Carleton University

Electronic Arts Incorporated Capstone Report

Jenna Calvano 100790081 Katarzyna Gnatek 100795176 Zachary Shore 100795766

BUSI 4609 G Carol-Ann Tetrault Sirsly Due March 20th 2013

Table of Contents

1.0 Executive Summary ...... 1 2.0 Introduction ...... 4 2.1 Brief Overview of Case ...... 5

Macro Environment: TESP Opportunities/ Threat Analysis 3.0 Technology Environment ...... 4 3.1 Mobile Transition...... 5 3.2 MMOGs ...... 5 3.3 Data Center Hosting and Digital Distribution ...... 5 3.4 User Modifications ...... 5 3.5 Controller Innovation ...... 5 3.6 3D Technology ...... 5 3.7 Second Screens ...... 5 Type chapter title (level 3) ...... 6

1.0 EXECUTIVE SUMMARY

I. GENERAL ENVIRONMENT While the rise of the mobile transition in the world of gaming and the increasing importance of digital distribution have proven to be both threatening and opportunistic technological trends in the industry; the decreasing popularity of MMOG subscription games is a notably opportunistic trend via capitalizing on its avoidance. In addition, consumer confidence is at a low in the United States and Europe however it is at a high for Japan. Coupled with an increase in disposable income, Japan is a very promising economy for the . The disposable income is forecasted to increase in the United States over the next couple of years. This is seen an opportunity for sales growth throughout all major regions. Lastly, the demographics of video game users remain stagnant, and are generally characterized as males in their late-twenties to mid-thirties, although the female user base has exhibited significant growth. It is notable the internet subscribers are increasing in all the US, UK and Japan, which is opportunistic for video game developers that publish online games. II. INDUSTRY ENVIRONMENT A thorough analysis of Porter’s 5 forces revealed a relatively low power of suppliers in the video game software industry increases industry attractiveness. Suppliers for video game companies are more or less interchangeable due to the commoditized process of manufacturing physical disks. In terms of knowledge suppliers, outside knowledge imported to aid with tedious, non-specialized video games has low bargaining power. Developers only possess negotiating power if hired to aid with specific, talent-based game development. Contrastingly, a high power of buyers in the industry decreases industry attractiveness; as end consumers have the ability to integrate backward through user modifications and digital distribution of content, while console manufacturers are buyers of video game brands, and dictate price upon legal right to final edit. III. INTERNAL ENVIRONMENT is a , publisher, distributor and marketer. In its 3 main markets of operation in 2012, Electronic Arts has notable market share in United States and Europe of 16.1% and 19.3% respectively, and an underwhelming 0.6% market share in the overcrowded Japanese market.Upon analyzing EA’s value chain, the most significant findings include the following: In respect to operations, Electronic Arts has perhaps invested too much into its assets and capital without turning much profit and thus exhibits the lowest return on assets over its competitors over the last three years; EA is also infamous for its lack of customer service, which immediately denotes a weakness for EA. The Consumerist determined EA to have the worst customer service in America in 2012; and lastly, it was noted that Electronic Arts Inc. is heavily invested into research and development due to the dynamic and innovative nature of the video game industry. Although, perhaps EA has exhibited overzealous behavior in R&D investment, and has invested a far greater proportion of revenues into R&D in recent years than any other its direct competitors, investing over 32% of their assets into R&D each year from 2009 to 2011, which may serve as a weakness due to overinvestment in short-lived technology. Ultimately, EA has been assessed as a moderately attractive firm overall, as the firm possesses many strengths in addition to obvious downfalls such as poor customer service. IV. CORPORATE STRATEGY A high weighted average cost of capital of 12.37, 9.79 and 9.65 in 2009, 2010 and 2011, respectively makes raising the funds required in order to maintain operating activities and expensive task. EA exhibits strength within its horizontal diversification due to the many labels it markets, thus it is not recommended for the firm to join efforts on labels yet use their resources to exploit the growing mobile gaming market. Finally, a transnational strategy is recommended to address local responsiveness in domestic markets through the creation of value-added activities and differentiated products. V. BUSINESS-FUNCTIONAL STRATEGIES Electronic Arts owns 5 major operating businesses: EA Games, EA Sports, Maxis, EA Bioware and EA Mobile. In addition, it was found that these 5 businesses employ differing strategies, including cost-leadership, differentiation, focused differentiation and integrated cost- leadership/differentiation. It was also noted that there are numerous issues that are associated with the current business strategies, and these include: Customers’ limited perception of value, counterfeiting, distribution model fluidity, source of cost advantage becoming obsolete, and overlooking important customer preferences. Significant changes were recommended for EA’s R&D activities, which includes outsourcing tedious game developing to third-party developers and implementing a “Bigger, fewer” comprehensive R&D strategy; its distribution activities, which includes implementation of a “Freemium” game model in addition to a transition to mobile and digital distribution; its marketing activities through symbiotic product placement; its customer service initiatives, which includes implementing a 24-hour technical support line; and its operations by increasing efficiency through economies of scale done by centralizing the operations of all markets. VI. IMPLEMENTATION OVERVIEW The total expected cost of implementation is $2,611,890, with the most significant of costs attributed to additional customer service initiatives. EA’s reputation for poor customer service is to be remedied with 24-hour technical support, although labour costs are likely to surmount to $540,000 per year. Revising operations by centralizing the operations in all markets accounts for $500,000. The revised marketing strategy via symbiotic product placement is fairly costly as well, and contributes $357,750 to the total implementation cost. Lastly, outsourcing some tedious game developing will accumulate a substantial cost of $290,940 per year. Subsequently, the activities that are felt to have the ability to have the greatest impact on improving Electronic Arts’ competitive advantage include; outsourcing tedious game developing to third-party developers so that EA’s in-house talent is able to focus on value creation and game innovation, the “Bigger, fewer” comprehensive R&D strategy that should result in EA’s games to be of higher quality, more non-substitutable, and will provide barrier to competitors looking to imitate EA’s developments, implementation of a “Freemium” game model which consists of implementing more free-to-play games and ridding EA is subscription-based game, and the transition to mobile and digital distribution which will likely be the most time consuming strategy, as it is the most complex, but will recruit more users to the EA brand. Digital and mobile access to games will attract traditional and non-traditional gamers alike, as it alleviates all the barriers that are imposed by consoles. Due to a high WACC and low Altman Z-score in its most recent fiscal year of 2.84, EA may have trouble financing such recommendation as they are not particularly attractive to investors. Acquiring debt will not be as costly as acquiring equity, so EA may have to issue corporate bonds to finance the strategic recommendations. 2.0 Introduction Electronic Arts Inc. is a video game developer, publisher, distributor and marketer.

Founded on May 28th, 1982, Electronic Arts was founded on May 28th, 1982. EA operates in the video game industry, and is the third-largest gaming company – after Nintendo and Activision

Blizzard. Many eminent video and computer games have been published or developed by EA, the most notable being: The NHL series, the Sims, Battlefield, the Madden NFL series, Rock

Band, Mass Effect 2, and Star Wars: The Old Republic – just to name a few.

The largest geographic markets in the video game industry include the USA, Japan and

Europe, with the largest European market being the United Kingdom. Though, it should be noted that due to the nature of the industry in which EA operates, it is relatively neutral, geographically.

EA was chosen because it operates in an interesting field that Zack, one of the group members, one day wishes to explore with his career. In addition, Jenna is an information systems student, and was excited about the prospect of focusing on a technology-based firm. As discussions continued in hopes of choosing a firm for the capstone report, the group always seemed to return to EA as the preferred company. The industry in which EA operates is compelling as well: The exponential growth of technology makes for interesting research and dynamic findings. For these reasons, we were attracted to EA and the video game industry in its entirety.

Our group consists of Zack Shore; a marketing student, Kasia Gnatek; a finance student, and Jenna Calvano; an information systems student. Our group is diverse in our skills, perspectives and interests, which will certainly strengthen our group in our pursuits. We will capitalize on our strengths by designating members to research portions of the assignments that are most relevant to them and their area of expertise. We will overcome our weaknesses by openly communicating, and learning from previous missteps to move forward in future assignments. Finally, our personal objectives include completing a successful, comprehensive culmination of our 4 years of studies at Carleton University of which we can be proud.

2.1 Brief Overview of Case Electronic Arts Inc. is a video game developer, publisher, distributor and marketer.

Founded on May 28th, 1982, Electronic Arts began in Redwood City, California, United States by a 28-year-old man named William "Trip" Hawkins III, who previously served as a director of product marketing for Apple Computers1. When EA was first founded, it was a home computing game publisher. Thereafter, EA moved onto in-house game developing and later into developing games that support an array of consoles. EA operates in the video game industry, and is the third- largest gaming company in terms of revenues – after Nintendo and Activision Blizzard. Many eminent video and computer games have been published or developed by EA, the most notable being: The NHL series, the Sims, Battlefield, the Madden NFL series, Rock Band, Mass Effect

2, and Star Wars: The Old Republic – just to name a few 2. These video games are supported by various platforms such as XBOX, PLAYSTATION, PC, and mobiles.

The largest geographic regions in which Electronic Arts operates include the USA, Japan and Europe, with the largest European market being the United Kingdom. The United States video game market is seemingly crowded, however Electronic Arts maintains an established

1 AllGame. Electronic Arts. . Accessed February 12 2013. 2 ibid. presence as seen in the figure below: United Stated Video Game Market Share.

Activision Blizzard Inc 2.6 1.9 00 0 0 0 0 3.5 4.7 Electronic Arts Inc 4.9 Nintendo Co Ltd 23.3 Others 6.6 Ubisoft Entertainment 8 16.1 Microsoft Corp 14 14.4 Take-Two Interactive

Sony Corp

Figure 13

Electronic Arts maintains the highest market share within its operations in the European video game market as depicted in the figure below: European Video Game Market Share.

Others 2.1 1.8 1.8 1.7 3.5 Electronic Arts Inc 3.6 Nintendo Co Ltd 4.5 20.04 Activision Blizzard Inc 8.8 Ubisoft Entertainment 19.3 SA 11.6 Sony Corp

18.8 Take-Two Interactive Microsoft Corp

Figure 24

Finally, although the Japanese video game market is highly crowded and Electronic Arts has a minimal market presence, it continues its efforts within the promising region and struggles to

3 Passport GMID. "Video Games”. Euromonitor International, 2012. Web . 4 ibid compete against local companies.

2.3 1.1 0.6 0.3 2.9 Others 3.3 Nintendo Co Ltd 20.2 Capcom Co Ltd 6.3 Square Enix Co Ltd 9.5 Konami Corp Sega Sammy Holdings Inc 10.2 18.8 Sony Corp

Electronic Arts Inc

Figure 35

Similar to any other organization, the past five years in a recessive economy have created a difficult barrier to creating positive revenue and ultimately net income. From 2009 to 2010,

Electronic Inc. experienced a loss in revenue from $3,654 M to $3,589 M. However, 2011 saw a promising signal in terms of recovery with an increase back up to $4,143 M6 due to popular releases such as and Madden NFL 12. Similarly, Electronic Arts has struggled to upkeep a positive annual net income. From 2009 to 2010, net income increased steadily from

$(677) M to $(276) M only to turn positive in 2011 with a total net income of $76M7. Another positive signal of post-recessive activity is witnessed by employee numbers over the few years.

From 2008 to 2010, the number went from 9100 worldwide to 7645. However, as of fiscal year

2011 Electronic Arts employed 9200 employees8.

This paper continues to analyze various value creating activities in detail in order to provide a deeper understanding of Electronic Arts. Supply chain management, operations,

5 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. Accessed February 8 2013 6 ibid 7 Ibid. 8 Ibid. distribution, marketing and sales, customer service, human resource management, research and development, as well as corporate leadership are assessed against with appropriate metrics in order to determine the strength or weakness of that activity.

3.0 Technology Environment Within the video game industry, the technology environment is extremely prevalent: The exponential growth of technology encourages remarkable technological innovation as well as a rampant stream of emerging technological trends. Due to the rapid-paced nature of technology in the video game industry; information, research, trends and innovations all have short-lived relevance and excitement, and quickly become outdated and replaced. Thus, in the video game industry, “trending tech” before the year 2012 is likely to have already been replaced or greatly expanded upon. The following are a number of technological trends that have either emerged recently and are predicted to gain prevalence in 2013, or have yet to emerge but characterize the near future of the video game industry.

3.1 Mobile Transition

In 2012, game developers allocated more resources to transitioning from traditional consoles to mobile platforms like smartphones and tablets than ever before. Facebook and other social networking sites have been major catalysts in the mobile transition of video games, and have brought the emergence of viral channels through which video games have organically spread. Thus, businesses in the industry must modify their strategies accordingly so that they are not overrun by competition. The focus is not necessarily on social networking platforms, but on video games on the mobile device, available as an application. Wooga has allocated over half of their staff to develop gaming on smartphones and tablets, Crowdstar has suspended social network gaming development to focus on mobile devices, and Zynga, the developer of the widely popular game Draw Something , spent 210 million dollars in 2012 on mobile gaming9.

Thus, it is predicted that 2013 will bring further maturation of the mobile transition, in all facets of the video game industry.

This mobile transition certainly poses a threat to traditional video game developers and publishers, as these companies have reported declines in the double digits while mobile games have been thriving 10.According to Cowen and Company analyst Dough Cruetz, “We believe that over the last several months, trends in the casual digital gaming space have swung decisively towards mobile and away from PC-based social gaming, at least in Western markets”. 11

Additionally, in September 2012, Facebook’s CEO Mark Zuckerberg stated that “A lot of the development is not going towards building desktop stuff anymore; it’s going towards building mobile stuff. We’re able to integrate and we’re helping a lot of folks build great mobile experiences – that’s the future”.12 Thus, the movement of development away from PC-based gaming and towards gaming on mobile devices pose a threat to video games that operate on traditional consoles like PCs of being replaced like never before. Video game publishers and developers must stimulate innovation to survive, or will be overcome by the transition to mobile.

In fact, this seems to have already been the case with mid-tier developers – whom seem

9 Graft, Kris. "Gamasutra - News - The 5 trends that defined the game industry in 2012." Gamasutra - The Art & Business of Making Games. 6 Dec. 2012. Web. . 10 Graft, Kris. "Gamasutra - News - The 5 trends that defined the game industry in 2012." Gamasutra - The Art & Business of Making Games. 6 Dec. 2012. Web. .

11 Caoili, Eric. "Gamasutra - News - Social game players continue ditching desktops for mobile." Gamasutra - The Art & Business of Making Games. 13 Sept. 2012. Web. .

12 Caoili, Eric. "Gamasutra - News - Social game players continue ditching desktops for mobile." Gamasutra - The Art & Business of Making Games. 13 Sept. 2012. Web. . to be squeezed out of the industry amidst this transition. It seems to be a case of “the rich are getting richer”, as the bar is being raised in the market due to all the choice on mobile platforms and Facebook that have emerged. It has become essentially impossible for mid-tier developers to create blockbuster games with a tenth of the budget. This is because large developers are investing more capital in cutting-edge technology and platform flexibility than ever before, making smaller developers unable to compete and likely to disappear, as it’s estimated that a game must sell 5 to 7 million units to achieve “triple-A status” and will cost 65 to 105 million dollars to make 13.

3.2 MMOGs

MMOGs (massively multiplayer online games) received huge popularity up until 2009, and have declined greatly in popularity and usage since. These games are multiplayer video games that can support thousands of users simultaneously that are internet-based by nature.

While usually played on PCs, they can also be accessed on internet-capable game consoles like

PSP, Playstation 3, , Nintendo DS, Wii, and now are even accessible on smartphones and tablets.

Though, even when MMOGs were at the brink of their success, around 2008, there were significant threats facing them: Running servers, performing maintenance, taking payments and providing web pages as well as community features all cost money. Traditionally, all of these elements would be recreated from scratch with each new release of game version. Virtualization techniques, common server architecture, prebuilt engines and unified systems for accounts, access, payment processing, web services architecture and even a mobile development team

13 Nath, Debabrata. "Mid-Tier developers will struggle in future” says Ian Livingstone | VG247." VG247 | VG247.com. 13 June 2012. Web. .

14could all aid in remedying this issue, but the popularity of MMOGs already seems to be on the decline, even in a matter of 2 years; from 2008 to 2010 – but is expected to continue onwards as a future trend.

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Due to the high costs associated with online games, MMOGs traditionally operate on a subscription-based payment model. Though, it is this model that has been declining in popularity over the recent years; simply because users are given so many free or single-purchase options, there is no need for them to continue payments through a subscription. In fact, the number of gamers who play subscription-based games has declined to 28% in 2010 from 35% in just 2009

16.Even more astonishing, player interest in MMOGs has decreased by 45% from 2009 to 2011

14 Gazimoff. "The Declining MMO Market | Mana Obscura." Mana Obscura | Tales of Magic from Strange Worlds. 21 Oct. 2011. Web. . 15 Tan, Nicholas. "MMOG Subscriptions on the Decline." Game Revolution - Xbox 360, Wii, PS3, PS2 Game Cheats & Reviews. 12 Nov. 2010. Web. . 16 Tan, Nicholas. "MMOG Subscriptions on the Decline." Game Revolution - Xbox 360, Wii, PS3, PS2 Game Cheats & Reviews. 12 Nov. 2010. Web. . 17.

Evidently, MMOGs with a monthly subscription model have seen declines in players in numbers that cannot be ignored. In 2012, Star Wars: the Old Republic was immensely underwhelmed with the number of subscribing players upon release; consequently, they restructured and quickly converted to a free-to-play model18. Thus, this decline in MMOG interest is evidently a threat for MMOG developers and publishers, but is an immense opportunity for video game developers and publishers that operate on a free-to-play structure, which have thrived in 2012 and are expected to continue growing in popularity in 2013.

3.3 Data Center Hosting and Digital Distribution

The video game industry is continually pointing to the importance of data center hosting; when large amount of data is stored in a facility used to house computer systems, associated components and storage systems. A Gamespot report that was released this month stated that current trends like continual game updates and digital distribution (as opposed to physical distribution in the form of disks, etc.) will be even more prevalent in 201319. Though, these trends require a considerable investment in managed hosting and other data center hosting models to support the technology and infrastructure required.

To elaborate, the game itself is no longer a static unit, but is acting as the console itself.

In the past, digital content downloads were rare, but have become a common industry trend today. The purchase of a game used to denote receiving a disk and little else. Though, games no longer static have this static functionality; games are released with the expectation that new

17 Stoutfoot, Tobold. "Tobold's Blog: The decline of interest in MMORPGs." Tobold's Blog. 21 Oct. 2011. Web. . 18 Graft, Kris. "Gamasutra - News - The 5 trends that defined the game industry in 2012." Gamasutra - The Art & Business of Making Games. 6 Dec. 2012. Web. . 19 Internap. "Video game industry trends point to importance of data center hosting”. 25 Jan. 2013. Web. . content and frequent updates will be available online for download. Not only do these digital downloads make game content more accessible to users, but they also enable publishers and distributors to release gaming content at lower costs by avoiding having to release it on a disk20.

Thus, this digital distribution trend can be very opportunistic for competitors in the video game industry. Costs can be cut by eliminating the need for disks, and the remaining capital can be reinvested in game content and technology in hopes of gaining competitive advantage. Digital distribution also poses an opportunity for significant additional revenues: Digital sales of mobile games for phones and tablets, full games for consoles, and extra game features and content have recently risen substantially21.

Due to the fact that trends in the video game industry like digital distribution and online updates are so heavily dependent on hosted data centers, managed hosting and content delivery are going to be imperative services that require investment from video game developers. This means that the IT services that are provided by a third party are going to be strategic assets in the video game industry. Alternatively, this also means that failure of proper IT governance or failure of IT-business alignment can convert the opportunities offered by digital distribution and online updates into threats for video game developers.

3.4 User Modifications

Expanding even further from the importance of third-party developers, recent years have brought an onslaught of players that act as fourth-party developers in the video game industry.

Players will create modifications to a game (called “mods” within the industry) by releasing their source code. Though users that contribute “mods” only represent 1% of the gaming community,

20 Internap. "Video game industry trends point to importance of data center hosting”. 25 Jan. 2013. Web. . 21 Molina, Brett, and Mike Snider. "New hardware may be game changer for video game sector." USA TODAY: Latest World and US News - USATODAY.com. 26 Jan. 2013. Web. . it is estimated that the occurrence of mod-contributing players will only increase in coming years. In fact, it is estimated that 600,000 established online game community developers currently existed in the year 201222.

Mods have the ability to open a realm of possibilities and opportunities for video game developers: Mods encourage open source game design structures, as well as innovative development and engineering. It will also add a new element to the value chain of the video game industry, making the product more intricate, innovative, and more tailored to optimize user satisfaction. For example, in early 2012, a modification for the game ARMA 2 was released, which caused sales to increase by dramatically – an estimated 300,000 units in sales23.

Alternatively, mods can also pose a great threat to the video game industry. Due to the nature of downloading user-generated content, mods are vulnerable to glitches, malware, viruses, errors, and adversely altered game behaviour. For example, in 2007 a Grand Theft Auto mod was posted to YouTube, containing a link to a malware website. Ultimately, when a user would attempt to download the mod, the malware would infect the user’s computer24. Unfortunately for video game publishers and developers, it is difficult to implement quality control for user- generated mods, as users often post their source code anywhere and everywhere on the web. It then becomes a trade-off which requires risk assessment; video game developers and publishers must decide which has greater value: the benefits reaped from open source game design structures, and innovative development and engineering, or the safety from glitches, malware, viruses, errors, and adversely altered game behaviour that may or may not arise from mods.

22 Flew, Terry, and Sal Humphreys. Games: Technology, Industry, Culture. Second Edition ed. South Melbourne: Oxford University Press, 2005. Print.

23 Usher, William. "DayZ Helps Arma 2 Rack Up More Than 300,000 In Sales." CinemaBlend.com: Entertainment news and opinions you can trust. 1 July 2012. Web. . 24 Vamosi, Robert. "Grand Theft Auto mod virus uses YouTube to spread | News Blogs - CNET News." Technology News - CNET News. 2 July 2007. Web. . 3.5 Controller Innovation

Perhaps the most unexplored and recently emerged of all the technology trends within the video game industry: Controller innovation. Video game controllers, version 2.0 seem to be one of the most exciting and anticipated technology trends of 2013. Traditional video game controllers consist of a few buttons and a joystick, but emerging controllers will go far beyond these characteristics: Players can look forward to controllers that have touch screens, wireless access for internet browsing, cameras for video chatting in real time with other players that are using the controller, motion sensors, downloadable applications, “buttonless” gaming, an infrared TV remote, personal video recording, compatibility with Netflix, Hulu Plus, Amazon and YouTube players, second screen abilities, as well as qualities much like those of a tablet.

These controllers address the “second screen” trend (discussed below), and expand upon it. The new controllers can be described as “a mash-up of an iPad and a traditional console, with a touch screen embedded in the middle”25– void of the buttons, triggers and joysticks found in traditional video game controllers. According to Reggie Fils-Aime, president and chief operating officer of

Nintendo’s United States unit, “It comes down to providing consumers new, unique experiences they can’t get anywhere else, experiences that really make them say ‘Wow, this is fantastic’ ”26.Thus, it seems that the future trend of video game controllers is characterized by innovation and focus on both the hardware and software elements of the device.

As exciting and anticipated as it is, controller innovation is more likely to pose a threat to the video game industry than an opportunity. Innovated controllers represent a missed opportunity in the mobile device industry. These new controllers are attempting to replace

25 Wingfield, Nick. "Nintendo's Wii U Takes Aim at a Changed Video Game World - NYTimes.com." The New York Times - Breaking News, World News & Multimedia. 24 Nov. 2012. Web. . 26 Wingfield, Nick. "Nintendo's Wii U Takes Aim at a Changed Video Game World - NYTimes.com." The New York Times - Breaking News, World News & Multimedia. 24 Nov. 2012. Web. . mobile devices, but smartphone-based video games have no competition in the industry. Another worrisome trend that renders these controllers as threats to the industry is the pricing trend.

These controllers are price upwards of $300, when traditional consoles can be bought for $25027.

In addition, many smartphone-based games are free of cost, or cost a dollar or two at most.

Traditional console-based video games are incredibly expensive in comparison. Not to mention the fact that smartphone-based games are available online, but for many traditional video games, a physical disk must be purchased for access. For these reasons, it is not wise for the video game industry to attempt to replace mobile phones by creating a substitute, as it cannot compete on price or convenience. The video game industry should embrace the mobile trend by developing complements, rather than substitutes.

Finally, the innovated controller may also pose threat to the industry if the technology is not perfected – or close to it. Video game controllers make big promises for the future, but failure to deliver the technology can result in unsatisfied and frustrated consumers. There are some clear flaws associated with the new features of future video game controllers. With motion sensor video game controllers (i.e. the Wii), technical difficulties are abundant, and users and often left shaking their controllers furiously, trying to work out a glitch. In terms of “button free gaming”, 90% of input capabilities are eliminated – which cannot be made up for purely with the appreciation of motion sensor technology. In addition, touch screen gaming has been criticized for eliminating the need to any timing or skill from the user, therefore rendering many games to be regarded as “boring”28. For these reasons, perhaps the video game industry should focus on

27 Wingfield, Nick. "Nintendo's Wii U Takes Aim at a Changed Video Game World - NYTimes.com." The New York Times - Breaking News, World News & Multimedia. 24 Nov. 2012. Web. . 28 Wong, David. "The 6 Most Ominous Trends in Video Games | Cracked.com." Cracked.com - America's Only Humor Site | Cracked.com. 13 June 2011. Web. . developing their niche products, instead of attempting to compete through the use of technology that may not have a place in video game hardware.

3.6 3D Technology

Video games that have been integrated with 3D technology have emerged in 2011, but are being revised and improved on a perpetual basis. With the wave of next-generation video gaming of 2013, it is predicted that new video game hardware will provide players with an unparalleled gaming experience via realistic physics and high-definition three-dimensional graphics29.

Perhaps one of the most exciting technology trends in the video game industry is a feature called “dual play”. Made possible with three-dimensional technology, dual play allows users to view two different images from the same screen, with two different user perspectives.

Much like traditional 3D technology, dual play overlaps two images simultaneously on the screen. Though, instead of combining these images – which is what traditional 3D glasses would do – the dual play glasses allow the player to block out one of the images so that they only see their own character perspective in the game30.

29 Molina, Brett, and Mike Snider. "New hardware may be game changer for video game sector." USA TODAY: Latest World and US News - USATODAY.com. 26 Jan. 2013. Web. . 30 Martin, Peter. "New Video Game Technology - Best Split-Screen Video Games - Esquire." Esquire. 17 Apr. 2012. Web. .

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This technology addresses the long-standing gaming phenomenon called “screen watching” – a form of cheating when two players are playing a first-person shooter game, and one opponent looks at the other opponent’s portion of the split screen to find out where they are so that they can win the game. Thus, it is an incredibly attractive feature for the users in the first- person shooter game market. Therefore, it can be opportunistic for the publishers and developers of such games to explore this technology and to consider making the investment to integrate it into their video game offerings. Furthermore, this innovation may become a threat for firms in the first-person shooter game market if competitors master the technology to the point where other firms are no longer able to compete innovatively.

3.7 Second Screens

The “second screen revolution” is a trend that has emerged in the past year, and is expected to play a larger role in the video game industry in 2013. For example, the tentative

GamePad offers an additional point of view beyond the TV screen, and the user can even completely switch their game over from the TV screen to the GamePad screen. The handheld

31 Martin, Peter. "New Video Game Technology - Best Split-Screen Video Games - Esquire." Esquire. 17 Apr. 2012. Web. . Vita also uses second screen technology: Players using the device are able to simultaneously compete against players using the console. In addition, players using the console are able to use the Vita to view additional information about game play in real time. In addition, there’s the

SmartGlass: a companion application for Xbox 360, which is compatible with Windows 8,

Windows Phone, iOS, and Android devices. SmartGlass enables mobile devices to serve as an interactive second screen, a remote controller, or a map for the new game32. According to Ken

Levine, co-founder of Irrational Games, "You have to be incredibly flexible and incredibly willing to learn how to figure out how to bring quality to different types of experiences and different platforms and with different payment models”33. Thus, in developing next-generation video games and consoles, developers are using cross-platform technologies to provide the user with always-improving video game experiences. In 2013, a prominent theme in the video game industry will include each of the major video game firms focusing on new ways to spread games, as well as additional content and interactive features across several screens.

The second screen trend can be both opportunistic and threatening in the video game industry. Second screens expose another feature of the industry that is yet to be saturated, so there is a lot of value that has yet to be realized with second screen technology. Opening up second screens to competitive platforms will likely strengthen existing services while securing current and next-generation platforms by empowering users with more flexibility with their device preference. Though, the second screen also empowers smartphones, tablets and other handheld devices, which fortifies the mobile transition trend – a major threat to the traditional competitors in the video game industry.

32 Tufegdzic, Pamela. "Second Screen Revolution in Game Consoles " Market Intelligence | Market Research Firm | Market Research & Industry Reports & Analysis - IHS iSuppli. 15 Nov. 2012. Web. . 33 Molina, Brett, and Mike Snider. "New hardware may be game changer for video game sector." USA TODAY: Latest World and US News - USATODAY.com. 26 Jan. 2013. Web. . 2.0 Economic Environment

In addition to concentrating on the North American market, Electronic Arts Inc has diversified its operations to include Asia and Europe (Electronic Arts Inc Annual Report).

Although China is the largest economy in Asia, its ban of game consoles creates a barrier to entry for many video game developers (Gaskin, 2007) and will thus not be included in the economic indicator study for the purpose of this report. Japan will be used to represent the economy of Asia instead.

2.1 GDP

The GDP growth is a popular and arguably the most important economic indicator which is used to determine the prosperity and health of any economy with its focus on the total dollar value change of that specific country. Real GDP by expenditure is a sum of consumption, government spending, investments and net exports.

The most recent data for year 2012 depicts a variation in terms of GDP for all three economies. The European Union staggers at a growth of zero, Japan is exhibiting lower than usual growth while the U.S. is approaching its five year high in GDP growth. Looking back historically, the 2008 recession had a clear impact on all three of the markets being studied by showing the true impact of globalization and its overriding nature of market diversification efforts (Appendix A: GDP by Expenditure). All three major economies are developed thus the reason why the changes in GDP growth throughout the years seem to be positively correlated.

This is seen as a threat in terms of diversifying the impact on revenue during times of economic crisis since the economies at hand will all be experiencing economic duress.

While the GDP focuses on the general outlook for economy at hand, it is important to focus on the consumption part of expenditure the equation since video game developers rely heavily on the sales of their goods in order to meet expected earnings by the company and investors alike.

The finding interestingly depicts that although Japan’s GDP growth is currently at a much lower rate then that of the U.S. and EU, the Japanese consumer confidence exceeds that of both economies. Thus although the Japanese economy is doing poorly as a whole, consumers are still confident in the performance and state of the economy along with their financial situation

(i.e. saving less and having job security). The EU has the lowest consumer confidence followed by the U.S. (Appendix B: Consumer Confidence). This indicates that consumers have a different view as to how they handle their personal finances and what their future outlook is despite of current conditions. The varying consumer confidence levels are an opportuntity for relatively stable sales in times of economic volatility.

Before being able to determine the true financial capacity of consumers in each of the identified economies, one must first determine what the price levels are through the analysis of the Consumer Price Index which measure the change in the price level of goods purchased by households.

2.2 CPI

As consumption is highly sensitive to the rate at which prices change, it is opportunistic to operate in economies where prices do not fluctute and become either unaffordable for consumers or unprofitable to suppliers (Appendix C: Customer Price Index). The CPI of any given economy also affects exchange rates which can create significant losses for a cross-border company. In order to be able to anticipate sales growth or decline as well as foreign exchange fluctuations, it is beneficial to extrapolate a CPI trend. However, the federal reserve, which has a high impact as to what the CPI rate is through its fiscal and monetary policies, predicts a stable rate of approximately 2% (Appendix D: CPI Forecast US). This is an opportunity for any industry that is sensitive to inflation due to heavy reliance on sales. Japan has a lower prediction of CPI levels in comparison to the U.S (Appendix E: CPI Forecast Japan). This outlook symbolizes stability and is an opportunity to industries involved in sales distribution such as the electronic games industry. Finally, a similar prediction is seen for the European Union in terms of expected inflation in the next two years (Appendix F: CPI Forecast Europe). The industry can expect stability in terms of sales and the profitability on their margin.

2.3 Disposable Income

Having determined the relative price stability for all economies in which the industry operates, it becomes crucial to look at the level of disposable income consumers have after the adjustment of inflation.

Real Disposable Income Growth (%) 3.00

2.00

1.00 European Union 0.00 Japan 2008 2009 2010 2011 2012 2013 2014 2015 2016 United States Growth (%) Growth -1.00

-2.00

-3.00

After the 2008 recession, the European Union has experienced great difficulty in recovery

(Appendix G: Europe Disposable Income) 34. The low consumer confidence has created a deficit

34 Economist Intelligence Unit. Disposable Income. 2013. 24 January 2013. . in real disposable income growth as individuals prefer to save instead of spend due to job insecurity and poor economic conditions. However, this trend of savings has been forecasted to change greatly in the years to come thus providing an excellent opportunity for sales growth. The video game industry could capitalize on this opportunity by focusing their marketing efforts on the UK market, fully aware that the people in the UK have experienced a recent surge in disposable income and are more likely to be able to afford the rather hefty price tags that are associated with video game purchases35. Coupled with its high consumer confidence, Japan has the highest disposable income growth although it is expected to decrease in the years to come.

