Shares of video game publisher Electronic Arts (EA, Financial) have had a volatile few days. First, USA Today reported that Amazon (AMZN, Financial) was looking into potentially purchasing the company, which sent the stock soaring. Then, CNBC reported that the deal was not happening, and since then, shares have been trending downward.
The deal would have made sense on several levels. Amazon is looking to bolster its gaming presence, which it hopes will become a huge money-making segment. On top of owning Twitch and launching its cloud gaming service, Amazon has also begun to offer gaming perks through Amazon Prime.
Amazon has been on a tear to diversify its business. For example, the company is beefing up its artificial intelligence division by acquiring iRobot (IRBT, Financial). It also plans to purchase 1life Healthcare (ONEM) in a $3.9 billion deal.
Electronic Arts is a thriving business with almost 600 million active accounts in its player network. The fact that 73% of Electronic Arts' net bookings come from its Live Services, a gaming experience that allows players to buy upgrades in-game and keep the game updated, will have a meaningful impact on the future revenue streams. Electronic Arts is well-known for creating popular titles such as FIFA, Apex Legends and Madden. The company is also responsible for publishing many successful mobile games, such as Tetris and Bejeweled. Overall, I believe it has a bright future ahead, regardless of whether Amazon decides to get involved.
The loss of the FIFA franchise and the way forward
The video game industry is volatile. It is hit-driven, and many gaming companies suffer from unsustainable cash flow. The industry has been around for decades and has seen the rise of many new trends. Some of these trends have been able to sustain themselves while others have faded away.
Most companies want a strong portfolio of titles to mitigate against any cash flow volatility. Sports games typically have new releases each year, reducing the hit-driven risk involved compared to other marque titles.
FIFA games have been a significant product for Electronic Arts. However, the deal with the football body is ending, and FIFA 23 will be the final edition. This will undoubtedly impact the business negatively, but it is already making plans for dealing with it. Electronic Arts will launch EA Sports FC once the partnership with FIFA completes its course. The company has also signed a multi-year deal with Spain's La Liga, the premier football tournament, as the title sponsor for the 2023-2024 season. The sponsorship will provide Electronic Arts with much-needed visibility in the football world.
In addition, the success of live services such as Ultimate Team (which contributed 29% of fiscal 2021 net revenue) helps to reduce overall volatility for a given franchise. Follow-on content is released throughout the calendar year. This helped the company maintain profitability even during one season when many other companies had financial problems. It allows gamers more ways to play games while keeping costs low.
Entering the mobile games market
Mobile games come with the added advantage of being playable on the go. Moreover, they're constantly evolving, and consumers' needs are no longer static due to new technological breakthroughs and innovations.
Although late to the party, Electronic Arts is mindful of this change in consumer preferences. In its latest reported quarter, revenue from mobile gaming clocked in at $323 million, a 48% increase from the prior-year quarter. For Electronic Arts, mobile gaming revenue is not substantial at this stage. However, the segment is growing steadily and will likely continue to trend in a positive direction.
What Electronic Arts can do in the meantime is to continue building out its profile through partnerships and acquisitions, and the company is doing just that.
Electronic Arts purchased Glu Mobile for a $2.4 billion price last year. Recently, the video game company signed an agreement with Middle-Earth Enterprises, a segment of The Saul Zaentz Company, for The Lord of the Rings: Heroes of Middle-Earth Role-Playing Game. A cult following for Lord of the Rings will undoubtedly bring Electronic Arts more success in the mobile gaming scene.
Takeaway
Things are quieting down recently after the initial buzz created by the potential Amazon deal. However, for Electronic Arts, I believe this will be a big fiscal year. Losing the FIFA franchise will hurt, but the company has plenty of logs in the fire to keep customers and investors interested. On top of that, the company has barely scratched the surface of mobile gaming. This is a huge business area that could become a big money spinner in the future.
