Oh, Electronic Arts… such a shame.
EA’s laying off yet more staff. They had about 11,000 staff. Then they dropped about 1,100 in February, and now they’re letting go another 1,500. And they’re going to be dropping about half of their gaming properties. Why?
They’re focusing on hits. Best-sellers.
Now, think about this for a moment. What better thing for a publisher to do than to only publish best-selling titles, right?
It’s not that easy. Actually the book publishing industry already tried this in the 1990s (due to a number of odd circumstances coming together at once). A number of top publishers started focusing on A-list, first-string authors and titles, and avoiding anything they didn’t think was going to sell so well.
For a brief instant that looks like a good business strategy.
Of the publishers who tried it, those that are still actually in business hardly ever show up on the best-seller lists each year.
Hits fade. Sequels and reworks of the same formula only go so far. Then they get tired. The audience becomes fatigued. It takes a long time before the old models start to look fresh. If you’re not putting ‘maybe’ titles in front of customers, you’re not going to have any hit-material when your previous hits wear out.
I think the better way to look at it would be that Electronic Arts has a core slate of games label and sports franchises that we will iterate on a either annual or bi-annual basis. And I think you know what those major titles are — all of them are selling or have sold in their most recent edition 2 million units or more. After that, we’ve got The Sims and Hasbro, and frankly anything that doesn’t measure up to looking like it can pencil out to be in very high profit contributor and high unit seller got cut from our title slate from this point going forward. – John S. Riccitiello, quarterly earnings conference call.
However, the other big problem is that you can’t predict hits. If you could, there wouldn’t be any actual misses. That’s basically the problem with this strategy.
What it is good for though is pumping the company before you cash in your options and get another job. There’s definite strong, short-term gains to be had, but in an industry with a median multi-year development cycle for properties those gains can suddenly become deep, deep losses before anyone realizes what’s going on.
And that’s really what I believe is of concern here. EA lost US$310 million in Q2, and US$391 million for Q3. For those of you that have been through a few company crashes, you probably know that EA should be focusing on quality, innovation and diversification right now. More eggs, and more baskets to keep them afloat. Traditionally, that’s more successful strategy for a troubled publisher than tighten-and-focus.
Instead, we’re looking at one basket, holding eggs that are only going to get heavier over time (pardon my overly stretched metaphor). Staff cuts save money. Writing off development costs for B- and C-list titles and the company can suck up the $300 million it just paid for Playfish Games.
And maybe things will look awesome for a year, or two, or even three. But if EA hasn’t significantly diversified by at least mid-next year, that will probably turn to losses so suddenly it will give you whiplash.
Prediction: Riccitiello will move on from EA before Q4 next year, before the strategy starts to unravel. I’m not suggesting that this move is a deliberate pump-and-dump, but I think it’s a gamble, and not a terribly smart one.