This is certainly an opportunity to the industry, as the demand for luxury goods like video games increase when disposable income increases. Finally, the United States disposable income growth has recovered post-recession and is predicted to remain stable in the years to come providing further sales growth opportunity. Again, because the USA is such an immense market in the video game industry, these numbers signify considerable opportunity. Americans have more disposable income on average, meaning that they are more likely to be able to afford luxury goods like entertainment. With the average video game priced at $67 USD (Appendix L: Sales

Information) 36, excess disposable income among a population will certainly increase the likelihood of the population having a greater percentage of video game users and buyers than the populations that do not have a notable amount of disposable income. Thus, the increase in forecasted consumer income in a majority of the major markets can be associated with an overall opportunity for the video game industry.

2.4 Foreign Exchange Rate

35 Euromonitor International. "Annual Disposable Income." Passport GMID. 2012. Web. . 36 Entertainment Software Association. "2012 Essential Facts about the Computer and Video Game Industry." The ESA., 2012. Web. . Since technology firms, and more specifically video game companies, are focusing on a centralized organizational structure37. This exposes the firm to foreign exchange rate risk. If the

U.S. dollar strengthens against any one of the currencies, then the foreign exchange rates may have an adverse impact on the financial condition of the firm.

Over the past five years, high periods of volatility within the foreign exchange market have occurred. The periods with the high peaks imply that the USD had weakened against the relative currency. This is an advantage for industries which rely on the export of their goods because not only will consumers demand the lower priced good due to the exchange rate but the company will also gain global competitiveness. It is evident that the USD/EURO exchange has exhibited the largest amount of volatility and thus exposes the industry to the most foreign exchange rate risk. It seems as though the USD/EURO exchange is headed to an appreciated value, thus making exporting from the U.S. less attractive. Since the GDP is directly related to the value of the currency of that particular country, it is not a surprise to see that the U.S. dollar is

37 Brandel, Mary. “IT Centralization is Back in Fashion”. March 8 2010. . Accessed January 20th 2013. appreciating relative to the Japanese Yen due to Japan’s -3% GDP growth for 2012.

The EURO/USD prediction as per the Morgan Stanley forcast, is anticipating a depreciation of the currency meaning that it will cost less Euro to purchase one Dollar in 2013 and 2014

(Appendix H: EURO/USD Forecast). The low forecast predicts a par value in the year 2014 making it a definite opportunity for U.S. exporters to Europe where consumers are now able to afford more of the foreign goods. During the time period where the U.S. dollar is high relative to the Euro, American consumers will want to import from Europe whereas European consumers will value their own goods more relative to the more expensive U.S. goods thus creating a weakness. The trend is forcaseted to change and allow for the American dollar to depreciate thus bringing European consumer interest back into the U.S. economy.

In the forecast conducted by Morgan Stanley, the U.S. dollar is anticipated to appreciate against the Japanese Yen for the next few years (Appendix I: YEN/USD Forecast). This means it will become more costly for the Japanese consumer to acquire one U.S. dollar, even in the long-run for the low forecast. This is a weakness for an exporting firm as consumers in Japan will reconsider purchasing goods from American companies and prefer to buy within their own economy. Foreign exchange rate risk is thus a weakness to the video game industry due to the uncertain nature of currency fluctuation. It comes as no surprise that many organizations which operate internationally use currency hedging in order to minimize some of this risk.

3.0 Socio-Cultural Environment

The nature of the video game industry is technology-based, making it quite neutral geographically. This is because technology can do distributed without geographic boundaries – especially when digital sales and online downloads are involved as well. Though, the main regions of operation in the video game industry can be identified by valuing the video game industry in each national marketplace throughout the world. According to Euromonitor

International (Passport GMID), the USA is the largest video game market – valued at $19,834.6 million USD in 2011, Japan is the second largest video game market – valued at $9,773.4 million

USD in 2011, and the United Kingdom is the third largest video game market – valued at 4,943.5 million USD in 201138. It is noted that these countries have been the leading markets in the video game industry since 2006.

Conversely, for the more specific video game software market, the largest national markets in the industry remain the same: the USA is the largest video game software market – valued at $8,729.9 million USD in 2011, Japan is the second largest video game software market

– valued at $3,998.7 million USD in 2011, and the United Kingdom is the third largest video game software market – valued at $2,309.8 million USD in 201139.

3.1 Trends in the Three Major National Markets

3.1.1 Age and Gender The target market within the video game industry is generally characterized by 30-35 year old males. According to the ESA (Entertainment Software Association), in 2004 the average video game player was 29 years old, but the average buyer was 36 years old. More specifically, this 2004 study found that 34% of video game users were under 18 years old, 46% of video game users were between 18 and 50 years old, and 17% of video game users were over 50 years old. In addition, this study found that 59% of video game users in the industry are male, while 39% of video game users in the market are female (Appendix J: Gamer Demographics 2004)40.

38 Passport GMID. "Video Games”. Euromonitor International, 2012. Web. . 39 Passport GMID. "Video Games”. Euromonitor International, 2012. Web. . 40 Entertainment Software Association. "2004 Essential Facts about the Computer and Video Game Industry." Princeton., 2004. Web. . Eight years later, the ESA conducted the same study. While the numbers varied slightly, the overall findings were generally the same: In 2012, the average video game buyer was 35 years old, the gap between men and women users in the industry had closed substantially, but men still represent the majority of video game users in the industry – 53% of users are male, while 47% of users are female. This is a major increase from 39% in 2004. It was also noted that women aged 18 and older constituted 30% of the overall market – substantially more than the

18% that is contributed by boys 17 and younger (Appendix K: Gamer Demographics 2012)41.

While the age of users seems to remain stagnant – around the ages 30-35 – there seems to be a trend in the increasing amount of women users in the industry. This will not likely pose a threat to the industry, as females are evidently purchasing the masculine-based video games that have always overrun the market. Despite the increasing amount of women entering the video game playing field, it is likely that 30-35 men will continue to be the largest market in the video game industry. Thus, the male population of this age group will be examined for the three main video game markets: USA, Japan and the United Kingdom.

From the years 2000 to 2010, the population of males aged 30-34 years old in the US experienced a 2.7% decrease. This decrease in 30-34 year old males in the US is certainly threatening to the industry, as it represents a decrease in the video game industry’s largest target market. Though, it is predicted that 10 years later, in the year 2020, the 30-34 year old American male population will increase 15.2%42– which is opportunistic increasing trend, as it represents a greater number of individuals that are most likely to purchase video games (Appendix L: The

Future Demographic)43.

41 Entertainment Software Association. "2012 Essential Facts about the Computer and Video Game Industry." The ESA., 2012. Web. . 42 Passport GMID. "United States of America in 2030: The Future Demographic”. Euromonitor International, 2012. Web. < www.portal.euromonitor.com.proxy.library.carleton.ca/Portal/Pages/Magazine/TopicPage.aspx>. 43 Passport GMID. "United States of America in 2030: The Future Demographic”. Euromonitor International, 2012. Web. < From the years 2000 to 2010, the population of males aged 30-34 years old in Japan decreased 5.8%. This decrease in 30-34 year old males in Japan is threatening to the industry, as it represents a decrease in the video game industry’s largest age group in Japan. In addition, it is predicted that 10 years later, in the year 2020, the 30-34 year old Japan male population will drop a substantial 21.6%44. This is an extremely threatening demographic trend, as the individuals in Japan – the video game industry’s second largest market – has already dropped and will continue to plummet in coming years. This is a threat to the industry, as it will probably result in decreased video game sales in Japan in coming years (Appendix L: The Future

Demographic)45.

From the years 2000 to 2010, the population of males aged 30-34 years old in the UK decreased as well – by 18.2%. This decrease in 30-34 year old males in the UK is threatening to the industry, and represents a decrease in the video game industry’s largest target market in the

UK. Though, it is predicted that 10 years later, in the year 2020, the 30-34 year old English male population will increase again, by 21.6%46– which is quite substantial. This increasing trend is opportunistic, as it forecasts that there will be a greater number of individuals in the UK in coming years that will be most likely to purchase video games (Appendix L: The Future

Demographic)47.

3.1.2 Internet Users The amount of internet users in the video game industry’s three largest markets is extremely relevant to the thriving or dwindling of industry success. Due to the emergence of

www.portal.euromonitor.com.proxy.library.carleton.ca/Portal/Pages/Magazine/TopicPage.aspx>. 44 Passport GMID. "Japan in 2030: The Future Demographic”. Euromonitor International, 2012. Web. . 45 Passport GMID. "Japan in 2030: The Future Demographic”. Euromonitor International, 2012. Web. . 46 Passport GMID. "UK in 2030: The Future Demographic”. Euromonitor International, 2012. Web. < www.portal.euromonitor.com.proxy.library.carleton.ca/Portal/Pages/Magazine/TopicPage.aspx>. 47 Passport GMID. "UK in 2030: The Future Demographic”. Euromonitor International, 2012. Web. < www.portal.euromonitor.com.proxy.library.carleton.ca/Portal/Pages/Magazine/TopicPage.aspx>. downloadable data and video games that are made available online, there is certainly a positive correlation between the number of internet users in a geographical region and the number of video game users in the same region. The following chart will depict the growth (or lack thereof) trend of internet users in each of the video game industry’s three principal national markets. It should be noted that 6 years of data will be used to analyze this trend, as well as the following trend. Though a 10-year time period was suggested, 6-year periods were available, while the findings are still relevant to that of a 10-year period.

In Japan, the number of internet users grew 8.5% from the years 2007 to 2012

(compounded annual growth of 1.6%). This growth is not outstanding, but any positive growth in this market can prove to be opportunistic for the video game industry. Secondly, the number of internet users in the USA grew 9.4% from the years 2007 to 2012 (compounded annual growth of 1.8%). Again, this is growth is somewhat modest, but is still opportunistic and advantageous for the video game industry. Though the growth rate may not seem to signify large opportunities, the fact that the USA is the largest of the markets, making this growth equivalent to over 21,000 million people, makes this growth quite substantial for the industry as a whole. Lastly, the number of internet users in the UK grew 13.9% from the years 2007 to 2012 (compounded annual growth rate of 2.6%)48. Again, this growth is beneficial to the video game industry, as an increase in the amount of internet users in a major market likely signifies an increase in the amount of video game users in that market. The growth of internet users from 2007 to 2012 in numerous countries is depicted below.

48 Passport GMID "Internet Users". Euromonitor International, 2012. Web. .

49

3.2. Socio-Cultural trends in the U.S.

3.2.1 Time Spent Playing Video Games In the USA, there has been a consistent increase in the average time spent playing video games from 2003 to 2012. In 2002, the average time spent playing video games per person per year was 71 hours, 5 years later in 2007 that number was 91. Finally, in 2012, the average time spent playing video games per person per year was 142 hours 50. This increased amount of time playing video games poses an opportunity for the video game industry. This is because this trend suggests a greater interest in video games from the average American, so the video game industry could capitalize on this, and focus their marketing efforts on the American market. In addition, this also means that Americans, on average, will take less time completing each video game, and will require video game purchases at a faster pace to satisfy their video game demand.

Thus, this could be a justifiable reason to stimulate video game development at a faster rate.

49 Passport GMID "Internet Users". Euromonitor International, 2012. Web. . 50 Stevenson, Veronis Suhler. "Time spent with videogames in the U.S. from 2002 to 2012 | Statistic." Statista - The Statistics Portal for Market Data, Market Research and Market Studies. Statista, 2013. Web. . 51

3.2.2 Ratings

According to the ESA, 55.7% of video games had an ERSB rating of E for “everyone” in

2002, 27.6% of video games had an ERSB rating of T for “teens” and 13.2% of video games had an ERSB rating of M for “mature” (Appendix M: Ratings 2002-2003)52. 10 years later, in 2012,

55.9% of video games had an ERSB rating of E for “everyone”, 17.4% of video games had an

ERSB rating of T for “teens” and 26.5% of video games had an ERSB rating of M for “mature”

(Appendix N: Genres and Ratings 2012) 53. Although the proportion of games suitable for everyone remains comparable, it seems that a large portion of the games that were once suitable for teens have been replaced with games that are rated “mature” – meaning that they include violence, profanity or nudity.

This shift to more profane content in video games can certainly pose a threat to the industry. Video games may be banned in certain markets – based on the severity of the content –

51 Stevenson, Veronis Suhler. "Time spent with videogames in the U.S. from 2002 to 2012 | Statistic." Statista - The Statistics Portal for Market Data, Market Research and Market Studies. Statista, 2013. Web. . 52 Entertainment Software Association. "2004 Essential Facts about the Computer and Video Game Industry." Princeton., 2004. Web. . 53 Entertainment Software Association. "2012 Essential Facts about the Computer and Video Game Industry." The ESA., 2012. Web. . resulting in lost revenues in a potential market. In addition, profane video game content is often subject to the scrutiny and complaints of many who insist that these “mature” games are having a negative, corrupt effect on the current generation of video game users. For this reason, mature video games lack of parental support, which can negatively skew video game sales as well.

3.2.3 Parents In the ESA’s “Essential Facts about the Computer and Video Game Industry” report for

2012 stated that the percentage of parents who believe that video games have a positive effect on their children’s lives had dropped to 52%, the percentage of parents who play video games with their children at least once a month had risen to 59%, while the percentage of parents who are present during the purchase of a video game for their household had risen slightly to 90%

(Appendix P: Parents and Games 2012) 54.

This data denotes that parents have become more involved with their children’s video game interaction over the past decade. Perhaps most importantly, this data also reveals that parents are becoming apprehensive of the negative effects that video games may have on the lives of their children. These trends pose a threat to the video game industry, as parental support has become more important because of increased parental interaction, although this parental support has diminished due to the unpleasant nature and possible adverse effects on youth that are associated with playing video games. The previously mentioned, increasingly “mature” nature of video games could also contribute to this statistic. In addition, if parents do not approve of a particular video game, it will not likely be purchased – since 90% of parents are now present during all their children’s video game purchases.

54 Entertainment Software Association. "2012 Essential Facts about the Computer and Video Game Industry." The ESA., 2012. Web. . 4.0 Political-Legal Environment

Due to the broad scope and ever-changing business frameworks of technology companies today, government agencies must constantly update and create new rules and regulations in order to satisfy the needs of both the consumer and producer. The Federal Communications Commission is a government agency which has a department specializing in Media. It promotes competition and diversity while aiding and regulating the transition of media products into the market55. The

Federal Communications Commission is seen as an opportunity for the industry due to the assistance it gives to U.S. media companies.

The competitive advantage in the multimedia and graphics software industry is that of innovation. Being able to safeguard that information and circumventing piracy is a main priority for these companies. The World Intellectual Property Organization Copyright Treaty is a strategic step in the fight against piracy especially when dealing with cross-border countries56.

New members are added into this organization frequently as the trend to fight piracy extends throughout the globe. This is an opportunistic breakthrough for media companies whose sales rely on the innovation of their product and the protection thereof. The Entertainment Software

Rating Board is a crucial element in the integrity of the multimedia industry. It enforces strict guidelines for disclosure and compliance with enforcement penalties such as fines up to one million and product recall57.

Intellectual property rights for online gaming are unique as they target software piracy58.

As a result, Digital Media Rights (DMRs) have a major impact on the video game industry.

55 Federal Communications Commission. Accessed January 14th 2013. . 56 World Intellectual Property Organization. 2013. 24 January 2013. . 57 Entertainment Software Rating Board. 2013. 24 January 2013 . 58 The Video Game Industry. “Piracy Issues”. . These particular rights enforce users to access video game content while imposing regulations and limits on the usage of digital content and devices. Although this is seen as a strength for the video game industry, many users claim that DMRs take away from the communal aspect of gaming through the restriction on the number of consoles a game can be played on. However, with huge video game revenue loss estimates due to piracy such as $817 million in Italy and

$589.9 million in China59, it becomes crucial for the industry to take such drastic actions.

The Telecommunications Act (Section 230) states that operators of internet websites are not responsible nor legally liable for any pirated distribution or selling of software products which occur on that site60. A similar act exists within the European Union called the Electronic

Commerce Directive (Section 14 and 15)61. The Digital Millennium Copyright Act has also included a clause on third-party protectionism (Section 517, Title 17 of the United States Code).

The original owner of the copyright material must file a request for the removal of the pirated material. Although this may seem as a potential to harm the industry, it in fact allows for an efficient and less intimidating way to remove infringement off of the internet. Instead of attacking the entire site and potentially facing uncooperativeness, the website is given a notice buy the DMCA to notify the perpetrator that 24 hours are given to remove the content62. Having the reinforcement to remove pirated material that is otherwise out of the hands of the original copyright owner is a huge opportunity to the industry. The only important aspect to this act is the independent company is responsible to monitor and scan the environment for intellectual property theft as it is up to them to report the case to the DMCA.

There has been a recent shift towards the concern that violent games impact the behavior

59 Ibid. 60 Cornell University Law School. "Legal Information Institute." 2013. 23 January 2013. . 61 Official Journal. "Directive 2000/31/EC of the European Parliament and of the Council." Official Journal (2000): 16. . 62 Centre for Innovation, Law, and Policy. "The Digital Millennium Copyright Act." 2013. 24 January 2013. . of children. News coverage by the media along with numerous studies have all shed a negative light onto the video game sector specifically. Originally implemented to safeguard children from advertisement exploitation on the internet, the Children’s Online Privacy Protection Act has since changed regulations to include online video gaming63. This off-putting image of video games and its impact on children is a threat to the sales of the market segment where parents are the customer.

In recent news, controversy has been ignited over the impact of violent video games on children creating cases of litigation and new law proposals. One such law which was proposed by the state of California asked to prohibit the sale of violent video games to minors. Although this law was dismissed by the Supreme Court due to an infringement on speech rights64, extreme attention was brought to the case leading many more protests and law proposals. A large portion of the demographics appealed to by the industry are minors thus this law change would cause a severe decline in sales. The public image of violent video games and its impact on children already has a negative effect on sales as a result of concerned parents however a law change would create permanent change regardless of public opinion.

A secondary concern in the regulatory impact on the software publishing industry is extended beyond the North American market. China is one of the largest economies in the world and is a market of interest for any company doing business worldwide. Unfortunately, however interested a gaming company may be in the Chinese market, their sales are restricted due to the ban on game consoles since 200065. Although computer games are permitted in the Chinese

63 Kleier, James. "Children's privacy in online gaming." 25 April 2011. COPPA. 24 January 2013. . 64 Stohr, Greg. “Violent Video-Game Limits Struck Down by Supreme Court in California Case”. June 27 2011. < http://www.bloomberg.com/news/2011-06-27/violent-video-game-limits-struck-down-by-supreme- court-in-california-case.html>. 65 Orland, Kyle. “China’s game console ban may soon come to an end”. January 28 2013. . market, developers which focus their sales heavily on games for the console are not able to penetrate the market as much as they would like. There is indication of China releasing the ban on game consoles in the future thereby allowing software developing companies to grow their sales as they enter into the new market while being weary of the major piracy issues occurring within China.

Macro Environment (TESP) Summary

The macro environment is of crucial importance to the video game industry as it is constantly changing and evolving over time. Technological trends are of crucial importance to such an industry. While PC-based gaming is facing a decrease in popularity, mobile games can be a threat to video game companies that focus solely on PC platforms. Thus, in order to overcome this threat companies must embrace emerging technologies in order to stay competitive. The forecasted increase in disposable income is a definite opportunity for the video game industry as consumers will engage in the purchasing of products or applications they were otherwise unable to during the recessive economy. The fluctuation and uncertainty of the foreign exchange rate poses a threat to the revenue stream a video game company receives. Perhaps currency hedging would be ideal in such an industry which operates on such a multinational platform. The threat of an aging population which would otherwise opt out of gaming has become a newly recognized issue within the video game industry. However, the increase in amount of mobile and internet users (along with some overlap due to the innovative smart phone market), allows this industry to capitalize on a growing market segment through the introduction of products for such platforms. One of the most major threats to the video game industry is certainly software piracy. With the increase of ease and simplicity to imitate intellectual property, video game companies are constantly trying new ways and joining organizations such as WIPO and DMR to limit the impact of piracy onto their revenue streams.

5.0 Industry Overview

Although sales have been increasing, the growth of sales within the U.S. video game industry is seen to be experiencing a decline of in the last three years66. As a result of economic turmoil and recession recovery, companies are continuing to downsize employees and overhead costs. The

ROA, ROE, and ROI have all experienced increases over the last three years however the ROI had experienced a minor setback in 2011 (Appendix Q: US Industry Overview). This decrease in the ROI could have lead companies to not undertake certain investments thus impeding potential growth in the future.

Japan has experienced an almost identical trend to that of the United States within the Video

66 BARNES Reports. Worldwide Software Publishing Industry Report. 28 January 2013. < http://web.ebscohost.com.proxy.library.carleton.ca/bsi/pdfviewer/pdfviewer?sid=654cead a-3edb-4a40-99d4-20daaaf06fa4%40sessionmgr13&vid=4&hid=18 >. game industry over the last 3 years67. The ROE, ROA, and ROI have experienced a steady increase unlike that of the US industry (Appendix R: Japan Industry Overview). This shows economic strength as well as promising growth potential within the Japanese video game industry.

Similar to the Japanese and the US industry results, there has been a decline in the number of establishments as well as the number of employees over the last three years68. This trend is expected to continue although at a slower pace in the years to come. The ROA and ROE have increased over the past three years with the most recent numbers being 9.3% and 21.2% respectively (Appendix S: Europe Industry Overview). This shows strong performance despite the recession recovery that has greatly impacted Europe. The return on investments has been on the decline showing potential weakness in future investments thus hindering the potential growth of the video game industry.

The sales within the video game industry, in all three regions, have been increasing for the past three years although a slowdown in sales growth is predicted to occur for 2013. The adaptation of consumers to free online games and inexpensive mobile application is a likely factor in the deterioration of software sales. Furthermore, as the video game market is highly fragmented, it

67 BARNES Reports. Worldwide Software Publishing Industry Report. 28 January 2013. < http://web.ebscohost.com.proxy.library.carleton.ca/bsi/pdfviewer/pdfviewer?sid=654cead a-3edb-4a40-99d4-20daaaf06fa4%40sessionmgr13&vid=4&hid=18 >. 68 Ibid. will continue to experience amplified competitive pressures, which will hurt overall profitability.

However, the launch of new hardware consoles from Microsoft and Sony (expected to be released in 2013) will surely improve the industry sales looking forward. The employment levels in the United States, Japan, and Europe have all decreased in the past three years and are forecasted to continue to decline. This is a result of the fast-paced and revolutionizing technology that the industry is heavily exposed to. Many business functions are being eliminated and are replaced with efficient information systems to manage the complex gaming information thus lowering overhead costs. As technology evolves, companies within the industry will continue to utilize its cost effective benefits and strive for maximum profits.

The year 2010 yielded in a poor growth percentage for all three regions of operation

(Appendix T: Industry Growth). However, Western and Eastern Europe exhibit much different results during this time period where Eastern Europe exhibited a growth rate of approximately

5% whereas Western Europe struggled to keep the rate above zero. An organization is thus able to benefit from diversifying its operations not only globally but also within a specific continent such as Europe in this case. Even with the release of major game consoles post-depression, each one of the three regions struggles to show industry growth recovery. The forecasted growth rates are all expected to remain just above the zero mark proving the industry has a weak outlook.

6.0 Strategic Group Map

Categorized under the Internet and Software sector, Software Publishers is the main industry analyzed. A subcategory of the software publishing industry is that of the video game industry; the main focus for the purpose of this report. The most pertinent distinguishing classifications used to select the direct competitors were the breadth of products (main classification used) as well as market share. Primarily, a list was created to list all of the players within the video game industry regardless of any specific classification (Graph U: Video Game

Industry Players). The primary classification was to eliminate the companies which also produce hardware since the optimal direct competitor only produces and develops video game software.

Eliminating the large players such as Nintendo, Microsoft, Warner Bros Entertainment, and Sony totaled approximately 50% of the global market share of all the industry players. The next classification was to select the software producing video game companies with the largest market shares. Activision Blizzard Inc, Electronic Arts Inc, Ubisoft Entertainment, Take-Two

Interactive, Bethesda Softworks, THQ Inc, and Konami Corporation.

2011 GLOBAL MARKET COMPANY NCIS ICS ANNUAL SALES SHARE Activision Blizzard Inc 511210 7372 $3.257 B 11.0% Electronic Arts Inc 511210 7372 $3.415 B 8.0% Ubisoft Entertainment 423430 5045 $1.061B 3.2% Take-Two Interactive 511210 7372 $0.825 B 2.4% THQ Inc 511210 7372 $0.83 B 1.3% Konami Corporation 334119 3577 $0.14 B 0.3%

For comparative purposes for use in creation of the strategic group maps, console-based video game notoriety and computer-based video game notoriety was a compared metric.

Essentially, this translates into the question: Is the firm more widely recognized for developing and publishing video games for use on traditional consoles or for use on computers? This metric was contrived by analyzing the global top 10 video games for console use and the global top 10 video games for computer use. Firms were weighted towards the console side or the computer side based on how many ranked titles they had developed or published on each list, as well as how high or low these titles ranked (i.e. a firm would be more heavily weighted towards console or computer if their title ranked high on the list rather than if it ranked low on the list).

THQ and Konami failed to publish any of the top 10 video or computer games of 2011, and therefore have not been included in the largest players in that are exclusive to the video game software industry, which has been found to be: Activision Blizzard, Electronic Arts,

Ubisoft and Take-Two Interactive (Appendix W: Strategic Group Map Calculations).

Market share in each of the main markets of operation (USA, UK and Japan) served as the second axis for comparative purposes. Thus, video game notoriety and computer game notoriety will act as the X-axis in the strategic group map. Conversely, high and low market share will act as the Y-axis in the strategic group map:

As depicted in the strategic group map above, Take-Two Interactive and Ubisoft are quite console-based, Activision Blizzard is mid-range between console and computer notoriety, and

EA is far more heavily weighted in computer-based video game notoriety. Activision Blizzard has the strongest presence in the US market, while EA’s presence is still quite significant.

Among competitors in the video game software industry, Activision Blizzard has 23.3% market share, Electronic Arts has 16.1% market share, Ubisoft has 8% market share, and Take-Two

Interactive has 4.9% market share in the US market69.

As depicted in the strategic group map above, Electronic Arts actually has a stronger market presence than Activision Blizzard in the UK market. Among competitors in the video game software industry, Electronic Arts has 19.3% market share, Activision Blizzard has 11.6% market share, Ubisoft has 8.8% market share, and Take-Two Interactive has 3.6% market share in the UK market70.

69 Passport GMID. "Video Games”. Euromonitor International, 2012. Web . 70 Passport GMID. "Video Games”. Euromonitor International, 2012. Web .

As depicted by the strategic group map above, none of the examined firms have significant market share in the Japanese market. This is because the video game market in Japan is dominated by domestic firms like Capcom and Konami, as well as by firms that also develop video game hardware, such as Nintendo. Among competitors in the video game software industry, Electronic Arts has 0.6% market share, Activision Blizzard has 0.1% market share, and

Ubisoft and Take-Two Interactive have no notable market share in the Japanese market71.

7.0 Five Forces Analysis

7.1 Rivalry or Direct Competitors

When determining the direct competitors within the industry, it is important to identify the according NAICS code in which the organizations operate. It becomes evident that video game console organizations are to be excluded from the direct competitor analysis as these firms operate on a widely diversified basis whereas video game developers compete on a narrower

71 Passport GMID. "Video Games”. Euromonitor International, 2012. Web . basis. The figure below illustrates the fact that the video game industry operates under the

NAICS code 511212; Video Games.

Sector: Publishing Industries 511 Subsector: Software Publishers 5112 Industry: Video Games 511212

Direct competitors in the video game industry are: Activision Blizzard (ATVI), Ubisoft (UBI), and Take-Two Interactive (TTWO). Activision Blizzard had the highest growth of its competitors in 2008 surpassing a 41% revenue growth rate from 2008-2009 (Appendix W:

Activision Blizzard Ratios). However the recession’s impact on sales was depicted on the next income statement with a sharp decline in the growth to fewer than 4%. The stifled growth proves that even the strongest of competitors are not immune to a recessive economy.

Activision Blizzard currently employs 7300 individuals with revenue per employee value of $615,753. This astonishing value is the largest within the industry and can be attributed to a combination of productivity and profitability of the organization as a whole. Activision Blizzard is able to carefully balance employment numbers with forecasted demand for their products. In such a way that has set them apart from competitors.

Ubisoft experienced a more sluggish revenue growth from 2009-2010. However, this number quickly changed in the fiscal year 2011 when revenue growth rapidly inclined to over

19% as a result of new product releases (Appendix X: Ubisoft Ratios). This swift change draws attention to the importance of being continuously innovative and releasing new products in order to keep positive revenue streams. The total assets for this company have been declining over the last few years and thus the return on assets has fallen as well. Employing 6,927 individuals as of

December 2011, the revenue per employee is $163,287, the lowest in the industry. Although this can be related to the low productivity of employees, it can also be attributed to the general lack of sales.

Take-Two Interactive has experienced a volatile fluctuation in revenue over the last 3 years. A revenue growth analysis shows the sensitivity of the video game industry regardless of the economic situation where one competitor can exhibit 41% growth and another has a 43% growth decline in the same year (Appendix Y: Take-Two Interactive Ratios). The ROI for Take-

Two Interactive was the lowest of the competitors analyzed with (21.7%). This shows definite weakness within the company’s ability to invest in lucrative projects. The total assets within this organization have remained stable, similarly to Activation Blizzard.

Activision Blizzard has managed a return on assets figure that has been increasing relatively high in comparison to their stagnant asset values. This change represents more efficient operations rather than an aggressive revenue increasing strategy. With the least amount of employees at 2,235 the revenue per employee is a humble $395,361.

In order to remain competitive within a cutting edge business such as the video game industry, a firm must not only be able to continuously release new products but ensure that these products become worldwide hits. In this way, a video game publisher can establish prominent exposure within the market. In 2009 and 2010, video game publishers were unable to create a presence within the top ten release titles. However, 2011 included hit titles from Activision

Blizzard and Ubisoft allowing for large increases in revenue streams as well as brand recognition

(Appendix : Top Ten Video Games 2009-2011). Due to the prominence of both direct and indirect (i.e. game console manufacturers) competition within the video game industry, the rivalry is very fierce. The requirements of asset outlays and capital are strenuous for all companies within the industry, thus the rivalry ranks 8 out of 10.

7.2 Threat of Entry Required Equity

Traditionally the video game industry featured limited competitors distinguished by their high access to capital. As technology for development, marketing, and distribution of video games has rapidly decreased in cost, so has the barrier for entry, thus increasing the threat. The relative importance of a valuable brand associated with video games has risen to mitigate some of the threat. A shift of the initial entry costs as well as normal operating costs has transferred away from being primarily research and development and in to marketing and customer service.

New entrants in the video game industry that are fully vertically integrated are rare, as most new competitors will focus on one of; development, marketing, and publishing72. There is a strong correlation between the fewer the amount of business functions a new firm in the industry performs and the amount of new entrants. Although the threat of new entrants is significant in regards to competition on a single business level, the threat is diminished, as the competition will more commonly only emerge to compete with a third of fully integrated business within the industry.

Distribution Methods

Distributors such as Microsoft (MSFT) and Apple (AAPL) have recently taken steps to facilitate the common use of digital distribution methods for video game software such as a new

72 S Hotho, K Champion. "Small businesses in the new creative industries: innovation as a people management challenge." Journal of Management History (Archive) (2011). development membership system (refer to the Power of Buyers section). Such actions dramatically increase the threat of entry due to the fact that developers can more easily manage a publishing role for their product73. The slightly less impactful, yet still significant impact of cheap digital distribution methods results in profits normally lost from used games being sold or traded. Although the exact used game industry value is undeterminable GameStop was able to generate $1.2B on used game and console sales in 201174.

Server Ownership

A large cost associated with many online games is maintaining a server capable of scaling to traffic requirements. The inherent characteristics of such a system makes forecasting the exact amount of customers extremely financially important. If a server is created with the capability of maintaining quality gameplay for too few customers the server will crash or customers will have to queue, drastically de-valuing the service, and associated brand. On the other extreme of anticipating more customers than in reality a large overhead has been incurred to pay for more than is necessary. Not all of video games require costly servers however of the top 10 selling video games of 2011, 9 require a server75.

Although server ownership diminishes the threat of entry, new services such as the “laaS” provided by Softlayer Technologies based in Dallas Texas, allow for the outsourcing of servers with more practical scalability76. With the ability to outsource servers, risk from potential entrants is diminished and the barrier to entry is reduced.

73 Irwin, Mary Jane. "Indie Game Developers Rise Up." Forbes (2011).

74 Sapieha, Chad. "Sony’s proposed patent has power to kill used game sales." Financial Post (2011). 75 Morris Chris. “2009’s Top Selling Video Games”. CNBC. . Accessed March 15 2013. 76 Softlayer Technologies. Dedicated Servers. 22 January 2012. 22 January 2012. .

