EA goes to the movies

Electronic Arts may be the major player in the video games world, but is it really serious about taking on the giants of the home entertainment business?

by Rhymer Rigby

Electronic Arts grabbed the headlines earlier this year when it announced – just like that – its intention to become the biggest home entertainment company in the world. Yes, EA wants to be bigger than the likes of AOL Time Warner and even the mighty Magic Kingdom of Disney, despite the fact that its 2004 revenues of about $3 billion make it only about a 10th the size of the Mouse Factory.

Its optimistic statement naturally made a lot of people look at the games market – and they found a nice, 'would you believe it?' statistic showing that video game sales – $10 billion a year in the US alone – are now bigger than cinema box-office receipts.

Certainly, EA looks like a company on the up. Founded in 1982 in California, it now has operations all over the world and is far and away the biggest player in the video games market, with a share of some 25%, more than three times the size of its nearest rival. The games (Harry Potter, James Bond and The Sims among them) are blockbusters, and it recently signed an estimated $300 million deal for exclusive rights to the American National Football League. It regularly snaps up smaller rivals (most recently acquiring a 20% stake in French gaming outfit Ubisoft).

The market is the fastest-growing segment of the entertainment business, and that's before we even start talking about the excitement that the coming next-generation consoles are engendering, with the promise of 10 times today's gaming power.

EA's European HQ exudes an air of confidence to match such lofty ambitions. Set in suburban Chertsey, just off the M25, it's a Norman Foster-designed building with an expensive, efficiently hip feel; a coffee bar dispenses upmarket Illy coffee in the vast glazed foyer, people in casual wear stride around purposefully, games consoles showcase the company's latest offerings, and a life-size statue of one of the company's more aggressive virtual characters skulks in the corner.

Gerhard Florin, EA's European MD, looks the part, too: youthful and as casually dressed as those who work in creative industries tend to be. A German, he is perhaps more measured than his American counterparts and a little less ready to make blockbusting claims. He concedes that fabulous though the box-office statistic sounds, it is highly selective. 'Sure, box office is one way of looking at it – and very nice for us. But you have to remember that film has several ways of making money.' And the medium that is a far more direct competitor is, of course, DVD.

Right now, sales of DVDs are double those of games. Still, there is nothing shabby about this. On the contrary, it's hugely impressive, especially when you consider that the modern video games market – the one that uses CDs rather than solid-state cartridges or floppies – dates from just 1995, when the first Playstation appeared. So, says Florin: 'The best answer to the question "how big are you?" is "probably bigger than you think".'

He's right: popular perceptions of the video games market lag some way behind the reality. The way the market has expanded has been by what is referred to as stealth growth. That is, long stuck with its 'spotty 14-year-old in a bedroom' image, it was largely ignored by mainstream commentators until recently.

'Gaming started in the bedroom as a kind of nerd male thing,' says Florin. 'Then it went to the den, where young lads did it together. Now it has moved into the living room.' Huge sales and mainstream acceptance mean that the media has finally started to pay serious attention to the industry and discovered that there's far more to it than they imagined.

Demographics are helping, too. For while kids continue to pick up gaming, older users are not dropping it. Indeed, the average age for a gamer is now between 23 and 25, and for those playing games on PCs it's a positively ancient 28. It sounds almost counter-intuitive, but video games are now an activity that fathers and sons can share.

At 34, London Art gallery owner Alex Proud is by no means an atypical gamer. Indeed, since he married, he has simply adapted his gaming to his changed domestic circumstances. Many young men, he says, whiled away their twenties with mates enjoying multi-player games. But by their thirties, they'd moved in with girlfriends and worked longer hours, which rather spoilt the fun – as most women just don't enjoy Grand Theft Auto that much.

Luckily, says Proud, there's now a technological fix. 'These blokes have recently discovered a replacement: online gaming. But I'm still trying to work out if I'm sad enough to get my old friends to join me in cyberspace or whether I want to keep on losing to 10-year-olds who are much better than me.'

