Microsoft’s interest in Electronic Arts

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“A game is an opportunity to focus our energy, with relentless optimism, at something we’re good at (or getting better at) and enjoy. In other words, gameplay is the direct emotional opposite of depression.” – (Jane McGonigal, book author)

The news about Microsoft’s interest in acquiring the multi-game publisher Electronic Arts (EA) occurred several times in the past. With EA’s publishing of its Q3 results (December 31st, 2017) by the end of January 2018, this rumour has appeared again. At the same time, the American video game website Polygon performed an analysis of Microsoft’s current problems with its Xbox and mentioned the past acquisition rumours regarding EA. Since Polygon’s post on its website, financial analysts, other newspapers or bloggers have been discussed this matter. Almost all of them share the same prediction: this acquisition is highly unlikely to happen; however, their opinions about the transaction range from “might make sense” (K. Kniskern on MSFT) to “wouldn’t make any sense” (P. Tessini, contributor for Forbes). In general, a majority of the articles analyse whether EA is a solution for Microsoft’s recent problems in the gaming industry by considering the relative advantages and disadvantages. The purpose of this article is to view the transaction from Electronic Arts’ perspective and determine if the company should even consider a potential purchase offer from Microsoft.

Microsoft’s main problems

The global video games market has been constantly growing in the past— from US$54.2bn in 2011 to an expected value of US$90.1bn in 2020. The market for PCs, consoles and mobile phones has expanded overtime due to technological advancements. This growing potential of the video game market was recognised by companies as well. Exemplarily, Sony introduced its game console “PlayStation” in 1994, and two years later, Nintendo started to sell its “Nintendo 64”. Both consoles turned out to be huge successes and could had been found in many households by the end of 1990. While these companies published the second versions of their devices, Microsoft presented its Xbox to the world in 2001. The sale revenues of Microsoft’s Xbox consoles were stable from US$9121bn (2015), US$9.395bn (2016) to US$9.256bn (2017) and represents approx. 10% of the company’s total revenues.

From the chart on the left side, we can see that the chronological order of the companies’ introductions into the video game market can be reflected by the numbers of units sold. The shares of Sony, Nintendo and Microsoft include all consoles that were available on the market at that time. The chart demonstrates exactly one of Microsoft’s problems: the company is still behind its large competitors. Sony generated stable revenues from selling its “PlayStation 3” and its next generation “PlayStation 4”. Nintendo was able to come back successfully due to its release of “Nintendo Switch” in March 2017. Microsoft did not enhance its market position in the past years; however, the new “Xbox One X” was released by the end of 2017 and achieved positive feedback; so, there might still be hope for Microsoft in the near future.

The result of the chart is also shown in the table, which presents the top list of video games sold in 2016. After the large hype about Pokémon Go in summer 2016, its number 1 position does not come as a surprise. The top 10 list is dominated by seven video games for Sony’s PlayStation 4 and only two for Microsoft’s Xbox One. Although many titles such as FIFA17 or Star Wars: Battlefront aravailable for all consoles, there are also games exclusively for a specific console, like Uncharted 4 for solely the PlayStation 4. Microsoft is still lacking this exclusiveness for games. In the given table, 2/8 of the different games listed are developed by EA (FIFA and Battlefield). An acquisition of EA by Microsoft could give the company the right to limit EA games to Xbox consoles. Therefore, players would be forced to buy an Xbox in order to play their preferred games.

 

The EA Perspective

Electronic Arts, founded in 1982, is an American video game developer and publisher. Since the beginning, the company has increased its range of games, offering action (i.e. Need for Speed or Battlefield), family (i.e. The Sims), strategy (i.e. SimCity or Command & Conquer) or sports (i.e. FIFA or NHL). Furthermore, EA has published games related to released films such as The Lord of the Rings, Harry Potter, James Bond or Star Wars.

The ongoing expansion of video games is reflected in EA’s financial performance. The company was able to increase its net revenues from US$3.8bn in FY2013 to US$4.8bn in FY2017 and is expected to rise to US$5.1bn in FY 2018 (ending March 31st, 2018), representing a CAGR 2013-2018 of 6.08%. Sales revenues are generated mainly from three different income sources: mobile games, games for consoles and games for PCs and others. While the share of PCs & others declined to approx. 17%, revenues from mobile games and consoles increased to 15% and 67% in FY2018e, respectively. This demonstrates the significance of offering games for several brands on the market. Moreover, considering that 2/3 of the consoles’ revenues are related to games for Sony’s PlayStation, a potential purchase by Microsoft may decrease EA’s sales performance significantly.

EA was also able to improve other financial positons, such as gross profit margin up to 74.9% (FY2018e) and a doubling of its operating cash flow to US$1,600m (FY2018e). The publishing of EA’s Q3 results for FY 2018e has increased the company’s market capitalisation up to US$38.6bn. It seems that there is no financial or operational incentive for EA to agree to an acquisition by Microsoft. In addition, it can be assumed that licence providers such as Disney, FIFA or NHL would not be happy about earning approx. 50% less of their revenues if games are limited to only Microsoft’s Xbox consoles. These companies might consider providing exclusive rights to one of EA’s competitors, such as Activision Blizzard, and consequently damaging EA’s business performance.

Instead of collaborating with Microsoft, EA should divert its efforts to its previous focus on Disney. Several blogs reported a new EA game with Disney’s MARVEL; however, the realisation may be unlikely since the same announcement was made years ago and later cancelled. Its previous cancellation was due to the development phase taking longer than expected. Recently, Disney was reportedly not satisfied with EA’s contribution regarding the Star Wars games. Disney hoped to benefit from games of the new Star Wars film trilogy (starting with VII: The Force Awakens in 2015). However, the release of “Star Wars: Battlefront” in 2015 did not entirely convince gamers and critiques. Moreover, its recent release of ‘Star Wars: Battlefront II’ (2017) faced even more negative feedback. EA has published only these two video games relating to Star Wars over the past five years (besides a mobile game in 2015), and both games’ performances have been quite disappointing.

There are not many clear incentives for Electronic Arts to accept a potential acquisition offer from Microsoft. Instead, the game company should concentrate on retaining its current exclusive rights and finding a sustainable solution for its future games.

Sources: Electronic Arts, Microsoft, Clairfield International, Statista, PwC, Forbes, Xboxaktuell, onMSFT, VentureBeat, METRO gaming, Polygon.

 

 


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