Established Brand Image

The creation of sequels is a popular marketing tactic in the entertainment industry, for multiple reasons. An established fan base is a reliable market after the success of a stand-alone title where a completely new title accompanies a much larger risk of failure. Production costs of sequels are often much cheaper than stand-alone titles as, depending on the game, a lot of the code is recyclable77. Of the 10 top selling video games in 2012, 9 were sequels78.

The forces hightening the threat of new entrants in the video game industry are cheaper technology, established third party distributors, and established third party server rental services.

These forces are slightly counteracted by the need for equity, and an established brand image.

7.3 Substitutes

Substitutes for video games are often non-existent due to the fact that consumption of video games satisfies a very specific need that modern consumers have developed79. In terms of casual gamers, substitutes for specific games are however a reality and do not solely consist of other video games. The major substitute good for video games is films, in DVD, Blu-Ray, and electronic formats80. The relationship between movies and video games is a peculiar one however because in some circumstances films and video games can act as complimentary goods or substitute goods. Examples of such a phenomenon are when either the video game or the movie is an extension of a brand to add dynamism and more consumption potential for

77 Weber, Rachel. Treyarch defends Call Of Duty Engine. 10 October 2012. 30 January 2013. .

78 CNBC. The Best Selling Videogames of 2012. 2012. 29 January 2013. .

79 May-Li Seah, Paul Caims. Form Immersion to Addiciton to Video Games. Study. London, York: University College London, University York, 2008. 80 Franich, Darren. "Videogames vs. Movies: Have games replaced films as the modern popular narrative medium?" Pop Watch (2011). consumers81. Examples of such a phenomenon were the Pokémon, and Tomb Raider films created as an extension of the previously “video game only” brand. The firm’s large profits from the films sales can be attributed to the video games already in mass distribution. The vice versa situation occurs with many popular films such as the Star Wars and Toy Story series, where the film’s success led to video game success.

Due to the fact that consumers are likely to invest in enabling technologies such as a television and surround sound system that enhance the consumption experience of both films and video games, it is likely that a movie enthusiast will also invest in video games as the relative consumption cost is cheaper than a non-movie enthusiast who would have to purchase a large television specifically for video game consumption adding to the argument that films and video games can in fact be complimentary goods. However, due to the fact that films and video games are consumed with similar, and in often cases the same technology, consumers often decide whether to consumer either a video game or a film, and can have even consumed both at the same time. This consumption decision is not as significant in terms of its relevance to impacting sales as the previously mentioned diminished relative consumption cost because the consumption process is post-sale.

Another substitute product for video games is traditional toys and games. The traditional toys and games industry worldwide is valued at $72.4B USD, where the video game industry is valued at $66.2B including hardware82. This statistical difference needs to be taken with a grain of salt as not all segments align in both industries83.

81 Murray, Simone. "Brand loyalties: rethinking content within global corporate media." Sage Journals (2005): 415- 435.

82 Passport GMID "Internet Users". Euromonitor International, 2012. Web. . 83 Ibid.

Infants consume very few video games

The reality of toys acting as substitutes for video games is often circumstantial dependent on the specific price. Due to the fact that video game prices can range from $0-$60+, each game may have its own respective potential substitute. More expensive games that are retailed for $60 will compete with remote control cars and other toys in similar price ranges where free or $1 downloadable mobile phone games will compete with bouncy balls or other cheap toys.

Although, cases where specific video games combine with traditional games and toys in order to enhance a brand experience the relationship are rarer than with films, they do exist.

The competition becomes more significant between traditional toys and games against video games depending on the distribution channel. In a study conducted by Texas Tech.

University 22% of respondents had made impulse purchases on the Internet where as 100% had made impulse purchases in a physical store84. The implications of this study can be inferred to mean that the competition is fiercer in physical stores then ordering online.

7.4 Power of Suppliers

84 Sreedhar Rao Madhavaram, Debra A. Laverie. "Exploring Impulse Purchasing on the Internet." Consumer Behaviour Study. Texas Tech. University, n.d. Components of the supply chain external to the standard video game company are:

Component Manufacturers, and in some cases Developers and Specialists. Console and smart phone manufacturers, although make up a majority of the buyers, are still integrated within the supply side of the value chain to a limited degree.

Component Manufacturers: Component manufacturers have noticed a steady decline in terms of their relative supplier power in the past decade due to the commoditization of the cd manufacturing process. Outsourcing has enabled industry participants to purchase physical cd’s for $0.15-$0.44 each (Appendix A2: CD Prices). The relative supplier power for the component manufacturer decreases even further with the increase in physical product quantities. Due to the irrelevancy of component manufacturer’s power, there are no “major suppliers”. Component manufacturers are extremely fragmented as countless Chinese firms sell CD’s, however these companies are not on the stock exchange and are generally foreign owned due to their reduced labor costs. The commoditization has made the component manufacturers price takers, as the competition is extremely fierce.

Developers and Consultants: Most established video game companies have a trained development staff on payroll, which supplies and creates the code for the products. Sometimes however external developers are contracted in order to help i.e. supply labor. In other cases expert consultants are contracted to aid with video games in need of specific information. An example of this occurring was when Navy SEAL’s were hired to share military information with the Medal of Honor© video game series85. Other cases where more complex knowledge is required, is for video games with virtual economies. Economists and Financial Analysts are hired

85 Mail Online. "Seven SEALs from bin Laden team are punished for sharing military secrets with creators of video game Medal of Honor Read more: http://www.dailymail.co.uk/news/article-2230296/7-Navy-SEALs-team- 6-punished-sharing-military-secrets-Medal-Honor-video-game-creator." Mail Online (2012). to create virtual economies that stimulate buying as much as possible, with virtual currency with real dollar value86. The relative power of these developers is dependent on how essential the knowledge the contractor adds to the creation process is. In most contracting situations, a specific task will need to be accomplished and therefore little negotiating room is available.

Contracting takes place on an individual level, as there are no competing firms that solely develop video games for video game companies. The only “developer only” firms work as marketing firms for brand extension campaigns, for company’s without their own development staff.

Console and mobile phone manufacturers not only represent the buyers, but also help in the development stages and supply information vital to the creation of many games. Console manufacturers supply information for video game developers to use in order to create software that can be smoothly integrated with the consoles, or smartphones.

7.5 Power of Buyers

Although video game companies do not receive payments from console manufacturers as a seller would in a traditional buyer-seller relationship, the fact that console manufacturers will take possession of the product before sale to the end consumer, officially classifies console manufacturers as “Buyers”. End consumers are the customers who pay for access to consume the video game.

Console Manufacturers: The three main console manufacturers/ buyers are: Nintendo of

America, Microsoft Corp and Sony Corp of America accounting for 93% of console sales

(Appendix B2: Mini-Industry Analysis of Buyers). The relationship between console manufacturers and developers can be summarized by Peter Zackariasson and Timothy Vilson in

86 Plumer, Brad. "The economics of video games." The Washington Post (2012). their book “The Video Game Industry: Formation, Present State, and Future” “A complex ecosystem of game console economies is based on the symbiotic relationship between console manufacturers and third-part developers/publishers. It can be characterized as symbiotic, but definitely not symmetrical” 87. Console manufacturers ultimately have final cut approval of products, and can base their decisions on what benefits their own interests. The addition of the fact that there are very few console manufacturers means that an oligopoly exists. Power within this oligopoly originates not only from the licensing processes, but brand building marketing expenditures from the console manufacturers themselves.

Hence, value is added to consoles with the creation of each new video game, and it is therefore in the best interest of console manufacturers to make the video game development process as lucrative as possible for developers. Microsoft has created a development package deal where they work with developers in order to communicate expectations as to what is expected and required of a game before it is given permission to be sold on the XBOX©.

Membership into this development program is sold at an extremely subsidized rate of $99 per year88. This program was created to mimic the iOS development program created by Apple for mobile games where the service includes testing, and distribution. Console manufacturers have several reasons while they may not accept a game onto their console (Appendix C2: Application

Rules) 89. One of the most significant implications of the fact that console manufacturers have so

87 Peter Zackariasson, Timothy Wilson. The Video Game Industry: Formation, Present State, and Future. NYC: Routledge, 2012.

88 Peter Zackariasson, Timothy Wilson. The Video Game Industry: Formation, Present State, and Future. NYC: Routledge, 2012.

89 Apple Inc. "App Review." January 2013. Developer.Apple. January 2013. . much power, is that they set revenue splitting benchmarks. Although this process is done on a case-by case basis, a sample revenue splitting model of a $67 game is approximately:

Party Involved Portion of Revenue Additional Information Console Manufacturers $6 Developer $6/$13 Before initial publisher investment is recuperated/ after investment is recuperated Publisher $30/$23 Before initial publisher investment is recuperated/ after investment is recuperated Retailer $25

End Consumers: Within the video game industry, two meta-genres exist. There are casual and non-casual games, targeted at two different segments with extremely different consumption characteristics. As the name implies, casual games will often be cheaper, and geared at the social experience for the general public. Non-casual games will often have higher premiums targeted at fewer consumers. Casual consumers are 30% larger in terms of sales, however there are 40% more of them (Appendix C2: Money Spent on Games and Game Platform). The meta-genre determines the level of concentration of the video gamers; casual games have a fragmented consumer base where as non-casual video games have a concentrated consumer base, as interpreted by the aforementioned statistics.

In addition, end users are also empowered by the previously mentioned user “mods”.

This allows users to make their own changes to game content by altering the source code, after which they generally distribute such content digitally and free of charge. Thus, this is also facilitated by the digital distribution trend. These users are incredibly empowered as they are able to backward integrate. Thus, end users are acting as individual video game developers and publishers. These gamers are reducing their dependency on the traditional video game developers and publishers, as they are taking some of their tasks onto themselves.

8.0 Driving Forces

There are many trends in the macro environment that have immense effects on one or more of Porter’s 5 forces. These forces transform a static snapshot of an industry into a dynamic interpretation of an industry over time. In the video game industry, technological trends like the transition to mobile and the growing popularity of digital distribution portray the exponential growth of technological innovation. In addition, socio-cultural trends like the growth of internet users in markets of different geographic regions or the annual disposable income changes in markets of different geographical regions depict the dynamic nature of the demographics in the video game industry.

The transition to mobile has certainly been a threat to the traditional players in the video game industry, and will likely continue to be a threat in the near future. Video game publishers and developers must stimulate innovation to survive, or they will be overcome by the transition to mobile. Mid-tier developers seem to have been squeezed out of the industry amidst this transition, as the bar is being raised in the market due to all the choice on mobile platforms and

Facebook that have emerged. In addition, the transition to mobile increases the threat of substitutes – as the convenient, flexible and convenient nature of mobile technology threatens to replace traditional video game software and hardware, by favouring organizations with non- traditional competitive advantages.

The growing popularity of digital distribution is certainly impacting the video game industry considerably. The game itself is no longer a static unit, but is acting as the console itself.

Digital content downloads have become a common industry trend today. Rid of their once-static functionality, games are released with the expectation that new content and frequent updates will be available online for download, which makes game content more accessible to users. Thus, this trend increases the power of buyers – buyers are enabled with access to downloadable content, additional features, and instantaneous gaming – some of it free of cost. Therefore, monetary consumer purchases become even more valuable to those competing in the video game industry.

In addition, buyers can release their own content as digital distribution to other buyers. This type of backward integration is called user “mods”, and it refers to users releasing their own source codes to alter/improve game play for the gaming community.

The annual disposable income in a specific geographic region is directly related to the success of the video game industry in that region. This is because playing video games is a rather expensive pastime. With the average video game priced at $67 USD 90, excess disposable income among a population will certainly increase the likelihood of the population having a greater percentage of video game users and buyers than the populations that do not have a notable amount of disposable income. The demand for luxury goods like video games decreases when disposable income decreases, and necessary goods take priority in consumer expenditure. Thus, a trend displaying an increase in disposable income in a major market in the industry (as is the case in the USA and in the UK) will increase the threat of entry, as it will cause the industry to appear far more attractive to tentative competitors. Alternatively, a trend depicting a decrease in disposable income in a major market in the industry (as is the case in Japan) will decrease the threat of entrants. Tentative competitors will determine that the consumer demand is not high enough for a new entrant to thrive in the video game industry; hence the industry attractiveness will decline greatly.

The impacts of monetary and fiscal policy as well as the interest rates decided upon by

90 Entertainment Software Association. "2012 Essential Facts about the Computer and Video Game Industry." The ESA., 2012. Web. . central banks also complexly affect various aspects of the industry at large. Video games could potentially become a good that is unaffordable by the average consumer thus leading them to cheaper substitutes. The political representation between the consumer and the organization is very strong within the video game industry. Consumers are protected by legalities such as privacy acts and attempts are made to increase the protection of the consumer against the video game industry (i.e. children and violent games). Consumer safeguarding increases the power of the buyer significantly through the exertion of pressure on the firm to comply with the regulations while consistently providing quality products.

9.0 Five forces Analysis

Although there are many players in the video game industry as outlined in the Strategic

Group Map, only a small number make up the majority of market share. For this reason, once a firm is established within the industry it enjoys the benefits of having majority market share while working tirelessly to maintain it.

Direct Competitors: 7/10

As technology prices decrease in terms of the ability to create video games, the threat of new entrants naturally rises. This threat is somewhat diminished form the trend of marketing expenditure increasing relative to R&D (which is lowered from cheaper technology). Equity is thus important; however the trend of cheaper video game development creates an element of risk for current players.

Threat of New Entrants: 8/10

Determining what products are likely to substitute the unique desire to consume video games is ambiguous due to the uniqueness of the product. This being said the two most highly correlated good categories were films, and traditional games and toys. Although these products can be used to enhance the brand tied to a video game, they are likely to replace sales to a certain degree, if the distribution is in a physical store.

Threat of Substitutes: 5/10

Suppliers for video game companies are more or less interchangeable due to the commoditized process of manufacturing cd’s. In the rare case that outside knowledge is imported to aid with creating specialized video games, the consultants are hired to aid with specific tasks and will only poses negotiating power if they are part of a select few with the necessary knowledge. Thus developers themselves can be commodity-like if they are hired to carry out

“tedious” game developing. Conversely, the skilled developers that are hired to focus on game innovation through talent and skill-based developing have more supplier power, as their skills and talents are highly coveted in the industry and are a main source of core competencies.

Power of Supplier: 3/10

Buyers for video games have tremendous power in terms of the intermediary console owners, and the end consumers. The legal right to final edit on behalf of the console owners gives them the power to select a price, and only few other console owners exist in the market place to govern that price. Consumers are fragmented in the casual gaming industry but concentrated in the non-casual industry and have relatively more power. Fortifying buyers’ power is the ability to backward integrate through the use of user modifications, which is facilitated with the viral trend of digital distribution.

Power of Buyer: 9/10

10.0 Summary of Industry Analysis

The industry average ROI is 8.4%, ROE is 0.82%, and growth rate is 11.75% (Refer to appendices Q, R, S for further data). The high ROI is representative of the collective ability of video game companies to properly invest in Research and Development as well as marketing as those are the two major investments within the industry. The figure is also attributable to the large revenue’s from increased sales. The low return on equity represents the flattening of the video game industry. Because equity not being as much of a correlating variable to returns as in other industries it means there are lots of intangible assets that are contributing to the success of the industry. An example of intangible assets leading to high revenues would be good will generated from increased quality control in the industry in recent years. The alarming growth rate of the industry reaffirms that video games are becoming more popular with each year. This statistic is largely attributable to the rise in sales of casual games for mobile phones.

Ranking summary: Power of Supplier: 3/10, Power of Buyer: 9/10, Threat of New Entrants: 8/10,

Threat of Substitutes: 5/10, Direct Competitors: 3/10. Thus, the industry average for Porter’s five forces is 5.4. Falling in the middle of the scale from 1 to 10, the power of buyer was the least attractive of the factors whereas power of suppliers and direct competitors were the most attractive. The video game industry is not exceptionally attractive, nor exceptionally unattractive, as it is a moderately attractive industry that has areas of promising opportunity, as well as areas of dangerous threat.

Primary Value Creating Activities Supply Chain EA is an extremely vertically integrated organization, they have in-sourced all main functions associated with the value chain in the video game industry, on the software side.

Inbound logistics is therefore simplified as the receiving and warehousing of raw materials is essentially non-existent. Due to the fact that EA procures knowledge rather than goods, the operations process of transforming inputs into finished products and services is the core value chain function. EA is the culmination of a developing, marketing, publishing and distributing firm, all taking advantage of chartered services procured for each function91. A common issue vertically integrated organizations such as EA has, is that innovation is naturally stifled. This phenomenon could be potentially detrimental to EA if not counteracted, as video game companies rely heavily on innovation in order to stay competitive.92 This natural threat associated with most vertically integrated firms is combated by EA with the hiring of multiple innovative contracting firms, able to keep EA up to date on trends with the goal of avoiding a stagnate corporate culture, and organizational structure. As is common in most software industries the supply chain is formulated mostly of consulting and other software organizations rather then traditional raw material distributors. The table in Appendix K illustrates the lists all the firms within EA’s supply chain as well as their respective industries.

Although EA’s supply chain is dynamic, potential conflicts of interests arise in the case of companies that serve as both a supplier and distributor for EA, such as Microsoft, Sony, and

Nintendo. It is thus even more important that EA works with a large variety of suppliers to ensure that information is truly unbiased. An example of a potential problem would be Nintendo sharing results of a study with EA regarding the increase of casual gamers, which would thus encourage EA to develop more casual games, which would favor the Wii system over the

PlayStation and the Xbox 360. A metric that can be used within the video game industry in order to measure innovation would be the amount of consultant/ idea based suppliers used. Multiple

91 Mergeant Online. Business Summary. Business Overview, Mergent Online, 2012 92 Williams, Dmitri. "Structure and competition in the U.S. home video." International Journal on Media Management (Taylor & Francis Online), May 2009.

sources of information, in theory, lead to the largest access of information, thus more knowledge-based suppliers is deemed favourable93.

TYPES OF SUPPLIERS IN VIDEO GAME INDUSTRY

60

50

40

30 All suppliers 20

10 Number Knowledge 0 Based Suppliers and Consultants

Figure 494 This figure demonstrates a significant difference in terms of the most common type of supplier within the industry. Most firms are on par with the amount of knowledge-based suppliers varying only between 20-30, meaning no firm sustains a competitive advantage. This common organizational structure is not valuable and easy to imitate, making the supplier structure competitively neutral, and it will likely remain that way.

In order to measure the efficiency of EA’s integration of supplier information within their own organization, the inventory turnover will be considered in figure 5. EA’s slow inventory

93 Zhang, John W. Henke Jr. and Chun. "Increasing Supplier-Driven Innovation." The Magazine (MIT Sloan Management Review), January 2010.

94 Capital IQ. [Electronic Arts Suppliers, Take-Two Suppliers, Ubisoft Suppliers, Activision-Blizzard suppliers]. Retrieved [February, 11, 2013] from https://www.capitaliq.com turnover ratio may be indicative of poor information systems between suppliers and the organizations themselves, low quality of supplier information, poor merchandising, overstocking, retaining outdated merchandise, or even poor marketing and sales. Ultimately, this is a weakness for EA.

Inventory Turnover Ratio

30

25

20 Electronic Arts Activision Blizzard 15 Ubisoft

10 Take Two Interactive Industry 5

0 2011 2010 2009

95 96 97 98 Figure 5 , , ,

A trend of more efficient supplier coordiantion is evident within the industry as turnover increases yearly, in all cases since 2009. The most notable outlier is the tremendous increase in

2011 from Take-Two Interactive. This outlier is in part a result of a Take-Two releasing its most popular game Grand Theft Auto IV, with tremendous commercial success. High inventory turnover is the culmination of not only supplier management, but also demand. Demand however can be influenced by other factors such as pricing and bundling, therefore adding sales volumes

95 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 96 Bloomberg Terminal. Electronic Arts. Financial Analysis: Custom. Accessed February 8 2013. 97 Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 98 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013 instead of number of units is also a valuable metric. Calculating the inventory to sales ratio, accounts for changes in price, and can be seen in figure 6.

Inventory to Sales

12

10

8 Electronic Arts Activision Blizzard 6 Ubisoft

4 Take Two Interactive Industry 2

0 2009 2010 2011

99 100 101 102 Figure 6 , , ,

Electronic Arts has trouble either keeping their inventory at a reasonable level or their customers have slowed down their orders. Electronic Arts maintains a comparably low inventory to sales ratio over the past three years. This data demonstrates a trend eluding to the fact that price reduction, as well as bundling games has led to the potentially inflated figures in figure 5.

Very limited value is thus added in this region comparatively as EA does not beat any competitors, and does not have a competitive advantage.

Operations

Electronic Arts Inc. develops, publishes and distributes their video game software. The

99 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 100 Bloomberg Terminal. Electronic Arts. Financial Analysis: Custom. Accessed February 8 2013. 101 Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 102 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013 company’s intricate system of operations is crucial in order to upkeep with the large orders it receives from its customers. It is important to note that Electronic Arts does not have its own physical stores from which they conduct sales to end-users; their focus remains on third party retailers as well as its own e-commerce website103.

Operating Margin (%)

40

30

20 Electronic Arts Ubisoft 10 Take-Two Interactive Activision 0 Industry 2009 2010 2011 -10

-20

Figure 7104,105,106,107 A firm’s operating margin measures the overall profitability of its operations after taking into account the costs of such activities. Without being able to maintain a healthy operating margin, a firm falls into financial trouble such as not being able to pay off debt. Electronic Arts exhibits continuously low operating margins, far lower than its competitors or the video game industry as a whole. This in turn will affect EA’s future investment opportunities due to the requirements to fulfill financial obligations without leaving room for innovative expenses. Although the firm

103 Origin. Electronic Arts Inc. . Accessed February 8 2013. 104 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 105 Bloomberg Terminal. Electronic Arts. Financial Analysis: Custom. Accessed February 8 2013. 106 Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 107 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013 shows a slightly positive operating margin in 2011, their poor past performance could be a hindrance with regards to their successful counterparts such as Activision, who could have used this time and money to invest in profitable ventures. In such a rapid and innovative industry, no organization is able to underperform for too long as the threat of being out-dated can seriously hinder and even destroy a company’s wealth altogether.

When stakeholders look to evaluating the effectiveness of a firm’s processes, the cash flow from operations as a percent of revenue is an appropriate metric as displayed in Figure 8:

Cash Flow from Operations.

Cash Flow from Operations (% Revenue)

2009

Industry Take Two Interactive 2010 Ubisoft Activision Blizzard Electronic Arts 2011

-30% -10% 10% 30% 50%

108 109 110 Figure 8 , ,

Within this analysis, a high percentage means that the company was able to turn a higher amount of its revenue into profits and net cash flow from its operating activities. A flat or

108 ibid 109 ibid 110 ibid increasing trend indicates consistent sales growth and effective expense management. Although it struggled to remain in the positive area for 2009, Electronic Arts has seen a slow increase over the past few years thus showing effective management in growing sales and reducing expenses.

However, in the most recent year of 2011, Electronic Arts is below all of its competitors and the industry average overall showing an overall weakness in Cash flow to revenue. Its competitors are outperforming Electronic Arts with regards to having more efficient techniques thus increasing their cash flow from operations. When an organization is continuously receiving low to negative cash flow from operations, these red flags should trigger some serious concern for management. Clearly, wrong decisions are being made and implementation of these choices should be reconsidered. In order to receive new and growing cash flows, an organization must rethink their methods of operations and begin to look at adapting more efficient and profitable techniques.

Appendix I is able to examine the operating income, loss, and expenses that Electronic

Arts and its direct competitors have exhibited over the last three fiscal years. While all firms have been increasing their operating expenses throughout the years, Electronic Arts was able to decrease them within the last year. This is a result of streamlining its operations in order to receive the benefits from economies of scale. In turn, the operating income was able to more than double over that same year. Although the impact of this change is not immediate, this efficient methodology will surely allow the organization to increase their operating margin in the years to come.

Distribution After the development of the software, Electronic Arts Inc. then distributes the finished good to third party retailers. In a rapidly changing industry such as the Video Game Industry, it is important to note that this finish good can be both tangible and intangible. The final good is either shipped to third party retailers who then sell the physical video game to end-users in store, it becomes available for sale on e-commerce websites, or it is transmitted via coding for downloadable use on mobile and internet applications (Appendix :D Electronic Arts

Distribution)111.

Although an order from a retailer means profits for an organization, it does not become so until payment is received. Thus, it becomes crucial to analyze accounts receivable and the amount of time it takes to turn the funds owing into funds gained.

Accounts Receivable Turnover Ratio

25

20

Electronic Arts 15 Activision Blizzard Ubisoft 10 Take Two Interactive Industry 5

0 2011 2010 2009

112 113 114 115 Figure 11 , , ,

A high A/R turnover ratio signifies that the company is able to convert money owing into revenue within a short amount of time. Up until 2011, Electronic Arts had surpassed the turnover

111 Capital IQ. Electronic Arts Inc. Customers. Accessed February 10, 2013. 112 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 113 Bloomberg Terminal. Electronic Arts. Financial Analysis: Custom. Accessed February 8 2013. 114 Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 115 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013 ratio of its competitors and the industry average by overwhelming amounts. This demonstrates that Electronic Arts is highly regarded by their customers thus they make payments at a quicker rate. This also means that the extension of credit that Electronic Arts provides for its customers is efficient.

Marketing and Sales

The most basic metric for comparing EA’s marketing efforts with the rest of the industry is total marketing expenditure. The nature of individual marketing expenditures will have vastly different returns based on many factors; such as creativity, external factors and internal variables.

The order of marketing expenditure in 2012 from largest to smallest is as follows: 1. EA 2.

116 Blizzard 3. Take-Two Interactive 4. Ubisoft.

Product: Electronic Arts sells video game software for hardware including but not limited to the

Sony PlayStation, Microsoft Xbox 360, Nintendo Wii, mobile phones, tablets such as the Apple iPad, and personal computers. Many products are compatible on multiple platforms, and are adapted in order to leverage the specific hardware117.

EA’s corporate strategy promotes slightly adapting products for international markets based on language, however standardization is used to reduce costs by keeping gameplay consistent. An advantage to only changing the languages in terms of gameplay is online compatibility and a consistent brand image. Another international adaptation of products is the

116 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. 117 An example of a difference across systems for EA can be found in the battlefield series. Battlefield 3 allows for a maximum of 64 player simultaneously on PC and 24 maximum on the console version. cover art. Covers of EA’s games are culturally adjusted to attract consumers based on geography.

118

Figure 13 Hardcore Games are categorized based on solely on psychographics; Casual games are psychographic also demographically focused

Hardcore games are often differentiable to casual games based on their depth and graphics engines. It is not uncommon for EA to implement the same graphics engine across genres within the hardcore category in order to minimize overhead costs. EA’s engine can be found in several shooter franchises such as Medal of Honor as well as Battlefield, and in racing franchises such as and strategy franchises such as Command and Conquer 119. The patents on the individual franchises EA owns are valuable and costly-to-imitate. The issue however is that because they are substitutable, the competitive advantage is of average returns or parity.

118 EA’s FIFA 13 sports 13 different covers depending on the geographical region in which it is being distributed. German soccer player Hand Sarpei is featured on the cover of FIFA 13 in Germany where Makoto Hasebe from Japan is featured on Japanese copies of FIFA 13. 119 Whitaker, Ron. Battlefield 3 to use DX11, Frostbite 2. August 5, 2010. http://www.gamefront.com/battlefield-3- to-use-dx11-frostbite-2/ (accessed February 9, 2013).

Price: EA traditionally prices its products slightly high relative to competitor pricing, using the skimming strategy for console games. Prices for the same game on the PlayStation 3 and Xbox

360 are always the same price, however it is common for the Wii version of the same game to be

$10 cheaper.

When comparing competitor pricing with EA prices for various consoles, it is also apparent that many games for mobile phones, tablets, and PC/MAC hardware use non-traditional pricing strategies such as the POS (point-of-sale) system120. Other than the POS pricing system utilized by EA in several cases, a DLC (downloadable content) heavy system is prevalent. Full games are retailed similar to the POS system, however additional features within the game are temporarily locked and can be unlocked in for a fee. This fee can be paid with regular currency, or in some cases a virtual currency created by distributors such as MSP121.

The “Freemium” model where only certain levels are unlocked in the original (usually free) version of the game, and the rest of the levels can be unlocked for a fee, is also common among tablet and mobile phone games. Several of EA’s products use a combination of the “Freemium” model with DLC in order to maximize revenue streams by increasing trial allowance in the heavily saturated market place.

Promotion: Promotion strategies are dependent on the franchise and operate on an extremely decentralized basis, however the EA logo is always highly visible on every EA game in order to build a stronger brand image. Promotion strategies for EA do however commonly use celebrities across all hardcore games. Within the sport genre, celebrities are often highly related to the sport, as successful athletes will be displayed on the cover and participate in advertisements.

120 POS or Point of Sale system involves consumers purchasing a product by paying a flat fee and then acquiring the good 121 MSP or Microsoft Points are purchasable points that can be redeemed in a variety of games on the XBOX 360. MSP can also be used to purchase select arcade games via. softcopy downloads. Although shooting games also use celebrities, the celebrities are often not related to the genre in any way. It is more common for the celebrity promoting a shooter to be a comedian, then a soldier. This was the case in EA’s Far Cry franchise when they had comedian Christopher Mintz-

Plasse appear in a small web series, where he would be comically tortured in a manner mimicking gameplay. Although humor is often used for shooters, graphics and larger than life explosions are also prominently featured displaying graphical capabilities.

A main distinguishing element within the promotion strategies when comparing hardcore games, with EA’s casual games is that the hardcore games will often include screenshots or gameplay clips where the casual games will use a more emotionally driven campaign, more distant from boasting the games internal qualities.

EA blends traditional advertising methods with social media marketing in order to reach as many potential consumers as possible. Facebook pages have been set up for all major franchises, and television commercials are also frequently used. Guerilla marketing is also used – characterized by unconventional means, as was the case in EA’s Dante’s Inferno “Sin to Win” campaign where participants were asked to commit an action of lust in order to win a copy of the game, and other paraphernalia. The popular online game Minecraft, not owned by EA was used as servers were used to advertise other EA games. This tactic was used as EA was aware that a large percentage of people on Minecraft would likely be the most interested in EA’s products.

EA is a leader within the industry on a global scale, second to Activision Blizzard. Although

Activision has a larger share within North America, Electronic Arts has a larger share in Europe.

Both Activision Blizzard and EA have significantly reduced share in Japan, where the competition is much stronger122. Exact market share values divided by regions can be found in

122 Passport GMID. "Japan in 2030: The Future Demographic”. Euromonitor International, 2012. Web. . (Appendix E: Specific International Market Share). The market share is very valuable, and difficult to attain. All of EA’s functions working together is hard to replicate, as only Blizzard is able to attain more, making market share a competitive advantage for EA.

Marketing Expenditure as a % of Sales:

Company 2012 2011 2010

EA Marketing Expense 853,000 747,000 730,000

EA Sales 4143000 3589000 3,654,000

EA ME/S 0.205889452 0.208135971 0.199781062

Blizzard Marketing Expense 545,000 520,000 544,000

Blizzard Sales 4,755,000 4,447,000 4,279,000

Blizzard ME/S 0.114616193 0.116932764 0.127132508

Take-Two Marketing Expense 183,749 176,294 72,402

Take-Two Sales 825,823 1,136,876 359,231

Take-Two ME/S 0.222504096 0.155068803 0.201547194

Ubisoft Marketing Expense 241,027 214,541 197,787

Ubisoft Sales 1,061,296 1,038,826 870,954

Ubisoft ME/s 0.227106293 0.206522555 0.227092361

Figure 14 The only outlier in the industry is Blizzard in terms of Marketing Expenditure compared with sales. The reason for this is that Blizzards sales are much larger, and diminishing returns on marketing expenditure are present within the industry. The ratio is almost identical however

among other competitors at 20%-23%. This seemingly shocking similarly may not be so coincidental however as it is common that within an industry, marketing expenditure is based on sales, rather than the assumed inverse relationship as it is possible that firms use the budgeting method of copying competitors expenditure. Nonetheless, the average sales: marketing expenditure ratio for EA is not a competitive advantage as it is similar across the industry.

R&D: Marketing Expenditure123:

Firm 2011 2010 2009 This table illustrates EA R&D 1,212,000 1,153,000 1,229,000 EA Marketing 853,000 747,000 730,000 the ratios of research EA Ratio 1.42 1.54 1.68 and development to

Activision R&D 646,000 642,000 627,000 marketing from 2009 Activision Marketing 545,000 520,000 544,000 Activision Ratio 1.19 1.23 1.15 to 2011. The trend of

Ubisoft R&D 355,007 369,585 311,424 relative marketing Ubisoft costs 241,027 214,541 197,787 Ubisoft Ratio 1.47 1.72 1.57 expenditure has

Take -Two Interative R&D 64,162 69,576 25,279 increased relative to Take-Two Interative Marketing 183,749 176,294 72,402 the research and Take-Two Interative Ratio 0.35 0.39 0.35 development costs.

