Electronic Arts's Plan to Get Your Last Gaming Dollar

A trailer for Battlefield 3, the latest installment of the hit video game franchise, fills the giant screen at a theater used by Electronic Arts (ERTS) to show off its movie-like wares. "You can fly F-18s, Cobra attack choppers, and drive tanks in the same space at the same time!" says EA executive Frank Gibeau over the noise, as realistic-looking soldiers grunt, curse, and shoot their way through a ravaged city. "It's all-out war!" Battlefield 3, due out later this year, is what big-time games aimed at PlayStation 3s (SNE), Xbox 360s (MSFT), and Wiis are supposed to be: engaging, high-production-value spectaculars.

A few minutes later, Gibeau, who oversees EA's nonsports games, enthuses just as much about Battlefield Heroes, which has none of that cinematic stopping power. It's a stripped-down, cartoonish version of the game that EA lets people play for free on a dedicated website. About 7 million people have signed up so far, and many end up spending money on add-ons that spruce up their characters—the same characters they use on their Battlefield console game. During one recent limited-time offer, EA sold 20,000 virtual parrots, at $10 each, that sit on soldiers' shoulders. Over the past year, the company sold $48 million worth of digital goods and services tied to the Battlefield franchise. "In the past, that figure would have been zero dollars," says Gibeau.

EA Chief Executive Officer John Riccitiello has been talking up the digital gaming shift for a decade. It wasn't an easy sell. Investors punished the company's stock as they watched EA lose money and talk big without much to show for it. Shares took a dive in late 2008 and have been stuck near $20 a share ever since. Now the strategy seems to be paying off. On May 4, EA reported $833 million in sales of digital goods for the 12 months ending in March, up 46 percent from the year-earlier period. That figure blew away analysts' estimates of about $750 million, with the company now tracing 22 percent of its $3.8 billion in revenue to virtual wares. It expects digital sales to pass $1 billion this year. "Ten years ago, I thought he was a complete idiot," says Michael Pachter, an analyst at Wedbush Securities. "Now he looks like a visionary."

The console business could use a little vision just now. During the 12 months ended in March, Nintendo's profits fell to their lowest level since 2004; Activision Blizzard's (ATVI) once-booming Guitar Hero franchise has been put "on hiatus," according to Activision. Hackers recently turned Sony into the laughingstock of the Internet by breaking into the PlayStation network and forcing its shutdown. Much of the pizazz these days comes from companies that make games for Facebook and smartphones, such as Zynga (maker of FarmVille and CityVille) and Rovio (Angry Birds).

EA's Riccitiello says FarmVille, Angry Birds, and other such games have helped expand the world's population of gamers from about 200million 10 years ago to more than 1 billion today. Gamers aren't just males aged 18 to 34 anymore: Families now discuss tending their virtual farms at the dinner table; middle-aged women while away their free time by hurling birds at pigs. As a result, the console games that used to account for about 80 percent of industry sales now make up 50 percent. "It's not that the console is getting tarred and feathered," Riccitiello says. "These other things are just rising so damned fast."

EA is still investing in shoot 'em-ups such as the Battlefield series, the Madden football series, and other big sellers that go for $50 a pop in stores. It just wants customers to keep playing those franchise games wherever they may be in their personal digispheres—on consoles, the Web, Facebook, smartphones. Gibeau's fantasy is that a gamer who gets his battle on at home will keep on gaming while at the coffee shop, where he guides his warrior through simplified quests on a laptop, earning pretend gold. Later he hops onto the smartphone version of the same game to organize his weapons and potions and kill time during a bus commute. EA meanwhile sells new levels, clothes, skill upgrades, and anything else it can think of to the gamers on each version. The console edition of its popular FIFA soccer game lets users create and outfit their own all-star teams. About 2.5 million people have downloaded 850 million items—players, managers, support staff, training sessions—all available for a fee. Three million people have signed up to use FIFA Superstars, the Facebook version of the game, and have created 12 million soccer clubs. All told, users spent $100 million on virtual soccer goods last year.

Making the shift to multiple platforms hasn't come cheaply. Franchise titles such as Battlefield require hundreds of developers and "well north of $10 million" to create and market, says Eric Brown, EA's chief financial officer. (Web and smartphone versions cost in the five- to six-figure range, he says.) In addition, the company has spent hundreds of millions of dollars trying to build an infrastructure that can support its console-digital strategy. It had to build a billing system that could follow people across multiple digital worlds, while giving them the feel of having a single repository of all their achievements and virtual possessions.

That investment came as EA struggled with lackluster, poorly received games and a bloated cost structure. The company needed a "shock to the system," says Riccitiello, which he administered in the form of a 20 percent cut in headcount over the past three years. EA eventually transformed from a slow-moving creature of habit—games for PCs and PlayStations came first—to a more nimble organization ready to take on new gaming platforms. In the past year it has gone from nowhere on Apple's (AAPL) iPad and iPhone to the leading game publisher through titles such as Tetris and Scrabble. Riccitiello says he wants to crack the Facebook market in a much bigger way, introducing the company to a new audience. "Zynga probably has 75 percent of the Facebook platform right now," he says. "I want a big chunk of that."

The bottom line: EA's big bet on digital gaming, which has cost hundreds of millions in infrastructure costs, may finally be paying off.

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