What players such as Proud also mean, says Florin, is that a large number of people who game are now becoming opinion-formers. It is entirely possible that there is even the odd MP who likes nothing better than heading off home after a hard vote and creating digital mayhem on a Playstation. What makes this market all the more enticing is that it is far from saturated. In the UK and US, between 25% and 30% of households have a console; in France and southern Europe, rather less. But in Germany, only about 7% of homes have one. Florin wants his countrymen to play more games. And this is before we start talking about Asia, which, although a hotbed of piracy, is a potentially enormous market.

And, of course, there are girls and women – at present, 80% of gaming is by boys and men. When it comes to attracting female customers, it may be much to EA's advantage that its products do not go in for quite as much of the testosterone-fuelled sex 'n' casual violence as some of its rivals. So, a good place to be, then. But how did EA become so much bigger than its competitors? Florin points to the company's 'relatively clever mix of Hollywood IPs [intellectual properties] like Bond and Potter.' The great thing about these, he explains, is that they are not one-offs. 'They're franchises [see panel] and are ongoing.'

Movie spin-offs and the company's other big iteration, sport, help in another way too. 'If people are going to buy a game as, say, a gift over Christmas and they're unsure of what to buy, they'll go for a franchise they trust. Sport is similar: people feel the same way about buying the new season's games.'

EA's vast size, Florin continues, also allows it to release games simultaneously everywhere in the world. 'The logistics of the operation are huge. You have probably 190 versions of the same game, once you factor in seven different consoles and 20 to 30 different languages. And simultaneous release is absolutely the best way to exploit this sort of IP. In the old Japanese way of doing things, video games would reach Europe a year after they were released in Japan. But now people wouldn't be interested in an "old" game.' And, he adds, there has been an element of luck: 'We have been very fortunate, too, with our choices.'

Yet, with its size and clout, EA is not without its critics. Type 'EA sucks' into Google and you're not short of results. One of the gripes you see quite often is that EA is not terribly original. 'It owns very little of what it does,' says Michael Prachter, an analyst at Wedbush Morgan Securities. 'What it is very good at is taking someone else's IP and making it into a good game. EA's biggest competitive advantage is its marketing muscle. Its games are best sellers, but they're not necessarily the best. It just has the market size to do whatever it wants. In this, it's a bit like Microsoft.'

As for EA's aim to be the biggest home entertainment company, Prachter is wholly un- convinced: 'It's an excellent company, with a very small slice of entertainment – a big fish in a small pond.' All the talk of media, he says, is because it wants to be valued like a media company. 'But it's just one of many content providers – the company reminds me of a movie star who thinks they've invented film.'

Whatever the reality, EA's existing market has plenty of room left in it and technological change – particularly in consoles and connectivity – means that we ain't seen nothing yet. Online game-playing is certainly an interesting area – if it can be made to pay. 'The issue with broadband gaming,' says Florin, 'is how to safeguard it from cheating. When you play opposite your computer, its AI [artificial intelligence] learns your level quickly and gives you the right challenges. But if your opponent is human...'

The other difficulty is that all this costs money, yet people haven't quite got their heads round the idea of paying for this kind of online service. 'People expect to buy a single-player version and get hubs [where gamers meet each other], cheat police and league officials all for the same price. But if customers are not prepared to pay, then we cannot deliver. You'll see a lot of companies paying a lot of money and failing – EA has lost a lot of money on this.'

Broadband has another dimension in this area, though: advanced connectivity between devices and the much-ballyhooed 'home server'. Essentially, the thinking here is that your PC, your DVD player, your video recorder and your music system are all moving in the same direction. They all use similar media and they all deal with digital information. 'In Japan,' says Florin, 'Sony was smart. It released a PS-X, which is a home server. That's the strategy – to try and own the living room.' And Sony is far from being the only business interested in this area; Microsoft – one of the world's most ruthlessly competitive companies – has been making a lot of noises too. But, although speculation is rife, it is just that. There are a lot of ideas out there, but right now nobody is sure what's going to happen.