This metric is very relevant to determining the focus of the organization, whether internal

(product focused) or external (market focused), and the change over time. Take-Two is extremely market based as they spend much more on marketing then R&D, where UbiSoft it the most focused on their products. Many strategic and cultural inferences can be made with these

123 Mergeant Online. Business Summary. Business Overview, Mergent Online, 2012 varying percentages such as the use of a push strategy or pull strategy orientation. These differences in values do not lead to competitive advantages as, either being product focused or market focused is not necessarily better, and other factors such as the previously used sales

(figure 16) would serve as a more appropriate indicator of successful strategy selection. No competitive advantage results as a result of the increased marketing expenditure on EA’s behalf.

Customer Service EA is infamous for its lack of customer service. The Consumerist tallied over 250,000 votes and determined EA to have the worst customer service in America in 2012124. No other video game company was a finalist in this vote, giving EA an extreme competitive disadvantage.

(Appendix F: Worst Companies in America) shows the other companies involved. There are many critics of this study however, that argue EA’s product is emotionally engaging, and therefore EA is more likely to be on consumer’s minds at the time of the vote. This negative image can be contrasted with what is now in the distant past, in 2007 where EA was awarded with the Gartner CRM Excellence award, presented by the “1to1 media” community comprising of over 132,000 business professionals125. No other gaming company has won that award, giving

EA a competitive advantage, from the associated prestige and accompanying good will.

In order to manage CR, EA has an independent internal CS division. Within this division there are CS product managers, strategy executives, as well as software coding specialists. The role of the CS product manager is to be an internal sales person who schedules meetings throughout different departments within EA with the goal of both aligning CR initiatives with any new innovations that may be on the horizon. The purpose of these meetings are two fold, as

124 Morran, Chris. "The Voters Have Spoken: EA Is Your Worst Company In America For 2012! ." Consumerist. 2012.

an advantage to CS Product Managers learning about a new innovation before it is completed, is that the CR department can prepare to solve new problems before they occur with a proactive approach, limiting the setup time when the innovation is public ready. This system limits the bottleneck situations that are devastating to any firm within the technology sector. The role of the coding staff is to be able to fix minor bugs and problems with any of EA’s products with the intention of not having to make that extra communication between CR staff and developers that would result in slower results. A culture within the CS department encourages staff to challenge corporate strategies, as they have initiated a system where lower level employees are promised that any suggestion will be reviewed and commented on by top executives. Recommendation can either be openly discussed at department wide monthly meetings, or anonymously submitted126.

Official Policies for EA are similar regardless of geographical area, and only differ slightly due to legal regulations. EA offers warranties for defective products within 90 days of purchase in all regions127.

EA’s online store “Origin” offers refunds, with no questions asked within 14 days for physical copy orders, however downloaded files are not refundable after purchase. The reasoning for this discrepancy lies within the ease of copying softcopy files. Physical copies of EA products will be replaced if they are damaged for the fees are listed in the following figure.

126 Beasely, Boyd, interview by Ginger Conlon. "Senior Director of Customer Support." Electronic Arts Customer Service Is No Game. (October 4, 2007). 126 Electronic Arts. "ELECTRONIC ARTS WARRANTY POLICY." EA. August 21, 2012.

EA Replacement Costs128

Figure 16

Although every firm in the industry categorizes the replacement costs differently, the prices can be compared as a viable metric in order to determine cost absorbance in relation to good-will efforts.

Activision-Blizzard does not offer replacement discs, although softcopies of games are always available for download. This system only helps PC/MAC gamers, as console games need to be re-purchased. Take-Two Interactive will not replace games in any form.

When comparing the goodwill within the industry in terms of lowest replacement costs the firms rank in the following order: Ubisoft, EA, Activision Blizzard, Take-Two Interactive.

The higher levels of customer service by Ubisoft and EA are costly to intimidate, and valuable as only highly efficient organizations can make such a large investment with no direct benefits other than brand image, profitable.

A second method of comparing firm’s levels of customer services is the amount of forums in which they offer to aid customers with inquiries. The following figure demonstrates the forums available for purely customer support purposes offered by each major player.

24 Hour Business Website Company Facebook Twitter Forums Telephone Hours Phone Email Mail Tickets

EA ✔ ✔ ✔ ✖ ✔ ✔ ✔ ✔

Ubisoft ✖ ✔ ✔ ✖ ✔ ✔ ✖ ✖

*through Take-Two rockstar not Interactive 2k ✖ ✔ ✖ ✖ ✔ ✖ ✔

Activision-Blizzard ✔ ✔ ✔ ✔ ✔ ✖ ✖ ✔

Figure 17 EA owns a competitive advantage for the amount of ways customers can be helped, however the advantage is very easy to imitate and is not costly, there for the unsustainability results in a temporary competitive advantage only.

EA operates customer services on a corporate level rather than decentralizing customer service to each franchise or specific game. EA’s website is extremely automated and can help consumers with many issues they may have. Common issues are all posted, and the option to contact support representatives from EA is available. Alongside their detailed B2C automated information system, EA also hosts a monitored forum where consumers are encouraged to discuss issues in order to solve them without EA directly intervening. EA’s forum is based on a reward system that gives virtual badges, XP, and awards to exceptionally helpful consumers, similar to systems in actual games themselves. Not only does EA distribute XP but consumers can also award other helpful consumers XP, awards, and badges. Not only are problems meant to be solved through this C2C customer service system, but new ideas are taken from consumers, and in return consumers feel more connected to the brand.

Training is often considered when customer service is analyzed, as widespread employee knowledge will directly increase general problem solving within the organization. EA has thus created the EA University where employees learn how to add value to their specific department, with the goal of ultimately improving customer experiences.

Secondary Value Creating Activities Human Resource Management A major value increasing aspect of any video game company is its human resources.

Maintaining a competitive advantage through innovation and gaming breakthroughs comes down the skills and abilities of a company’s employees. The analysis of employee satisfaction as well as their productivity measured by sales will give an accurate depiction of the treatment of employees as well as their commitment to help sustain a competitive advantage for their organization.

Electronic Arts promote the increase of knowledge and skills through continuing education by reimbursing part of the studies. This program covers courses or degree programs which are directly related to positions and prepare employees for advancement within the company129. A class-action lawsuit was filed in 2004 for unfair over-time compensation which cost Electronic Arts $14.9 million130. This lawsuit could have a lasting effect on the interest of potentially valuable candidates. However, in a notable study done by Universum in 2012,

Electronic Arts was ranked in the top ten best technological companies to be recruited for in

North America by university students (Appendix G: Ideal Employers 2012)131. This study revealed that Electronic Arts is a more attractive employer among students in comparison to its direct competitors Take-Two Interactive, Activision Blizzard, and Ubisoft who are not on the list but also operate within North America.

Informal measures of employee satisfaction can also give a good indication as to how workers are feeling in relation to their current employment. Employee reviews give an interesting look inside the company with the disclosure of satisfaction that would otherwise be withheld by an organization. Glassdoor employee reviews reveal ratings such as career opportunities, compensation & benefits, work/life balance along with an overall score out of five132.

129 EA. “BENEFITS THAT REWARD A PASSION FOR EXCELLENCE”. Accessed February 10 2013. . 130 Surette, Tim. “EA settles OT dispute, disgruntled "spouse" outed”. April 26 2006. Gamespot. . 131 Universum. “America’s Ideal Employers 2012”. . Accessed February 7 2013. 132 Glassdoor. Company Reviews: Electronic Arts, Activision blizzard, Ubisoft, Take-Two Interactive. . Accessed February 10, 2013 Employee Ratings

100%

80%

60%

40% Electronic Arts 20% Take-Two Interactive

0% Ubisoft Activision Blizzard

Figure 18133,134,135,136 Through this informal analysis, Electronic Arts and Ubisoft have the top overall ranking within the video game industry in terms of employee satisfaction. Electronic Arts Inc scores the highest in all categories except Work/Life Balance and Cultural Values. For an individual who values family and down time, Electronic Arts would not be the optimal place of work for them.

The strength within this company is the fact that Electronic Arts tied with Ubisoft in terms of overall satisfaction. This would in turn draw interested and potentially valuable candidates who viewed the ratings to apply for the job openings. Although this data may not be precise, it should also not be overlooked as it surely impacts the company’s image with respect to potential candidates who frequent this company review website and concludes an overall satisfaction level of the already employed.

133 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 134 Bloomberg Terminal. Electronic Arts. Financial Analysis: Custom. Accessed February 8 2013. 135 Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 136 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013

Employees are the key drivers to the success of a video game company through the use of innovative and efficient techniques. Sales per employee help to assess how productive the organization is in utilizing their staff and how productive the personnel are overall.

Sales per Employee ($ US)

800,000.00

600,000.00 Electronic Arts Activision Blizzard 400,000.00 Ubisoft Take Two Interactive 200,000.00 Industry

0.00 2011 2010 2009

Figure 19137,138,139,140 Revenue per employee is a relatively high metric in any technological industry. This is because labour intensity is low thus fewer employees are required to operate the organization, inevitably leading to higher sales per employee. As visualized in the figure above, the sales per employee have remained relatively stable for each respective competitor and the industry average. This symbolizes a learned balance between the size of the workforce and tasks delegated to them as well as stability within the personnel. The consistent output indicated that turnover is does not cause any turbulence within the sales generated per employee and could also signify that perhaps the turnover ratio is also stable. Electronic Arts Inc fell behind Activision

137 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 138 Bloomberg Terminal. Electronic Arts. Financial Analysis: Custom. Accessed February 8 2013. 139 Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 140 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013 blizzard and Take-Two Interactive for the utility and productivity of its human resources.

Electronic Arts has the highest number of employees relative to its competitors and does not have sales high enough to surpass their sales per employee. This is a definite weakness for

Electronic Arts as this could symbolize either dissatisfaction within the workplace of the inefficient allocation of employees within the organization.

Although the compensation and benefit expense figures are not directly disclosed by the firms competing within the video game industry, the general and administrative expense for each firm can be used as a proxy for such. Although expenses such as rent, utilities, and professional assistance can be expensed to this category, payroll costs and managerial compensation are also included. While major competitors have spent a constant dollar amount on such an expense

(ranging from 20-43% of sales), Electronic Arts falls way below such targets (Appendix ?:

General and Administrative Expenses). Only spending approximately 8% of their sales per year on the compensation of employees, it is no secret as to why employees are dissatisfied with

Electronic Arts as an employer and why such expensive law suits are filed against the company for unfair wages paid. In order to stay competitive within the industry, Electronic Arts much have comparable sales per employee metrics. However, as depicted previously, EA falls behind in this category and it is most likely due to unsatisfied employees. By practicing fair compensation as do the direct competitors, Electronic Arts will be able to increase its employee productivity and ultimately its revenue stream s. The firm must realize the importance of its human resources and act accordingly with respect to wages and salaries paid.

R&D/ New Product Development Due to the nature of the video game software industry, Electronic Arts Inc. is heavily invested into research and development, as it is likely to be one of the most – if not the most – competitively-defining value chain activity. R&D investments, as well as copyright, trademark and intellectual property metrics will define whether R&D is a strength or weakness for EA.

R&D Expenditure

R&D expenditure is the most direct way to measure the importance and investment a firm places on research and the development of new product. Displayed as a percentage of total revenues, EA’s expenditure in R&D is compared against those of its direct competitors, as well as the industry as a whole – as depicted by the following figure.

R&D EXPENDITURE AS A % OF SALES

40.00%

35.00%

30.00% EA 25.00% Ubisoft 20.00% Take-Two 15.00% Activision Blizzard 10.00% Industry Average

5.00%

0.00% 2009 2010 2011

141142143144 Figure 20

Evidently, in recent years Electronic Arts has invested a substantially larger proportion of their revenues into research and product development than their direct competitors or the industry as a whole have. In 2009, EA invested a sizable 33.63% (Appendix: EA 2010) of their

141 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. 142 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. 143 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. 144 Bloomberg Terminal. Take two. Financial Analysis: Custom. revenues into R&D, when the next-largest proportion of their direct competitors was exhibited by Activision Blizzard, with only 14.65%145 (Appendix: Activision Blizzard 2009) – less than half of the proportion that EA invested. In their 2009 annual report, EA claims that this substantial investment was largely due to a large increase in headcount in the organization, the acquisition of VG Holdings (Bioware and Pandemic studios) and most importantly, development costs for their new releases: EURO Soccer video game franchise and new title from The Sims franchise146. Although the industry did begin collapsing the gap in R&D investment in comparison to EA’s, as Ubisoft invested 33.45%147 (Appendix: Ubisoft 2012), which surpassed

EA’s 30%148 (Appendix: EA 2012) in 2011.

Perhaps due to the importance that the video game industry has placed on innovation via intense competition, EA has allotted copious funds to R&D, although perhaps not justifiably so.

As previously mentioned, EA has not displayed favorable return on investment metrics in recent years – and has actually fallen considerably below the industry average. In fact, in 2009 – when

EA’s investment was most sizable relative to the industry – they had a return on investment of -

23.86%. This is expected, but in the 2 following years, when it would have been expected that

EA would reap the benefits of their investment, their return on assets were -3.3% and -6.8%149, while the industry average was 2.84% and 3.33%150 and competitors like Activision Blizzard were experiencing returns of 3.7% and 6.4%151 in 2010 and 2011. Thus, EA’s overzealous R&D investment trend is likely a weakness. Although this investment may seem wise, especially in the

145 Activision Blizzard, Annual Report. 2009. 146 Electronic Arts, Annual Report. 2009. 147 Ubisoft, Annual Report. 2011. 148 Electronic Arts, Annual Report. 2011. 149 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. 150 Bloomberg Terminal. Industry, Application Software. Financial Analysis: Custom. 151 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. video game industry where new products are always emerging and innovation is emphasized, this may be the very same source of weakness: Since technology is developing at an exponential rate, it may be wise to save funds for impending, future technological trends and innovations. In simple terms; although it may seem wise to invest in the development of graphics for a new Sims title, there may be new technological trends and innovation that may emerge after or during the release of the title, making the game inferior and the excessive funds better-off saved. In addition, unlike other direct competitors, EA has declared investment in “developed and core technology” in their annual reports, further exhibiting their dedication to R&D investment. In

2009, EA spent $51 million in this category, which dropped off to $13 million in 2010 and 2011, which has a weighted-average useful life of 5 years152 - enough time for technological trends to come and go, and for new innovation to completely replace the current standards in gaming.

Thus, EA could be spending $51 million on “developed technology” that is just that: developed.

This developed technology may become inferior in less than 5 years – which would not be a surprising or unusual occurrence in the video game industry.

Trademarks, Patents and Copyrights

The video game industry is an industry based on the creation of intellectual property like software code, trade secrets, game content, audio-visual elements and the like, which although are not usually subject to patents, are certainly subject to trademarks and copyrights. Thus, EA and its direct competitors in the video game industry own copyright to the software code, as well as the trademark under which the products are marketed. Thus, the value of trademarks, patents and copyrights as a part of a firm’s assets is a direct indicator of the new products the firm has developed and published that year. Hence, the following figure depicts the value of trademarks,

152 Electronic Arts, Annual Report. 2011. patents and copyrights as a percentage of total assets in the video game industry, although much of value is due to acquisitions where the goodwill is allocated to the trademark.

TRADEMARKS, PATENTS AND COPYRIGHTS AS % OF TOTAL ASSETS

3.50%

3.00%

2.50% EA 2.00% Ubisoft 1.50% Take-Two

1.00% Activision Blizzard

0.50%

0.00% 2011 2010 2009

Figure 21153 154 155 156

It is evident that Activision Blizzard clearly out-trademarks and out-copyrights all of its direct competitors each year, with trademarks and copyrights accounting for 3.15%, 3.23% and

3.26% of its total assets157. Though, Activision Blizzard is comprised of what used to be two major video game competitors – Activision and Blizzard – as well as many smaller gaming companies that they’ve acquired. This is likely to contribute to their large proportion of trademarks and copyrights in their assets. EA clearly displays the second-most proportion of trademarks and copyrights in their assets among its direct competitors – thus it may be justifiably

153 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. 154 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. 155 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. 156 Bloomberg Terminal. Take two. Financial Analysis: Custom. 157 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. regarded a strength. Accounting for 0.92%, 0.68% and 0.41%158 of total assets, EA’s trademarks and copyrights far surpass its closest competitor in this metric: Take-Two Interactive, with

0.17%, 0.11% and 0.05% in 2009, 2010 and 2011159. These trademarks and copyrights serve as a strength not only because they protect the firm’s intellectual property from imitation, illegal distribution and the like, but because they signify that EA is indeed developing new products that are requiring copyrights and trademarks, which is essential when competing in the video game industry in hopes of attaining a competitive advantage. Additionally, if these copyrights are infringed by other firms, EA is legally entitled to remuneration from this competitor.

As a more accurate indication of EA patenting, copyrighting and trademarking activity, the number of patents filed by EA is depicted in the graph below:

Figure 22160

As depicted above, EA frequently files for patents. Historically, EA will file a patent every few months, and had filed 6 patents in an incredibly short span characterized by the end of

2006/beginning of 2007. Some of these patent titles include; Metagame Translation (referring to

158 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. 159 Bloomberg Terminal. Take two. Financial Analysis: Custom. 160Patent Docs, "Electronic Arts, Inc. - Patent applications." 2012. Web. . game metadata), Video Game Providing Simulated Disc Jockey Experience, Track-Based

Interactive Music Tool Using Game State to Adapt Playback, and User Interface for Selecting

Items in a Video Game161. These patents filed by EA are certainly a source of strength, despite the myths surrounding the efficacy of patents in fast-cycle markets like the video game industry.

Some believe that video games are intellectual property that cannot be patented. This is untrue; as the Patent and Trademark Office states that "computer programs embodied in a tangible medium, such as floppy diskettes, are patentable subject matter"162 This means that the memory uploaded to a system’s memory may be patented, or the process performed by the programming code that is being executed on a computer or console may be patented as well. In addition, many believe that the legal system is far too slow and costly to realize any benefits from patents, especially in a fast-cycles market with quick-evolving innovation. This is also untrue; as the

Patent and Trademark Office recognizes that the timeline for filed patents is slow, thus they may add time onto the patent’s enforceable tern to make up for time lost during the filing process163.

In addition, upon filing a patent, it is important to identify the full scope of the idea in question, so that a “cushion” is provided in the case that the industry happens to shift slightly. This way, the patent will be broad enough to cover small modifications to the technology. Lastly, the staying power of a good innovation should not be underestimated, as there are many technologies that have been in use for many years, and will likely will in use for many years to come. Video game technology is not necessarily an exception.

As a final note, protecting video game technology with a patent could increase marketing efficacy, attract investors, as well as increase company credibility, defense, leverage and strength

161Patent Docs, "Electronic Arts, Inc. - Patent applications." 2012. Web. . 162 Chang, Steve, and Ross Dannenberg. "Editorial - Patent Myths Revealed (Ross Dannenberg, Esq. and Steve Chang, Esq. ) - Game Industry News." Game Industry News. 2012. Web. . 163 Chang, Steve, and Ross Dannenberg. "Editorial - Patent Myths Revealed (Ross Dannenberg, Esq. and Steve Chang, Esq. ) - Game Industry News." Game Industry News. 2012. Web. . in the industry. Finally, patent benefits may be reaped via the collection of licensing fees upon licensing the patent to other firms.

Corporate Leadership Board of Directors

EA’s board of directors include Laurence Probst, the chairman of the board who has worked at EA since 2007; John Riccotiello, the CEO who has worked at EA since 2007 as well;

Blake Jorgensen, the CFO and executive vice president who has been at EA since 2012; Kenneth

Barker, the interim CFO, senior VP and CAO who has been with EA since 2012; Frank Gibeau, the president of EA Labels since 2011; Peter Moore, the COO since 2012; Rajat Tenaga, the CIO who has been with EA since 2011; and a number of other executive VPs and directors164, including Leonard S. Coleman Jr., who has served as President of the National League of

Professional Baseball Clubs from 1994 to 1999 and is known his philanthropy. Mr. Coleman spent four years providing management consultant services in health care, education, and community development in Africa, and developed a micronutrient campaign designed to combat the widespread global health threat of iron deficiency anemia and vitamin and mineral malnutrition among infants and children in the developing world165. Mr. Coleman alone serves as a strength for EA, as he provides the board of directors with insight regarding wellness issues, ethics and corporate social responsibility.

The number of years of service among board of director members is important: The longer the directors have been in their positions, the more likely it is that the management team is

164 Reuters, "Electronic Arts Inc (EA.O) People | Reuters.com." Business & Financial News, Breaking US & International News | Reuters.com, 30 Mar. 2012. Web. . 165 Forbes, "Leonard Coleman - Forbes." Information for the World's Business Leaders - Forbes.com, Web. . a good fit and that the organization has become comfortable and efficient regarding its corporate leadership and organizational infrastructure. In addition, there are many risks associated with the hiring and firing of board members. Thus, organizations that do not have to go through that process will prosper from the managerial fit, and it ensues as a strength. The following figure depicts the average number of years each current member has been on the board of directors for

EA and its direct competitors.

MEMBERS' AVERAGE NUMBER OF YEARS ACTIVE ON BOARD OF DIRECTORS 20 18.4 18 16 14 12 EA 10 Ubisoft 8 5 Take-Two 6 3.7 4.3 4 Activision Blizzard 2 0 EA Ubisoft Take-Two Activision Blizzard

166167168169 Figure 23

As depicted by the figure, EA has the lowest average years of service among its board members in comparison to its direct competitors. For the reasons previously stated, this is likely a weakness for EA, as the members on its board of directors are relatively new, with the average

166 Reuters, "Electronic Arts Inc (EA.O) People | Reuters.com." Business & Financial News, Breaking US & International News | Reuters.com. 30 Mar. 2012. Web. . 167 Reuters, "Activision Blizzard Inc (ATVI.O) People | Reuters.com." Business & Financial News, Breaking US & International News | Reuters.com. 30 Mar. 2012. Web. . 168 Reuters, "Take-Two Interactive Software Inc (TTWO.O) People | Reuters.com." Business & Financial News, Breaking US & International News | Reuters.com, 30 Mar. 2012. Web. . 169 Reuters, "Ubisoft Entertainment SA (UBIP.PA) People | Reuters.com." Business & Financial News, Breaking US & International News | Reuters.com. 30 Mar. 2012. Web. . years of service at 3.7 years170. Contrastingly, Ubisoft is likely benefiting from their unusually high average years of service among board members – 18.4 years of service. This is because many of Ubisoft’s founding board members are family, and have been with the company as long as since 1988171.

In addition to the number years of service among board of director members, board meeting attendance is also a definitive indicator of managerial fit. The following figure depicts attendance at board meetings as a percentage of the total number of board members.

BOARD OF DIRECTORS MEETING ATTENDANCE IN % OF NUMBER OF BOARD MEMBERS

90.00% 80.00% 70.00% 60.00% EA 50.00% Ubisoft 40.00% Take-Two 30.00% Activision Blizzard 20.00% Industry Average 10.00% 0.00% 2009 2010 2011

172173174175 Figure 24

While EA’s 75% rate of board of directors meeting attendance throughout 3 years176 is respectable, but it is still below the industry average of 79.33%, 80% and 82% in 2009, 2010 and

170 Reuters, "Electronic Arts Inc (EA.O) People | Reuters.com." Business & Financial News, Breaking US & International News | Reuters.com. 30 Mar. 2012. Web. . 171 Reuters, "Ubisoft Entertainment SA (UBIP.PA) People | Reuters.com." Business & Financial News, Breaking US & International News | Reuters.com. 30 Mar. 2012. Web. . 172 Bloomberg Terminal. Take two. Financial Analysis: Custom. 173 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. 174 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. 175 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. 176 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. 2011177. When board meeting attendance isn’t as high as it could or should be, it signifies lack of motivation or even tension among board members, which can certainly be categorized as a weakness for EA.

The increasing number of females in the video game industry is a prominent trend. On both the user and executive ends of the spectrum, integrating the female perspective into the board of directors can prove to be an advantageous element of diversity. The following figure depicts the percentage of EA and its direct competitors’ board of directors that is comprised of female members for 2009, 2010 and 2011, as well as the industry average.

% OF BOARD OF DIRECTORS THAT IS COMPRISED OF FEMALE MEMBERS

25.00%

20.00% EA 15.00% Ubisoft Take-Two 10.00% Activision Blizzard 5.00% Industry Average

0.00% 2009 2010 2011

178179180181 Figure 25

In this metric, EA is substantially stronger than all of its competitors and the industry as a whole. Female gamers are swiftly approaching male gamers in numbers, as discussed in the previous report, thus female perspectives among executives are more valuable than ever before.

177 Bloomberg Terminal. Industry, Application Software. Financial Analysis: Custom. 178 Bloomberg Terminal. Take two. Financial Analysis: Custom. 179 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. 180 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. 181 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. In 2009, 2010 and 2011, EA’s board of directors was 22.22%, 20% and 20% female182, in comparison to the industry average at about 10%183 all three years and its competitors, who seem to barely have any female executives at all, EA has created a strength through female diversity – as they may be more likely to effectively market to the emerging female gamer market segment.

In extremely recent news, EA’s CEO, John Riccitiello resigned from his position at

Electronic Arts. Although Riccitiello claimed that it was partly due to the difficult video game industry, his resignation was certainly due, in part, to internal slip-ups. Thus, this is definitely a source of weakness in EA. The resignation was indicative of falling retail sales within the firm; as they were down more than 25% in first 10 months of 2012. This may be because EA is not positioned correctly in the current video game marketplace, as consumers now prefer free-to- play, smartphone compatible games – which are not quite within EA’s market of expertise. In

Mr. Riccitiello’s resignation letter, he added that “EA’s shareholders and employees expect better”, while one specific analyst noted that Mr. Riccitiello “had some credibility issues, and on balance, investors will probably view the move favorably”184. Thus, although the resignation of the CEO signifies a weakness in the organization, a source of strength may ensue upon the change. If shareholders view EA more favorably and if metrics like ROE improve upon the introduction of a new CEO, EA will become more attractive to investors, financiers and customers. Hence, although it symbolizes a low characterized by internal missteps, with the resignation of Mr. Riccitiello comes vast opportunity for organizational growth.

182 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. 183 Bloomberg Terminal. Industry, Application Software. Financial Analysis: Custom. 184 Streitfield, David. "Electronic Arts Chief Resigns, Sending Stock Up - NYTimes.com." The New York Times - Breaking News, World News & Multimedia. The New York Times, 18 Mar. 2013. Web. . Sustainability and Corporate Social Responsibility

Sustainability and corporate social responsibility are vital metrics that measure managerial effectiveness. It is essential that an organization “gives back” to obtain community and user support. In addition, management that encourages ethical and socially responsible

95arleton are more likely to be conscientious, agreeable and flexible – which foster a better work environment for the employees, better daily operations, and better products for consumers. One of EA’s most prominent direct competitors, Ubisoft practices sustainable packaging, has implemented an energy efficiency policy, and has actively began emission reduction initiatives.

In 2006, Ubisoft began its “Sharing more than games” sponsorship program that helps provide children and young adults from deprived backgrounds or who are ill access to education, culture and leisure. Ubisoft also makes efforts to reduce its carbon footprint by implementing “Green

IT”, reducing energy consumption of buildings, promoting videoconferencing tools, recycling computer equipment, paper, ink cartridges and unmarketable products, responsibly disposing of waste, developing a sustainable procurement policy, encouraging suppliers to incorporate environmentally friendly operations and policies, and even raising awareness of environmental issues among staff and the general public with game content185. Unfortunately, neither EA nor any other direct competitor has implemented these policies and initiatives186. This lack of corporate social responsibility is certainly a weakness for EA, as neglecting the community and the environment will only lead to lack of support from users and the community as a whole. Such support will likely be redirected to Ubisoft, who is making great efforts to aid the community and sustain the environment. In addition, it signifies a lack of conscientiousness and responsibility – qualities that are imperative to organizational prosperity.

185 Ubisoft, Annual Report. 2010. 186 Bloomberg Terminal. Industry, Application Software. Financial Analysis: Custom. Return on Equity

A performance metric such as the return on equity (ROE) is indicative of the rate of return on ownership interest of the stock owners. A high ROE would indicate that a firm is effective in generating profits from shareholders’ equity and using investment funds to stimulate growth. The ROE among EA and its competitors from 2009 to 2011 is depicted below.

ROE: 2009-2011

15

10

5

0 EA 2009 2010 2011 -5 Ubisoft -10 Take-Two Activision Blizzard -15

-20

-25

-30

187188189190 Figure 26

EA’s decreasing ROE trend is a weakness. EA’s ROE dwindled to -7.06% in 2011, while

Activision Blizzard had an ROE of over 10% in the same year, and Take-Two experienced tremendous growth of over 300% between 2009 and 2010. EA’s diminishing return on investment in comparison to its direct competitors could indicate that top management is not effectively investing shareholders’ investment – and changes to EA’s corporate leadership structure and/or governance policies may be required to reverse this trend.

187Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. Accessed February 8 2013. 188 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 189 Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 190 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013

Value Creation Summary

Upon completing an analysis of Electronic Arts’ value creation, it has become apparent that a number of value creation activities, such as marketing & sales, operations and research and development are particularly important for the company.

Marketing & Sales

Marketing and sales is swiftly gaining importance in the video game industry. Relative marketing expenditure has significantly increased relative to the research and development costs.

Thus, a trend is emerging to focus of the business is marketing, and slightly alleviating the usual focus to develop the games themselves.

Electronic Arts markets and sells video game products that are compatible on multiple platforms, possess slightly adapting products for international markets, international adaptation of culturally adjusted cover art to attract a large breadth of global consumers, in addition to just enough standardization to maintain consistent gameplay and controlled costs. Promotion strategies operate on an extremely decentralized basis, however the EA logo is always highly visible on every EA game. Thus, each game is developed into a strong franchise, while EA as a whole continues to fortify its brand image. In addition, EA often uses celebrities in advertising channels, and blends traditional adverting methods with social media marketing in order to reach as many potential consumers as possible.

For these reasons, EA’s marketing and sales value is classified under the resource-based view as valuable and costly to imitate. The individual game franchises EA has developed are developed using an intricate value-creating strategy, employing the previously mentioned mix of marketing and sales techniques to outperform the competition and attain a competitive advantage. Direct competition will find it difficult to employ international adaptation, standardization, decentralized promotion and franchise development, centralized promotion, celebrity endorsement and social media marketing simultaneously – allowing EA to outperform its competitors, fortify value in this value creating activity, and provide EA with a competitive advantage over its competitors.

Operations

One of EA’s most important value creation activities is operations. In the extremely dynamic video game industry, a firm must have high inventory turnover in order to sell stock before a newer product version is released or gaming technology changes altogether.

Consequently, a low turnover ratio is an indication of overstocking which would then become useless once products become obsolete, as they tend to quickly do in the video game industry.

Thus, Electronic Arts operations, or more specifically; their inventory turnover ratio is classified under the resource based view as valuable. Although not the strongest in the industry,

Electronic Arts Inc has seen growth within it inventory turnover ratio, maintaining a stable level is appropriate in order to ensure the availability of product. This could provide a competitive advantage for EA, as the maintenance of a relatively stable inventory turnover ratio allows for smooth and efficient operation with a buffer for future sales demand. If competitors are unable to match such efficient operations, it could prove to be considerably advantageous for EA.

Research and Development

Due to the nature of the video game software industry, Electronic Arts Inc. is heavily invested into research and development. For EA, this includes R&D investments, as well as copyright, trademark and intellectual property metrics.

In recent years, EA has invested a larger portion of its sales into research and development than any of its direct competitors, though it can be argued that this may serve as a weakness as well. Additionally, although EA does not have the largest proportion of assets as trademarks and copyrights, their intangible assets such as this intellectual property is still a respectable proportion in comparison to that of other direct competitors in the industry.

For these reasons, EA’s research and development value is classified under the resource- based view as costly to imitate. EA has invested so heavily into R&D; so much so, that it would be incredibly costly for any of its direct competitors to attempt to match EA’s R&D investment from their current positions, even when proportionally speaking, in the case of its competitors of smaller size. In addition, the trademarks and copyrights that EA holds as assets signify that EA is indeed developing new products that are requiring copyrights and trademarks, which provides

EA with a greater likelihood to attain a competitive advantage over its competitors.

Firm Assessment

Evidently, the mentioned value creation activities contribute greatly to EA’s attractiveness as a firm. Though, EA has evident areas of weakness as well. These include, but are not limited to: customer service policies for which EA has been heavily scrutinized, a lack of any corporate social responsibility or sustainability initiatives, and is the most unprofitable in terms of its return on assets as it remained negative for the last three years while all competitors managed to have positive numbers at the end of 2011, meaning that EA is injecting a large amount of capital into operations while receiving little income. Therefore, EA is assessed as a moderately attractive firm. EA has promising core competencies that can be capitalized upon to develop competitive advantages, but the firm certainly must attend to their obvious downfalls.

Part IV: Corporate Strategy

PRELIMINARY ANALYSIS

Market Capitalization: Market capitalization is defined to be an estimated value of a publicly traded firm’s shares. Many analysts, shareholders and so on use capitalization as their basis for finding a company’s net worth. Thus, capitalization becomes a formative factor in stock valuation. Figure

1 below illustrates the total capitalization for Electronic Arts Inc, Activision Blizzard, Take-Two

Interactive, and Ubisoft Corporation.

