The New King in Town

With Electronic Arts’ Fiscal Year 2012 earnings call in the history books, here are the five personal observations that I came away with:

1. The Future Is Digital.

Digital revenue for EA over the last 12 months was more than $1.2 billion dollars. That’s 47% percent more than the same period a year ago. Full-game download revenue increased by 76% over the same period, raking in over $60 million in revenue alone. These trends, which are projected to maintain forward speed in the coming year, are indicators that EA is focusing primarily on the digital side of the business. As more consumers continue to jump online with their smartphones, tablets, computers, and even consoles, EA seems confident that they’ll buy digitally instead of preferring more traditional “packaged goods” - or physical copies.

I tend to agree with this assessment, which leads us to...

2. Software Declines Will Continue At Retail.

During the call, it was projected that sales of physical media would continue to be in the red based on year-over-year comparisons. The decline was slated to be in the single-digit range, so I suspect somewhere between a 5% and 9% projected slide. This trend is consistent with YOY declines in retail software sales, though I suspect that the overall number for the industry will be just a shade worse by year’s end. I’m thinking about a somewhere between 10-15% lower sales in software overall as compared with 2011. This could be for a few reasons, including the extreme length of this console generation, high software prices, and/or a gradual exodus by some consumers to other forms of entertainment.

In other words...

3. Console Gaming Is In Decline.

While smartphone, mobile, and social gaming are all growth markets, slides supplied by EA to reference during the earnings call pointed to a single-digit decline for consoles. Repeatedly during the call, references were made to social and digital gaming, while consoles were referred to less and half-hearted statements of encouragement about the future of console gaming were made by Electronic Arts CEO John Riccitiello. While I agree that the console video sector is struggling, it’s unclear as to whether next-generation hardware will stop the bleeding.

Speaking of the next console generation...

4. Electronic Arts Is Committing $80 Million Over The Next 12 Months For Next-Gen Development.

At first, this seemed like a positive to me. Then I realized that, with soaring development budgets, this number isn’t really all that impressive. Perhaps EA is purposely starting on the slow end, taking fewer risks and transitioning safely (but smartly) into the next console generation. It would make sense to me, based on what’s been selling well for EA, that a next-gen FIFA game, a Madden game, and maybe 2-3 other major projects are in the works. I don’t believe that any of these will be new IPs. The $80 million is a small number, subsidized by success in the social and mobile markets. If console gaming doesn’t recover for the next generation, then an $80 million loss can be overcome... plus, with risk averse development, the games would most likely sell decent amounts.

As for FIFA...

5. FIFA Has Surpassed Madden On The EA Sports Depth Chart.

FIFA 12 generated over $100 million in downloads and micro-transactions, an achievement that can’t be ignored. Even if a percentage of that winds up getting charged back due to alleged hacking or theft, it still bodes well for a sport that continues to expand its exposure and popularity worldwide. During the call, FIFA was more prominently referred to than Madden was, which is pretty telling if you consider how Madden used to be the cornerstone of EA Sports. Madden is still popular, but it seemed pretty evident to me that FIFA has caught up with and even blown past it in terms of importance to the publisher.

I do believe that EA is trying to position itself for success in the years to come, and even with the somewhat bearish outlook on consoles that I read from the call, reliance on digital and social gaming will continue to fund the a potentially smaller console market in the future. Console gaming isn’t a dead market, but it’s clearly no longer a growth market, either.

We’ll see how this trend continues to evolve as two more notable industry dates - Activision’s Q1 2012 results and NPD sales data for April - both hit later this week.