Kick off with EA

The video games publisher is best known for its sports franchise games, including the likes of Madden, which is based on the US national football league (NFL), and NHL, the American national hockey league. But it is the FIFA series that has historically been its biggest seller, accounting for 12 per cent of net revenue in 2020 – hardly surprising, given that the brand, which has released a new game every year since 1993, regularly tops charts in both the UK and Europe. 

But the nature of sales at EA has certainly evolved since the 1990s. The publisher has increased its focus on game downloads, which accounted for 14.6 per cent of sales last year, compared with 10.7 per cent five years ago. And it has also aggressively grown live service and mobile revenues, where money is made by selling updates and extras for existing games. These sales accounted for 63 per cent of the total last year, compared with 44 per cent five years earlier. The digital shift has fattened up EA’s gross margin, which stands at about 75 per cent today compared with less than 50 per cent a decade ago. 

All this is not to mention the boom in the wider gaming industry since countries moved into lockdown. According to market research firm NPD Group, industry consumer spending on video gaming in the US reached a second-quarter record of $11.6bn – 30 per cent higher than the same three months last year. This momentum may not give out too quickly given two new console releases are slated for autumn from Microsoft (US:MSFT) and Sony (TY:6758). 

Investors should note, however, that EA does not own key intellectual property (IP). It releases content from other developers, as well as licensing IP from other companies. Big IP owners, such as Disney, from which EA licenses Star Wars, are in powerful negotiating positions. Meanwhile, FIFA rights are due to expire at the end of 2022 following an extension in 2013. The loss of a major rights agreement or more demanding commercial terms could have a noteworthy impact on profitability. 

However, EA’s established position in sports strengthens its bargaining power here. EA has a web of more than 400 agreements with sports rights owners, spanning not only sports bodies, such as FIFA, NFL and the NHL, but also leagues, teams and even stadiums. This complex network creates a barrier to entry and limits the bargaining power of the individual IP owners, especially given that its nearest competitor, Konami’s (TYO:9766) Pro Evolution Soccer (PES) series, trails behind in terms of sales.  

Still, investors should be aware that the market for video games is intensely competitive. Indeed, in 2019, EA put out what it described as a disappointing performance, with operating profits dropping by 30 per cent. This was following a year of weak execution: major releases Battlefield V and Anthem were both met with poor reviews. But that is not to undermine EA’s overall leading market position: Star Wars Jedi: Fallen OrderTM won the 2020 D.I.C.E award for best adventure game and Madden NFL 20 set a number of records for player engagement. 

Despite now being a largely digital business, EA is also not immune to the fallout from the pandemic. The disruption of the sports calendar could affect sales of related games if brand awareness is diminished. That is not to mention the shaky macroeconomic backdrop and potential recessionary pressures on consumer spending.