FIGURE 1: Market Capitalization, in Millions USD, 2007-2011191192193194

2007 2008 2009 2010 2011 Overall Electronic Arts Inc. 15661.96 15874.56 5875.37 6157.8 6503.49 -9158.47 Activision Blizzard 5365.91 11337.74 13892.29 14720.5 13963.38 8597.47 Take-Two Interactive 1394.85 921.45 898.72 902.8 1323.22 -71.63 Ubisoft Corporation 1659.27 2520.82 1290.51 960.51 681.86 -977.41

FIGURE 2: Year-to-Year Number of Shares (in Millions USD), 2009-2011195 2007 2008 2009 2010 2011 Electronic Arts Inc. 311 318 323 330 333 Activision Blizzard 566 1312 1250 1183 1133 Take-Two Interactive 73.27 77.7 82 84.61 86.12 Ubisoft Corporation 90.79 92.39 93.78 94.35 94.58

FIGURE 3: Year-to-Year Market Capitalization Growth (Decline), 2007- 2011196,197,198,199

2007 2008 2009 2010 2011 Overall Electronic Arts Inc. - 1.4% -63.0% 4.8% 5.6% -51.21% Activision Blizzard - 111.3% 22.5% 6.0% -5.1% 134.64% Take-Two Interactive - -33.9% -2.5% 0.5% 46.6% 10.62%

191Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. Accessed February 8 2013. 192 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 193 Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 194 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013 195ibid 196Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. Accessed February 8 2013. 7 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013

198Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 199 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 Ubisoft Corporation - 51.9% -48.8% -25.6% -29.0% -51.46%

As illustrated in Figure 1, it is interesting to note that Activision Blizzard is the only one of the competitors to exhibit an increase in capitalization and has the highest year-to-year market capitalization growth over the five most recent fiscal years. The main reason for this is due to

Activision Blizzard’s decision to issue more shares in 2008 due to the booming economy right before the recession hit as seen in Figure 2. While the rest of the competitors maintained a fairly stable number of shares, Activision Blizzard decided to engage in a share repurchase in 2009 signaling an undervaluation in the firm, thus allowing it to be the only one of the competitors to experience a positive market capitalization growth. Electronic Arts Inc experienced the largest impact with respect to its market capitalization immediately after the recession thus resulting in the second largest decline in market capitalization over the past five years. According to Figure

3, Activision Blizzard has a greater overall year-to-year market capitalization growth meaning that, ceteris paribus, their corporate strategy is more effective than their large competitor, especially in recent years.

Major Metrics:

The return on investments, return on equity, return on assets and earnings before interest, taxes, depreciation and amortization are crucial metrics in determining the financial stability of any corporation. The return a firm realizes on its investments is a measure of its efficiency in choosing the right projects to infuse its free cash flow into. The video game industry is very volatile with respect to the ROI metric as in one year, ample resources will go into the production of a new video game; however, sales are not sufficient enough to cover such a large expense. Thus, one year a firm can exhibit low return on investments but then realize a positive return the next. Activision Blizzard Inc. has experienced the most stable return on investment over the last three years thus it is best able to manage its cash inflow relative to the outflow for investments. Activision Blizzard outperformed its competitors outstandingly in the most recent fiscal years with respect to both the return on assets and equity. Electronic Arts Inc. is the weakest performer within all the major metrics and its EBITDA growth is the lowest of all competitors. Electronic Arts Inc is unable to meet its required investment returns in many different regions and its outperformed by competitors both larger and smaller in capitalization thus showing weakness in corporate strategy. This symbolizes a weakness for the firm to make the correct and profitable decisions required in order to realize positive returns on investments.

Refer to Appendix A: Major Metrics 2009-2001 for detailed metric figures.

Share Price Performance:

When analyzing a publicly traded firm, both market capitalization and stock price are key metrics to take into consideration. The increase in stock price is highly correlated to the overall increase in revenues and thus profitability which ultimately affects a stakeholder’s future forecasts of the stock price.

Figure 4: December Year end 2009-2011: Stock Prices (USD $ per share) 2009 2010 2011

Electronic Arts Inc. 18.19 18.66 19.52

Activision Blizzard 11.11 12.44 12.32

Take-Two Interactive 10.97 10.67 15.37

Ubisoft Corporation 13.76 10.18 7.21

Figure 4 above illustrates that Electronic Arts Inc is the only firm from its competitors that was able to achieve a constant increase in share price over the last three fiscal years. However, when looking at the comparable 30-day price highs and lows as well as volatility, it is important to note that Electronic Arts Inc experiences the most fluctuation. This signals high investor uncertainty about the company’s performance and is surely a negative in terms of future stability and ability to access funds. Refer to Appendix B: 30-Day Stock Price Highs, Lows and

Volatility, 2009-2011.

The price to earnings ratio represents the value which investors place on the future performance of the firm. If a firm’s P/E ratio is equal to one, the price of the stock will be accurately priced based on today’s prices. However, the higher this ratio becomes, the more emphasis investors place on future performance as they believe the stock price will be worth more in the future thus their current earnings are not. In the chart below, an outstandingly high

P/E ratio of 933 is seen in 2009 for Electronic Arts200. This represented high confidence with the firm’s future performance; however, the following year showed a drastic decrease due to the realization of actual performance. Although Electronic arts was unable to meet the unrealistic expected earnings, its continuously high ratio in comparison to its direct competitors shows that investors believe the firm is worth the investment.

2009 2010 2011 Electronic Arts 933 42.21 31.7 Ubisoft 21.02 15.63 13.83 Take-Two 32.21 17.49 23.64 Activision Blizzard 26.45 25.39 13.25

200 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. Accessed February 8 2013. Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013 Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 Financial Capital Structure:

The capital structuring of a firm can give an accurate insight as to the profitability and overall financial health of any given firm. Thus, the analysis of capital expenditures as a percentage of sales, weighted average cost of capital, beta, and Altman Z-Score will be useful in determining opportunities or weaknesses in the financial capital structure.

All competitors within the video game industry have experienced a negative capital expenditure figure as a percentage of sales with the lowest numbers pertaining to Electronic Arts

Inc. This indicates that the companies are foregoing the purchases of expenditures which create future benefits. The fact that Electronic Arts Inc is placing less cash in its capital expenditures as a percentage of its sales puts it in a disadvantage.

In recent history, many video game publishers have located their subsidiaries in Quebec due to tax breaks201. Electronic Arts and Ubisoft Corporation both have operations within

Montreal in order to take advantage of this incentive. Looking forward, the United Kingdom has announced a tax credit promise for 2013. EA recently stated that the “UK is a vital centre of game development and [EA] intends to maintain a strong presence here".202 Along with Ubisoft and Take-Two Interactive, it is beneficial for these large video game producers to maintain presence in the UK market in order to take advantage of the possibility of future incentives.

The weighted average cost of capital for Electronic Arts and Activision blizzard are among the lowest of competitors. This signifies that investors expect less return from their investments in these companies due to a lower perceived risk. This financial metric is directly related to the beta of the firm. Electronic Arts Inc has experienced a fluctuating beta over the

201 Praet, Nicholas. “Video game tax break makes Quebec an industry hub”. October 15 2012. . 202 The Guardian. “Video game tax breaks: what does it mean and what happens now?” . years but managed a beta close to 1 which signifies that the share price moves with that of the overall market. Activision Blizzard maintains a relatively low beta meaning that the equity is less volatile than the overall market; something a risk-averse investor would be highly interested in.

Finally, the Altman Z-Score is useful in determining a company’s financial health. A Z- score above 3.0 means the company is considered to be safe from bankruptcy, a score of 2.7 to

2.99 means one should exercise caution when investing in the particular company, a score of 1.8 to 2.7 means there is a good chance the company will go bankrupt within two years of the date the figure was given, and a figure of below 1.8 means the probability of bankruptcy for that particular firm is very high203. Electronic Arts Inc has been just under or above 3.0 in past years until the most recent fiscal year with a rating of 2.84 meaning investors should perform due diligence before investing in the company204. The firm may also have relative difficulty in obtaining loans and capital due to the rating. All of the other competitors have maintained a Z- score of over 3.0 and are thus considered safe from bankruptcy, placing Electronic Arts Inc at a great disadvantage. Refer to Appendix C: Financial Capital Structure Components 2009-2011 for more detailed figures.

Analyst Recommendation and Earnings Guidance:

When determining on whether or not a firm would make for a good investment, it is useful to look at and consider the recommendation of recognized analysts. While Electronic Arts and Ubisoft accumulated a mean average of hold, both Activision Blizzard and Take-Two

Interactive are recommended buys. These recommendations signal the high outlook on the video

203 Chi, Yuanlong. “A Comparative Study of Altman’s Z-score and A Factor Analysis Approaches to Bankruptcy Predictions”. October 9 2012. . 204 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. Accessed February 8 2013. Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013 Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 game industry as very few analysts recommended a sell strategy for any of the competing firms.

The return potential for Electronic Arts is the only negative estimate out of the four firms concluding that investors should hold onto their stock as long-term future potential is high despite the low expected near-future returns. Additionally, all firms are expected to outperform or stay neutral at its worst. These positive outlooks deem the video game players as good investments. See Appendix ?: Analyst Recommendations for further details.

Relative Market Attractiveness:

Although the economic recession hindered the performance of many players within the video game industry, many of these firms were able to re-establish high growth and earnings estimates.

As a result, investor confidence within this specific industry has been on the incline over the past three fiscal years. Conclusively, the recent market performance of this industry has been seen as attractive for investors. The incline in share price performance and P/E ratios have been an indication of such an attractive market. Analyst recommendations have also solidified this.

VERTICAL INTEGRATION

Vertical Integration:

Vertical Integration is a term that corresponds with management control. A firm that is vertically integrated holds all, or parts, of their supply chain under ownership. Benefits of such a management tactic include lower transaction costs, accurate matching of supply and demand due to synchronization, greater strategic independence, as well as lower uncertainty.

Current Corporate Strategy:

Electronic Art Inc’s upstream processes are handled by a third party. In 2002, the firm began relying on unrelated video game manufacturers in both Taiwan and Japan which manufactured parts for small engines. This manufacturer did not own the appropriate raw materials or components to produce video games. However, going forward, Electronic Arts entered in agreements to employ the right labour and capital required to manufacture video games205.

The video game industry is a hit-driven business; where small number of titles generates a large portion of sales profits206. A firm’s resources and capabilities offer a more secure base for strategy rather than focusing on market factors and thus become the primary source of profitability. Therefore, the firm is focused mainly on midstream operations where most of the revenue is acquired, which include the development and distribution of its final product (See

Figure 5: Vertical Integration). As for the downstream focus, Electronic Arts Inc entails intricate system of operations that is crucial in order to upkeep with the large orders it receives from its customers. It is important to note that the firm does not have its own physical stores from which they conduct sales to end-users; their sales focus remains on third party retailers as well as its own e-commerce website (Origin, 2013)207.

Figure 5: Vertical Integration

205 Onecle. “Electronic Arts, Inc. and Subsidiaries”. Accessed February 20 2013. . 206 Boorstin, Julia. “Rough December Caps Bad Year For Videogame Sales” January 11 2013. CNBC. < http://www.cnbc.com/id/100373005/Rough_December_Caps_Bad_Year_For_Videogame_Sales> Accessed February 25, 2013. 207 Origin. Electronic Arts Inc. . Accessed February 8 2013.

Problems and Issues:

Although customer service is not an integral part of midstream operations, the satisfaction of end-users is crucial to the continuous success of the organization. Unfortunately, the customer service within Electronic Arts has been ranked as terrible by its end-consumers208 and was rated America’s Worst Company by the Consumerist209. The vertical integration between the firm and its customer contact centre must be analyzed accordingly in order to manage and improve the poor customer satisfaction ratings.

Due to the focus on midstream operations, Electronic Arts Inc leases many buildings in the regions it operates (i.e. North America, Asia, and Europe) in order to fulfill its research, development and distribution functions. The ability to finance the lease payments requires

Electronic Arts Inc to access funds at a relatively high weighted average cost of capital in comparison to that of the other video game publishers. Its cautionary bankruptcy score as described previously by the Altman Z model also makes access to debt more difficult.

208 Customer Service ScoreBoard. Electronic Arts Customer Service. Accessed February 25, 2013 209 Morran, Chris. "The Voters Have Spoken: EA Is Your Worst Company In America For 2012! ." Consumerist. 2012. Strategy Recommendations:

Corporation efficiency can be achieved through the cooperation between business functions or through integration. Electronic Arts works with a company named RightNow® in order to supply their Customer Service operations, an integral part in the success of operation.

With this partnership, EA received the Gartner CRM Excellence Award in 2007210. RightNow’s web-based model was ideal for EA’s globally dispersed, partially outsourced contact center operations. Online access allows EA to assign responsibility for specific games or tasks anywhere in the world in order to meet fluctuating demand while giving managers full visibility into all support activities and metrics211. However, in recent years the performance of this outsourced contact centre has not been entirely impressive signaling that further attention is required within this activity. Electronic Arts can vertically integrate this CRM supplier in order to provide better control over sufficing customer needs. This strategy would aid in the increase of satisfied consumers and thus potential future revenue growth due to returning clientele.

Finally, in order to reduce their lease expenses and cost of debt, Electronic arts should strive to achieve a lower weighted average cost of capital. It is recommended that a stock buyback is the most efficient way to use the company’s excess cash in order to reduce invested capital. Electronic Arts Inc has exhibited constantly negative returns on investments; thus, the free cash flow should no longer be infused into expenditures at the historical proportions.

Following the buyback, Electronic Arts will be able to raise debt capital in order to replace the

210 Gartner. “Electronic Arts Wins 2007 Gartner CRM Excellence Award”. Accessed February 20 2013. . 211 RightNow. “ELECTRONIC ARTS REACHES TOP LEVELS IN THE GAME OF CUSTOMER EXPERIENCE”. Accessed February 20 2013. . cash formerly held. Ultimately, the firm’s WACC should decrease since the cost of the debt used to replace the cash will be much lower than the cost of equity for the cash that was held212.

HORIZONTAL DIVERSIFICATION

Current Corporate Strategy:

Electronic Arts Inc is located in a very concentrated industry where video game publishers attempt to cover all possible markets in order to maintain their presence. A niche within the video game type can be easily duplicated by a competing firm which can simply add the niche to their line of existing products, thereby reducing the overall competitive edge.

Electronic Arts Inc operated under four different labels: A Games which includes the largest number of studio and development teams. This particular label is responsible for action- adventure, role playing, racing and combat games213. The EA Sports label publishes all the realistic, casual, and freestyle sports titles, such as FIFA Football, Madden NFL, Fight Night,

NBA Live, NCAA Football, Cricket, NCAA March Madness, Tiger Woods PGA Tour, and NHL

Hockey214. EA Maxis is where the casual and non-traditional games are created and published.

The most popular title under this label is The Sims series which include life simulations and online communities215. Finally, the EA Bioware label focuses on multiplatform, role-playing,

MMO and strategy games216.

Electronic Arts plans not only to maintain this high level of horizontal business diversification but also plans to diversify among the labels through its product distribution

212 Cash, Debt, and WACC. “Simplifying Complexity”. ThoughtStorm. . Accessed February 25, 2013. 213 EA Games. “Company Labels”. . Accessed February 26, 2013. 214 28 29 ibid

channels (i.e. physical CD games, online sales, and mobile applications). Problems and Issues:

As discovered previously in the major metrics analysis, Electronic Arts has exhibited a largely negative ROI, ROA, and ROE whereas competing firms, although still negative, have managed to maintain relatively low figures. These poor returns on investments signal that the firm is either placing too much cash into unprofitable investments or the revenues are simply not high enough to cover such expenditures. Activision Blizzard has been able to provide a very healthy return on all aforementioned metrics and maintains its leading position within the video game industry. The transition from traditional games to mobile games certainly poses a threat to video game developers and publishers, as these companies have reported declines in the double digits while mobile games have been thriving217. Controller innovation also poses a threat to the video game industry. Innovated controllers represent a missed opportunity in the mobile device business. These innovative controllers attempt to replace mobile devices; however smart phone- based video games are very hard to compete with as a result of pure convenience and low cost.

Strategy Recommendations:

The Increase of earnings is the optimal solution to achieve an improvement in ROA, ROI, and ROE. Finding methodologies to improve the revenue of a corporation can certainly be a drain on. In recent years, there has been a global shift to mobile gaming due to the popularity of smart phones. Up until now, the competitors within the video game industry have not fully tried to access this large consumer pool as their focus remains on sales for PC, online, and hardware platforms. Although most of the revenue will still be derived from traditional console games, the expansion into the market of mobile delivery of basic or even rereleases of older games can be a

217 Graft, Kris. "Gamasutra - News - The 5 trends that defined the game industry in 2012." Gamasutra - The Art & Business of Making Games. 6 Dec. 2012. Web. . successful method of revenue expansion due to a high profit margin.

Video game publishers and developers must stimulate innovation to survive, or will be overcome by the transition to mobile, as the case of Kodak and smartphones. Electronic Arts must be able to embrace the mobile trend by developing complements, rather than participate in substitutes. If Wii requested EA to develop a game for its wireless controller platform and the video game is already not-so-profitable in the traditional platform, the investment should not be undergone. Rather, Electronic Arts should focus its horizontal efforts on up and coming markets such as that of the mobile industry.

By maintaining its diverse gaming labels, Electronic Arts must determine where to focus its channel of distribution efforts. The label A Games includes action-adventure, role playing, racing and combat games which are simple and highly adaptable for mobile games. Electronic

Arts should thus focus on developing this label for PC, online, and mostly mobile gaming.

Due to the complexity of functions within the EA Sports label, gaming controllers are required and thus a focus of sales for this label should be hard copies for physical platforms. EA

Maxis and EA Bioware labels focus on role-playing, strategy and simulation which would be the perfect attributes for a game to take on the go such as on the smart phone or the tablet. Thus, applications for these labels would be desired by consumers. Although there are no real synergies between the labels, low correlation of sales between each business is what enables this high level of diversification. Therefore, it is recommended that Electronic Arts does not combine labels in order to conglomerate efforts on a project. Instead, the research and development teams should jointly work on application software but labels should distinctly offer their products. In this way, product diversification is maintained as it is one of electronic art’s arts competitive advantages. However, economies of scale can be achieved through joint work within the R&D functions in order to save on costs. Specialists working on gaming landscape for example can do so for multiple projects despite of the label, whereas currently these functions are separated.

GEOGRAPHIC DIVERSIFICATION

Current Corporate Strategy:

Electronic Arts Inc operates its global Headquarters in Redwood Shores, California218. In addition to its presence in North America, Electronic Arts Inc. has also entered the European and

Asian markets. Currently, Electronic Arts employs a global corporate strategy. With investments in many countries around the world, their brand and image is marketed consistently throughout the globe. EA’s corporate office in Redwood Shores, California is responsible for the implementation on monitoring of the global strategy. Each one of the four previously mentioned labels has dedicated game development and marketing teams, and each operates on an international scale with little to none regional modification. The firm’s strategic planning, distribution, sales, and localization all fall under their Global Publishing unit which oversees its mobile and online businesses219. Electronic Art uses subsidiaries as its mode of entry into global markets, many of which include: Origin Systems; Electronic Arts Puerto Rico Inc.; Electronic

Arts Canada Inc.; Electronic Arts Ltd. (U.K.); Electronic Arts Pty. Ltd. (Australia); Electronic

Arts GmbH (Germany); Electronic Arts S.A. (France); Electronic Arts Victor, Inc. (Japan)220.

Problems and Issues:

Although EA’s current corporate strategy entails slightly adapting products for international markets based on language (i.e. marketing strategies), standardization is used to reduce costs by keeping game play consistent. Although keeping game play consistent between

218 Electronic Arts Inc. “About Us’. Accessed February 20, 2013 . 219 AllGame. Electronic Arts. . Accessed February 12 2013. 220 Funding Universe. “Electronic Arts Inc. History”. Accessed February 20 2013. . countries is important in maintain the image of the firm, EA should recognize the potential of developing products tailored to specific cultural needs.

Video game user age remains stagnant at 30-35 year old. It is predicted that this trend will increase to 11,595 million221 which is an opportunistic increasing trend as sales growth will most likely increase as a result. However, the Japan male population will drop substantially to

3,457 million222 and since it is the video game industry’s second largest market, a huge threat is witnessed. This would especially be an issue as the video game industry is currently not welcome in china with respect to console-based games. Thus, albeit attractive, the Asian market raises concern of future sales and profitability for the video game industry.

Strategy Recommendations:

Electronic Arts realizes the importance of culture sensitivity through the adaptation of product cover art. Covers of EA’s games are culturally adjusted to attract consumers based on geography. Although Electronic Arts currently follows a global strategy for its international operations, perhaps a transnational strategy would help EA build a competitive advantage. This strategy would provide the benefits of the global strategy however it contains local responsiveness in domestic markets. Through the design of dynamic organizational structures and creating value-added activities, the exploitation of national similarities and differences can occur. The development and marketing business functions could benefit from being tailored to specific country specifications. By enabling the global subsidiaries to be able to develop games which would thrive in their market, or by giving marketers the freedom to make executive advertisement choices, Electronic Arts can diversify its global operations thus gaining a competitive advantage. For example, in a country where football is not considered to be a

221 "2012 Essential Facts about the Computer and Video Game Industry." The ESA. Entertainment Software Association, 2012. Web. . 222 ibid popular sport, EA could use this as an opportunity to create a game featuring a more applicable sport, thereby capitalizing on the difference between cultures. By using current human resources and pre-existing R&D knowledge, the development of newly tailored games would not be costly to the organization other than the obvious labour hours required in the development of the game.

These games should differ in terms of sports being played (within the EA Sports label) or the characteristics of the cities being built for SimCity (in the EA Maxis label). Customers would much better enjoy the experiences that they can relate to based on their cultural differences thus making EA a truly globalized and diversified company.

Finally, the possible decline within the most significant age group for the video game industry in Japan can be addressed by focusing at other countries within Asia. Although the

Japanese population is maturing, the Chinese population is growing at exponential rates. Even though China has an outstanding ban on console gaming, Electronic Arts should not forego the opportunity within the mobile and PC market that exists. Thus, its horizontal diversification strategy of expansion and growth in mobile and PC gaming development as described previously should be carried forward into the global market in order to maximize revenue growth.

CURRENT BUSINESS STRATEGIES

Electronic Arts Inc. has numerous businesses operating under the EA brand. These include EA Games, EA Sports, Maxis, EA Bioware and EA Mobile.

EA Games employs a differentiation strategy. EA Games has the most studio and development teams of all of EA’s businesses, and develops traditional packaged-goods video games in addition to multiplayer online video games under the EA brand. It includes intellectual properties, established franchises as well as contracted work external game developers.223 Thus,

EA Games has a broad competitive scope that caters to a large market of consumers via traditional packaged video games, multiplayer online video games, established franchises and third-party developers, and also provides unique and high-quality products by allocating abundant resources to the development of games via studio and development teams as well as rigorous marketing efforts.

EA Sports employs an integrated cost leadership/differentiation strategy. EA Sports develops sports-based video games that include content based on real sports leagues, players, events and venues, as well as casual games with more fictitious, arcade-like game play and graphics224. EA Sports releases new version of many of its titles annually, usually expanded upon from the previous year with new, more relevant players, events and venues, as well as additional features. Thus, EA Sports’ targets a broad audience that plays sports games of all natures, is differentiated in respect to its notoriously large marketing efforts, uniquely “new” versions of their titles made available annually and is the highest standard of sports games in the video game market today, but also demonstrates qualities of a cost leadership strategy by reusing game codes, graphics and engines from previous years, largely cutting costs to develop.

Maxis employs a differentiation strategy. Maxis develops games for the mass audience by creating casual games for both traditional and non-traditional gamers. This includes franchises, products of third-party developers, and most importantly, life-simulation games and online communities such as The Sims225. Thus, this strategy targets the critical masses of a broad target market of traditional and non-traditional gamers alike, and produces high-quality games

223 Mergent, "Electronic Arts, Inc." Mergent Online. 22 May 2012. Web. . 224 Mergent, "Electronic Arts, Inc." Mergent Online. 22 May 2012. Web. . 225 Mergent, "Electronic Arts, Inc." Mergent Online. 22 May 2012. Web. . that are renowned for their unique game play, such as life-simulation.

EA Bioware employs a focused differentiation strategy. EA Bioware develops role- playing games that are focused on stories, characters and fictitious worlds through the means of multiplatform, role-playing, MMO and strategy games. Thus, EA bioware’s strategy focuses on a narrow market by targeting customers that specifically play hardcore games. In addition, EA

Bioware’s strategy is differentiated, as they are known to invest copious resources into ongoing services, which produces fewer products, more unique games that are always adding new content through online connectivity such as patches that are distributed digitally.226

EA Mobile employs a cost leadership strategy. EA mobile develops games for mobile devices and tablets which include the iPhone, iPad and Android phones, as well as internet platforms which include social networking sites such as Facebook227. Thus, EA Mobile’s strategy targets a broad market, as the integration of mobile and internet platforms includes the critical user masses by alleviating the barriers that consoles impose on the market. In addition,

EA Mobile employs a cost leadership strategy by allowing customers purchase and download games directly from their mobile devices. Though revenue is generated via paid subscriptions, online advertising, and sales of digital content, many of the games remain free-to-play and the digital distribution model is extremely low-cost, with little to no overhead costs associated with growing user bases.

The following figure shows each of EA’s business-level strategies as a depiction of

Porter’s 4 generic strategies, with low-cost defined as “efficient” and differentiation defined as

“unique”.

226 Takahashi, Dean. “Ray Muzyka Talks About Blockbuster Franchises” Online video clip. Youtube. 10 March. 2010. February 2013 227 Mergent, "Electronic Arts, Inc." Mergent Online. 22 May 2012. Web. .

ISSUES WITH BUSINESS STRATEGIES

Customers’ Limited Perception of Value

EA Games’ differentiation strategy of investing large sums of marketing expenditure in relation to limited funds into product development can lead to consumers buying multiple titles rather than a single title, resulting in higher revenue in the short term. Consumers favor EA titles due to the intangible, and some tangible value created from marketing efforts, however they constantly compare pre-purchase opinions with post-purchase opinions of products. As long as

EA continues to invest in post-purchase marketing such as game support systems and multi social media connectivity, the discrepancy of opinions may be limited, rather than solely pre purchase marketing such as advertising. Over time however there is a chance that consumers stop valuing the differentiating marketing efforts supplied by EA, which would diminish the value of the competitive advantage. This differentiation tactic is especially vulnerable when discussed in relation to the high threat of new competitors within the video game industry.

Whenever limited development costs are a reality, the firm runs the risk of being exposed for inferior products by new rivals with different marketing tactics then current competitors.

The potential limited value perception problem of marketing efforts in the future can also be amplified by the fact that EA games prices are not strongly correlated with development costs, as mentioned in the organizational analysis of assignment 2. The price of EA games is set based on current industry norms, and if that norms change as well as value of marketing efforts for EA, profits will drastically decline.

Imitation

Maxis games are very unique in terms of how they are created, however the success of the unique simulation genre pioneered by Maxis is experiencing a closing window of monopolization. Popular simulation titles competing with SimCity include: Tropico VI (2011),

Anno 2070 (2011), Cities XL (2009), Grand Ages (2009), Tycoon City New York (2006) and

Children of the Nile (2004).228

Although each game can offer a unique view of the simulation genre they all satisfy extremely similar needs, and are not necessarily counterfeiting Maxis’ SimCity, however they are all strongly inspired by the top selling game. There are current barriers in place for mass imitation of EA titles, such as the barriers to entry for competitors due to distribution networks.

Because firms often have to have product approved by third parties such as console owners, products cannot legally be slightly modified and resold, on console. Hard copy distribution systems through brick and mortar stores also act as a deterrent as illegal copies of games would not be allowed to sell. As distribution models change, and games become more widespread for

228 Crasto, Demetrius. techshout. 20 Jun 2012.. sale on the Internet via soft copies, there will be fewer forces stopping imitators. Another force that could result in more imitation is the threat of new entrants. Although competitors are already imitating games such as The Sims, and SimCity, there will be even more imitators as the amount of competitors increases due to the lowering barriers to entry mentioned in the industry analysis.

Distribution Channel Dynamics

EA Games and EA sports in particular rely heavily on the current distribution model as mentioned in the organizational analysis, in particular the pricing breakdown from Nintendo,

Microsoft, and Sony. This model however in by no means definite, and owners of the most popular gaming consoles may change drastically. This presents a major problem for EA as well established understandings and relationships with current distributors may be worthless in the future. It is possible that the next generation console employs different pricing schemes, in turn destroying EA’s profitability. The lack of vertical integration in terms of hardware that can facilitate consuming EA products, serves as an extreme threat and potential problem, due to the aforementioned potential future distributor issue.

Source of Cost Advantage Becomes Obsolete

A common issue associated with cost leadership strategies develops when what was once a source of cost advantage eventually becomes obsolete. In the case of EA Sports, which employs an integrated cost-leadership/differentiation strategy, this is very much the case. EA

Sports is notorious for releasing “new”, slightly innovated games in high frequency. EA Sports will often publish annual versions of the same game, based upon the same league, with most of the same graphics and features as the previous years, but will allocate abundant marketing funds to the release of each subsequent version. Thus, codes, graphics and engines are reused in a cost- efficient manner, but marketing expenditure is so high that the game can no longer reap the benefits of a cost advantage. Hence, costs are driven up that are unrelated to actual product development, and EA Sports’ game prices remain high within the market.

This remains true in the case of EA Mobile, which also employs a cost-leadership strategy. EA Mobile may capitalize on the opportunities that the market’s mobile transition offers like digital distribution and free downloads that keep users satisfied, but it also reveals threats that make such advantages obsolete. Digital distribution and free-to-play payment models dilute revenues and ultimately profits. In addition, as mentioned in the industry analysis, movement of development away from PC-based gaming and towards gaming on mobile devices pose a threat to video games that operate on traditional consoles like PCs of being replaced like never before. Video game publishers and developers must stimulate innovation to survive, or will be overcome by the transition to mobile. In addition, this also depicts a high level of Porter’s threat of substitutes, as the mobile transition threatens to replace PC and console-based video games – which are currently EA’s largest sources of profit.

Overlooking Important Customer Preferences

Another issue common to the cost leadership approach includes overlooking important customer preferences. This is an extremely pertinent issue for EA, as they have notoriously struggled with customer service. As a weakness that was previously indentified in the value chain, the Consumerist tallied over 250,000 votes and determined EA to have the worst customer service in America in 2012229. No other video game company was a finalist in this vote, giving EA an extreme competitive disadvantage.

Though EA Games and EA Bioware employ differentiation strategies, they both exhibit ignored important customer preferences with their subscription-based payment model

229 Morran, Chris. "The Voters Have Spoken: EA Is Your Worst Company In America For 2012! ." Consumerist. 2012. associated with their MMORP (massively multiplayer online role-playing) games. For instance,

EA’s Star Wars: The Old Republic subscription-based game lost tremendous amounts of subscribers upon release, with fewer than one million subscribers left after just a few months of being on the shelves230.

As a previously mentioned threat in the industry analysis, this downturn in

MMORPG popularity among consumers exists because users are given so many free or single- purchase options, thus there is no need for them to continue payments through a subscription. It is simply not realistic to expect users to pay a fee every month when there is so much free content available elsewhere. In fact, the number of gamers who play subscription-based games has declined to 28% in 2010 from 35% in just 2009, as depicted in the figure below231.Even more astonishing, player interest in MMOGs has decreased by 45% from 2009 to 2011232. Thus,

EA’s release of MMORPGs may signify that the organization is missing the mark in respect to

230 Boorstin, Julia. "Electronic Arts' Radical Strategy for Long-Term Growth." Stock Market News, Business News, Financial, Earnings, World Markets - CNBC.1 Aug. 2012. Web. .

231 Tan, Nicholas. "MMOG Subscriptions on the Decline." Game Revolution - Xbox 360, Wii, PS3, PS2 Game Cheats & Reviews. 12 Nov. 2010. Web. . 232 Tan, Nicholas. "MMOG Subscriptions on the Decline." Game Revolution - Xbox 360, Wii, PS3, PS2 Game Cheats & Reviews. 12 Nov. 2010. Web. . customer preferences in an attempt to generate more revenues.

233

STRATEGY RECOMMENDATIONS AND RATIONALE

The following will provide strategy recommendations and rationale via a revised value chain to remedy and/or address the problems associated with the business strategy (denoted with a P), threats or opportunities that were introduced in assignment 1 (denoted with a T or O, respectively) or weaknesses that were established in assignment 2 (denoted with a W).

