EA layoffs, Playfish buyout draw mixed analyst reactions

17 percent reduction of publisher's payroll, $300 million social-game developer buyout met with approval, surprise, confusion.

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Yesterday, EA announced the layoffs of 1,500 employees, roughly 17 percent of the company's workforce. The move comes less than a year after the publisher's last major restructuring, when EA cut 1,000 employees from its global workforce.

EA announced the Playfish acquisition on the same day it revealed a round of 1,500 layoffs.

Today, analysts' reactions to the move have been mixed. In a note to investors, Pacific Crest Securities' Evan Wilson was fairly positive on the move, calling the headcount reduction "a good thing." Citing his own contacts, Wilson said the cuts are primarily coming from the staff of recently finished holiday games.

"We are now more optimistic because EA seems to have realized its dire position, with heaps of unprofitable revenue and not much option to turn it into profitable revenue," Wilson said.

Wilson added that the size of the console and handheld market is near the top of his expectations for the current generation of systems, but the growth of the audience hasn't kept pace with the growth of development budgets. As a result, EA has to create more profitable hit games--something Wilson says the publisher struggles with--or reduce costs through things like restructuring and layoffs.

Wedbush Morgan Securities' Michael Pachter was more skeptical of the layoffs. In particular, he took exception to EA's cancellation of more than a dozen titles, saying it "raises the question as to why the company's management didn't recognize the low revenue and profit potential of these games when it conducted its last deep soul searching in early 2009." (Although EA announced its previous round of layoffs in December 2008, they were not completed until March of 2009.)

Pachter was puzzled by some of EA's moves.

"It is also difficult for us to explain to investors that they should have confidence in a management team that is so lacking in transparency," Pachter said. "When asked about which games were being eliminated, the cavalier answer came back that the dozen or so games that were canceled were games 'we hadn't yet told you about.' One of the recurring complaints we have heard about Electronic Arts management is that they are dreamers rather than visionaries and that they see profits in places that others don't. If the company had a stellar track record in discovering heretofore undiscovered gems, its lack of transparency might be more palatable."

Pachter singled out one EA practice as being particularly opaque. He said the company pulls together unrelated businesses under its "digital" category, whether they be iPhone game sales, Warhammer: Age of Reckoning subscription fees, or Battlefield 1943 Xbox Live revenues. Pachter said that setup could allow EA to grow that area's revenues however it wants by simply adding more unrelated businesses to the pot.

While EA was readying its latest round of cuts, it was also taking on new employees, as the publisher announced the acquisition of casual online game developer Playfish in a deal that could total $400 million. That move also baffled Pachter, who said it had "the potential to confuse." Pachter estimated that the social gaming company generates about $75 million annually, where he pointed to Zynga as the leader in the space with an estimated $200 million in annual revenues.

"It is not clear that the social games opportunity is immediate and that buying is preferable to building," Pachter said, adding, "It seems to us that EA would have had equal success in building its own social games and in paying Facebook for slotting of its games in a preferable position to Zynga and PlayFish. However, the company chose to buy a private entity that is two years old, rather than building up its own presence."

Despite his misgivings about EA management, Pachter maintained his "Outperform" rating on the company stock and increased his revenue estimate for the publisher's fiscal year.

Janney Capital Markets' analyst Shawn Milne also weighed in on the PlayFish acquisition, saying it seemed expensive, with a total cost ranging up to $400 million, depending on performance incentives.

"However, Playfish should be able to accelerate EA Interactive's growth and better position the company as gaming expands on social networking sites and the iPhone," Milne added.

In his own note to investors, Signal Hill analyst Todd Greenwald said he expected the layoffs but was surprised by the magnitude of them. Like Pachter, he took notice of the publisher's digital revenues.

"EA is rapidly de-emphasizing its declining packaged goods business, and trying to offset this with a rapidly growing (but still small) digital business," Greenwald said. "While the transition to digital sounds appealing, the steps needed to get there will likely be painful to EA's [profit and loss statement], as EA is essentially trying to replace the sale of low margin $59.99 console games with an array of $4.99 iPhone games, as well as various high margin but low revenue monetization strategies such as online subscriptions, microtransactions, advertising, and virtual goods."

