Electronic Arts 2.0

The games giant has spent $860 million on recent deals, heralding a shift in strategy and potentially building a new innovation engine for itself

Electronic Arts' (ERTS) hard turn toward innovation is gaining traction. Better known for publishing licensed blockbusters like Madden NFL, the games giant announced earlier this month that it would spend $860 million to acquire BioWare and Pandemic, two leading independent developers with reputations for stellar game design.

The acquisition, expected to close early next year, is the largest in EA's history and one of the biggest recent buyouts in gaming. It's also the latest move in Chief Executive Officer John Riccitiello's effort to transform the company from an entertainment monolith, which had been overly dependent on games based on costly licenses, into a maker of exclusive, innovative titles. "There's a tremendous amount we can learn from the [two companies] from a quality and innovation standpoint," says Frank Gibeau, president of EA's Games Label, under which the two will eventually reside.

A Move Towards Diversity

EA's gameplay needs a change. The company's strategy of spending lavishly to license and develop games based on movies such as the Harry Potter series or on sports franchises like football star John Madden—and then producing new versions in following years—is showing signs of weakness. September sales released by research firm NPD Group show that two of EA's strongest sports franchises are underperforming compared with the same month last year. Although extremely well publicized and highly anticipated, sales of Madden 2008 were down 48% on the previous year's version, with 619,000 copies sold, while NCAA 2008 was down 23% vs. the 2007 game, with 113,000 copies sold. "EA is a strong brand, but a predictable one," says Dan Hsu, editor-in-chief of Electronic Gaming Monthly. "Gamers know what they're getting into: something with high production value and solid but not spectacular gameplay."

To guard against the downturn, EA is embracing innovative game design, eschewing well-worn concepts for new types of subject matter and gameplay. It's a strategy already adopted by longtime EA collaborator and game design guru, Will Wright, whose long-anticipated Spore (BusinessWeek, 3/21/07) will provide a distinct departure from the designer's lauded Sims franchise. With the addition of Mass Effect, a role-playing game from BioWare, and Mercenaries 2, an action title from Pandemic, EA suddenly has an impressive stable of original, creative titles. The games also give EA new strength in genres in which it has traditionally been weak, notably action, adventure, and role-playing games. According to Gibeau, those three categories accounted for 36% of the North American games market last year. Yet less than 10% of EA's portfolio caters to those genres.

The acquisition, which is expected to close early next year, gives EA control of a pair of coveted game developers. Founded in 1998, Pandemic has a reputation for creating technologically sophisticated games that are hot retail sellers. Its leaders, CEO Andrew Goldman and President Josh Resnick, are widely respected in the industry. The buzz, meanwhile, has largely been created by EA's acquisition of BioWare. That company was founded in 1995 by the "two doctors," Dr. Gregory Zeschuk and Dr. Ray Muzyka, who have become gurus of story-rich game design thanks to the in-depth narratives of their company's role-playing games.

Harnessing New Expertise

According to Michael Pachter, a Wedbush Morgan Securities analyst, BioWare's prowess at designing and producing role-playing games—both original and franchise-based—could help jump-start EA projects that have so far been stuck in the mud. A prime candidate is Lord of the Rings: the White Council. "EA hasn't been able to get it right for two and a half years now," says Pachter. "But if BioWare takes it over, it should do very well in the marketplace," he adds, citing the company's previous hits with titles based on the Star Wars films, which could prove helpful for taking on Tolkien.

In what would arguably be a more interesting development, BioWare could become an incubator of innovative ideas and technologies that could eventually filter into EA's other properties. Gibeau envisions individual EA teams developing technical and gameplay expertise that could be shared across all of the company's titles. He cites, for instance, a dialogue system developed by BioWare for the upcoming Mass Effect game, which allows players to engage in hyperrealistic conversation with computer-generated characters. "The dialogue engine is something we will almost immediately look at as an asset for other teams," says Gibeau.

Analysts seem pleased with the additions to EA's roster, though some balked at the price of the acquisition, which works out to more than $1 million per employee—combined, the two developers have some 800 workers. But, Bank of America (BAC) analyst Michael Savner noted that EA was wise to acquire two of the "best developers within the industry." And Pachter says the two developers combined should be able to deliver EA at least $300 million in annual gross revenue by 2009.

Fans Fear Corporate Control

The tight-knit community of BioWare fans and players, however, weren't so pleased. Gamers flooded the official message boards on BioWare's Web site. "You guys just sold your soul," wrote a gamer from Du Quoin, Ill., under the handle SlaughterX. Others, like a player nicknamed Veacute;linn, were less bellicose, pleading, "BioWare, if there is ANY way you can get out of this, do it now. Do it!"

The discontent may not be misplaced. The history of game developer acquisitions is checkered at best. Fans fear that EA's corporate culture might stifle the developers' future products. The last megagames deal to get as much attention was Microsoft's (MSFT) $375 million acquisition of British developer Rare in 2002, which has yet to produce the commercial or critical success initially anticipated, despite a winning string of blockbusters before the purchase. For his part, Gibeau is stoic: "We treat our studios like city-states," he says. "They'll have their own independence, though we encourage collaboration."

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