Video game giant Electronic Arts Inc. (ERTS) had a very simple formula for success: base a product on a popular sports or movie franchise, spend a fortune marketing it, and then push out a new version of that game year after year. The strategy netted big bucks with games based on the Harry Potter, James Bond, and Lord of the Rings movies, as well as with EA'S Madden NFL series. It also delighted investors with a reliable stream of revenue in the notoriously hit-or-miss video game business. In 2005, the company landed the No. 34 spot on the BusinessWeek 50 list of top corporate performers.
But now EA is stumbling, and a big part of its time-tested strategy is about to change. The company hopes that its next mega-franchise will revolve not around a football star, a boy wizard, or a dashing British spy, but...a microbe. The game is called Spore. Developed by Will Wright, the creator of SimCity and The Sims, it lets players design an invertebrate in its primordial stages and then guide its evolution until the creature's offspring develop into a thriving civilization with cities, religion, and spaceships. EA's ambitious goal is to create more such innovative, internally developed games while lessening the company's dependence on professional sports and Hollywood movie franchises.
The plan is nothing if not challenging. It's forcing EA's president of Worldwide Studios, Paul Lee, to rethink the way the company creates games and to figure out a way to transform a risk-averse organization known for its operational efficiency into a hotbed of creativity. Lee has little choice. Movie studios and sports leagues are driving the costs of licenses higher, while video game sales have stayed sluggish. Making matters worse, EA flubbed its debut on Microsoft's new Xbox 360 console, failing to grab its usual No. 1 market share and losing out to smaller competitor Activision (ATVI) Inc. Although the company's revenues, an estimated $3.3 billion to $3.4 billion for the fiscal year ending on Mar. 31, remain more than twice the size of its next-largest U.S. competitor, it has either lowered or missed its earnings guidance for the past six quarters. The reasons include delayed games, higher-than-expected development costs, and disappointing sales of key titles.
To reverse the slide, Lee needs the EA home team to hit a few home runs. He wants to push the number of games based on internally created concepts above 50% of EA's total portfolio in the next 12 to 18 months, from about 30% today, and create at least one new franchise a year. The company is aggressively snapping up marquee talent ranging from award-winning game designer Doug Church to movie director Steven Spielberg, who will consult on the story lines of three original games. It is also building a brand-new development studio in Montreal that will focus entirely on cooking up new, original titles. With some $3 billion in cash and zero debt, EA is also eager to acquire independent studios.
At the heart of the Redwood City (Calif.) company's mission is figuring out how to inject creativity into its 6,100-employee operation without losing control. Most development houses typically rely on tightly knit groups of 40 or so programmers, artists, and designers, who focus on one game from start to finish for 12 to 18 months. Many such studios are wholly owned by large game publishers but have tremendous autonomy. And these little outfits have created some of the most imaginative and best-selling games today, from the Grand Theft Auto series, which came out of Take-Two Interactive Software Inc. (TTWO) subsidiary Rockstar North (TTWO), to Halo, which was created by Microsoft Corp. (MSFT)-owned studio Bungie. Studios in this model "create an environment where creative control goes without question, and the voices around the table are all supporting the same vision," says John Riccitiello, a former president and chief operating officer of EA. "That doesn't happen everywhere in the game world." Riccitiello left EA in 2004 to join Elevation Partners, a private equity firm that has acquired two independent game studios (and boasts U2's Bono as a lead investor).
EA's model, with a few exceptions like Wright's Spore group, traditionally has been very different. It employs hundreds of developers at its main studios in Vancouver, Los Angeles, and Redwood City, and assigns them to projects as needed, sometimes rotating them through a number of different ones to meet a tough deadline. This lets the company release many more titles a year and gives it an unparalleled ability to release titles on time. And the millions that EA spends on market research to decide what games it should sell lessens the chance of a big bomb.
For much of EA's past, that setup made it a model of reliability. But it's hardly a recipe that stokes creativity. So Neil Young, general manager of EA's Los Angeles studio, has been working on a way to encourage innovation while boosting the staff's morale and competitive spirit. For the upcoming World War II game Medal of Honor: Airborne, for example, Young has broken the development staff into small six-to-eight person "cells" and assigned each cell a small mission for the game, from programming the way enemies fire weapons or flee to making the human faces of the characters look as realistic as possible.
The idea is to embed technological advances in every detail of the game. "What I'm trying to build is a studio of gamemakers," says Young. "I don't want people focused on building the 90th tree or the 70th truck" in a game. Every week, the teams with the most remarkable breakthroughs have their work featured on the flat-panel TV screens that are placed throughout the studio. "It creates the feeling that you are swimming in a sea of small inventions," says Young, and helps spur cross-pollination between different cells. The more tedious line production tasks, such as coloring in trees or trucks, are outsourced. The cell system is now at work in several of the company's smaller studios, including the new Montreal location.
Another change is that homegrown projects will be given more flexible deadlines. Since these projects won't have hard release dates like sports or movie titles, Lee believes it makes more sense to develop them until the team feels its idea is fully realized. "In the past we have committed to ship dates with large development teams before we had a game design," says Lee. "That is changing....We're going to have the best games and release them when they are ready."
That could mean a higher level of quality for the company's new game titles, but it could also translate into headaches for investors as EA's product pipeline and revenue stream become less of a sure thing. That is probably not music to Wall Street's ears. But it may just be the price EA pays to achieve greater creativity.
By Burt Helm