233 Tan, Nicholas. "MMOG Subscriptions on the Decline." Game Revolution - Xbox 360, Wii, PS3, PS2 Game Cheats & Reviews. 12 Nov. 2010. Web. . • Stifled innovation due to vertical integration (W) Supply • Conflicts of interest within supply chain (T) Chain • Imitation(P)

• Low cash flow from operations (W) Operations • Low return on assets (W)

• Mobile Transition (O and T) • Rise of Digital Distribution (O and T) • Growing population of internet users (O) • Downturn of MMOGs (T) Distribution • Distribution Channel Dynamics(P) • Source of Cost Advantage Becomes Obsolete (P) • Overlooking Important Customer Preferences (P)

• Overexpenditure (W) • Relatively high prices (W) • Parental influence (O) Marketing • Customers’ Limited Perception of Value (P) and sales • Source of Cost Advantage Becomes Obsolete (P) • Overlooking Important Customer Preferences (P)

• Bad reputation (W) Customer Service • Customers’ Limited Perception of Value (P) • Overlooking Important Customer Preferences (P)

• N/A Human Resource Management

• Overexpenditure (W) R&D/New • Imitation (P) Product • Source of Cost Advantage Becomes Obsolete (P) Development

• Lowest average years of service among its board members (W) Corporate • Lack of Sustainability and Corporate Social Responsibility initiatives (W) Leadership

Supply Chain

It was noted in the internal organizational analysis of assignment 2 that stifled innovation is a common weakness that emerges from extremely vertically integrated value chains much like

EA’s. EA is the culmination of a developing, marketing, publishing and distributing firm, thus

EA must actively seek knowledge-based suppliers and consultants to integrate into their value chain to avoid a stagnate corporate culture. EA’s suppliers include third party developers and coders, which are often employed into the value chain by EA games and Maxis234. These knowledge-based suppliers and consultants will add diversity and market knowledge into EA’s supply chain to improve their mindfulness of market trends and efficiency in supply chain processes. Any additional efforts put forth to avoid a stagnating corporate culture and suspended innovation will offset EA’s weaknesses associated with its extremely vertically integrated value chain.

234 Mergent, "Electronic Arts, Inc." Mergent Online. 22 May 2012. Web. . In addition, it was also noted that conflicts of interest within the supply chain could pose a substantial threat to EA’s value creation. EA may find it beneficial to determine the close, partner-like, “strategic” suppliers from the suppliers that are kept at arm’s-length and may only be purchased from on occasion. EA can then deem the maximum benefit it can extract from its closest suppliers, from whom obtaining discounts and additional competitive advantage is more likely. Thus, EA could choose to integrate a large variety of suppliers to ensure that information is truly unbiased, or they could develop a close partnership with fewer suppliers, which is likely preferable option. This is because a close partnership with fewer suppliers fosters a supply chain based on trust, mutual benefit and respect. This can be done by signing contracts or promising business to third-party developers and coders. Thus, these developers are likely to agree not to participate in contracts that would denote a conflict of interest in return for EA’s loyal business.

Additionally, this would also address the imitation problem associated with the cost-leadership business strategy that is employed by EA mobile and partially by EA sports. This is because close supplier partnerships, opposed to arms-length supplier partnerships, foster trust to the point of unbiased – or positively biased knowledge and consulting. Essentially, close developers and coders are likely to have insightful information into market trends, in addition to the newest innovative trends that EA’s competitors are employing. In addition to providing such information to EA, these partner-like suppliers are to be trusted not to share EA’s innovative trends with EA’s competition, which would otherwise be a direct source of imitation of EA products. A prevalent risk includes dissatisfaction with a supplier because of their inefficiencies, inadequate outputs or dishonesty, in which case EA would like to breach the contract – which may come with a hefty price and could be financially burdening. Operations

Though there were no notable opportunities or threats upon performing the external industry analysis of assignment 1 in respect to operations, there were, however notable weaknesses in EA’s operations. EA exhibited a low cash flow from operations, and is below all of its competitors and the industry average overall showing an overall weakness in Cash flow to revenue. Its competitors are outperforming Electronic Arts with regards to having more efficient techniques thus increasing their cash flow from operations. This low percentage indicates that

EA is unable to a turn high amount of its revenue into profits and net cash flow from its operating activities. This can be remedied in a number of ways. Firstly, EA can segment inventory. This would include observing the volatility of sales. EA must focus on products that are “hits”, such as Madden, NFL and The Sims, and less on products that only sell periodically or sporadically – as this extra capital could be most effectively reinvested into the products that generate most profit, and has the quickest turnover. In addition, this would also better serve customer needs.

In addition, EA also exhibited a notably low return on assets. This signifies an inefficiency of EA’s resources and their impact on providing profitable revenue streams. Since many video game companies invest into leasing and the ownership of large facilities, return on assets gives an indication on how profitable their operations are. In fact, Electronic Arts Inc is the most unprofitable in terms of its return on assets as it remained negative for the last three years while all competitors managed to have positive numbers at the end of 2011. This means that the company is injecting a large amount of capital into operations while simultaneously receiving little income. To remedy this, EA should consider switching to more efficient warehouse locations – as large warehouses in urban areas can make operation costs skyrocket, and could be partially responsible for a low return on assets. In addition, EA should be particularly mindful of equipment costs, such as graphics software, enterprise resource planning systems and computers with powerful processing abilities, and should allocate more into equipment maintenance, organization-wide implementation rather than just installation, and software updates to avoid costly replacement costs – which could also be a great contributor to a low return on assets. For example, failing to properly implement an ERP system organization- wide (through proper end-user training, etc.) by falsely believing that a simple installation would suffice could result in millions of dollars lost on operations. Nike, Sobeys and HP are exemplary firms that attempted to implement an ERP system like SAP, but failed to implement the change throughout the organization, which resulted in the loss of millions of dollars235.

Distribution

As mentioned, problem associated with EA’s business strategy is distribution channel dynamics. Essentially, this means that channels of distribution are incredibly dynamic and are difficult to predict for the future. Thus, EA could invest immensely in a channel of distribution by distributing their products as disks for PCs or console-compatible games – though, if such distribution channels were to become irrelevant, this would adversely impact EA’s profitability immensely. For this reason, EA should alter its distribution activity to capitalize on the more relevant distribution channels of today: the mobile transition, as well as digital distribution. This is directly linked to the rising of both of mobile and digital distribution, which is established as both an opportunity and a threat in the industry analysis. Digital distribution channels and mobile gaming present an opportunity of costs savings, as there is little-to-no overhead with each successive user, and the nature of mobile and digital distribution knows no geographic

235 Wailgum, Thomas. "10 Famous ERP Disasters, Dustups and Disappointments." CIO.com. N.p., 24 Mar. 2009. Web. . boundaries, so it would render EA less dependent on physical storefronts as a means of distribution. In addition, as discovered upon analyzing the industry in assignment 1, there is a growing population of internet users in all of EA’s major markets, making the concept of digital distribution that much more opportunistic. In specific, from the years 2007 to 2012, the number of internet subscribers in Japan, USA and the UK grow 8.5%, 9.4% and 13.9% respectively236.

It is noted that the mobile transition proposes a threat to essentially replace traditional PC and console-based video games, so EA is suggested to encourage the transition rather than fight it. This would entail that EA develops more smartphone and mobile device-compatible games and relieves their focus from traditional console and PC games – with the exceptions of their blockbuster “hit” games, such as NFL, Madden, Fifa and The Sims.

EA can employ this mobile transition using 4 techniques: in-app purchases need to be compelling and tailored to the game and audience; analytics will provide constant assessment of what's effective and what needs to be changed, “live service” will release periodic updates and additional game content to keep users interested, and finally, social features and ad content will complement gameplay without being intrusive237.

The mobile transition will employ the “freemium” payment model, which is expected to monetise better than traditional one-time-downloads and ad-supported games and require the previously mentioned "live-service". Free-to-play games will aid discoverability of EA brands in the crowded videogame marketplace and will drive more consumers, including non-gamers. This is because the mobile transition and digital distribution that are made possible with the downloading of data via the internet alleviate the barriers imposed by expensive consoles that are

236 Passport GMID "Internet Users". Euromonitor International, 2012. Web. . 237 Smith, Chris. " Mobile gaming: Peter Parmenter, EA Mobile – Q&A | Media Network | guardian.co.uk ." Latest US news, world news, sport and comment from the Guardian | guardiannews.com | The Guardian . 15 Nov. 2012. Web. . generally exclusive to “gamers”. Thus, the free-to-play model does not dilute revenues like one may initially believe, but actually helps generate revenues and satisfy customers like never before. Ultimately, the source of cost advantage then no longer becomes obsolete for EA Mobile.

In addition, gamers are simply not willing to pay to play anymore: there has been a downturn in subscribers to MMOGs (massively multiplayer online games), as mentioned as a threat in the industry analysis of assignment 1. Thus, EA is suggested to capitalize on the “freemium” model with online games as well. According to Electronic Arts COO Peter Moore, “The idea of giving away play for free is the trend seeing that we’re in the market place.” Thus, this trend in recruiting more gamers while knocking down price barriers may aid in EA’s organizational growth in respect to its user base238. To make up for lost revenues, users can choose to purchase upgrades with in-game currency, for example. This strategy focuses on recruiting as large of a user base as possible in hopes of tapping into opportunity for long-term growth, while also addressing important customer preferences against subscription models instead of ignoring them.

The vehicle for this digitization of sales will be externally sourced. More specifically, this will be done via leveraging Infrastructure as a Service, or IaaS. Infrastructure will be purchased from – and perhaps implemented by – a third party. In EA’s case, the software infrastructure could be based on cloud computing, thus virtualizing a portion of EA’s enterprise architecture – its business model. Many believe that cloud computing operates over networks that can be easily compromised, but this is a myth. Essentially, cloud computing requires digital (online) and smartphone (online) game data to be stored elsewhere, not on EA’s servers, but on third-party host servers. This will also remedy one of EA’s weaknesses: two weeks ago, EA released the

238 Boorstin, Julia. "Electronic Arts' Radical Strategy for Long-Term Growth." Stock Market News, Business News, Financial, Earnings, World Markets - CNBC.1 Aug. 2012. Web. . newest SimCity game, but users had trouble connecting to the online game and staying connected. EA blamed its servers but this weakness, as EA didn’t anticipate the game’s overwhelming popularity, thus the servers were overloaded with users239. Cloud computing would alleviate EA’s servers, creating an opportunity to prevent this issue from occurring again.

Piracy, viruses and glitches from user “mods” are possible threats, so the enforcement security measures like reinforced network security, more intricate authentication processes (i.e. biometrics), required product keys or encrypted web pages to download the games will be a major part of implementation. Misconceptions among users (and potential users) that cloud computing renders data insecure could also serve as a risk when trying to stimulate growth within the user base.

Marketing

The following strategic decision would strengthen a revenue stream, increase marketing efforts while minimizing costs, keep EA on top of changing customer preferences and maintain the competitive advantage of having EA product always in the consumers evoked set.

Symbiotic Product Placements

In such an immensely dynamic industry, no revenue stream can be guaranteed in the long run. Traditional models, such as the point of sale method, are being replaced with in game services and add-ons, which constantly suffer from piracy and high commissions through console companies/distributors. With such an uncertain method of delivering product to the consumer, an abundance of capital has been invested into traditional and modern marketing techniques to ensure gamers chose EA products, regardless of how they buy. As a result marketing costs are astronomical, and the results are just keeping EA on par with competition in

239 Streitfield, David. "Electronic Arts Chief Resigns, Sending Stock Up - NYTimes.com." The New York Times - Breaking News, World News & Multimedia. The New York Times, 18 Mar. 2013. Web. . terms of brand awareness/ visibility. In this chaos EA needs a more certain revenue stream that remains throughout the on-going lifecycle of games, even when consumers do not want to buy add-ons. EA needs to monetize the countless hours of gamers, after purchase.

In-game advertising is already a small revenue stream for EA, as they sell static advertising240 and varying advertising241, but the potential being reached is the tip of the virtual iceberg. A proposed change in the paradigm of how to monetize video games could lead to multiple symbiotic marketing partnerships. The strategy proposes a Partner Relationship

Manager position to be created to work side by side with developers, with the goal branding every product within games as the games are being created, and after they are made. Problem solving skills, and creativity would be required for this position, as each game can be leveraged in extremely different ways. An example of a potential deal for EA would be to approach Film

Studio A with the information that there is a movie theatre level in an upcoming game, and that

EA would love to be able to show a scene from Film Studio A’s upcoming movie. In return EA can ask from Film Studio A to have a character in Film studio A’s other film that is already scripted to be playing a video game, to be playing EA’s game. An entrepreneurially minded

Partner Relationship Manager would then realize that the value to Film Studio A for one film in the movie theatre decreases after the film has been in theatres for three weeks, and realizes EA is able to change the movie theatre scene to another film with some simple updates to the game after talking with developers, to fully monetize the hours of attention from gamers EA controls.

Film Studio A submits a new movie scene every three weeks to fully maximize their own marketing efforts, and also keeping EA’s game fresh and re-playable. As long as the target

240 Static Advertising: In-game advertising that is within a game as it released and does not change with updates and patches 241 Varying Advertising: Advertisement spots (ex. Virtual billboards) that are changed with each patch and updates for new products markets for EA’s game with the movie theatre level, and Film Studio A ‘s films have similar interests, not only do both parties increase marketing efforts while reducing costs, but both final products are in fact improved. As virtual worlds in video games and films attempt to imitate reality, and become closer to accomplishing their goal, real foreign products will make a stronger presence within those mediums, which must be leveraged.

Film Studio A owns a way to directly benefit EA’s value chain, and so do endless other business in unique and creative ways that encompass EA’s brand values. Although advertisement such as the scene being screened in EA’s movie theatre level in a game could always just be sold, there are many other opportunities for creative marketing partnerships; some examples of creative marketing partnerships can be found below:

 A game with a car could use a Ferrari. Ferrari could then put an EA sticker on their

winning racecar right before the upcoming race. There is a direct correlation between

users of EA’s overwhelmingly popular Need for Speed games and racing fans.

 Maple Leaf Food’s hotdogs could be sold in NHL 13’s hockey arenas. A code for a free

jersey in NHL 13 could be given away inside Maple Leaf Food’s salami packages.

 Westin Hotels can be where protagonist sleeps instead of in a nameless hotel, in

exchange Westin Hotels in real life may allow guests to play EA Xbox games in their

rooms, for a discounted fee.

The examples above are useful at conveying the way of thinking a Partner Relationship

Manager should embody within their work. The threat of piracy is mitigated with a fully branded game because EA will still profit from a game that is not paid for, solely by having a consumer play it and share cherished gaming time with a new brand, and start a relationship. The threat of a changing distribution model is mitigated; marketing expenditure is decreased yet results are increased. Maintaining several marketing relationships will offer EA a unique and fresh perspective into consumers changing tastes and preferences allowing for innovativeness to increase sales, and game play time. EA will gain visibility in ways it never before had, at the cost of creating virtual worlds that are more realistic, and therefore of higher quality.

Customer Service

Although when measuring empirical performance indicators of customer service such as available forums for customer support, and replacement costs EA ranks in the top of the industry, the perception consumers have of EA is much lower. This discrepancy becomes evident considering that EA was voted to have the worst customer service in America in 2012, after 250,

000 votes. EA employs a division separate from developers in charge of dealing with minor bugs and patches in games already in distribution, where developers focus on creating new games, and only assist with major problems in previously created games. The first step in order to fix the reputation is to make the customer service more efficient, and over time the perception and reality will align. In order to better serve the customer service function it would be beneficial for developers of a game to take time in between games to help the customer service coders learn the details of each game. Although time developers are not spending on making new games can be seen as wasted time eating into revenue, it is imperative that EA products are held in high esteem or else the new games will not be sold. Having time in between projects for developers to assist customer service coders is important right after the game is launched due to the fact that, that period is the time where a game is most susceptible to having problems such as bugs. Developers can also be active on media primarily reserved for customer service representatives such as

Facebook support, Twitter support, Telephone support, Email, Mail and Website tickets. Because

EA is able to offer relatively cheap replacement costs compared to other companies in the industry (Activision-Blizzard, and Take-Two Interactive), these prices should be more prominently displayed, as they are now only located on the legal section of the website. Even if consumers do not have broken games, they would still hold EA in higher esteem if game packages displayed replacement costs if broken, justifying the price as shipping fees. The ability to advertise changing replacement costs aligns with EA’s competitive advantage of having open communication channels between departments, and would mitigate the weakness of negative perception. Coupled with more prominently displaying the relatively low replacement costs, increasing the presence of Facebook support and Twitter support would also help increase EA’s value in terms of customer support. Methods to increase the visibility of these support channels would be for more customer representatives to actively search for problems people are having on forums, and discussion boards all over the internet and direct people to the Facebook or Twitter page. Aside from solely posting informative information and helping consumers, customer service technicians can add personality to the messages, making them hopeful and entertaining for people who do not have the specific problem. The following figure is an example of what a typical Facebook post from EA support looks like, and although it is informative it might make people who are not having a problem think they will have a problem and generally lose perceived value in the product, if they have purchased it or not.

A more attractive message could embody an element of humor and maintain its usefulness. An example of a message could be: “Servers were down temporarily from an alien escaping at EA head quarters, we caught him though, and they’re fixed! Access the following link to learn how to start up the game properly http://bit.ly/UGRyXb , stay strong soldier!” The inside jokes would make people not have the game interested in joining the community, from a problem rather than be turned off by a standard error message.

R&D / New Product Development

Upon internal performing an internal organizational analysis for the second assignment, it was noted that EA far outspent its competitors in R&D and new product development in recent years. In 2009, EA invested a sizable 33.63% of their revenues into R&D, when the next-largest proportion of their direct competitors was exhibited by Activision Blizzard, with only 14.65%242

- less than half of the proportion that EA invested. For the years leading up to and including

2011, the proportion of sales that EA has invested into research and development is yet to be matched by other competitors. Thus, EA’s overzealous R&D investment trend is likely a weakness and likely contributes to its negative return on investment (-23.86% in 2009) 243.

Although this investment may seem wise, especially in the video game industry where new products are always emerging and innovation is emphasized, this was identified as a weakness:

Since technology is developing at an exponential rate, it would be wiser to save funds for impending, future technological trends and innovations. As mentioned, EA has been known to release “new”, slightly innovated games in high frequency. EA will often publish annual versions of the same game with codes, graphics and engines that are reused in a cost-efficient manner, but EA will market the game so much so that the game can no longer reap the benefits

242 Activision Blizzard, Annual Report. 2009. 243 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. of a cost advantage. Ultimately, costs are driven up that are unrelated to actual product development, and EA’s game prices remain high within the market, thus the source of cost advantage becomes obsolete, and this is a common issue for firms that attempt to cut costs. Thus,

EA is recommended to spend less on frequent, smaller innovations to reinvest into their brands in order to develop powerful, less frequent innovations through new game development.

This is done by outsourcing the tedious portions of game development that do not require innovative developer talent to third-party developers. The portions are the project that will not be outsourced and will be developed in-house will be given more flexible deadlines. Since these games are being relieved of their current, hard release dates, they will be developed fully so that the entire development team feels that the game’s potential is fully realized and explored.

The focus of this strategy is to deliver high quality products and technological advances in every detail of the game, rather than insignificant improvements on existing products on a more realistic, practical basis. This should also cut costs from marketing and publishing so frequently.

Though, notable risks are involved. This is includes the risk of probable delay caused by communication lags and lack of proper governance and managerial oversight when outsourcing tasks abroad. A second risk includes compromised intellectual property through knowledge sharing that is required by outsourcing. EA may alleviate this risk by only outsourcing segmented tasks and game content, thus keeping innovative content and development hidden. EA can pick and choose what they may or may not want to share with third-party developers.

Imitation is also an issue for EA. There have been many games that have been strongly inspired by EA’s top selling games such as SimCity, for example. Though there are barriers that do exist to prevent blatant imitation, EA is recommended to take additional measures, such as more rigorous copyrighting and trade marking initiatives. EA has the second-most proportion of trademarks and copyrights of their assets among its direct competitors next to Activision

Blizzard –accounting for 0.92%, 0.68% and 0.41%244 of total assets in 2009, 2010 and 2011, respectively. Thus, EA is suggested to increase number of patents they file on a regular basis to better protect their intellectual property. In addition, the strategy to develop fewer, larger innovations (as well as the revision in supplier relationships previously mentioned) will further increase barriers for competition to imitate EA games.

Corporate Leadership

The two main issues at EA in terms of corporate leadership are the lack of Corporate

Social Responsibility Initiatives and the high turnover among board members. Both problems are related, as board members will be more likely to stay at EA if they feel as though they are helping out in regards to social and environmental issues245. Sustainability is naturally common within software companies as virtual copies of games lead to no waste, unlike products from traditional manufacturers. Although waste is not created by EA in the traditional sense, an excess of energy usage is an extreme indirect pollutant. Implementing a full sustainability initiative will not only help the environment but also EA’s goodwill will increase in the perception of all stakeholders. The initiative will cover methods of being more efficient with energy, as well as indicate how much profit should be donated and how charities or social organizations are selected in order to receive donation. A charity that represents desirable values for EA would help the most in terms of portraying a positive public image. An example of this phenomenon is that because parents are worried about video games promoting violence as mentioned in the

244 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. 245 Serafeim, Robert G. Eccles Ioannis Ioannou George. "The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance." 2011.

industry analysis, a donation to a charity such as one that stops violence against women will

cement EA’s official stance on the subject.

Implementing official policies indicating charity donations is straight forward, but in

order for EA to fully make the transition to a sustainable eco-friendly organization the core

culture will need to change. Incremental steps will then have to happen not only in formalized

actions, but attitudes to dealing with general problem solving scenarios. After the culture is at a

desired state, management will continue encouraging sustainable behavior to ensure the new

culture remains. With all employees feeling more comfortable with how their work is effecting

the environment, not only will board members have a lower turnover rate, but so will employees

at all levels. The largest associated risk is resistance to change, which is common when trying the

implement change at a very human very; with employee tasks and inefficiencies, as opposed to

implementing change in a system.

IMPLEMENTATION OVERVIEW

High-Level Time Line

Business-Functional Strategies: Implementation Timeline Months 3 6 9 12 >12 1. Charitable Donations (Corporate Leadership) 2. CSR and Sustainability Policies (Corporate Leadership) 3. Additional Customer Service Initiatives (Customer Service) 4. Contracts with Third-Party Developers (Supply Chain) 5. Symbiotic Product Placements (Marketing) 6. Increasing Trademarks and Copyrights (R&D) 7. Segment Inventory (Operations) 8. Initiatives to Reduce Operations Costs (Operations) 9. Outsourcing Tedious Developing (R&D) 10. “Bigger, Fewer” Strategy (R&D) 11. “Freemium” Game Integration (Distribution) 12. Transition to Mobile and Digital Distribution (Distribution)

Cost Legend Very High High Moderate Low-Moderate Low

As depicted in the chart above, most strategies are fairly low-cost, as many of the

strategic recommendations aim to reduce EA’s costs to render the organization more profitable,

and to do so under a reasonable time frame.

The business-functional strategies are listed in the theoretical chronological order of

implementation. This order was justified based on simplicity of implementation and need.

Essentially, the most simplest, most urgently needed strategies are implemented first, while the

most complex and least urgently needed strategies are implemented will be given a bit more time

before they are actually underway.

A more detailed forecast of implementation costs is displayed below:

Costs $ 1. Charitable Donations (Corporate Leadership) 200,000 $ 2. CSR and Sustainability Policies (Corporate Leadership) 50,000 $ 3. Additional Customer Service Initiatives (Customer Service) 540,000 $ 4. Contracts with Third-Party Developers (Supply Chain) 200,000 $ 5. Symbiotic Product Placements (Marketing) 357,750 $ 6. Increasing Trademarks and Copyrights (R&D) 123,200 $ 7. Segment Inventory (Operations) 200,000 8. Initiatives to Reduce Operations Costs (Operations) $ 500,000 $ 9. Outsourcing Tedious Developing (R&D) 290,940 $ 10. “Bigger, Fewer” Strategy (R&D) 50,000 $ 11. “Freemium” Game Integration (Distribution) 100,000 12. Transition to Mobile and Digital Distribution (Distribution) $ 2,611,890.00

Beginning with charitable donations, this is a strategy that can be implemented right away – as EA should, since they’ve been lacking any CSR initiatives to give back to the community thus far. Corporate social responsibility and sustainability initiatives are next to be implemented, and little risk is associated with CSR and sustainability initiatives – EA just must ensure that they are following proper protocols and are implementing the policies safely. To add to this recommendation’s specificity: Donations are made to Child’s Play, a game industry charity dedicated to improving the lives of children with toys and games in our network of over

70 hospitals worldwide. These donations allow for children to enjoy age-appropriate entertainment, interact with their peers, friends, and family, and can provide vital distraction from otherwise generally unpleasant circumstances. In addition, this recommendation includes updating CSR policy handbooks and start an emissions reduction campaign (i.e. shut off all lights and machinery during closing hours).

Additional customer service are next to be implemented. This will likely take a number of months to establish, and perhaps a focus group will be used to test the quality of customer support and after-sale service initiatives. Glitches and additional customer dissatisfaction are the main risks, but should be fortified in a few short months. High costs are incurred through hiring

25 employees at $13.50/hour to create a 24 hour technical support line (current line is open from 5am to 7pm pacific time).

Contracts with EA’s suppliers such as third-party developers and coders are next to be implemented. This is done to establish close partnership-like relationships with suppliers to reap mutual benefit. Though it is low cost and could be done immediately, associated risks include breach of contract, breach of trust, conflict of interest, unbiased information, etc. Thus, contingency plans may include clauses for such cases within the contracts being signed. 10 new contracts are expected cost $20,000 each.

The next strategy to be implemented is the symbiotic product placements. As a moderately low-cost alternative to traditional marketing, monetary risks are reduced.

Implementation can begin in 6 months’ time and continue onward. Costs are incurred via the following: Small to large-sized billboards that range between $300 - $30,000 per ad per 4 week period, as well as digital bulletin (large digital) ranges between $3,500 - $25,000 per ad per 4 week period for an ~8 second spot in a loop of ~64 seconds. The ranges of rates depend on size, timing, market and specific location. Minimum purchase is 5 to 20 billboards thus, EA is recommended to purchase 20246.

Increasing trademarks and copyrights is next to be implemented. Patents and copyrights should be submitted immediately, as it will likely be a timely process before they are completed and effective. Since this initiative is to reduce risk, little risk is actually associated with an increase in protection of intellectual property. To compete with Activision Blizzard’s 3% of total assets, EA will increase patents from .5% to 3%, which is over $100,000. Most importantly, this translates into an increase in the number of patents being filed per on a regular basis.

The following implementation is inventory segmentation. Defining which inventory is to

246 Blue Line Media, "Billboard Advertising in 300 Cities - Billboard Ads Company." Advertising Company in 300 Cities - Blue Line Media. . be replaced and which is to be focused upon takes some time: about a year to make an accurate decision. Risks include not meeting demand for certain products or having excess supply for others – in which case, revised production should begin immediately and inventory should be re- segmented and readjusted as appropriate. Improved inventory segmentation can detect demand and deliver accordingly, thus reducing excess supply and stock based on product needs. EA would capitalize on hit products, and save costs by filtering out what isn’t producing profits.

Shortly following suit are the initiatives to reduce operation costs.

Implementing the “Freemium” game model consists of implementing more free-to-play games and ridding EA is subscription-based games with the expectation of stimulating long-term growth. Thus, the associated risk is characterized by a lack of long-term growth – in which case, subscription-based games will be reintroduced before making decision concerning the remaining free-to-play games. "Freemium" feature only incurs costs to develop game however most of cost will be absorbed when customers subscribe post-free trial.

The following 3 stages of implementation characterize the key recommendations that are imperative to improved performance. If the strategic recommendations are to be summarized in one phrase, it would be “Do fewer, do bigger, go digital, go mobile”. The following stages of implementation facilitate the elements of this statement.

The next implementation is outsourcing tedious game developing to third-party developers. This could accumulate high costs, as labour is being outsourced elsewhere. Risk is reduced if suppliers are kept close and are trusted, but common risks with suppliers still exist.

The most prevalent risk is the risk of compromised intellectual property, but patents can aid in protecting the engines used for developing, and EA may withhold innovations in development and only outsource segmented parts of games, so that third-party developers can perform tasks like filling in trees and completing game landscapes and character features, etc. This section aids the “do fewer and bigger” part of the strategic statement, as it allows skilled at-home developers to focus on innovation in order to release less frequent, but far more radically different games.

The “Bigger, fewer” R&D strategy is a large, comprehensive strategy that will likely take more time than most of the other strategies. Deeper innovation is required for each game and new release revenues are less frequent. It would include focusing current R&D efforts on successful games in order to filter out underperformers, which is fortified through the previously mentioned inventory segmentation. A contingency plan would include a gradual shift back to the original business model.

As a final implementation, the transition to mobile and digital distribution will refine

EA’s distribution channels altogether. This will be done by leveraging Infrastructure as a

Service, or IaaS. In EA’s case, the software infrastructure could be based on cloud computing, thus virtualizing a portion of EA’s enterprise architecture – its business model. Many believe that cloud computing operates over networks that can be easily compromised, but this is a myth.

Piracy, viruses and glitches from user “mods” are possible threats, so the enforcement security measures like reinforced network security, more intricate authentication processes (i.e. biometrics), required product keys or encrypted web pages to download the games will be a major part of implementation. This stage of implementation encompasses the “Go digital” and

“go mobile” parts of the strategic statement.

Financing Sources

Drawing on the weighted average cost of capital that was established previously, it may be somewhat difficult to finance such strategies. This is because the weighted average cost of capital for Electronic Arts is among the lowest of its competitors. This signifies that investors expect less return from their investments in these companies due to a lower perceived risk. In addition, EA has experienced a fluctuating beta over the years while maintaining close to 1, displaying that EA’s share price moves with that of the overall market. Thus, EA’s volatility is directly linked to the volatility of the market, and risk-averse investor may be unlikely to invest in EA. Additionally, EA’s credit rating is also low. As previously mentioned, the Altman Z-

Score is useful in determining a company’s financial health. Electronic Arts Inc has been just under or above 3.0 in past years, and in the most recent fiscal year, EA has an A Z-score of 2.84.

The firm may also have relative difficulty in obtaining loans and capital due to the rating.

As a result of expensive external financing, Electronic Arts is recommended to use internal funding as a source of capital. Free cash flow for EA is expected to be around $300.0 million for fiscal 2013247. Resultantly, the $2.6 million in required cash outlay can be easily financed. The expected payback period for the aforementioned strategy implementation will approximate two years. For these first two years of implementation alone, the expected return on investment will be 16%. Using Electronic Art’s WACC of 9.65% for the 2011 fiscal year and assuming a five year life of the cash flows, the present value of the implementation will be approximately $10 million. Electronic Arts will realize a return of 284% as a result of the implementations and is thus encouraged to pursue such a value enhancing investment. Please

Refer to Appendix E: Payback Period and Expected Return Calculations for further details.

A 5-year period was chosen as expected life of cash flows due to the volatility and constantly changing environment within the video game industry. This is because the video game market is one of incredibly fast-cycle, thus cash flow is expected to have an exceptionally short life in comparison to the 10-year discount number used by many firms.

247 Zack’s Equity Research. “EA Reports Profit in Q2”. October 31 2012. . Summary

Although EA has been suggested to undertake 12 strategic recommendations to address and/or remedy the weaknesses, threats and opportunities that are apparent in its current value chain, EA’s most important recommendations can be characterized in one strategic statement

“Do fewer, do bigger, go mobile, go digital”. Hence, these strategic recommendations in specific will have the greatest impact in obtaining a competitive advantage. In specific, this includes outsourcing tedious developing to third-party game developers in order for EA’s in-house talent to focus on substantial value creation through game development, so that game innovation becomes a core competency for EA, for which they may capitalize on as a competitive advantage. This also includes imposing a “bigger, fewer” strategy in respect to the publishing of

EA’s games. EA will publish fewer, more innovative games. This will render EA’s games as higher quality, more non-substitutable, and will provide barrier to competitors looking to counterfeit EA’s developments. Lastly, the recommendations with greatest impact also include a transition to mobile and digital distribution. This transition will be done by leveraging IaaS through externally sourced cloud computing technology. Digital and mobile access to games will attract traditional and non-traditional gamers alike, as it alleviates all the barriers that are imposed by having to purchase a disk for an expensive console that a small percentage of the population has access to. Though, the population percentage with data, smartphone and internet access is outstanding – and is yet growing in all of EA’s major operating markets. Thus, this inflow of “gamers” that now have access to EA’s brands and EA’s new gaming experience will stimulate growth that competitors will be unable to match – and this will place EA at a great competitive advantage. Bibliography

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APPENDICES

Appendix A: GDP by Expenditure

Appendix B: Consumer Confidence

Appendix C: Consumer Price Index

Appendix D: CPI Forecast US

Appendix E: CPI Forecast Japan

Appendix F: CPI Forecast Europe

Appendix G: Europe Disposable Income

Appendix H: EURO/USD Forecast

Appendix I: YEN/USD Forecast

Appendix J: Gamer Demographics 2004

248

248 Entertainment Software Association. "2004 Essential Facts about the Computer and Video Game Industry." Princeton., 2004. Web. . APPENDIX K: GAMER DEMOGRAPHICS 2012

249

249 Entertainment Software Association. "2012 Essential Facts about the Computer and Video Game Industry." The ESA., 2012. Web. . APPENDIX L: THE FUTURE DEMOGRAPHIC

USA

250

JAPAN

250 Passport GMID. "United States of America in 2030: The Future Demographic”. Euromonitor International, 2012. Web. < www.portal.euromonitor.com.proxy.library.carleton.ca/Portal/Pages/Magazine/TopicPage.aspx>.

