Largest customer now Apple
Digital is a massive opportunity for game developers like EA. EA can now sell games direct bypassing retailers and physical packaging costs. They are also able to monetise some of their older brands on mobile like the Simpsons and Simcity. The mobile opportunity has grown so fast that Apple is now the Company’s largest retailer.
Digital sales will be bigger than retail
The older consoles had limited storage space for downloads but the new generation consoles have larger storage capacity. While downloads can take a while they have engineered the download so that gamers can play the early parts of the game while the rest downloads in the background. Approximately 10-15% of game sales are downloaded digitally. This is great for business as while the retail margin tends to go to the console developers game companies save 5-10% on packaging costs. They also gain 10-20% savings from no sales reserves which are estimates for price declines over time, basically no reserves are needed to discount excess packaged games.
The console market is doing better than expected. As of March Sony announced they had shipped 6 million PS4 units they originally estimated 5 million. Expectations were that gamers would move away from consoles but the combined number of Microsoft and Sony units are greater now than at a similar point in the last cycle. EA expects sales of games for new consoles will offset the decline in older generation consoles by Christmas this year.
One finger gaming
Mobile is an opportunity but it is different. Mobile games tend to played in bursts of less than four minutes and as we all know tend to played with one finger swipes. The good news for EA is they can leverage their portfolio of brands to get their games through the clutter of thousands of free games.The best example being EA's The Simpsons Tapped Out game. Their freemium business model with games downloaded free are subsidised by in game payments and advertising. This is their fastest growing division. The mobile game market is becoming similar to the PC or console market where a few key games and companies dominate the industry.
From 2016 onwards EA will benefit from the Star Wars license from Disney with new games coincided to be released around the new Star Wars movie. The Company has also announced a partnership with Tencent to launch FIFA Online to the China market. With a new CEO and the digital opportunity EA is back in the game.
Jason
Disclosure: Decisive does not have a position in Electronic Art (EA) stock
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