Fortune reporter Alex Conrad wrote a good article this week on the challenges facing Electronic Arts. EA once stood at the pinnacle of the video game business. Eight years ago, I wrote a case study about the firm. At the time, EA had a stable of high-performing video game franchises, with healthy profits each year. Today, EA faces many challenges. It lost in excess of $1 billion in 2009, and it lost more than $300 million in the second quarter of this year. Social gaming firms such as Zynga have burst onto the scene and disrupted the console-based video game industry.
Interestingly, the signs of trouble stretch back to a time well before Zynga arrived on the scene. EA became increasingly reliant over the years on building franchises, with a series of sequels building off of a popular game. Moreover, those franchises often relied on others' intellectual property (whether it was a movie character or John Madden and the NFL players/teams). Acquisitions played a key role too. Fewer and fewer blockbuster hits emerged organically within EA's studios based solely on its own intellectual property. As EA became more reliant on others, and less successful at creating home-grown hits, the threats to its competitive advantage increased. Then, just as EA became vulnerable due to these trends, social gaming came along to disrupt the business substantially.
Now, EA must decide how to counter the social gaming threat. The article suggests that one way it will do so is by adapting some of its popular titles for the social world. However, one wonders if that is the optimal strategy. Perhaps they will leverage those strong brands to make popular social games. On the other hand, one must acknowledge the significant differences between console-based games and social games such as Farmville. Will a firm trying to adapt titles from the console business end up creating a suboptimal social gaming experience? Will the mindset of creating high quality, graphics intensive console games (which require substantial R&D expenditures) get in the way of producing successful social games (which have simple graphics, much less technological sophistication, and which require much less development investment)? Companies focusing completely on social games, without the history of console game development, may actually have an advantage here. EA itself seems aware of these challenges. That may be why they have acquired several social gaming companies. How they manage those acquisitions will prove critical to their future success.