Discussion

13 comments
2bitSmOkEy
2bitSmOkEy

All this company needs to do is create NEW games. Sequels sell no doubt, its the way of the industry. If someone likes a game then they will most likely want to play another one like it. But what happens when people start to get sick of the same regurgitated ideas that get spammed and copied everywhere. Continue to pop out the easy mode products like Madden and Need For Speed, but make new quality products to keep things fresh and possibly jump start a new franchise. If a company as massive and rich as EA can't afford to take risks on new material then who can?

FallenOneX
FallenOneX

And that's why i buy all of my EA games used, there's a good chance the guy at the flea market used to work for EA.

norabbitnofun
norabbitnofun

So it sounds like a familiar story: a top leader team without a vision, a middle maangement team without a sense of realities happening in the lower levels, shareholders that just want more profit, and in the end the company's target market is reduced and the employees pay the toll. Motorola lived through the same thing and is starting to get back up from this because they have a more visionnary leader. I guess that could be a more useful part of the example to follow.

DAKYON
DAKYON

i just feel bad for those people who got fired =(

Ottozero
Ottozero

EA.....ahem.... I will save your company. I have Ideas that will sell products. You see I was born and raised in the 80s-90s. When the Internet took off, I owned records, I was the first person in the planet to use MP3s (debateble). I I have been a Ubber nerd/geek/jock (no really), Internet addict, computer Advanced user (people come to me for tech info, on everthing from Computers to toasters). I know all the movies that people like me watch, all the music people like me hear, all the books people like me read (not that many anymore thanks to the internet).. anyways all I require is one thing. Total Control=My word must be absolute, If i say its no good, its no good, If I say it will sell it will SELL!! If you want to hire me, please contact me at THEPERSONWHOCANSAVE_EA_fromitSelf@Geeksavescompany.net

SLjimbolian
SLjimbolian

Same here, I find it baffling why EA would make a pricey move to acquire a new company while making massive layoffs. I don't see much of a long term profit for EA with this social networking game.

chibi-acer
chibi-acer

I'm with Pachter on this one. Fire your employees and then buy out another company? What a bonehead move. Not to mention it seems like a crap investment. Give it another 5 years and there will probably be some new fad that replaces Facebook.

JackHoleFace00
JackHoleFace00

Riccitiello's an idiot, plain and simple. He's running EA into the ground and if I were a shareholder I'd call for his head. His sole obsession is over profits, yet that's precisely what got EA into this mess! Cases in point: -Wii was a big sales success, so he demanded bringing franchises to it, including Dead Space, despite it being a BAD FIT on Wii. Lo and behold, bad sales, and a waste of time, money, and resources. -Skate was a marginally successful game at first that he green-lit to be MILKED into oblivion. That franchise should have been one and done to focus on more original titles. -Flat out COPYING Wii Fit in creating EA Workouts, on the same console no less, years after Fit was out. And he thinks it can duplicate its success??! -And now, as detailed above, he chose to acquire a casual/digital game company in the midst of back-stabbing and firing 1,500 others, thinking that will save the company and provide tons of profit. Give me a break! It's clear this clown has no clue about videogames, let alone how to run one of the industry's largest companies. His actions will only lead to more unoriginality and doom for EA. He should be fired immediately.

LordRaymond
LordRaymond

Dam it EA you will make a profit again soon.

imperial_agent
imperial_agent

I understand EA's philosophy of cutting down on risky games and focusing on a few quality titles. That's how all companies should approach their business. However, buying out a social networking game studio, especially for 300-400 million, doesn't make sense. EA has the resources and money to just create their own, at a much lower cost. These social games on Facebook and such don't require tremendous amounts of art or technology to build. Meanwhile, they lay off 1,500 employees at the same time. So on one hand, EA's new philosophy makes perfect sense, but how they're executing that philosophy is baffling to say the least.

k0r3aN_pR1d3
k0r3aN_pR1d3

EA is starting to get things right, one step at a time. Activision is falling thanks to Bobby Kotick, and EA is rising thanks to new corporate policy. Dragon Age: Origins, FIFA 10 are just proof of this. I can't wait for EA's solid 2010 lineup, especially Bad Company 2.

hatieshorrer
hatieshorrer

Note surprising when people tell EA they arent interested in any more sequels EA releases it anyways. I understand Madden but after EA created SSX they put out four sequels and burnt out the series in a single generation. A sequel can be hashed out every year for some games that sale ridiculously well but not the games that just sale well and EA doesnt seem to understand that.