Bilal Latif

Mark Moskvitine

Zoheir Mehrabani

Agenda

• About EA

• Macro Environment

• Industry Environment

• Value Chain

• Corporate Strategy

• Business Strategy

• Recommendations

What does EA do?

• Primary NAICS code – 511210 – Software Publishing.

• Production of video, PC, and mobile games.

• Software Publishing – Packaging, Marketing, Distribution.

• Sales of video games to retailers and end-customers over the internet.

History

• 1982 - Founded in California.

• 1984 – Builds global network to distribute software produced externally.

• 1990 – Begins producing games internally.

• 2008 – Founded/Acquired more than 30 development studios since 1991.

EA’s Major Titles

• Madden NFL (sport)

• Need For Speed (racing)

• Battlefield (action)

• The Sims (simulation)

• Command & Conquer (strategy)

Political and Legal Environment

• Piracy

• Intellectual Property Rights

• Patent Protection

• Copyright Protection

• Country-Specific Laws

Technological Environment

• Internet Speed and Online Gaming

• Portable and Mobile Gaming

• CPU speed

Technological Environment

• Currently accounts for the largest growth in the gaming industry

• $3.8 billion in revenue in 2006, expected to reach $11.8 billion in 2011

• Online games can support multiple players from anywhere in the world

Technological Environment

• Portable games launched in 1989, mobile games in 1997

• Cell phone gaming revenue increased from $153 million in 2004 to over $4 billion in 2007

Technological Environment

• Computer Processors evolve continuously

• Increase in processing capacity stimulates demand for more complex software

Socio-Cultural Environment

• Aging Population

• Female Population

Economic Environment

• Number of PCs and consoles in use increasing in US, EU and China

• Increasing market size for computer and online games

Economic Environment

Personal Computers in Use (in millions)

0

50

100

150

200

250

USA EU China

2003

2004

2005

2006

2007

Economic Environment

Internet Subscribers (in millions)

0

20

40

60

80

100

120

140

160

USA EU China

2003

2004

2005

2006

2007

Economic Environment

Investment in Telecommunications (in millions USD)

0

10

20

30

40

50

60

70

80

USA EU China

2003

2004

2005

2006

2007

Porter’s Five Forces

• Direct Competition

• Threat of Entry

• Substitutes

• Power of Suppliers

• Power of Buyers

Direct Competitors - 10/10

• Activision (Call of Duty, Guitar Hero)

• Take-Two Interactive (Grand Theft Auto)

• THQ (Frontlines)

Threat of Entry - 2/10

• Negligible variable costs

• Substantial fixed costs

• Strong established brands to contend with

Substitutes - 7/10

Media Usage Changes 2003-2007

1%

15%

52%

19%

-5% -3% -8%

TV Games Music DVD Internet Radio Movies

Power of Suppliers – 4/10

• Most of intellectual property is produced in-house by the studios

• The suppliers are responsible for hardware, software tools

• Licenses are obtained from 3rd parties (sport, movie brands)

Power of Buyers – 4/10

• Many competing forms of entertainment.

• Video games are unique because they are interactive.

• The Internet allowed buyers to exchange information about the titles and companies.

Five-Forces Summary – 5.4/10

Summary for Video Game Industry

10

2

7

4 4

5.4

0

2

4

6

8

10

12

Competition Threat ofnew

entrants

Substitutes Pow er ofSuppliers

Pow er ofBuyers

Overall

• Technology (demand for more advanced games)

• Internet and Human Interaction Online (demand for multiplayer games)

• Using both yield maximum results (World of Warcraft)

Driving Forces

Entertainment Software Industry 2005-2007R

OA

6.1

7

RO

A 1

.88

RO

E 7

.86

RO

E 0

.37

RO

I 9.

26

RO

I 2.

81

RO

A (

2.42

)

RO

E (

4.48

)

RO

I (4

.45)

2005 2006 2007

Industry Summary

Entertainment Software Industry 2005-2007R

OA

6.1

7

RO

A 1

.88

RO

E 7

.86

RO

E 0

.37

RO

I 9.

26

RO

I 2.

