Electronic Arts Inc. Is Learning a Painful Lesson

For EA stock, the game is changing

By Dana Blankenhorn, InvestorPlace Contributor

EA Stock Is Learning a Painful Lesson

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Electronic Arts Inc. (NASDAQ:EA) is learning a painful lesson with its Star Wars: Battlefront II rollout. While movie audiences are passive, gamers are active. If they think a publisher is messing with them, they have ways of fighting back movie audiences never dreamed of.

This is causing pain and consternation on Wall Street. The EA stock price is down almost 10% since Halloween, as protests over how it seeks to profit from the game force it to pull back, and as investors digest a horrible earnings report.

EA stock rose with sports games that had a built-in audience, and a simple transactional business model. It is now in a cloud era where audiences are in control and where money must be made in other ways to pay high development costs.

It’s like if you handed this old man a console keypad. EA doesn’t even know the rules of the new game it is playing.

The Change Has Come

EA figured it had an easy win, licensing Star Wars from Disney, in entering the cloud battlefield. The same was true for investors. Strong pre-orders of the game, which carries an initial price tag of $60, caused them to speculate on a big win.

But the costs of developing such a game are huge, and EA saw this sticker price as an entry fee, like a Disney fee to enter one of its parks. You wouldn’t walk into Epcot with an empty wallet.

EA decided to monetize its game by charging gamers to unlock specific characters and game play. Gamers reacted the way they would to a Disney park demanding cash for paid visitors to get on Mr. Toad’s Wild Ride.

They protested. They screamed on Twitter and screamed on Reddit. EA heard them and backed away, turning off the micro-transaction capability “for now.”

EA should have known better. Rival Activision Blizzard, Inc. (NASDAQ:ATVI) ran into the same kind of backlash with its Destiny 2 game.

My own gaming editor, in the form of a 26-year-old son, has been warning of this kind of money creep for years. Before they started charging for characters and shading, game companies would deliver a barely finished game and then charge extra for “expansion packs” as the game was fleshed out. He compared it to buying a movie ticket, then being charged extra to see the ending.

Blood From a Stone

EA should be rolling in money, thanks to the entrance of its sports gaming franchises into eSports, where it is spinning off actual eSports franchises.  Getting gamers to pay to watch other people play, turning the best players into stars, has a simple business model.

In fantasy worlds, that’s not the case. There is no “audience,” just the gamers.

The solution should be simple. EA could charge a low price for the client portion of the game that gamers know doesn’t reflect costs. Then it could charge a per-hour or per-minute fee for playing the game that gamers consider reasonable. But that runs into competition from “free to play” cloud games, which are the real market threat.

The Bottom Line on EA Stock

The bottom line here should be obvious. Accept the short-term weakness in EA stock as a buying opportunity, as Chris MacDonald says.

The problem is, as I noted earlier, that this is a different game. It’s a big jump from charging for clients to charging for game play. And there are higher development costs inherent in such a shift and the challenge of building virtual worlds.

If Electronic Arts can’t make it work with Star Wars, how is it going to make it work? Luke Lango believes Take-Two Interactive Software, Inc (NASDAQ:TTWO) has this figured out.

You can speculate on that, or you can switch allegiance. For my money, if I’m investing in gaming today, I’m going with Sony Corp (ADR) (NYSE:SNE).

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.

Article printed from InvestorPlace Media, https://investorplace.com/2017/11/electronic-arts-is-learning-painful-lesson/.

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