EA is no longer a powerhouse

I started off writing a rather thorough examination of Electronic Arts' earnings, but then I realized it all boils down to one thing: EA is not the powerhouse it used to be. (If you don't yet know the basics of today's EA earnings report, you can get it here.)

The plain truth is clear in the numbers for fiscal 2010 (which starts April 1): EA cutting its planned operating expenses by $500 million, from $2.6 billion to $2.1 billion. And it's reducing the number of SKUs (one game released for three consoles counts as three SKUs) by 14% from fiscal 2009. If not for the delay of "Godfather Part II," "Sims 3" and "Dragon's Age: Origins" -- all of which are essentially done but EA says need a longer lead time for marketing -- that reduction would be about 20%.

EA, in other words, is 80% of the company it used to be.

Speaking in very carefully coded terms, CEO John Riccitiello essentially admitted this is the case on today's earnings call: "Our expense base is geared to a business that assumes much more revenue."

In the current economy, of couse, almost nobody is the absolute powerhouse they used to be. But EA has lost ground comparatively speaking. It's no longer even a clear no. 1 amongst the third parties in North America. EA's $1.65 billion in revenue last quarter was virtually even with Activision Blizzard's guidance of $1.6 billion (assuming that it actually meets its guidance, which it hasn't warned it won't). In terms of market capitalization, Activision Blizzard is now worth more than twice as much as EA ($12 billion compared to $5 billion).

And it's no longer much of a presence on the sales charts. "Madden NFL '09" for the 360 was EA's only game in the U.S. top 10 for 2008 or (ignoring "Left 4 Dead" which it distributed for Valve) the top 20 for the crucial December holiday sales month. "Clear and simple, our titles, did not perform to our expectations," Riccitiello stated flatly. EA just can't sell 'em like it used to.

Going forward, the company isn't expecting more revenue at all. It's revenue guidance for next fiscal year is identical to the current fiscal year: $4.2 billion. In other words: no growth.

Given all that, it's perhaps remarkable that EA is "only" laying off 11% of its staff, or 1,100 people. Then again, the figure was 6% in October and 10% in December, so who knows if it will rise again.

The plan now is to produce fewer titles, start marketing them earlier, and focus more on the Wii (EA's failure to prioritize the Wii has turned out to be an outright disaster, one that JR says they're trying to change).

An EA that produces fewer games with fewer people is simply not the industry force it was a few years ago. So who is? Activision, as I noted, is gaining, though that's in large part due to its merger with Blizzard. The real winner is Nintendo, which made $7.8 billion last quarter. A lot of that is hardware sales, but as the NPD charts demonstrate, it's also dominating on the software front. If anybody has become a videogame powerhouse at EA's expense, it's Nintendo.

Cutting the number of releases and overall costs, marketing smarter, and focusing more on the best selling consoles makes good sense. but the larger context is undeniable. The era of dominance for Electronic Arts has ended.

(The market, it should be noted, expected today's bad news from EA and responded positively to it plans to reflect reality by shrinking. Its stock is up 4% in after-hours trading)

The picture above is the Roman Empire. Get it?