Wednesday, May 9, 2012

EA's Fuzzy Math

Looking at the performance of Star Wars: The Old Republic, EA should feel pretty good.  The MMORPG with the second highest subscriber numbers (after World of Warcraft) in the west.  1.3 million subscribers after four months, which makes it the most successful launch in MMO history. But put into context, the numbers aren't so good.  Looking at the coverage from the business press indicates that SW:TOR is dragging down the price of EA stock, which fell 5% in after hours trading Monday.

Reuters (via CNBC) - EA loses Star Wars users, shares tumble:
Electronic Arts lost 400,000 subscribers of "Star Wars: The Old Republic" in the fourth quarter, dealing a blow to its efforts to rely on the new game for growth and sending the game maker's shares down as much as 10 percent.
EA has poured more money and firepower into "Star Wars: The Old Republic" than it has any game in its 30-year history. Wall Street is closely watching to see if the game can succeed, since it could bring EA riches for years to come. If it struggles, EA's earnings will be hurt in future quarters.
Ian Sherr, WSJ's MarketBeat - Electronic Arts Shares Pounded on Weak Outlook:
As if the outlook on its own wasn’t bad enough, the sixth bullet point on the front page of the results included another bad nugget: subscribers to the company’s “Star Wars: The Old Republic” were below expectations.

The game, released in December, had 1.7 million subscribers at the end of the holidays; now, it has 1.3 million, meaning it’s a slow and likely hard slog to compete with Activision’s “World of Warcraft” and its massive base of 10 million subscribers.
Dan Gallagher, MarketWatch - EA sales beat targets; ‘Star Wars’ takes hit:
The stock had already slumped more than 26% since the first of the year — mostly on worries about growth of the new franchise that is one of the company’s biggest bets in trying to expand its digital business. The shares closed the regular session up fractionally at $15.13.
“In terms of the quarter, they met expectations,” said Colin Sebastian of Robert W. Baird, adding “but I don’t think anyone was expecting a 400,000 decline in ‘Star Wars’ subscribers.” ...
“The trend is clearly downward, and for an MMO like this, you don’t want to see a decline this early on,” Sebastian said. 

Michael Pachter of Wedbush Securities said the numbers for “Star Wars” during the quarter suggest the game might “level off” at the 1-million-subscriber mark, compared to some earlier estimates of 1.5 million subscribers, “so the franchise is far less valuable.” 

He added, though, that the current valuation of EA’s stock is “ridiculously cheap.” 

Analysts were expecting EA to end the recent quarter with about 1.6 million active subscribers — defined as those paying for subscriptions along with players who are still in the free month of trials after buying the game.
Given the expectations of investors, EA leadership's reluctance to disclose the subscription numbers is understandable.  But did they feed into unrealistic expectations?  On the EA Q3 2012 earnings call on 1 Februrary, EA announced that it had sold 2 million copies of SW:TOR and had 1.7 million subscribers.  This was right at the end of the first free month those who pre-ordered the game received.

The good news continued as EA CEO John Riccitiello announced at the 2012 Wedbush Conference on 9 March that at the end of February that SW:TOR still retained almost 1.7 million active subscribers, although MMOData was less optimistic and put the number closer to 1.5 million.  But one attendee, Cowen & Company analyst Doug Creutz, actually forcast 2 million subscribers for SW:TOR by the end of June 2012.

As March turned to April and player discontent about low population levels on many of the SW:TOR surfaced, the outlook began to dim.  The same Doug Creutz who predicted 2 million subscriptions by June 2012 lowered his long-term outlook and caused a ruckus by predicting a subscription base of 1.25 million by March 2013.  He also stated that the 1.7 million subscriptions announced on 1 February would be the high-water mark for the game.  EA fought back to dispel the rumors of a falloff of subscriptions.  SW:TOR's lead writer, Daniel Erickson, told PC Gamer in an interview published 23 April that SW:TOR was not experiencing a drop in subscriptions but just a falloff in players logging in during peak hours.  That was the official explanation for the light server loads and the reason that Bioware was considering server mergers.  So two weeks before the Q4 2012 earnings call the official line was that SW:TOR still had around 1.7 million subscribers.

EA/Bioware did a lot of things to increase subscription numbers, but perhaps the most ethically questionable move was the granting of 30 days free game time to all accounts with a level 50 character as part of the launch of patch 1.2.  The incentive wasn't questionable because Bioware made a public relations blunder by stating that players with a level 50 character were its "most valued players".  The reason is that the move artificially inflated the subscription numbers reported on Monday's earnings call.

Why do I say that?  Because by giving the 30 free days, players who were about to let their subscriptions expire then counted as active subscriptions.  I believe a large percentage of players who preordered the game chose the 3-month subscription model.  Those subscriptions were originally due to run out on 18 April, although that was extended a couple of days due to server/patching issues.  By handing out the free time, EA locked in those players to be subscribed past the earnings call, thus inflating the numbers.  How much was added?  I don't know, but Daniel Erickson's comments indicate that a lot of players had just stopped playing even though they were still subbed.

I have read many argue, especially on the SW:TOR forums, that the above logic is incorrect because EA would be reporting the numbers as of 31 March, the actual end of the financial quarter.  That is simply incorrect.  EA's interim CFO Ken Barker stated on the call Monday:
"Let me provide you with an update on Star Wars. Through the end of the quarter approximately 2.4 million units have sold through. In our last call we indicated that we had 1.7 million active subscribers, and as of the end of April, we now have 1.3 million, with a substantial portion of the decrease due to casual and trial players cycling out of the subscriber base, driving up people who are all percentage of paying subscribers. We have already launched a number of initiatives designed to growth subscriptions. Initial responses have been positive and we are encouraged by the gaming community's reaction." [emphasis mine]
Based on other statements on the call, the future numbers for SW:TOR can't be good as EA is minimizing the importance of the game on the company's bottom line.  I thought this statement from EA CEO John Riccitiello was telling:
"First off, Star Wars' performance right now is very much in line with our original assumptions and the assumptions in where we are guiding folks to over the last couple of years. Where that puts it in our portfolio is, in terms of profitability from a franchise, it's in our top 10 but it is not in our top 5. So as a business contributor, while important, it is not as important as Medal of Honor or Battlefield or FIFA or Madden or the Sims or SimCity but it is more important than Tiger Woods PGA Golf."
If EA leadership thought that SW:TOR was going to have a big boost in subscriptions I know they would tout that number.  A figure of 2 million subs probably means a sustained income of approximately $25 million a month.  Instead, analysts are predicting half that amount.  I would not be surprised if that number falls to 800,000 by the end of the year.  For a normal MMORPG, a subscription base of 800,000 would translate into a very successful game.  But for the estimated $200 million in development costs EA/Bioware sank into Star Wars: The Old Republic?  Even 1 million spells disappointment, at least to investors.

1 comment:

  1. My favorite bit is in the last quote, which very vaguely implies SimCity is ranked higher than almost every other game EA makes. Odd, they haven't released a SC game since 2003. Perhaps the suits running the show should talk to actual gamers about actual games and know the products their own companies develop.

    Nice post!