81

RO

A (

2.42

)

RO

E (

4.48

)

RO

I (4

.45)

2005 2006 2007

• Software Tools

• 3rd Party Software Code

• Licenses

Supply Chain Management

Operations

Operating Margin 2005-2007

21%

3%

13%10%11%

-18%

1%4%

1%

-13%

5%8%

Electronic Arts Take Tw o Activision THQ

2005

2006

2007

• Distributed Worldwide

• Mass-market Retailers (WalMart)

• Electronics Specialty (Best Buy)

• Games Specialty (GameStop)

• Online Retailers (Amazon.com)

Distribution

• Four main brands

• Sports licenses

• Movie licenses

• North American market declining EU increasing

Marketing and Sales

Marketing and Sales

2001 World Sales in USD

USA and Canada 50%

European Union 28%

Asia and Pacif ic 20% Eastern

Europe 0%

Latin America2%

Marketing and Sales

2006 World Sales in USD

USA and Canada 40%

European Union 36%

Asia and Pacif ic 19% Eastern

Europe 1%

Latin America 4%

Marketing Expense as % of Revenue 2005-2007

12%13%

16%15%15%

13%

19%

15%15%

13% 13%14%

Electronic Arts Take Tw o Activision THQ

2005

2006

2007

Marketing and Sales

Marketing Expense as % of Revenue 2005-2007

12%13%

16%15%15%

13%

19%

15%15%

13% 13%14%

Electronic Arts Take Tw o Activision THQ

2005

2006

2007

• Website

• eGain Assistant

• Gartner CRM Excellence Award

Customer Service

• Number of Employees

• Revenue per Employee

• Average Level of Education

• Salaries and Compensation

Human Resource Management

Human Resource Management

Average Industry Compensation in North America (USD)

75,692

71,586

100,735

85,000

73,021

64,833

70,500

- 20,000 40,000 60,000 80,000 100,000 120,000

Softw are Engineer

3D Artist

Sr Softw are Engineer

Associate Producer

Art Director

Video Game Designer

Project Manager

Human Resources Management

Revenue per Employee (millions/person) 2005-2007

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Electronic Arts Activision Take-Tw o THQ

2005

2006

2007

Research and Development

R&D as Percent of Revenue

0

5

10

15

20

25

30

35

40

Activision Electronic Arts Take-Tw o THQ IndustryAverage

Year: 2005

Year: 2006

Year: 2007

• Only three CEOs since 1982

• Current CEO: John Riccitiello before EA worked for PepsiCo

• Riccitiello improved the situation of the employees

Corporate Leadership

Corporate Leadership

Return On Assets

-25

-20

-15

-10

-5

0

5

10

15

Activision Electronic Arts Take-Tw o THQ

Year: 2005

Year: 2006

Year: 2007

VC ActivityValuabl

eRare

Costly to

Imitate

Non- Substitutabl

eCompetitive

Supply Chain Management

Yes No No No Parity

Marketing & Sales

Yes No Yes YesTemporary

CA

Customer Service

Yes No No Yes Parity

HRM Yes Yes Yes NoTemporary

CA

R&D Yes No No No Parity

Corporate Leadership

Yes Yes No YesTemporary

CA

Value Chain Analysis

• Expansion by Acquisition

• Application of Marketing and Distribution to all subsidiaries (Economies of Scope)

• Distribution of software globally (Economies of Scale)

Current Strategy

Current Strategy

Market Capitalization 2003-2007

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Electronic Arts Activision THQ Take-Tw o

bill

ion

s o

f U

SD

20032004200520062007

• Divest itself of less successful subsidiaries

• Pursue trans-national strategy to stimulate demand in EU

Recommendations

Current Strategy

Cost Leadership Differentiation

Focused Differentiation

Cost Focus

Lower Cost Differentiation

Competitive Scope

Narrow

Broad

Competitive Advantage

Poor Labour Force Practices

• 1.2 acquisitions per year since 1991 – 1/3 resulted in termination of acquired firm

• No autonomy and must adapt to EA’s culture

• Working hours can reach 12-hour days 7 days a week

• Fatigued employees = more chances of error

• 50% employee turnover rate in engineering department

• Build a management team to support acquired firm

• Let employees have more autonomy and allow a more creative and innovative working environment

• Don’t rely on acquisitions so much and try to focus on internal solutions

Improve HRM Activity

• Decline in Operating margins

• Increasing Marketing and R&D expenses % of Revenue

• Focus on long-term growth (high investment in the short-term)

Operations

• Concentrate on products that are most successful

• Adapt games to demographic and cultural customer segments

Operations

Questions?