Analysis: EA bets big on Jedis and Wookies
(Reuters) - Electronic Arts invested more money and firepower into "Star Wars: The Old Republic" than it has on any game in its 30-year history. Starting today, the company will find out if the bet pays off.
If it succeeds, the game, which features the Star Wars movies' familiar Jedis, Wookies, and Siths, could bring EA riches for years to come. If it fails, EA's earnings will be hurt in future quarters.
"A lot is at stake for EA," said Robert W. Baird & Co analyst Colin Sebastian, who estimates the company spent more than $300 million to make "the Old Republic."
Other analysts think between $100 million and $300 million was spent on the game. EA has not divulged the cost.
"This caps years of development and hundreds of millions of dollars. It's a very important part of their pipeline for the next several years. If it's a failure, it's a huge loss for EA," Sebastian said.
"Star Wars: The Old Republic" is different from other recent high-profile releases by EA such as "Battlefield 3" in that it is a massive multiplayer player online game, or MMO, that allows thousands of people to play simultaneously for a monthly subscription fee as opposed to a one-time purchase.
Gamers will pay $60 up front and then about $15 a month for "Star Wars: The Old Republic," reflecting a move by the video game industry to evolve into a cable television business model. Companies like EA are trying to create a steady and predictable revenue stream from subscribers as opposed to a current Hollywood-like business model where games can be one-time blockbuster events.
Despite the film franchise's commercial pedigree, however, the game is no slam dunk. The success of MMO games is hard to predict and early reviews by critics may not gauge its success since it can take months to test the hundreds of hours of playing time.
EA has made no secret that it is using the game, developed in Austin by its BioWare Studio over three and a half years, to go after "World of Warcraft," the title made by its biggest competitor, Activision Blizzard.
"World of Warcraft" represents the genre's gold standard, in some years generating $1 billion in revenue by itself. To help compete, EA hired more than 1,000 voice actors for "Star Wars: The Old Republic," which broke an industry record.
"There hasn't been a big MMO release in many years, not since 'World of Warcraft,' that is this ambitious in scope and broadly appealing," said Frank Gibeau, president of EA labels.
Gibeau said that monthly subscriptions giving players constant access to new content could make the game a "ten-year business." The company has previously said it needs 500,000 subscribers to break even on the game and that more than 1 million subscribers would make it "a very profitable business."
According to Arvind Bhatia, a Sterne Agee analyst, EA should have no trouble reaching that milestone. Bhatia expects the game to sell 3 million copies at the start and sign up 1.5 million subscribers by the end of 2012.
Bhatia, underscoring how much EA has riding on this one game, added that the company's annual earnings next year could take a 15 to 20 cent hit if the game is a bust.
"If it's a flop, then it's bad for the sentiment of the stock and from an earnings standpoint," Bhatia said.
EA's Gibeau downplayed the idea that it could suffer a major loss if the game, which was developed by more than 400 full-time EA employees, does not catch on.
"In terms of scale, scope and expense, this doesn't make or break the company. This is just one initiative and we have many other bets we are making," Gibeau said.
WAR OF WORDS
Activision Blizzard Chief Executive Bobby Kotick has questioned whether EA would make money off the game since it has to pay Lucas Arts, the owner of the Star Wars license, for rights.
"Lucas is going to be the principal beneficiary of the success of Star Wars," Kotick told Reuters in November. "We've been in business with Lucas for a long time and the economics will always accrue to the benefit of Lucas, so I don't really understand how the economics work for Electronic Arts."
EA has since brushed off Kotick's claim, with Gibeau saying EA is used to making money off major licensing deals, from its soccer game, "FIFA" to its football title "Madden NFL."
"I wasn't aware Bobby had access to our deal and knows what we are going to get," said EA's Gibeau. "That's not the case here. This is a very good business for us.
While gamers have been salivating for years over leaked details of the game, which takes place more than 3,000 years before the movies, investors like Dan Niles, chief investment officer of the AlphaOne Capital Partners hedge fund, have also been paying close attention, but for a different reason. Niles said if the game does well, he may buy EA shares.
At Monday's close of $19.84 per share, EA shares have gained 21 percent for the year. However, the company's shares have also shed 19 percent since its last earnings report on October 27.
"I am looking forward to the game coming out to see if it could be interesting for the stock," Niles said.
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