Eletronic Arts Industry Analysis

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Strategic Review of Electronic Arts Part 2: Industry Overview Table of Contents & Disclaimer

Executive Summary

Part 1: Company Analysis Business Model, Operating Performance, Capital Requirements

Part 2: Industry Analysis Value Chain, Competitive Field, Corporate Finance Activity

Part 3: Valuation Analysis DCF, Comparables, Precedents

Part 4: Leveraged Buyout Transaction Structure, Returns, Viability

Part 5: Transaction Analysis M&A Opportunities

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Disclaimer: This presentation is being provided solely for the purpose of offering training opportunities to competitors looking to compete in the National Investment Banking Competition and members of the NIBC Competitor Portal and may not be distributed without express written permission. The information contained herein is copyrighted, proprietary and has not been reviewed for external publication or audited and therefore should not be relied on or used for any other purpose than for training as stated here.

$68bn global industry projected to grow at 6.7% CAGR over next 5 years with market roughly split between Asia Pacific and North America plus EMEA

Industry Overview North America Video Game Software Industry by Segment ($bn)

North America Revenue by Major Segment (2014) $18 Console/handheld games Online games Mobile games Physical games and software $16.9bn

Consoles $13.3bn $15

Online games and software $7.0bn $12 Total revenue $40.9bn

5-year revenue growth 6.1% $9

EBITDA margins 19.7% - 36.8% $6 North America Industry Characteristics

Total Debt/EBITDA 3.5x $3

Total Debt/EV 0.1x - EBITDA margin 16.3% 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

EV/EBITDA 8.0 – 10.4x Other 3% Asia Pacific Cash Ratio 1.1x 7%

Market share held by 5 majors 40.7% North Global Industry America 24% Total revenues $68bn North America Forecasted 5-year revenue growth 6.7% Asia Pacific EMEA 45% 43% 47% Revenue Profile EMEA 30% Market declined in 2008 onwards due to dependency on discretionary spending but has been relatively resilient

Market has picked up in since 2012 due to improved confidence and growth in mobile/online segment Global industry sales by region Average distribution of sales for video game (2012) publishers in 2014 (EA, ATVI, TTWO, UBI)

Key stakeholders include developers, publishers, distributors and retailers; EA is involved in all stages of the value chain except for physical retail

Development Retail

Outsourced to Publishing Distribution In-house studios Independents Physical Retail Digital Retail

Develop video games Perform financing, manufacturing Distribute games to major Deliver games and software to and related content and marketing functionalities to retailers via physical or digital customers prepare games for launch channels

. Majors have multiple in- . Major publishers and banks . Major publishers often . Physical retailers generate house game development finance game development distribute their own games more sales from used rather studios Activision Blizzard, Electronic Activision Blizzard, Electronic than new software EA Studios (Electronic Arts), 2K Arts Arts GameStop, Walmart (Take Two) . Ancillary services are . Digital distribution is . Digital retailers include mobile . Independents receive provided growing through multiple storefronts and web retail advances from Majors for Market research and digital marketplaces App Store, Amazon game development costs and technology assistance Xbox Live Arcade, PlayStation royalties for sales Network, Wii Ware, Origin . Console manufacturers Arkane Studios (Call of Duty), (Electronic Arts) charge publishers a royalty Bethesda Softworks (Fallout), for each game . Independent publishers rely Mojang (Minecraft) manufactured on third party distributors Nintendo, Sony, Microsoft Synnex, Ingram Micro

Industry trends include focus on blockbuster releases as well as rise of mobile, online social media, casual and free- to-play games as well as digital distribution of conventional console games

Industry  Blockbuster releases: Emphasis by large companies on fewer game releases and significant marketing campaigns, which lead to Trends revenue fluctuation and lower operating costs if successful  Mobile and online gaming: ̶ Sales by independent developers are up 37.2% from 2013 to $29.5bn in 2014 ̶ Online platforms create lower barriers to entry for game developers  Digital Distribution: Improved online games stores and increased access to broadband is driving digital distribution of console games, which has lead closures in physical video manufacturing facilities  Social and casual gaming: Recent innovations in new platforms allow companies to appeal to broader demographics with more accessible and less complex casual and social games  Console games: Sophisticated console games continue to be in high demand with Play Station 4 selling more units than any predecessor model and the open-world game Destiny (ATVI) being the most expensive game ever developed  Platforms: Console platforms are likely to remain highly relevant platforms since mobile and tablet devices have limited capabilities, although PC platforms are becoming more powerful  Genres: Multi-player first-person shooter games have become most successful genre (Counter-Strike, Halo) but open-world role playing games (ability to use and access everything like in GTA) have become very popular as well; sports games continue to exhibit steady demand while arcade games have decreased in popularity

Total Global Consumer Spending on Video Games by Platform Total Consumer Spending on Video Games

90 Console Games Free-to-Play Games Mobile Games PC Games

30 User Spending (US$ billions) (US$ Spending User -

End 20

- 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Performance of industry players is somewhat volatile, driving trend towards M&A activity to gain economies of scale and mitigate risk