Even more intriguing, perhaps, is the potential offered by mobile phones. What makes them attractive, says Florin, is numbers and cycles. 'Where people in our industry underestimate mobiles is in the speed of change. We talk about a five to six-year life cycle from one console to the next; mobiles take six to 12 months. People change them so quickly, which is strange when you consider that their absolute cost is more than a console.' And not only are mobiles getting smarter faster than anything else; there's the sheer number of them in circulation. According to the Mobile Data Association (MDA), UK mobile penetration now exceeds 100% and Brits will send 30 billion texts this year. That is 500 per person. 'It's a huge group of people communicating, and if only 5%-10% say they want to combine that with gaming then that's great.'

EA is interested in effectively fractionalising its games onto phones. Using The Sims, a game where you create a virtual world populated by characters, as an example, you could take one character and put it on your phone. Or take a small part of the game – your character in a certain situation, say at a party. And, as phones are all about connectivity, you could send the character to friends or even have it interact with other characters on other phones.

EA is interested in these devices on a much more pragmatic level, too. 'What I love about mobiles,' says Florin, 'is the payment system. Our games are £40 to £50 and that's a barrier, because people need to pay upfront. So if you had a business model where people could buy two or three levels for £10, that would be great. But no-one has cracked it yet.'

Back in the more certain surroundings of the existing games market, we also have the next generation of consoles (the Playstation 3, X-Box replacement et al) to look forward to, probably in 2006. These will have roughly 10 times the power of the current machines and may be a driver for the take-up of high- definition TV. And, says Florin, they will bring emotions into games; characters' faces are pretty zombie-like at the moment, but with the added processing power of new consoles, characters will react like real people.

'Do people care about characters?' asks EA's head of studio, Rory Armes. 'Not really. But with this, you can create characters that'll really suck you in.' And, of course, emotions – and mobiles – could be another driver for greater female take-up.

But if EA is really serious about taking on the wider world of entertainment, it will need more than just bleeding-edge technology and muscular microprocessors. It also needs to get creative and start developing more ideas of its own. Owning the idea means you get all the money, but, crucially, it also opens the door to the highly lucrative additional revenue streams of merchandising, spin-offs and brand extensions. And, as any movie mogul will tell you, these are often far more profitable than the product itself.

But for all the speculation, better, richer games spreading out across different technologies and platforms are a more likely future for EA than a frontal assault on Hollywood. 'You can talk about us becoming a studio company or a music company,' says Florin, 'but before that, I personally believe we have so much scope for growth where we are.'

The making of a game

The comparison between video games and films is not just about sales. It's also about the cost of development. For although games don't yet match films in price, the figures are not that far off. A typical blockbuster now costs from $5 million to $15 million to develop, and involves large teams – 90% of the price of development is accounted for by staff cost. Development times range from 18 months to two years.

Games, says EA's European head of studio Rory Armes, usually start life in one of two ways. 'Either IP like Harry Potter or Lord of the Rings is bought, or someone comes up with an original idea.' If they start with an original idea, he says, they'll take an existing 'engine' – the technology that drives the game – and mock it up to see how it looks.

The success rate for original ideas is typically about one in a 100, rising to one in 20 of those worth mocking up. 'Working the technology out takes a long time and a lot of work. So that's why we tend to use existing technology to prove the concept,' says Armes.

If the game gets the green light, it will require its own 'engine', and this is one of the reasons why franchises like Bond are very popular. You can usually get two or three games out of the same engine before you need to develop a new one. Bought-in IP – EA's stock-in-trade – is different. With hefty price tags (think of that rumoured $300 million for the five-year rights to NFL football), the game will always be made, but there are other constraints. 'With movies, we meet with directors and go on set,' explains Armes, 'because the game has to be released at the same time as the film. So we need to see how the lighting and photography work.'

Each type of IP is different. Books can be a good source because they usually have better fleshed out 'universes' than films. It can be difficult to get a video game with 20 hours of play out of a two-hour film.

The investment needed means that there is likely to be consolidation, as small companies cannot afford to go it alone. Or, if they do, they will produce niche games. 'I'm not saying these are better or worse. But smaller companies cannot afford to make blockbusters,' says Armes.

But, he adds, the differences between games and films will always remain: 'The thing about games is that there are no stars to hog the limelight. They're always a team effort.'

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