251

UK

251 Passport GMID. "Japan in 2030: The Future Demographic”. Euromonitor International, 2012. Web. .

252

APPENDIX M: SALES INFORMATION

252 Passport GMID. "UK in 2030: The Future Demographic”. Euromonitor International, 2012. Web. < www.portal.euromonitor.com.proxy.library.carleton.ca/Portal/Pages/Magazine/TopicPage.aspx>.

*average video game price= 16600 million dollars/245.6 million units = 67 dollars/unit

253

253 Entertainment Software Association. "2012 Essential Facts about the Computer and Video Game Industry." The ESA., 2012. Web. . APPENDIX N: RATINGS 2002-2003

254

254 Entertainment Software Association. "2004 Essential Facts about the Computer and Video Game Industry." Princeton., 2004. Web. . APPENDIX O: GENRES AND RATINGS 2012

255

255 Entertainment Software Association. "2012 Essential Facts about the Computer and Video Game Industry." The ESA., 2012. Web. . APPENDIX P: PARENTS AND GAMES 2004

256

256 Entertainment Software Association. "2004 Essential Facts about the Computer and Video Game Industry." Princeton., 2004. Web. . APPENDIX Q: PARENTS AND GAMES 2012

257

Appendix R: US Industry Overview258

257 Entertainment Software Association. "2012 Essential Facts about the Computer and Video Game Industry." The ESA., 2012. Web. . 258 Bloomberg Terminal. United States: Video Game Industry Overview. Accessed February 1 2013. ROE ROA ROI Ticker Name 2010 2011 2012 2010 2011 2012 2010 2011 2012 None (16 securities) Average Average -12.4014 8.955213 5.919553 -4.3338 2.843453 3.326327 10.66176 6.527111 8.040467 EA US Equity ELECTRONIC ARTS INC -39.1382 -5.9312 -11.2012 -23.8599 -3.3067 -5.8415 N US Equity NETSUITE INC -19.6067 -26.146 -27.6285 -10.2044 -13.4938 -13.2828 13.6108 10.7653 SNPS US Equity SYNOPSYS INC 9.9439 12.0204 10.5374 5.9029 7.616 6.6522 3.7988 5.3954 CNQR US Equity CONCUR TECHNOLOGIES INC 4.8637 3.4756 -1.6077 3.9145 2.351 -0.9772 CDNS US Equity CADENCE DESIGN SYS INC -198.292 84.3314 11.9242 -76.5929 10.5998 2.2486 10.5875 8.4295 SLH US Equity SOLERA HOLDINGS INC 13.475 17.0671 23.4926 4.7107 6.3192 8.8428 9.7411 8.5053 7.4128 ANSS US Equity ANSYS INC 9.1486 10.4242 11.5667 5.9924 7.1324 8.1658 11.6994 6.99 ATHN US Equity ATHENAHEALTH INC 28.3938 6.803 11.2536 20.107 4.5753 7.5319 -4.8101 NUAN US Equity NUANCE COMMUNICATIONS INC -1.1211 -0.882 1.5995 -0.611 -0.5255 0.9724 12.4114 3.4676 PMTC US Equity PTC INC 6.0763 2.5736 11.6998 3.3751 1.5115 6.5457 7.0455 3.8247 ULTI US Equity ULTIMATE SOFTWARE GROUP INC -1.0844 1.2931 5.3097 -0.4109 0.3789 1.3784 16.8859 14.6011 4.3102 ADSK US Equity AUTODESK INC -6.879 13.4212 16.249 -4.1543 8.1895 9.8423 WDAY US Equity WORKDAY INC-CLASS A MENT US Equity MENTOR GRAPHICS CORP -5.4094 2.6618 10.0394 -2.6877 1.4409 5.7251 12.2644 11.7791 11.9296 CERN US Equity CERNER CORP 14.7543 13.7035 14.2449 10.5454 10.3005 10.9986 10.82 6.46 TRAK US Equity ACTIVISION BLIZZARD 1.01 3.99 10.49 0.8 3.07 8.12

Revenue Revenue Growth Ticker Name 2010 2011 2012 2010 2011 2012 None (16 securities) Average Average 959102871.5 994446269.9 1125721803 1.532707 12.53037 21.25451 EA US Equity ELECTRONIC ARTS INC 3946000000 3668000064 3857000000 -11.8568 -19.9239 13.3122 N US Equity NETSUITE INC 164977000 184046000 224300000 3.22 19.2735 22.5479 SNPS US Equity SYNOPSYS INC 1360045024 1380660992 1535643040 -4.1176 10.9913 4.0151 CNQR US Equity CONCUR TECHNOLOGIES INC 247596000 292936000 349488000 12.6297 19.5541 22.7981 CDNS US Equity CADENCE DESIGN SYS INC 876054016 885403008 1036324016 -7.0395 10.0924 22.9152 SLH US Equity SOLERA HOLDINGS INC 565468008 639487008 724481984 5.4388 5.3983 25.0365 ANSS US Equity ANSYS INC 501823992 564025008 659813008 4.859 9.093 23.6637 ATHN US Equity ATHENAHEALTH INC 174892000 230618000 300921000 33.8066 33.199 32.6196 NUAN US Equity NUANCE COMMUNICATIONS INC 950352000 1118948000 1318740960 3.9232 17.6317 18.4909 PMTC US Equity PTC INC 938185024 1010048992 1166948992 7.5036 3.1432 19.4048 ULTI US Equity ULTIMATE SOFTWARE GROUP INC 193858000 219597000 256866000 9.5874 18.5134 18.795 ADSK US Equity AUTODESK INC 1747400000 1880200000 2150900032 -31.3293 14.344 15.0829 WDAY US Equity WORKDAY INC-CLASS A MENT US Equity MENTOR GRAPHICS CORP 808230000 844582992 1001588000 2.35 26.2907 4.8427 CERN US Equity CERNER CORP 1684591008 1763073984 1978771008 -3.1493 13.0108 23.549 TRAK US Equity ACTIVISION BLIZZARD 4279000000 4447000000 4755000000 41.41 3.93 6.93 Employee Numbers YEAR 2010 2011 2012

Total 65835 65317 68902 ELECTRONIC ARTS INC 9100 7800 7645 NETSUITE INC 971 968 1084 SYNOPSYS INC 5928 6707 6803 CONCUR TECHNOLOGIES INC 1100 1200 1600 CADENCE DESIGN SYS INC 4900 4400 4600 SOLERA HOLDINGS INC 2176 2202 2247 ANSYS INC 1750 1600 1660 ATHENAHEALTH INC 824 1035 1242 NUANCE COMMUNICATIONS INC 5800 6100 7300 PTC INC 5165 5317 6122 ULTIMATE SOFTWARE GROUP INC 933 989 1000 AUTODESK INC 7800 6800 6800 WORKDAY INC-CLASS A 388 599 599 MENTOR GRAPHICS CORP 4500 4400 4700 CERNER CORP 7500 7600 8200 ACTIVISION BLIZZARD 7000 7600 7300

Appendix S: Japan Industry Overview259

ROE ROA ROI Ticker Name 2010 2011 2012 2010 2011 2012 2010 2011 2012 None (8 securities) Average Average 0.171187625 2.336975 3.597475 0.277938 0.277938 1.56485 5.6474 5.887133333 7.5658 EA US Equity ELECTRONIC ARTS INC -39.138199 -5.9312 -11.2012 -23.8599 -3.3067 -5.8415 9697 JP Equity CAPCOM CO LTD 16.1588 1.7801 12.9444 10.0148 1.0891 7.7815 14.7928 12.4014 9684 JP Equity SQUARE ENIX HOLDINGS CO LTD 1.9805 5.7531 -7.1197 1.2923 3.4283 -4.3186 1.2877 9766 JP Equity KONAMI CORP 0.6215 8.5107 10.417 0.3778 5.2975 6.6253 1.8781 7.1667 9.0892 7832 JP Equity NAMCO BANDAI HOLDINGS INC 1.7017 -10.9187 5.5626 1.2386 -7.8293 3.8307 2.2093 5.5766 3626 JP Equity IT HOLDINGS CORP 6.1992 4.0045 2.5329 2.8795 1.894 1.1968 5.1418 3.3145 3.8248 4733 JP Equity OBIC BUSINESS CONSULTANTS 5.4461 7.4937 7.6091 4.9677 6.8287 6.9469 6.1994 7.1802 6.937 2327 JP Equity NS SOLUTIONS CORP 8.3999 8.0036 8.0347 5.3127 5.1172 5.2038 8.0227

Revenue Growth Revenue Ticker Name 2010 2011 2012 2010 2011 2012 None (8 securities) Average Average 1.99413 -2.17678 0.95035 2620000000 2380000000 2380000000 EA US EquityELECTRONIC ARTS-11.8568 INC -19.9239 13.3122 3860000000 3670000000 3950000000 9697 JP EquityCAPCOM CO LTD29.9504 11.8047 -20.1531 1060000000 771000000 1050000000 9684 JP EquitySQUARE ENIX HOLDINGS58.8672 CO LTD -42.2495 -7.263 1440000000 1900000000 1660000000 9766 JP EquityKONAMI CORP-23.8637 8.0101 8.9501 3270000000 2950000000 2910000000 7832 JP EquityNAMCO BANDAI-3.7811 HOLDINGS INC -5.4864 15.617 5120000000 4240000000 4300000000 3626 JP EquityIT HOLDINGS CORP-15.9528 4.8139 2.1047 4000000000 3580000000 3390000000 4733 JP EquityOBIC BUSINESS-6.6933 CONSULTANTS 18.7018 -5.4181 214000000 181000000 170000000 2327 JP EquityNS SOLUTIONS-10.7169 CORP 6.9151 0.453 2000000000 1740000000 1630000000 Employee Numbers YEAR 2010 2011 2012

Total 52221 52287 47155 ELECTRONIC ARTS INC 7645 7800 9100 CAPCOM CO LTD 2089 1930 1813 SQUARE ENIX HOLDINGS CO LTD 3297 3338 2952 KONAMI CORP 5758 5708 5632 NAMCO BANDAI HOLDINGS INC 7075 7552 7176 IT HOLDINGS CORP 20831 20476 15259 OBIC BUSINESS CONSULTANTS 609 635 587 NS SOLUTIONS CORP 4917 4848 4636

259 Bloomberg Terminal. Japan: Video Game Industry Overview. Accessed February 1 2013. Appendix T: Europe Industry Overview260 ROE ROA ROI Ticker Name 2010 2011 2012 2010 2011 2012 2010 2011 2012 None (16 securities) Average Average 14.70468 14.45077 21.12444 7.297238 7.250513 9.370233 19.7772 18.22552 18.07581 EA US Equity ELECTRONIC ARTS INC -39.1382 -5.9312 -11.2012 -23.8599 -3.3067 -5.8415 SGE LN Equity SAGE GROUP PLC/THE DSY FP Equity DASSAULT SYSTEMES SA 11.2645 14.8081 16.1383 6.9254 8.7084 9.2231 10.463 12.7215 14.2135 SAP GR Equity SAP AG 22.3272 19.8097 30.5519 12.8181 10.586 15.6039 21.3407 25.3482 18.7268 UBI FP Equity UBISOFT ENTERTAINMENT GTO FP Equity GEMALTO AVV LN Equity AVEVA GROUP PLC IDR SM Equity INDRA SISTEMAS SA 23.9212 20.5359 19.5694 8.0392 7.4799 6.5951 18.8915 17.2706 13.8138 PTEC LN Equity PLAYTECH LTD AMS SM Equity AMADEUS IT HOLDING SA-A SHS 53.557 10.1835 9.2294 TEMN SW Equity TEMENOS GROUP AG-REG 34.0746 23.9202 3.353 12.3037 9.485 1.3366 13.8599 3.7915 COP GR Equity COMPUGROUP MEDICAL AG 2.004 7.2766 5.7748 0.7991 2.7267 1.7433 2.0039 4.7272 3.7753 SIM DC Equity SIMCORP A/S 53.6564 30.6906 57.1792 33.9953 19.1312 34.6185 57.0282 35.4257 62.9804 UNIT4 NA Equity UNIT 4 NV MONI LN Equity MONITISE PLC OPERA NO Equity OPERA SOFTWARE ASA 9.5277 4.4963 15.1976 7.357 3.1936 10.8696 8.9356

Revenue Revenue Growth Ticker Name 2010 2011 2012 2010 2011 2012 None (16 securities) Average Average 2117200553 2221609580 2625805645 -2.0217375 13.3743 13.9431556 EA US Equity ELECTRONIC ARTS INC 3946000000 3668000064 3857000000 -11.8568 -19.9239 13.3122 SGE LN Equity SAGE GROUP PLC/THE 2228446718 1998332745 1909837863 DSY FP Equity DASSAULT SYSTEMES SA 1750723704 1944821515 2417178998 -8.3569 38.3613 7.2349 SAP GR Equity SAP AG 14936992948 16547814025 19770255593 -8.6459 27.1702 10.8921 UBI FP Equity UBISOFT ENTERTAINMENT 1168466604 1342937672 1415292899 GTO FP Equity GEMALTO 2323273830 2247513615 2749262638 AVV LN Equity AVEVA GROUP PLC 245710863.9 244687419.9 289965559.6 IDR SM Equity INDRA SISTEMAS SA 3367912783 3410145291 3636968054 4.545 0.8304 4.7127 PTEC LN Equity PLAYTECH LTD 157886677.2 181280573.8 199179113 AMS SM Equity AMADEUS IT HOLDING SA-A SHS 3705136595 3.3272 TEMN SW Equity TEMENOS GROUP AG-REG 373905000 416768000 496267008 -11.8105 17.4641 16.178801 COP GR Equity COMPUGROUP MEDICAL AG 380624635.1 414741138.7 519106924.2 9.5241 7.8306 36.5252 SIM DC Equity SIMCORP A/S 243404030.3 246503382.3 267643670.7 2.3789 2.9408 8.7502 UNIT4 NA Equity UNIT 4 NV 535016058.1 544180625.4 606583137.5 MONI LN Equity MONITISE PLC 4231716.485 9376294.985 24426477.28 OPERA NO Equity OPERA SOFTWARE ASA 95412722 107041334 148785790 8.0482 32.3209 24.555099 Number of Employees 2010 2011 2012 TOTAL 138764 144575 143285 ELECTRONIC ARTS INC 9100 7800 7645 SAGE GROUP PLC/THE 14352 13256 12385 DASSAULT SYSTEMES SA 7875 7834 9035 SAP AG 47584 53513 55765 UBISOFT ENTERTAINMENT 5765 6402 6331 GEMALTO 10000 10000 10000 AVEVA GROUP PLC 809 815 902 INDRA SISTEMAS SA 24430 25271 27339 PLAYTECH LTD 751 817 994 AMADEUS IT 7287 7385

260 Bloomberg Terminal. Europe: Video Game Industry Overview. Accessed February 1 2013. HOLDING SA-A SHS TEMENOS GROUP AG- REG 2994 3416 4261 COMPUGROUP MEDICAL AG 2557 2800 2952 SIMCORP A/S 1048 1100 1111 UNIT 4 NV 3486 3320 3666 MONITISE PLC 99 89 152 OPERA SOFTWARE ASA 627 757 747

Appendix U: Industry Growth 261

Appendix V: Video Game Industry Players

261 Euromonitor International. "Annual Industry Growth." Passport GMID. 2012. Web. .

262

APPENDIX W: TOP SELLING VIDEO AND COMPUTER GAMES OF 2011

262 Passport GMID. "Video Games”. Euromonitor International, 2012. Web. .

263

Appendix X: Strategic Group Map Calculations

263 Entertainment Software Association. "2012 Essential Facts about the Computer and Video Game Industry." The ESA., 2012. Web. . Of the top 10 video games of 2011 (Please refer to appendix A) (Entertainment Software

Association, 2012), Activision Blizzard published 1st ranked (Call of Duty) and the 6th ranked

(Call of Duty). Thus, 1st ranked (allotted10 points) + 6th ranked (allotted 5 points) = 15 points.

Of the top 10 video games of 2011, Electronic Arts published 3rd ranked (Madden NFL) and 5th ranked (Battlefield). Thus 3rd ranked (8 points) + 5th ranked (6 points) = 14 points.

Of the top 10 video games of 2011, Ubisoft published 2nd ranked (Just Dance), 9th ranked (Just

Dance) and 10th ranked (Assassin’s Creed). Thus 2nd ranked (9 points) + 9th ranked (2 points) +

10th Ranked (1 point) = 12 points.

Of the top 10 computer games of 2011 (Appendix V: Top Selling Video and Coputer Games of

2011) (Entertainment Software Association, 2012), Activision Blizzard published 3rd ranked

(Starcraft) and the 5th ranked (World of Warcraft). Thus, 3rd ranked (8 points) + 5th ranked (6 points) = 13 points.

Of the top 10 computer games of 2011, Electronic Arts published 1st ranked (Star Wars), 4th ranked (Sims), 6th ranked (Battlefield), 7th ranked (Sims), 8th ranked (Sims) and 9th ranked

(Sims). Thus 1rd ranked (10 points) + 4th ranked (7 points) + 6th ranked (5 points) + 7th ranked (4 points) + 8th ranked (3 points) + 9th ranked (2 points) = 31 points.

Thus, Activision has a total of 15 + 13 points = 28 points.

15/28= 54% video games, 13/28= 46% computer games

EA has a total of 14 + 31 points = 45 points.

14/45= 31% video games 31/45= 69% computer games

Ubisoft has a total of 12 points. 100% video games.

Take Two Interactive did not publish any of the top 10 console or computer-based video games, but has published numerous within the top 20, unlike THQ and Konami, and is thus another major competitor in the industy. 264

Appendix Y: Activision Blizzard Ratios265

12 months 12 months 12 months For the Fiscal Period Ending Dec-31-2009 Dec-31-2010 Dec-31-2011

Profitability

1.8% 3.7% 6.4% Return on Assets %

2.3% 4.8% 8.3% Return on Capital %

1.0% 4.0% 10.5% Return on Equity %

17.6% 22.4% 31.8% EBITDA Margin %

Revenue 4,482.3 4,423.0 4,833.9

Growth Over Prior Year

41.4% 3.9% 6.9% Total Revenue

Total Assets 14,394.7 13,374.4 13,497.4

Appendix Z: Ubisoft Ratios266

12 months 12 months 12 months For the Fiscal Period Ending Mar-31-2009 Mar-31-2010 Mar-31-2011

Profitability

6.5% (3.9%) 1.0% Return on Assets %

9.1% (5.1%) 1.3% Return on Capital %

9.9% (5.8%) (7.1%) Return on Equity %

33.0% 26.8% 40.8% EBITDA Margin %

1,765.7 1,198.4 1,430.9 Revenue

Growth Over Prior Year

264 Entertainment Software Association. "2012 Essential Facts about the Computer and Video Game Industry." The ESA., 2012. Web. . 265 Capital IQ. Activision Blizzard: Financial Ratios. Accessed February 4, 2013.

266 Capital IQ. Ubisoft: Financial Ratios. Accessed February 4, 2013.

(5.5%) (17.7%) 19.3% Total Revenue Total Assets 1,892.2 1,629.3 1,457.2

Appendix A2: Take-Two Interactive Ratios267

Fiscal 12 months 12 months 12 months For the Fiscal Period Ending Year Oct-31-2009 Mar-31-2010 Mar-31-2011 Change

Profitability FYC

(7.2%) FYC 0.8% 3.07% Return on Assets %

(11.3%) FYC NA NA Return on Capital %

(22.5%) FYC NA (33.51) Return on Equity %

Margin Analysis FYC

(14.6%) FYC (6.1%) 8.2% EBITDA Margin %

756.9 FYC 808.8 1,104.2 Revenue

Growth Over Prior Year

(43.1%) FYC 19.7% 43.0% Total Revenue

1,068.3 Total Assets 1,087.4 FYC 943.8

Appendix B2: Top Ten Video Games 2009-2011268269270

2009 Title Publisher 1 Wii Fit Ninendo 2 Wii Play Ninendo 3 Pokemon Platinum Ninendo 4 Mario Cart Wii Nintendo 5 Resident Evil 5 (XBOX) Capcom 6 Killzone 2 Sony

267 Capital IQ. Take-Two Interactive: Financial Ratios. Accessed February 4, 2013. 268 Morris Chris. “2009’s Top Selling Video Games”. CNBC. . Accessed March 15 2013. 269 Morris Chris. “2010’s Top Selling Video Games”. CNBC. . Accessed March 15 2013. 270 Morris Chris. “2011’s Top Selling Video Games”. CNBC. . Accessed March 15 2013. Call of Duty: World At 7 War Activision 8 Resident Evil 5 (PS3) Capcom 9 Halo Wars Microsoft 10 Street Fighter IV Capcom

2010 Title Publisher 1 Dead Rising 2 Capcom 2 Final Fantasy XIV Square Enix 3 God of War III Sony 4 Halo: Reach Sony Super Mario Galaxy 5 II Nintendo 6 Metroid: Other M Nintendo 7 Motion Control Sony 8 Split/Second Disney 9 Alan Wake Microsoft Electronic 10 APM Arts

2011 Title Publisher 1 Call of Duty: Modern Warfare 3 Activision Blizzard 2 Just Dance 3 Ubisoft 3 Elder Scrolls V: Skyrim Bethesda 4 Battlefield 3 Electronic Arts 5 Madden NFL 12 Electronic Arts 6 Call of Duty: Black Ops Activision Blizzard 7 Batman: Arkham City Warner Bros 8 Gears of War 3 Microsoft 9 Just Dance 2 Ubisoft 10 Assassin's Creed: Revelations Ubisoft

Appendix C2: Marketing Expense Increase

R&D : Marketing R&D : Marketing Y1 2012

Blizzard 1.474476415 1.185321101

Take Two 0.3819393 0.349182853

Ubisoft 1.574542311 1.472893078

Appendix D2: CD Prices

Appendix E2: Mini-Industry Analysis of Buyers

Appendix F2: Application Rules

Appendix G2: Money Spent on Games and Game Platform

Normalized Financial Documents ** Please take note that due to the fact that Ubisoft and EA’s fiscal year ends on March 31st, 2010-2012 data was used for these firms for comparative purposes against Activision Blizzard and Take-Two Interactive’s 2009-2011 financials. 2010 financials were used in “2009 data”, 2011 financials were used in “2010 data” and 2012 financials were used in “2011 data” throughout this report. This alignment ensured more accurate comparisons for metrics, due to greater overlap throughout the years. ** All financials were extracted from the corresponding firms’ annual reports. ELECTRONIC ARTS: BALANCE SHEET ELECTRONIC ARTS INC. CONSOLIDATED BALANCE SHEET - DOLLARS AS % OF ASSETS

(In Millions, except par value data)

ASSETS 2010 % assets 2011 % assets 2012 % assets Current assets: Cash and cash equivalents $ 1,273.00 27.40% $ 1,579.00 32.04% $ 1,293.00 23.55% Short term investments $ 432.00 9.30% $ 497.00 10.09% $ 437.00 7.96% Marketable equity securities $ 291.00 6.26% $ 161.00 3.27% $ 119.00 2.17% Receivables $ 206.00 4.43% $ 335.00 6.80% $ 366.00 6.67% Inventories $ 100.00 2.15% $ 77.00 1.56% $ 59.00 1.07% Deferred income taxes, net $ 44.00 0.95% $ 56.00 1.14% $ 67.00 1.22% Other current assets $ 239.00 5.14% $ 327.00 6.64% $ 268.00 4.88% Total current assets $ 2,585.00 55.64% $ 3,032.00 61.53% $ 2,609.00 47.51%

Property and equipment, net $ 537.00 11.56% $ 513.00 10.41% $ 568.00 10.34% Goodwill $ 1,093.00 23.53% $ 1,110.00 22.52% $ 1,718.00 31.29% Other intangible, net $ 204.00 4.39% $ 144.00 2.92% $ 369.00 6.72% Deferred income taxes, net $ 52.00 1.12% $ 49.00 0.99% $ 42.00 0.76% Other assets $ 175.00 3.77% $ 80.00 1.62% $ 185.00 3.37% TOTAL ASSETS $ 4,646.00 100.00% $ 4,928.00 100.00% $ 5,491.00 100.00%

LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 91.00 1.96% $ 228.00 4.63% $ 215.00 3.92% Accrued and other current liabilities $ 717.00 15.43% $ 768.00 15.58% $ 857.00 15.61% Deferred net revenue (packaged goods and digital content) $ 766.00 16.49% $ 1,005.00 20.39% $ 1,048.00 19.09% Total current liabilities $ 1,574.00 33.88% $ 2,001.00 40.60% $ 2,120.00 38.61%

0.75% convertible senior notes $ - $ - 0.00% $ 539.00 9.82% Income tax obligations $ 242.00 5.21% $ 192.00 3.90% $ 189.00 3.44% Deferred income taxes, net $ 2.00 0.04% $ 37.00 0.75% $ 8.00 0.15% Other liabilities $ 99.00 2.13% $ 134.00 2.72% $ 177.00 3.22% Total liabilities $ 1,917.00 41.26% $ 2,364.00 47.97% $ 3,033.00 55.24%

Stockholders' equity: Preferred stock, $0.01 par value, 10 shares authorized $ - 0.00% $ - 0.00% $ - 0.00% Common stock, $0,01 par value, 1,000 authorized issued and outstanding $ 3.00 0.06% $ 3.00 0.06% $ 3.00 0.05% Paid-in capital $ 2,375.00 51.12% $ 2,495.00 50.63% $ 2,359.00 42.96% Retained earnings $ 123.00 2.65% -$ 153.00 -3.10% -$ 77.00 -1.40% Accumulated other comprehensive income $ 228.00 4.91% $ 219.00 4.44% $ 173.00 3.15% total stockholders' equity $ 2,729.00 58.74% $ 2,564.00 52.03% $ 2,458.00 44.76% TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,646.00 100.00% $ 4,928.00 100.00% $ 5,491.00 100.00%

ELECTRONIC ARTS: INCOME STATEMENT

ELECTRONIC ARTS INC. INCOME STATEMENT - DOLLARS VALUES AS % SALES

(In millions, except per share data) 2010 % sales 2011 % sales 2012 % sales

Net revenue $ 3,654.00 100.00% $ 3,589.00 100.00% $ 4,143.00 100.00% Cost of goods sold $ 1,866.00 51.07% $ 1,499.00 41.77% $ 1,598.00 38.57% Gross profit $ 1,788.00 48.93% $ 2,090.00 58.23% $ 2,545.00 61.43%

Operating expenses: Marketing and sales $ 730.00 19.98% $ 747.00 20.81% $ 853.00 20.59% General and administrative $ 320.00 8.76% $ 301.00 8.39% $ 375.00 9.05% Research and development $ 1,229.00 33.63% $ 1,153.00 32.13% $ 1,212.00 29.25% Acquired in-process technology $ - 0.00% $ - 0.00% $ - 0.00% Amortization of intangibles $ 53.00 1.45% $ 57.00 1.59% $ 43.00 1.04% Abandoned inquisition-related costs $ - 0.00% $ - 0.00% $ - 0.00% Goodwill impairment $ - 0.00% $ - 0.00% $ - 0.00% Restructuring charges $ 140.00 3.83% $ 161.00 4.49% $ 16.00 0.39% Acquisition-related contingent consideration $ 2.00 0.05% -$ 17.00 -0.47% $ 11.00 0.27%

Total operating expenses $ 2,474.00 67.71% $ 2,402.00 66.93% $ 2,510.00 60.58%

Operating income (loss) -$ 686.00 -18.77% -$ 312.00 -8.69% $ 35.00 0.84% Losses on strategic investments, net -$ 26.00 -0.71% $ 23.00 0.64% $ - 0.00% Interest and other income, net $ 6.00 0.16% $ 10.00 0.28% -$ 17.00 -0.41% Income (loss) before income taxes and minority interest -$ 706.00 -19.32% -$ 279.00 -7.77% $ 18.00 0.43% Provision for (benefit from) income taxes -$ 29.00 -0.79% -$ 3.00 -0.08% -$ 58.00 -1.40%

Net income (loss) -$ 677.00 -18.53% -$ 276.00 -7.69% $ 76.00 1.83%

Net income (loss) per share: Basic and diluted -$ 2.08 -0.06% -$ 0.84 -0.02% $ 0.23 0.01%

Number of shares in computation Basic and diluted 325 330 331

UBISOFT: BALANCE SHEET

UBISOFT CONSOLIATED BALANCE SHEET - DOLLARS AS % OF TOTAL ASSETS

(In thousands of Euros)

ASSETS 2010 % assets 2011 % assets 2012 % assets Current Assets Inventory $ 47,973.00 4.05% $ 35,218.00 3.33% $ 20,013.00 1.82% Trade receivables $ 68,746.00 5.81% $ 49,263.00 4.66% -$ 13,143.00 -1.20% Other receivables $ 89,159.00 7.53% $ 59,478.00 5.62% $ 83,592.00 7.61% Current financial assets $ 33,271.00 2.81% $ 29,112.00 2.75% $ 15,287.00 1.39% Current tax assets $ 25,080.00 2.12% $ 10,574.00 1.00% $ 13,691.00 1.25% Cash $ 185,316.00 15.65% $ 193,354.00 18.28% $ 175,703.00 15.99% Assets held for sale $ - 0.00% $ - 0.00% $ - 0.00% Non-current Assets Goodwill $ 106,496.00 8.99% $ 108,125.00 10.22% $ 147,773.00 13.45% Other intangible assets $ 526,383.00 44.45% $ 451,701.00 42.70% $ 520,452.00 47.37% Property, plant and equipment $ 31,800.00 2.69% $ 34,824.00 3.29% $ 39,177.00 3.57% Investments in associates $ 393.00 0.03% $ 393.00 0.04% $ 404.00 0.04% Non-current financial assets $ 3,613.00 0.31% $ 3,335.00 0.32% $ 3,342.00 0.30% Deferred tax assets $ 65,884.00 5.56% $ 82,525.00 7.80% $ 92,325.00 8.40% TOTAL ASSETS $ 1,184,117.00 100.00% $ 1,057,902.00 100.00% $ 1,098,616.00 100.00%

LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings $ 121,784.00 10.28% $ 92,732.00 8.77% $ 91,072.00 8.29% Trade payable $ 144,499.00 12.20% $ 110,947.00 10.49% $ 80,800.00 7.35% Other liabilities $ 93,617.00 7.91% $ 96,847.00 9.15% $ 116,531.00 10.61% Current tax liabilities $ 32,921.00 2.78% $ 7,005.00 0.66% $ 3,145.00 0.29% Non-current liabilities Provisions $ 2,215.00 0.19% $ 2,295.00 0.22% $ 3,918.00 0.36% Employee benefits $ 1,710.00 0.14% $ 1,196.00 0.11% $ 1,568.00 0.14% Long-term borrowings $ 22,548.00 1.90% $ 1,895.00 0.18% $ 1,479.00 0.13% Deferred tax liabilities $ 32,921.00 2.78% $ 30,990.00 2.93% $ 37,396.00 3.40% Total liabilities $ 422,646.00 35.69% $ 307,531.00 29.07% $ 291,548.00 26.54% Shareholders' equity Capital $ 7,320.00 0.62% $ 7,341.00 0.69% $ 7,369.00 0.67% Premiums $ 512,444.00 43.28% $ 527,469.00 49.86% $ 265,358.00 24.15% Consolidated reserve $ 285,380.00 24.10% $ 231,305.00 21.86% $ 452,659.00 41.20% Consolidated earnings -$ 43,672.00 -3.69% -$ 52,120.00 -4.93% $ 37,321.00 3.40% TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,184,117.00 100.00% $ 1,057,902.00 100.00% $ 1,098,616.00 100.00%

UBISOFT: INCOME STATEMENT

UBISOFT CONSOLIDATED INCOME STATEMENT - DOLLARS AS % OF SALES

(In thousands of Euros) 2010 % sales 2011 % sales 2012 % sales

Sales $870,954.00 100.00% $ 1,038,826.00 100.00% $ 1,061,296.00 100.00%

Cost of sales -$358,118.00 -41.12% -$ 365,208.00 -35.16% -$ 343,162.00 -32.33% Gross Margin $512,836.00 58.88% $ 673,618.00 64.84% $ 718,134.00 67.67% R&D costs -$311,424.00 -35.76% -$ 369,585.00 -35.58% -$ 355,007.00 -33.45% Marketing costs -$197,787.00 -22.71% -$ 214,541.00 -20.65% -$ 241,027.00 -22.71% Administrative and IT costs -$ 75,301.00 -8.65% -$ 71,248.00 -6.86% -$ 76,477.00 -7.21% Operating profit (loss) from continuing operations -$ 71,676.00 -8.23% $ 18,244.00 1.76% $ 45,623.00 4.30% Fair value adjustment -$ 367.00 -0.04% -$ 1,354.00 -0.13% $ - 0.00% Other operating expenses -$ 905.00 -0.10% -$ 97,669.00 -9.40% $ - 0.00% Other operating income $ 852.00 0.10% $ 293.00 0.03% $ - 0.00% Operating profit (loss) -$ 72,096.00 -8.28% -$ 80,486.00 -7.75% $ 45,623.00 4.30%

