order of magnitude fewer sessions than the most popular rivals.

The third online subset, game communities, were websites that that discuss, trade, customize and
promote elements of popular games. About half of all PC gamers in the US (20 million) and around
10% of PC gamers in the rest of the world visit one of these sites per month. Game publishers attract
only a minority of this traffic, with independent sites drawing most of the traffic. EAs most popular
community site was Simcity.com, which attracted 1 million users per month for its first 6 months.
Traffic thereafter settled to 200,000 monthly visits.

5. 2. What should EAs corporate strategy be for the next 5 years? Why? How execute the strategy?

Discussion of EAs strategy going forward should take into consideration its current strengths and the
forces that will shape the company in the future. By 2002, EAs scale allowed the company to leverage
its intellectual properties across multiple platforms and geographies. The companys prominence in
its industry gave EA other benefits. EA had the potential to influence the success of a platform by its
decisions to publish titles for it. Since the success of a platform was tightly linked to the number and
quality of games available on them, EA was regularly consulted by hardware manufacturers concerning
technical specifications. This enabled EA to develop titles faster and better prepare for transitions in
the platform cycles.

Online gaming will likely become more important to the company. But for this to happen, several
forces exogenous to EA must come into place. These include greater ubiquity of broadband Internet
connections in homes and continued development of Internet capabilities in consoles. Forces that EA
can influence with respect to online gaming include the development of compelling content for
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multiplayer and massively multiplayer games that are particularly well suited to the online channel and
creation of an online business model that will generate sufficient revenue to the company.