Consoleation Reaction: Electronic Arts Earnings Call (FY 2012)
I’ve already submitted a story for approval to Popzara Games regarding Electronic Arts‘ earnings conference call yesterday, but I’m still thinking a lot about it.
I’m struck by the cautious and arguably negative tenor that was taken during the call when it came to EA’s position on console video games. EA isn’t going anywhere, of course, and console games will still be coming over the next 12 months, but something just isn’t right. Perhaps it’s because we’re entering a lame duck period for this console generation as we prepare for what EA calls Gen4– the next generation of console hardware. Perhaps it’s something more ominous, such as the reality of analyst observations stating that consumers are fleeing to other forms of entertainment. Either way, there were a whole lot of social, mobile, and digital mentions made… and not a whole heck of a lot of console mentions made.
I’ve talked about the decline of console gaming in recent days and months, and I think that it’s been easy to spot. Trends are key. Despite a hefty release schedule for console games in the final three months of last year, sales continued to trend down. Hardware sales have been trending down for all platforms since December, and April will make it five straight months of YOY declines unless the PlayStation 3 surprises and moves more than 205,000 units. That trend could be explained in part by the generation ending as I mentioned. Lagging software sales are another problem, though. Perhaps they can be explained by a generally weak release schedule that’s had one genuine hit in Mass Effect 3 and couple of moderate movers so far in 2012, but that doesn’t explain disappointing March sales that were down 26% YOY despite a decent slate of releases.
It can be argued that console sales will show more life once the next generation transition is complete, but what if it doesn’t?
There isn’t a guarantee that consumers will come flooding back to consoles if they’ve found other entertainment to enjoy instead. Mobile and social gaming are slated to increase by 20% over the next 4 years. Console growth is projected to increase by only 5% during the same period, according to EA, and that’s after this current cycle of declines that we’ve seen since since 2008. This indicates to me that while console gaming will still be a viable market, it doesn’t make sense for publishers to invest a ton of money on development if the risk is that enough consumers don’t buy in.
That’s where the revelation that EA is investing $80 million into next-gen development comes in. At first, I looked at this number as more of a positive. Then I thought about it some more. $80 million isn’t a ton. If we go by the assumption that next-gen development probably needs to start now (or soon) to have games ready for a release in the second half of 2013, that amount indicates to me that EA is probably staying away from major risk and taking a very cautious first step. They’re doing it because success in other areas of the business can subsidize development in a market that has potential, but not a lot of apparent strength. If not for mobile and social, it’s not out of the question that EA would be in a much tougher position moving forward.
It’s possible that my position is rather bearish, but listening to CEO John Riccitiello try to give a vote of confidence for console gaming to analysts during the Q&A portion of the call was painful, at best. There wasn’t confidence in his voice at all. There was uncertainty and hope for a turnaround, while the confidence was shown during questions about other facets of the business. I think that things are going to get worse before they get any better, but I also believe that the decline that we’re seeing is a necessary correction for an industry that got much bigger than anyone could have projected.
Look for more reactions this week as Activision shares its prior quarter results on Wednesday evening and then NPD sales data for April drops on Thursday evening.