ERTS Q1 FY2009 Earnings Estimate

Electronic Arts (ERTS) is scheduled to announce Q1 FY2009 earnings on 7/29/2008.  16 Analysts estimate revenue to be around $625.10 Million with a net loss of $-0.32 a share.  Previous year actuals were $395 Million in revenue with a loss of $-0.22 a share. Based on estimates, revenue is expected to grow by an astounding ~58%, but the net loss is widening by an additional 45%.

I believe the average estimate on both earnings and revenue is a bit too low.  The video game industry is the fastest growing segment within the entertainment business.  Last year, video games revenues were significantly higher than the box office and home video sales.  The streak continue, as the month of June recorded another stellar increase of 53% in total revenue.  Even economic woes, gas prices, and inflation have not stopped the spending spree for video games.  This trend is not expected to end and will continue in a sharp upwards trajectory as more great games and more consoles are sold in the next few years.

EA should definitely outperformed this quarter.  With an increased focus on next-gen consoles, the average price point of games sold to consumers should have significantly increased.  In Q1 2008, the previous generation consoles (PS2) and the PC made up a signification portion of the company’s revenue.  New games for the PS2 & PC sell at $39-$49 while older titles go for $19-29.  As more consumers migrate towards the newer consoles, the price point for new games increases to $49-59 and older games to $29-$39.  With sales of newer games increasing, EA is effectively recording an additional 20% increase in sales for every game sold.

Games wise for the consoles, EA had 2 major releases with Battlefield: Bad Company and UEFA Euro 2008.  Both games are expected to be a million unit seller by Q2.  EA also distributed Rock Band to the European region and a new Wii version for the Americas.  With the extremely high price point Rock Band commands, EA should be seeing once again significant growth in the top-line for their distribution division.  For PC Games, EA released several new expansion for the Sims and the highly awaited Mass Effect RPG game.  PC sales should see a spike in revenue from these new games, but because Mass Effect has already been released for X360, the spike should be relatively small.   Finally, EA released several well received games in Q3 and Q4 FY2008.  These games: Burnout Paradise, Army of Two, etc. continue to sell very well and will contribute greatly to both the top and bottom line.

EA’s other revenue streams continue to grow at an extraordinary pace.  Cell Phone games have contributed more to the top-line than Nintendo DS games in Q4 2008.  In-game advertising have begun to become more prevalent, and EA’s subscription service for Pogo.com is still signing on more and more customers.

Overall, all of EA’s business lines have performed very well in the past and this quarter should be no exception.  In terms of profits, cost control is one key area.  In the prior year, a large portion of the revenue came from licensed games or distribution contracts, services that command at most single digit margins.  This year began with a renewed focus on internally owned properties.  These internally owned properties have so far proven to be quite successful.  In addition, as the restructuring continues and one time costs are factored out, EA should be seeing a very profitable fiscal year.

For Q1, my revenue estimates are $809.96 Million and a $0.01 EPS.

Strategies against PC Piracy!

So … if Piracy is such a huge problem, then why are there still publishers that are PC only or heavily dependent on the success of PC games? Wouldn’t these publishers be crawling to stay alive just like the recording industry?

For the most part, Yes, some publishers are having a huge amount of trouble with pirated games. Even though various technologies have been introduce to prevent pirating, for the most part these strategies are failures.

Then what is a successful strategy against pirates?

Here is where the real post begins. There is no successful strategy against pirates, unless the revenue comes from a service. Video games are essentially a manufactured product. Once the game has been created, it is copied to various discs and sold in retail stores/online. Because it is a product, it can be pirated. But the industry is transforming itself into a service, a service of connecting people. Something that is extremely difficult to pirate.

Over the past several year, the industry has been quite successful in transforming itself from a “product” to a “service”. With the advent of the internet, the change was inevitable. People want to enjoy and play games with other people. Instead of providing game aka product for people to play, the industry started to provide a interactive environment aka service where people interact with others. This transformation for the most was difficult to notice because most games are still bought upfront. People generally don’t consider something a service unless there is a recurring cost or direct interaction with other people. But in reality, video games had transformed into a service with an upfront fee of $50. The best example is StarCraft. Once the game has been bought, customers can go online and play against a variety of opponents for “free”.

This flat fee, unlimited play for the same game model is currently the most prevalent business model within the industry. But this is also slowly changing, to one where it is video games become a continuously evolving world with a subscription aka World of WarCraft.

This is one way of combating piracy, by providing a service instead of a product.