Financial Analysis Of Ea Games

Part A: INDUSTRY INFORMATION

1. Economic Features

Market size and Growth Potential (as of 2003):

* The video game industry is currently a $31 billion global market.

* Market size has tripled in value over the last decade from $10 billion in 1995 to $31 billion as of 2003.

* In five years the industry is expected to grow approximately 14.8% ($36,042/$31,374), at a rate of approximately 2.96% per year (14.8%/5).

* We feel that the industry is entering the early maturity stage of the growth cycle for the overall global market.

* Some observers feel that growth potential is massive, predicting that the video game market is "on track to rival the movie, music, and television industries"

* Further analysis reveals that some markets of the industry such as console hardware and software are on the decline in terms of growth, whereas the mobile gaming industry is currently in the rapid growth stage of the growth cycle.

* The mobile gaming industry is expected grow to roughly 6 times its current size in only 5 years ($587/3783).

* This all implies that the industry's growth prospects are focused on emerging technologies such as mobile gaming and online gaming where there is less industry saturation and maturity

Buyer Characteristics:

* It is estimated that there are currently 400 million gamers around the globe.

* Up to 75% (300 milliom/400 million) of gamers are considered to be 'very frequent' players and therefore contribute to the majority of revenues by purchasing upwards of 10 new games annually.

* Majority of gamers are between the ages of 20 and 40, with the average gamer age rising.

* From a geo-demographic perspective the emerging markets of online and mobile gaming are currently experiencing their rapid growth in the South Korean and Japanese consumer markets.

Competitive Rivalry:

* The gaming market is lead by a relatively small number of game producing companies; Sega, Activision, Acclaim Entertainment, THQ, Sony, Nintendo, Microsoft, and Electronic Arts.

* Microsoft and Sony are currently the leaders for the console hardware market while other companies such as Sega and Acclaim currently only focus on gaming software (i.e. Games).

* The gaming competitive landscape is virtually worldwide with the exception of Africa

* Recent high growth in mobile and online gaming has likely attracted the attention of would be competitors.

Product:

* Gaming software products are compared with on many platforms including quality, game features, timing of releases, brand-name recognition, access to distribution channels, and pricing.

* Rival products are becoming more differentiated as the larger companies are trying to separate themselves by entering licensing agreements with professional sports leagues (e.g. NBA, NFL); TV stations (ESPN), movie studios (Disney) to better improve the perceived status of their games.

* R&D product innovation is critical, as games must keep up with the rapid technological advances of gaming consoles and to keep up with the latest athletic season, or version of a popular comic series.

Technological Change:

* The rapidly advancing speed of the processing capabilities of gaming console units has forced the game producers to also keep pace with the advances in bit-graphic technology.

* Each new generation of consoles (e.g. PlayStation 2, PlayStation 3) requires that a new generation of games be produced also to compliment the new systems.

Economies of Scale and Experience Curve:

* Notably, extensive advertising is increasingly becoming imperative to create mass-market demand for premium games and as a result the smaller game producers are having difficulty competing with the wealthier industry heavyweights.

* Established industry companies (e.g. Nintendo) often have the advantage of better-established relationships with retail stores and other members of the value chain

Vertical Integration:

* Some industry members such as Microsoft are quite vertically integrated, being involved in hardware, software, distribution etc.

* Others such as Sega and significantly smaller players have decided to focus on game producing only.

* Some major industry players are increasingly turning to outsourcing some of their game production to independent licensed game developers.

2. Competitive Analysis

*Due to the vast amount of information regarding the gaming industry, we concentrated more on the work of independent game developers than on the three makers of game consoles.

The Rivalry among Competing Sellers in the Gaming Industry:

Rivalry is seen as being intense due to the following factors:

Major players in the gaming industry: THQ, Acclaim Entertainment, EA Games, Microsoft, Sega, and Activision

* Gaming industry has experienced fierce competition due to the presence of three (Sony, Nintendo, Microsoft) different console manufacturers and several independent game developers.

* All three makers of gaming consoles also develop some of their own games, which are exclusive to their own console.

* Game developers are continually coming out with new games in attempt to improve upon previous releases that were of a lesser technological quality

* The smaller game developers are having difficulty staying competitive due to a lack of capital, and unpredictable cash flows.

* Standardization is definitely present in the many games that are released; therefore we see many game players switch from one brand to another due to low switching costs.

Firms