Video Games Firms Desperately Need New Frontiers

Electronic Arts became the world's biggest maker of videogames by relying on a dependable formula, now widespread throughout the industry: routinely pumping out sequels of familiar game franchises like Madden football that consumers bought almost on cue.

Now EA's new chief executive says EA and other companies in the industry need to change their ways or risk losing audiences to more compelling forms of entertainment.

 

In his first in-depth comments since taking over the top job at EA in April, John Riccitiello says he worries that EA and other companies in the industry make too many games that lack innovation.

Riccitiello says EA and others need to push more aggressively beyond traditional gamer audiences to court new "casual" consumers and to experiment more with new approaches to selling its products, outside the norm of selling $50 to $60 discs with 40-hour games that he says few players ever finish.

"We're boring people to death and making games that are harder and harder to play," Riccitiello said in a wide-ranging interview at his home in Silicon Valley.

The blunt comments by Riccitiello, 47 years old, are likely to cause a stir at the annual E3 games conference beginning July 10 in Los Angeles, where game makers assemble to tout their upcoming products.

Much of his criticisms have been articulated before by analysts and others, but rarely have they been made so publicly by the head of major games company.

They are a departure for EA management, which has downplayed the magnitude of the challenges it faces in the past, even as profits and revenue stagnated in recent years.

Riccitiello praises some new games, including Activision Inc.'s (ATVI) Guitar Hero series and Vivendi Universal SA's online fantasy title World of Warcraft, as well as a music game by Viacom Inc.'s (VIA) MTV called Rock Band that EA will distribute later this year. But he says there aren't enough titles that break new ground. He believes making sequels is still a sound strategy, as long as they're more innovative than in the recent past.

"For the most part, the industry has been rinse-and-repeat," he says. "There's been lots of product that looked like last year's product, that looked a lot like the year before."

EA itself is suffering more than others from changes in the games business, in part because of its leading share of industry sales. It's common for the games business to hit a financial speed bump every five or so years as companies like Sony Corp. (6758), Microsoft Corp. and Nintendo Co. (7974) introduce new games hardware.

The consumer uptake of new games hardware has been slower with the current generation of hardware than in the past though, delaying the payoff from hefty investments in expensive new games by EA and others.

Revenue at EA is up only 5% for the fiscal year ended March 31 to $3.09 billion from the $2.96 billion it reported three years ago. Net income, meanwhile, plummeted to $76 million from $577 million during the same periods.

Riccitiello worries that unprecedented competition from other technologies for the attention and dollars of young consumers puts the games business "at risk of being a little less interesting than Facebook and iPods and the next cool cell phone."

Earlier this year, EA appointed Riccitiello, a former top EA executive who had departed for a job in private equity, to help navigate the challenges.

"Prior to Riccitiello's return, EA kind of made the assumption that this transition would be similar to other ones - they approached it with the same playbook," says John Taylor, an analyst at Arcadia Investment Corp. "I think Riccitiello understands you've got to throw that playbook out."

Riccitiello's solution: to reengage EA's core audience with games that break new ground. He also wants to bring new gamers into the fold with clever tricks that make some of its more complicated titles more playable, in a nod to the success that Nintendo Co. has had with its Wii game system.

For instance, new Wii versions of all of EA's sports titles including Madden, NBA Live and FIFA soccer will come with a "family mode" that allows novice players to pass, shoot and kick balls without worrying about controlling the field and court positions of players.

Riccitiello's plan to restart growth also includes more experimentation with new approaches to selling games, including offering shorter "episodic" games that cost less than the titles EA typically sells.

He says EA has begun to further depart from its traditional retail business in high growth markets such as South Korea, where the company has begun giving away its FIFA soccer game for free due to rampant piracy, making money instead by charging users for team jerseys and other virtual items sold over the Internet.

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