Interest on borrowings -$ 1,972.00 -0.23% -$ 6,546.00 -0.63% -$ 4,347.00 -0.41% Income from cash $ 1,426.00 0.16% $ 1,458.00 0.14% $ 1,820.00 0.17% Net borrowing cost -$ 546.00 -0.06% -$ 5,088.00 -0.49% -$ 2,527.00 -0.24% Result from foreign exchange operations $ 5,246.00 0.60% -$ 4,310.00 -0.41% -$ 3,404.00 -0.32% Other financial income -$ 92.00 -0.01% -$ 345.00 -0.03% -$ 308.00 -0.03% Other financial income $ 142.00 0.02% $ 6,064.00 0.58% $ 8,705.00 0.82% Financial Income $ 4,750.00 0.55% -$ 3,679.00 -0.35% $ 2,466.00 0.23% Share in profit of associates $ 50.00 0.01% $ - 0.00% $ 10.00 0.00% Income tax $ 23,624.00 2.71% $ 32,045.00 3.08% -$ 10,778.00 -1.02% Profit (loss) for the period -$ 43,672.00 -5.01% -$ 52,120.00 -5.02% $ 37,321.00 3.52%

Earnings per share Basic earnings per share -$ 0.46 0.00% -$ 0.55 0.00% $ 0.40 0.00% Diluted earnings per share -$ 0.45 0.00% -$ 0.54 0.00% $ 0.39 0.00%

TAKE-TWO INTERACTIVE: BALANCE SHEET

TAKE-TWO INTERACTIVE SOFTWARE INC. CONSOLIDATED BALANCE SHEET - DOLLARS AS % OF ASSETS

(In thousands, except for share amounts)

ASSETS 2009 % assets 2010 % assets 2011 % assets Current assets: Cash $ 102,083.00 10.12% $ 145,838.00 17.38% $ 280,359.00 28.85% Accounts receivable $ 199,395.00 19.77% $ 74,135.00 8.83% $ 84,217.00 8.67% Inventory $ 93,996.00 9.32% $ 24,479.00 2.92% $ 24,578.00 2.53% Software development costs and licenses $ 167,341.00 16.59% $ 114,608.00 13.66% $ 131,676.00 13.55% Prepaid taxes and taxes receivables $ 8,814.00 0.87% $ 8,654.00 1.03% $ 3,280.00 0.34% Prepaid expenses and other $ 56,595.00 5.61% $ 51,704.00 6.16% $ 37,493.00 3.86% Assets of discontinued operations $ - 0.00% $ 7,182.00 0.86% $ - 0.00% Total current assets $ 628,224.00 62.29% $ 426,600.00 50.83% $ 566,603.00 58.31% Fixed assets $ 27,392.00 2.72% $ 23,571.00 2.81% $ 19,632.00 2.02% Software development costs and licenses $ 75,521.00 7.49% $ 139,340.00 16.60% $ 138,320.00 14.24% Goodwill $ 220,881.00 21.90% $ 216,289.00 25.77% $ 225,170.00 23.17% Other intangibles $ 23,224.00 2.30% $ 22,729.00 2.71% $ 17,833.00 1.84% Other assets $ 33,329.00 3.30% $ 10,747.00 1.28% $ 4,101.00 0.42% TOTAL ASSETS $ 1,008,571.00 100.00% $ 839,276.00 100.00% $ 971,659.00 100.00%

LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 172,976.00 17.15% $ 45,913.00 5.47% $ 56,153.00 5.78% Accrued expenses and other current liabilities $ 174,983.00 17.35% $ 134,449.00 16.02% $ 158,459.00 16.31% Deferred revenue $ 6,334.00 0.63% $ 11,944.00 1.42% $ 13,434.00 1.38% Liabilties of discontinued operations $ 17,561.00 2.09% $ 2,842.00 0.29% Total current liabilities $ 354,293.00 35.13% $ 209,867.00 25.01% $ 230,888.00 23.76% Long term debt $ 138,000.00 13.68% $ 99,865.00 11.90% $ 107,239.00 11.04% Income taxes payable $ 10,146.00 1.01% $ 7,980.00 0.95% $ 12,037.00 1.24% Deferred income taxes $ - 0.00% $ - 0.00% $ 2,961.00 0.30% Other long-term liabilities $ - 0.00% $ 941.00 0.11% $ 3,255.00 0.33% TOTAL LIABILITIES $ 502,439.00 49.82% $ 318,653.00 37.97% $ 356,380.00 36.68% Stockholders' equity: Preferred stock, $.01, 5000 authorized $ - 0.00% $ - 0.00% $ - 0.00% Common stock, $.01, 150,000 authorized issued and oustanding $ 819.00 0.08% $ 840.00 0.10% $ 861.00 0.09% Additional paid-in capital $ 616,776.00 61.15% $ 674,477.00 80.36% $ 706,482.00 72.71% Retained earnings -$ 119,655.00 -11.86% -$ 150,981.00 -17.99% -$ 102,523.00 -10.55% Accumulated other comprehensive income (loss) $ 8,192.00 0.81% -$ 3,713.00 -0.44% $ 10,459.00 1.08% TOTAL STOCKHOLDERS' EQUITY $ 506,132.00 50.18% $ 520,623.00 62.03% $ 615,279.00 63.32% TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,008,571.00 100.00% $ 839,276.00 100.00% $ 971,659.00 100.00%

TAKE-TWO INTERACTIVE: INCOME STATEMENT

TAKE-TWO INTERACTIVE SOFTWARE INC. CONSOLIDATED INCOME STATEMENT - DOLLARS AS % OF SALES

(In thousands, except per share amounts) 2009 % sales 2010 % sales 2011 % sales

Net revenue $ 968,488.00 100.00% $ 359,231.00 100.00% $ 1,136,876.00 100.00% Cost of goods sold $ 717,826.00 74.12% $ 222,396.00 61.91% $ 689,381.00 60.64% Gross profit $ 250,662.00 25.88% $ 136,835.00 38.09% $ 447,495.00 39.36% Selling and marketing $ 148,624.00 15.35% $ 72,402.00 20.15% $ 176,294.00 15.51% General and administrative $ 135,127.00 13.95% $ 43,466.00 12.10% $ 109,484.00 9.63% Research and development $ 63,748.00 6.58% $ 25,279.00 7.04% $ 69,576.00 6.12% Business reorginization and related $ - 0.00% $ - 0.00% $ - 0.00% Impairment of goodwill and long-lived assets $ 14,754.00 1.52% $ - 0.00% $ - 0.00% Depreciation and amortization $ 18,623.00 1.92% $ 6,622.00 1.84% $ 14,999.00 1.32% Total operating expenses $ 380,876.00 39.33% $ 147,769.00 41.13% $ 370,353.00 32.58% Income (loss) from operations -$ 130,214.00 -13.45% -$ 10,934.00 -3.04% $ 77,142.00 6.79% Interest and other expense, net -$ 3,195.00 -0.33% -$ 11,352.00 -3.16% -$ 13,519.00 -1.19% Income (loss) before income taxes -$ 133,409.00 -13.77% -$ 22,286.00 -6.20% $ 63,623.00 5.60% Provision for income taxes $ 4,521.00 0.47% $ 4,266.00 1.19% $ 9,819.00 0.86% Net income (loss) from continuing operations -$ 26,552.00 -7.39% $ 53,804.00 4.73% Income (loss) from discontinuted operations -$ 2,250.00 -0.63% -$ 5,346.00 -0.47% Net income (loss) -$ 137,930.00 -14.24% -$ 28,802.00 -8.02% $ 48,458.00 4.26%

Earnings (loss) per share: Basic -$ 1.80 0.00% -$ 0.37 0.00% $ 0.56 0.00% Diluted -$ 1.80 0.00% -$ 0.37 0.00% $ 0.56 0.00%

Weighted average shares outstanding: Basic $ 76,815.00 7.93% 76815 21.38% Diluted $ 76,815.00 7.93% 76815 21.38%

ACTIVISION BLIZZARD: BALANCE SHEET

ACTIVISION BLIZZARD INC CONSOLIDATED BALANCE SHEET - DOLLARS AS % OF TOTAL ASSETS

(In millions, except share data)

ASSETS 2009 % assets 2010 % assets 2011 % assets Current assets: Cash $ 2,768.00 20.14% $ 2,812.00 20.98% $ 3,165.00 23.84% Short-term investments $ 477.00 3.47% $ 696.00 5.19% $ 360.00 2.71% Accounts receivable $ 739.00 5.38% $ 640.00 4.77% $ 649.00 4.89% Inventories $ 241.00 1.75% $ 112.00 0.84% $ 144.00 1.08% Software development $ 224.00 1.63% $ 147.00 1.10% $ 137.00 1.03% Intellectual property licences $ 55.00 0.40% $ 45.00 0.34% $ 22.00 0.17% Deferred income taxes $ 498.00 3.62% $ 640.00 4.77% $ 507.00 3.82% Intangible assets $ - 0.00% $ - 0.00% $ - 0.00% Other current assets $ 327.00 2.38% $ 293.00 2.19% $ 396.00 2.98% Total current assets $ 5,329.00 38.78% $ 5,385.00 40.17% $ 5,380.00 40.52% Long-term investments $ 23.00 0.17% $ 23.00 0.17% $ 16.00 0.12% Software development $ 10.00 0.07% $ 55.00 0.41% $ 62.00 0.47% Intellectual property licences $ 28.00 0.20% $ 28.00 0.21% $ 12.00 0.09% Property and equipment $ 138.00 1.00% $ 169.00 1.26% $ 163.00 1.23% other asset $ 9.00 0.07% $ 21.00 0.16% $ 12.00 0.09% Intangible assets $ 618.00 4.50% $ 160.00 1.19% $ 88.00 0.66% Trademark and trade names $ 433.00 3.15% $ 433.00 3.23% $ 433.00 3.26% Goodwill $ 7,154.00 52.06% $ 7,132.00 53.20% $ 7,111.00 53.56% TOTAL ASSETS $ 13,742.00 100.00% $ 13,406.00 100.00% $ 13,277.00 100.00%

LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 302.00 2.20% $ 363.00 2.71% $ 390.00 2.94% Deferred revenues $ 1,426.00 10.38% $ 1,726.00 12.87% $ 1,472.00 11.09% Accrued expenses and other liabilities $ 779.00 5.67% $ 818.00 6.10% $ 694.00 5.23% Total current liabilities $ 2,507.00 18.24% $ 2,907.00 21.68% $ 2,556.00 19.25% Deferred income taxes $ 270.00 1.96% $ 112.00 0.84% $ 55.00 0.41% Other liabilities $ 209.00 1.52% $ 184.00 1.37% $ 174.00 1.31% Total liabilities $ 2,986.00 21.73% $ 3,203.00 23.89% $ 2,785.00 20.98% Shareholders' equity: Common stock, at $.000001 2,400,000,000 shares authorized and issued $ - 0.00% $ - 0.00% $ - 0.00% Additional paid-in capital $ 12,376.00 90.06% $ 12,353.00 92.15% $ 9,616.00 72.43% Less: Treasury stock at cost -$ 1,235.00 -8.99% -$ 2,194.00 -16.37% $ - 0.00% Accumulated deficit -$ 361.00 -2.63% $ 57.00 0.43% $ 948.00 7.14% Accumulated other comprehensive loss -$ 24.00 -0.17% -$ 13.00 -0.10% -$ 72.00 -0.54% Total shareholders' equity $ 10,756.00 78.27% $ 10,203.00 76.11% $ 10,492.00 79.02% TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,742.00 100.00% $ 13,406.00 100.00% $ 13,277.00 100.00%

ACTIVISION BLIZZARD: INCOME STATEMENT

ACTIVISION BLIZZARD INC. CONSOLIDATED BALANCE SHEET - DOLLARS AS % SALES

(In million, except for share data) 2009 % sales 2010 % sales 2011 % sales Net revenues Product sales $ 3,080.00 71.98% $ 3,087.00 69.42% $3,257.00 68.50% Subscription, licensing and other revenues $ 1,199.00 28.02% $ 1,360.00 30.58% $1,498.00 31.50% TOTAL NET REVENUES $ 4,279.00 100.00% $ 4,447.00 100.00% $4,755.00 100.00%

Costs and expenses Cost of sales - product costs $ 1,432.00 33.47% $ 1,350.00 30.36% $1,134.00 23.85% Cost of sales - MMORPGs $ 212.00 4.95% $ 241.00 5.42% $238.00 5.01% Cost of sales - software royalties and amortization $ 348.00 8.13% $ 338.00 7.60% $218.00 4.58% Cost of sales - intellectual property licenses $ 315.00 7.36% $ 197.00 4.43% $165.00 3.47% Product development $ 627.00 14.65% $ 642.00 14.44% $646.00 13.59% Sales and marketing $ 544.00 12.71% $ 520.00 11.69% $545.00 11.46% General and administrative $ 395.00 9.23% $ 364.00 8.19% $456.00 9.59% Impairment of intangible assets $ 409.00 9.56% $ 326.00 7.33% $- 0.00% Restructuring $ 23.00 0.54% $ - 0.00% $25.00 0.53% TOTAL COSTS AND EXPENSES $ 4,305.00 100.61% $ 3,978.00 89.45% $3,427.00 72.07%

Operating income (loss) -$ 26.00 -0.61% $ 469.00 10.55% $1,328.00 27.93% Investment and other income $ 18.00 0.42% $ 23.00 0.52% $3.00 0.06% Income (loss) before income tax expense -$ 8.00 -0.19% $ 492.00 11.06% $1,331.00 27.99% Income tax expense -$ 121.00 -2.83% $ 74.00 1.66% $246.00 5.17% Net income (loss) $ 113.00 2.64% $ 418.00 9.40% $1,085.00 22.82%

Earnings per common share Basic $ 0.09 0.00% $ 0.34 0.01% $0.93 0.02% Diluted $ 0.09 0.00% $ 0.33 0.01% $0.92 0.02% Weighted average numer of shares outstanding Basic 1,283 1,222 1,148 Diluted 1,311 1,236 1,156 $ 0.15 $0.17 Appendix D: Electronic Arts Inc. Distribution

Appendix E: Specific International Market Share

(Euromonitor International, 2011)

Appendix F: Worst Companies in America

consumerist.com Appendix G: Ideal Employers of 2012

Number of participants in 2012: 59,643 respondents Number of individual employer evaluations: 207,435 Number of universities targeted: 318 Field period: November 2011 to March 2012

(Universum, 2012)

Appendix H: Corporate Leadership Comparables/Metrics271:

Electronic Arts FY 2011 FY 2010 FY 2009 Revenue (in millions) 4143.00 3589.00 3654.00 Price/Sales 1.32 1.80 1.66 Actual Sales Per Employee 450326.09 469457.16 468461.54 Net Fixed Assets (Millions) 568 513 537 Total Assets 5491 4928 4646 Cash from operations 277 320 152 Number of Employees 9200 7645 7800 Return on Assets 1.46% -5.77% -14.52% Inv. Turnover 23.50 16.94 11.77

271 271 Bloomberg Terminal. Industry, Application Software. Financial Analysis: Custom. 271 Bloomberg Terminal. Take two. Financial Analysis: Custom. 271 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. 271 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. 271 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. A/R turnover 8.71 11.82 13.27 Inventory to Sales 1.49 2.15 2.74 Operating Margin 1.50% -4.68% -14.52%

Ubisoft FY 2011 FY 2010 FY 2009 Revenue (in millions) 1061.30 1038.83 1,057.93 Price/Sales 0.76 0.49 0.66 Actual Sales Per Employee 153,211.49 164,085.61 136,044.05 Net Fixed Assets (Millions) 39.18 34.82 31.80 Total Assets 1,057.90 1,184.12 1,133.73 Cash from operations 403.47 241.39 316.27 Number of Employees 6927 6331 6402

Return on Assets 3.46% -4.65% -3.77% Inv. turnover 8.78 6.5 5.1 A/R turnover 17.61 12.6 13.76 Inventory to Sales 3.39 5.51 5.89 Operating Margin 4.30% -7.62% -8.24%

Take-Two Interactive FY 2011 FY 2010 FY 2009 Revenue (in millions) 1,136.88 1,159.02 968.49 Price/Sales 1.09 0.78 0.87 Actual Sales Per Employee 536,768.65 491,354 427,966.42 Net Fixed Assets (Millions) 19.63 22.31 27.39 Total Assets 971.66 1,048.26 1,008.57 Cash from operations 134.8 116.17 -210.20 Number of Employees 2,118.00 2,200.00 2,263.00

Return on Assets 3.07% 0.80% -7.20% Inv. turnover 25.12 11.32 7.24 A/R turnover 9.1 6.35 5.43 Inventory to Sales 2.16 2.61 9.71 Operating Margin -10.20% 6.79% 6.92%

Activision Blizzard FY 2011 FY 2010 FY 2009 Revenue (in millions) 4,755.00 4,447.00 4,279.00 Price/Sales 2.97 3.42 3.33 Actual Sales Per Employee 651,369.86 585,131.58 611,285.71 Net Fixed Assets (Millions) 163 169 138 Total Assets 13,277.00 13,447.00 13,742.00 Cash from operations 952.00 1,376.00 1,183.00 Number of Employees 7,300.00 7,600.00 7,000.00 Return on Assets 6.40% 3.70% 1.80% Inv. turnover 13.71 12.05 9.17 A/R turnover 7.19 6.3 5 Inventory to Sales 3.03 2.52 5.63 Operating Margin 29.88 28.45 17.88

INDUSTRY FY 2011 FY 2010 FY 2009 Revenue (in millions) 1,120 934.32 950.86 Price/Sales 4.63 4.30 3.78 Actual Sales Per Employee 241,580.00 232,010.00 220,870.00 Net Fixed Assets (Millions) 166.16 145.57 153.06 Total Assets 2,510 2,110 2,030 Cash from operations 364.52 269.41 241.85 Number of Employees 4,000.00 4,000.00 4,000.00 Return on Assets 3.33% 2.84% -4.33% Inv. turnover 24.84 22.01 20.60 A/R turnover 6.97 7.47 7.08 Inventory to Sales 0.58 0.55 0.78 Operating Margin 8.23 11.03 3.05

Appendix I: Operating Details272

Electronic Arts In Millions FY 2012 FY 2011 FY 2010

Operating Income or Losses 141 62 -168 Operating Expenses 2,362.00 2,483.00 2,258.00

272 272 Bloomberg Terminal. Industry, Application Software. Financial Analysis: Custom. 272 Bloomberg Terminal. Take two. Financial Analysis: Custom. 272 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. 272 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. 272 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Ubisoft In Millions FY 2012 FY 2011 FY 2010

Operating Income or Losses 40.18 45.62 -79.13 Operating Expenses 712.29 672.51 752.75

Take Two In Millions FY 2011 FY 2010 FY 2009

Operating Income -84.27 77.14 80.24 Operating Expenses 381.23 370.35 375.33

Activision In Millions FY 2011 FY 2010 FY 2009

Operating Income 1,451.00 1,353.00 795 Operating Expenses 1,743.00 1,630.00 1,526.00

Appendix J: General and Administrative Expenses273 EA 2009 2010 2011

General 320,000,000 301,000,000 337,000,000

Sales 3,589,000,000 3,654,000,000 4,212,000,000 %Sales 8.92% 8.24% 8.00%

Ubisoft

General 355,030,000 371,540,000 412,750,000

Sales 1,038,830,000 870,950,000 1,057,931,000 %sales 34.18% 42.66% 39.01%

Take -Two

General 283,750,000 297,070,000 285,780,000

Sales 1,136,880,000 1,159,021,000 968,490,000 %Sales 24.96% 25.63% 29.51%

273 IBID Activision

General 1,001,000,000 891,000,000 1,030,000,000

Sales 4,755,000,000 4,447,000,000 4,279,000,000 %sales 21.05% 20.04% 24.07%

Appendix K: Suppliers274

Industry Companies

Advertising Aegis Group, The Value Engineers Limited Real Estate Operating Companies Ascendas India, Atrium Ljungberg Application Software Bango PLC, Geomerics, Splunk Inc., Spyder Lynk Internet Software and Services Brightcove Inc Home Entertainment Chilingo Ltd., Crytek GmbH, Epic Games Inc., SNE Platform, Software TransGaming Broadcasting ESPN Movies and Entertainment Fédération Internationale De Football Association Leisure Facilities Football Association Premier League Ltd, PGA Tour Home Entertainment Software G5 Entertainment, Nintendo Co., Sega Corp. Leisure Products Hasbro Inc. Movies and Entertainment Image Metrics Office REITs Liberty Property Limited Partnership Internet Software and Services Limelight Network, Renren Inc.

274 Capital IQ. [Electronic Arts Suppliers, Take-Two Suppliers, Ubisoft Suppliers, Activision- Blizzard suppliers]. Retrieved [February, 11, 2013] from https://www.capitaliq.com Home Entertainment Software LucasArts Entertainment Company, LLC, Tode Co. Systems Software Microsoft Corporation, Technologies Ltd. IT Consulting and Other Services Microsoft Licensing, GP Environmental and Facilities Services MITIE Group Internet Software and Services Nanigans, Inc. National Basketball Association, Inc., National Hockey, Warner Bros. Movies and Entertainment Entertainment, Inc. League Advertising NFL Properties Specialty Stores Players Inc. Life and Health Insurance Standard Life Asset Management and Custody Banks US Industrial

Appendix A: Major Metrics 2009-2001: Electronic Arts, Activision Blizzard, Take-Two

Interactive, Ubisoft Corporation275276277278

Electronic Arts Electronic Arts (% (% REVENUE) GROWTH) 2011 2010 2009 2011 2010 2009 - ROI 5.7 -11.6 8.8 ROI 303.5% 175.8% - - ROE -7.06 -5.77 9.94 ROE -18.3% 272.3% -

275Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. Accessed February 8 2013. 276 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 277 Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 278 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013

- ROA -4.65 -3.77 6.31 ROA -18.93% 267.4% - - EBITDA 1.16 1.38 1.13 EBITDA -19.23% 17.68% -

Activision Blizzard (% REVENUE) Activision Blizzard (% GROWTH) 2011 2010 2009 2011 2010 2009 ROI 10.82 6.46 2.3 ROI 181% 67% - ROE 10.49 3.99 1.01 ROE 295% 163% - ROA 8.12 3.07 0.8 ROA 284% 164% - EBITDA 37.60 40.21 41.79 EBITDA -4% -6% -

Take -Two Interactive (% REVENUE) Take-Two Interactive (% GROWTH) 2011 2010 2009 2011 2010 2009 ROI 8.99 8.59 -11.3 ROI 5% 176% - ROE 7.33 7.56 -24.6 ROE -3% 131% - ROA 4.8 4.14 -13.19 ROA 16% 131% - EBITDA 21.10 20.70 24.77 EBITDA 2% -16% -

Ubisoft (% REVENUE) Ubisoft (% GROWTH) 2011 2010 2009 2011 2010 2009 ROI 1.3 -5.1 9.1 ROI 125% -156% - ROE -7.1 -5.8 9.9 ROE -22% -159% - ROA 1 -3.9 6.5 ROA 126% -160% - EBITDA 24.90 29.70 24.45 EBITDA -16% 21% -

Appendix B: 30-Day Stock Price Highs, Lows and Volatility, 2009-2011279

279 Bloomberg Terminal. Excel Add-In. Historical Prices: Highs, Lows, 30-Day Volatility. Accessed February 12 2013. Electronic Arts US EQUITY Activision US EQUITY Date HIGH LOW 30-day Volatility Date HIGH LOW 30-day Volatility 3/20/2009 20.6 14.24 61.996 3/20/2009 10.5283 7.798 44.554 6/29/2009 23.76 17.48 30.591 6/29/2009 12.588 9.4362 32.75 9/30/2009 22.42 17.68 35.674 9/30/2009 12.4538 10.3367 25.874 12/28/2009 21.05 15.86 26.129 12/28/2009 12.4155 9.8194 26.723 3/31/2010 18.99 15.7 15.971 3/31/2010 11.8274 9.5128 18.291 6/30/2010 20.24 14.37 36.986 6/30/2010 12.2158 9.7008 29.636 9/24/2010 17.53 14.06 28.078 9/24/2010 11.74 10.0212 26.011 12/31/2010 18.06 14.67 17.848 12/31/2010 12.2838 10.4679 17.579 3/31/2011 20.2 14.8 23.578 3/31/2011 12.2759 10.0989 21.837 6/30/2011 24.79 19.5 28.819 6/30/2011 11.8884 10.6956 23.814 9/28/2011 25.05 17.52 42.019 9/28/2011 12.125 10.252 27.969 12/29/2011 26.13 18.99 45.657 12/29/2011 14.1951 11.4349 24.457

Take Two Interactive US Equity Ubisoft US Equity Date HIGH LOW 30-day Volatility Date HIGH LOW 30-day Volatility 3/20/2009 13.03 6.84 105.252 3/20/2009 18.9 18.9 18.88 6/29/2009 9.94 5.56 67.777 6/29/2009 23.85 23.3 20.73 9/30/2009 10.01 7.52 50.889 9/30/2009 19.3 19.3 35.44 12/28/2009 12.57 9.19 44.85 12/28/2009 14.25 14.25 44.54 3/31/2010 12.15 7 43.517 3/31/2010 13.75 13.75 34.39 6/30/2010 11.25 8.94 29.931 6/30/2010 7.45 7.45 32.03 9/24/2010 11.84 8.6799 50.053 9/24/2010 11.18 10.96 22.32 12/31/2010 11 7.98 30.302 12/31/2010 10.02 10.02 44.23 3/31/2011 13.62 10.58 36.449 3/31/2011 10.2437 10.2 35.14 6/30/2011 16.75 12.04 24.836 6/30/2011 9.9 9.9 34.54 9/28/2011 17.58 14.26 30.406 9/28/2011 5.5 5.5 43.21 12/29/2011 15.77 10.63 40.795 12/29/2011 6.21 6.21 45.43

Appendix C: Financial Capital Structure Components 2009-2011280281282283

280Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. Accessed February 8 2013. Electronic Arts Inc 2011 2010 2009 Capex (%SALES) -5.68% -35.02% -10.87% WACC 9.65 9.79 12.37 Beta 0.9827 0.5875 1.0201 Altman Z 2.84 2.99 4.15

Activison Blizzard 2011 2010 2009 Capex(%SALES) -1.51% -2.18% -1.61% WACC 8.59 9.05 9.15 Beta 0.6228 0.4635 0.8823 Altman Z 5.49 4.01 4.26

Take Two Interactive 2011 2010 2009 Capex(%SALES) -0.85% -0.87% -1.15% WACC 10.15 10.43 9.49 Beta 1.1089 1.1675 1.1597 Altman Z 5.05 3.43 2.18

Ubisoft Corporation 2011 2010 2009 Capex(%SALES) -2.14% -2.26% -30.12% WACC 12.04 8.33 8.03 Beta 1.3475 0.8934 0.826 Altman Z 3.42 3.32 5.79

281 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 282 Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 283 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013

Appendix D: Analyst Recommendations284285286287

Electronic Arts Inc Firm Name Analyst Recommendation Tgt Px Longbow Research JAMES L HARDIMAN neutral Consensus USD Piper Jaffray MICHAEL J OLSON neutral 20 Consensus Rating 3.55 Pacific Crest Securities EVAN S WILSON sector perform Buys 34.50% Cowen and Company DOUGLAS CREUTZ outperform Holds 58.60% Stifel DREW E CRUM buy 17 Sells 6.90% MKM Partners ERIC O HANDLER neutral 15 12M Tgt Px 21/29 Brean Murray Carret & Co TODD MITCHELL buy 22 Wedbush MICHAEL PACHTER outperform 23 Ascendiant Capital Markets EDWARD WOO neutral 20 Last Price 19.34 Argus Research Corp JOSEPH F BONNER hold Return Potential -8.43% BMO Capital Markets EDWARD S WILLIAMS outperform 20 1 Year Return 17.25% Robert W. Baird & Co COLIN SEBASTIAN neutral 15

Activision Blizzard Firm Name Analyst Recommendation Tgt Px Consensus USD Longbow Research JAMES L HARDIMAN neutral Consensus Rating 4.85 Piper Jaffray MICHAEL J OLSON overweight 17 Buys 92.30% Cowen and Company DOUGLAS CREUTZ outperform Holds 7.70% Stifel DREW E CRUM buy 15 Sells 0.00% MKM Partners ERIC O HANDLER buy 17 12M Tgt Px 21/27 Wedbush MICHAEL PACHTER outperform 19 Argus Research Corp JOSEPH F BONNER buy 18 BMO Capital Markets EDWARD S WILLIAMS outperform 17 Last Price 15.03 Brean Murray Carret & Co TODD MITCHELL buy 15 Return Potential 5.09% Robert W. Baird & Co COLIN SEBASTIAN outperform 15 1 Year Return 23.65% Sterne, Agee & Leach ARVIND BHATIA buy 17 National Alliance Capital Mark MICHAEL HICKEY buy 16.2

285 Bloomberg Terminal. Electronic Arts (EA) Us Equity. Financial Analysis: Custom. Accessed February 8 2013. 66 Bloomberg Terminal. Activision Blizzard. Financial Analysis: Custom. Accessed February 8 2013 67 Bloomberg Terminal. Take Two Interactive. Financial Analysis: Custom. Accessed February 8 2013 68 Bloomberg Terminal. Ubisoft. Financial Analysis: Custom. Accessed February 8 2013

Ubisoft Entertainment Firm Name Analyst Recommendation Tgt Px Arkeon Finance CHARLES-LOUIS PLANA buy 12 Consensus EUR Exane BNP Paribas JEAN-CHRISTOPHE LIAU outperform 11 Consensus Rating 3.71 Wedbush MICHAEL PACHTER neutral 7 Buys 35.70% BMO Capital Markets EDWARD S WILLIAMS outperform 9 Holds 64.30% JPMorgan MARCUS DIEBEL neutral 9.1 Sells 0.00% CM - CIC Securities(ESN) ERIC RAVARY hold 7.5 12M Tgt Px Jul-15 Oddo & Cie EMMANUEL MATOT neutral 7.5 Pacific Crest Securities EVAN S WILSON sector perform Sterne, Agee & Leach ARVIND BHATIA neutral Last Price 8.82 Kepler Capital Markets CONOR O'SHEA hold 8 Return Potential 0.42% EVA Dimensions ANDREW S ZAMFOTIS hold 1 Year Return 45.42% Natixis RICHARD MAXIME BEAU buy 12

Take-Two Interactive Software Inc Firm Name Analyst Recommendation Tgt Px Longbow Research JAMES L HARDIMANbuy 17 Consensus USD Piper Jaffray MICHAEL J overweightOLSON 18 Consensus Rating 4.22 Cowen and Company DOUGLAS CREUTZoutperform Buys 66.70% MKM Partners ERIC O HANDLERbuy 17 Holds 27.80% Wedbush MICHAEL PACHTERoutperform 15.5 Sells 5.60% Sterne, Agee & Leach ARVIND BHATIAbuy 17 12M Tgt Px 16.38 BMO Capital Markets EDWARD Smarket WILLIAMS perform 16 Brean Murray Carret & TODDCo MITCHELLhold Robert W. Baird & Co COLIN SEBASTIANneutral 13 Last Price 15.93 Credit Suisse STEPHEN JUneutral 14 Return Potential 2.81% Hilliard Lyons JEFFREY S THOMISONbuy 18 1 Year Return 1.59% Jefferies BRIAN J PITZhold 13

Appendix E : Payback Period and Expected Return Calculations 12. Transition to Mobile and Digital Distribution11. “Freemium” Game Integration 10. “Bigger, Fewer” Strategy Outsourcing9. Tedious Developing Initiatives8. to Reduce Operations Costs Segment7. Inventory Increasing6. Trademarks and Copyrights Symbiotic5. Product Placements Contracts4. with Third-Party Developers Additional3. Customer Service Initiatives CSR2. and Sustainability Policies Charitable1. Donations Costs $ $ $ $ $ $ $ $ $ $ $ $ $

2,611,890.00

100,000 100,000 290,940 400,000 200,000 123,200 357,750 200,000 540,000 200,000

50,000 50,000 Year 1 Payback $ $ $ $ $ $ $ $ $ $ $

1,349,000

200,000 130,000 100,000 200,000 380,000 150,000

25,000 50,000 76,000 38,000 - - Year 2 $ $ $ $ $ $ $ $ $ $ $ $

3,022,579

300,000 200,000 150,000 200,000 383,800 150,000

50,000 50,000 75,000 76,760 38,019 - Pre-existing supply chain make transition cheap and chain transition make quick supply Pre-existing basis subscription year Users are first on in free Focus on productshit on 20%Savings R&Dof Costs more of efficiency Result satisfaction time, Quick order response measure sales of loss Preventative by .5%Increase to due exposure Sales increases Efficiency Chain Supply customers to satisfied .01%due returning increase sales to .05%due consumer awareness increase income net Expected Expected Return Present Value: WACC 2011: Expected Life of CF: Payback period:

2years $10,034,850.01 5years 9.65% 284% Reasoning