Shares in Electronic Arts fell nearly 6 per cent on Wednesday after the video game publisher issued a cautious outlook for its current fiscal year.
Investors seemed to overlook the fact that it is trying to manage expectations with more conservative estimates these days and that its digital business appears to be taking off.
EA’s digital revenues grew 33 per cent in its fiscal year ending March 31 to $570m, or 14 per cent of total revenues. The Silicon Valley company expects growth of 30 per cent in the current year to reach its target of $750m in digital revenues.
The biggest component of its digital business is mobile games, where it is the industry leader with revenues north of $200m.
Eric Brown, chief financial officer, told me EA was seeing the highest growth rates in digital coming from downloadable content on consoles, with the rest of sales coming from subscription and social networking-based games.
EA bought Playfish, the number two player in social gaming, last November for up to $400m and its latest title, Hotel City, became a Top 15 game on Facebook in its first two weeks.
“We’re now bringing to bear the high-quality EA brands like Fifa,” he said – Fifa Superstars will be the first major EA franchise to feature on Facebook and is in beta testing this month.
Analysts are generally positive about EA’s digital progress.
“EA is likely making the right steps in its transition from a packaged-goods focused video game publisher to a digital, direct-to-consumer developer,” said Todd Greenwald of Signal Hill in a research note.
However, he added: “We prefer to wait on the sidelines while this slow-going and painful transition progresses.”
Mr Greenwald is sceptical EA can achieve its $750m target, with more than 50 per cent of digital revenues coming from slow-growing mobile, advertising and Pogo casual gaming. He believed Playfish was running into numerous hurdles on Facebook, with its limited notifications ability driving monthly active users down significantly and the use of Facebook credits, a virtual currency, driving costs up.
Michael Pachter and Edward Woo at Wedbush Morgan Securities were more bullish.
“The digital opportunity continues to be the story…the company’s investment has finally begun to bear fruit,” they said in a note.
They highlighted how EA would achieve incremental digital revenues for each of its major franchises on top of the sales of their packaged goods versions.
For example, in the case of Fifa, apart from the disc-based Fifa World Cup 2010 , Fifa 10 Ultimate Team was driving microtransactions on Xbox Live and the PlayStation Network, there was Fifa for the iPhone and other handsets, Fifa Superstars for Facebook and an online subscription Fifa game in Korea.
With digital, there is no used-games secondary market to deal with, where gamers trading-in and buying second-hand games sucks away revenues from publishers.
EA has even found a way to monetise this market digitally. Its new Online Pass programme for EA Sports titles gives buyers of the disc-based game a registration code for online services. Buyers of the used games will be able to access these for a short trial period, but must pay $10 for online game play and access to other features on a permanent basis.
The industry as a whole is moving towards online digital distribution, but EA is pushing the hardest and coming up with the greatest amount of innovation.
