by Adam Benjamin | May 14, 2013 11:40 am
Electronic Arts (NASDAQ:EA) has successfully defended its title as the Worst Company in America … and shareholders understandably couldn’t care less.
This “victory” came from Consumerist’s annual reader poll, which pits 32 companies against each other in a tournament of customer dissatisfaction. The video game publisher became the first repeat winner — beating out Bank of America (NYSE:BAC), Comcast (NASDAQ:CMCSA) and Ticketmaster in the final four — and managed to perform the feat in back-to-back years, no less.
Consumerist’s post-tournament write-up observed that EA seems to run on a “there’s no such thing as bad publicity” campaign. Critics accuse the company of taking popular properties like Dead Space and Star Wars: The Old Republic and rushing their production to cash in on brand loyalty, rather than taking the time to develop good games.
The company generated more controversy after announcing that it would include microtransactions (offering players the opportunity to buy premium in-game items) in all of its games. (EA has since withdrawn that statement.) The company also has taken fire for denying that always-online gaming is a digital rights management scheme.
And after a debacle of a release for the much-anticipated Sim City game (servers for the online-only game crashed, preventing many users from playing), CEO John Riccitiello stepped down.
Someone forgot to report all of the above to EA shares, which are up almost 50% in 2013.
“How?” cry Mass Effect fans everywhere. “How is this possible?”
Well, sadly, because customer satisfaction doesn’t always directly correlate to financial performance. In fact, in this case, it doesn’t seem to matter at all.
That YTD performance includes last Wednesday’s 18% jump, prompted by Electronic Arts’ Q4 earnings report. While earnings came in at 55 cents per share, falling just short of analyst expectations for 57 cents, the company did forecast earnings of $1.20 per share for the coming fiscal year — a full 10 cents higher than the Street expected.
Investors probably also are celebrating EA’s recently inked deal with Disney (NYSE:DIS) to work on licensed Star Wars games now that LucasArts has been shut down. The property has been prolific — Star Wars games have been released regularly since 1982 — and gives EA continued access to the series’ enormous fan base.
Analysts rushed to upgrade EA stock. National Alliance Capital Markets and Monness Crepsi & Hard got bullish Wednesday, and The Street joined in Thursday. Sterne Agee raised the company’s price target to $25 — roughly 12% higher than current prices.
So what’s driving those revenues and inspiring analyst upgrades?
Electronic Arts has a few enormous franchises under its belt, and the respective fanbases are as close to guaranteed sales as you can get. The Star Wars titles are nothing short of a dollar-bill printing press, and all the negative publicity in the world — or even a downright bad game — won’t stop EA from selling millions of copies of Madden 25.
EA has the sports franchises locked down. It publishes yearly installments of Madden, NHL and FIFA games like clockwork — EA recently extended its exclusivity contract with FIFA through 2022 — and each year, fans shell out another $60, mostly for the updated rosters and not the “improved” gameplay.
The Madden series, which spans 24 games so far, has sold 99 million units — that’s 31 million more than the fan-favorite Legend of Zelda series — making it one of the best-selling video game franchises of all time. Last year’s installment, Madden 13, sold 1.6 million copies in its first week of release. If anything could hurt sales for this year’s 25th anniversary edition, it would be an aging console generation, but even then, the game should easily sell 1 million units.
Another reason for EA’s continued success are those pesky microtransactions. In cases like Dead Space 3, EA can take items that already exist in the game, and offer you early or easy access to them for $5. That’s right: EA can get you to pay $60 for a game, then pay more money for weapons that are already in the game. Other downloadable content like map packs for multiplayer modes can be more expensive. And because DLC is always offered through direct download, the margins are absurdly high.
As it turns out, the practices consumers abhor (but, importantly, that they still tolerate despite rampant complaint) and that earned EA such a dubious title are what makes EA such an attractive investment. So as long as it still holds a monopoly on the sports franchises, and as long as it can keep prodding gamers into ponying up $5 more each time they want a better gaming experience, neither Electronic Arts nor its shareholders have a worry in the world.
Of course, consumers might one day find their limit — their line in the sand against EA’s money-first, you-last practices. Maybe that line would be a full-out botching of its upcoming Star Wars titles. Or maybe it will be a forced always-online requirement for its games. Much like Facebook (NASDAQ:FB) shareholders might have nagging doubts about when privacy concerns will come to a boil and prompt a mass exodus (but have had that worry for some time without it bearing fruit), EA shareholders should fear that day when the company prods its users out of their gaming chairs.
But considering EA shares are 25% higher since winning its second consecutive Golden Poo award, that day clearly is a long way away.
Adam Benjamin is an Assistant Editor of InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.
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