Financial  Hit-driven profit: Profit is fairly volatile and margins are expected to grow based on lower cost of online distribution and increased Aspects sales due to intensive marketing for fewer Blockbuster releases  Labor costs: Talented software developers are in high demand, resulting in high spending on labor costs reaching approximately $0.08 spent in capital for every $1 spent in wages  Technological advances: The industry is transitioning into a generation of new consoles, the anticipation of which generally stalls new games and present-generation console sales in the two years leading up to the release  Console cycle: Video game sales have historically ramped up in the 3rd year of a console cycle (will be 2016 in the current cycle) as price points become more manageable for consumers  Cyclicality based on disposable income: Video game revenue is dependent on consumer discretionary spending

Corporate  Content Acquisition: Difficult to develop blockbuster titles in-house Finance ̶ Vertical integration: With lower barriers to entry created by online gaming development, quality developers with attractive Activity games are in strong demand as larger publishers want exclusive access to their game pipeline  Expansion Into Market Segment: Easier to expand into new segment like mobile / online gaming via acquisition  Consolidation: Trend towards creating a competitive advantage via gaining market share ̶ Horizontal mergers: Major players look to become fully-functional companies that publish, develop and market directly to customers instead of operating as pure-plays  Expansion of Distribution Channels: Growing increasingly important to have distribution channels expanding into new markets  LBOs: The industry has not seen much activity in LBOs, with only two deals making recent headlines Regional  International Markets: Expected to be grow at a faster rate than North America Characteristics  Japanese Game Developers: Have fallen behind Western manufacturers and lack the ability to developer first-person shooter games  Western Game Developers: Derive most revenues from North America and Europe with Japan and the broader Asia Pacific region accounting for relatively small share Key Players  GameStop (16.2% - retail) (% US Video  Microsoft (11.6% - console platform) Game Market,  Activision Blizzard (5.5% - publishing) CY 2013)  Nintendo (4.1% - console platform)  Electronic Arts (3.3% - publishing)  Sony (3.1% - console platform)

Activision Blizzard and Ubisoft’s operating and stock price performance have lagged, while Take-Two had the strongest stock price performance and Zynga leading with highest revenue growth

Business Model FY2013 Regional Revenue Revenue Segments N. America Europe Asia 5-Year Share Price Performance . Franchise console games and MMORPGs $2,436 $1,968 $452 ATVI Activision Blizzard (ATVI) Take-Two (TTWO) TTWO . Two major franchises for console games $565 $649 $25 5,000 TTWO NASDAQ 4,500 . Multiple social gaming hits $520 $353 ZNGA $20 4,000 UBI . Few popular franchises for console games $687 $915 $113 3,500 $15 3,000 Nintendo . Console hardware and software developer $2,512 $1,803 $2,218 2,500 $10 2,000 . EA Known for sports and simulation franchises $1,701 $2,096 1,500 $5 1,000 500

Operating Performance Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Revenue CAGR (5yr) CAGR (2yr) EBITDA CAGR (5yr) CAGR (3-5yr) Margin Zynga (ZNGA) Ubisoft (FP: UBI)

(US$m) LTM* Historic Forecast LTM* Historic Forecast FY 2013 $16 5,000 ZNGA NASDAQ 4,500 $14 ATVI $4,290 9.9% 1.6% $1,368 19.8% 0.5% 36.8% 4,000 $12 3,500 TTWO $2,333 (11.6)% 69.8% $254 (342.2)% (20.2)% 20.9% $10 3,000 $8 2,500 ZNGA $700 131.1% (23.1)% $(55) (0.7)% 44.3% 8.4% 2,000 $6 1,500 2.1% -2.4% 4.6% (1.2)% $4 UBI $1,350 $607 37.5% 1,000 $2 Nintendo $5,592 (10.9)% (16)% $(288) (138.2)% NA (3.7)% 500 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 EA $4,090 79.7% 55.0% $995 51.7% 66.3% 9.2%

Nintendo (JP: 7974) Electronic Arts (EA)

Capital Structure and Valuation* ¥35,000 5,000 Nintendo NASDAQ 4,500 ¥30,000 (US$m) EV Market Cap Debt Cash Net Debt/EV EV/EBITDA P/E 4,000 ¥25,000 3,500 ATVI $15,364 $15,247 $4,321 $4,199 0.8% 11.2x 14.7x 3,000 ¥20,000 $1,573 $1,955 $459 $822 (23.1)% 2.3x 21.9x 2,500 TTWO ¥15,000 2,000 ZNGA $1,808 $2,535 $0 $136 (7.5)% ned neg ¥10,000 1,500 1,000 ¥5,000 UBI $1,794 $1,779 $253 $229 1.3% 4.0x neg 500 Nintendo $8,600 $15,607 $22,645 $4,390 (51)% neg neg Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 EA $9,512 $11,242 $586 $1,554 (10.2)% 9.6x 19.9x

Sources: Bloomberg, CapIQ *LTM as of Sep 26th 2014

Most prevalent transactions consist of conglomerates acquiring small developers although consolidation in traditional console and growing digital segments have become more common

Sony launches PS2 (new console cycle)

Microsoft acquires Bungie (conglomerate / developer)

Launch of Xbox and GameCube (new entrant) SquareSoft merges with Enix (consolidation, mid-size) Sammy merges with SEGA (consolidation, large-scale)

EB Games merges with GameStop ($1.4bn) (consolidation, distribution) Microsoft launches 7th gen console cycle with Xbox 360 (new console cycle) 2000 2001 2002 2003 2004 2005 2006

2007 2008 2009 2010 2011 2012 2013 (consolidation, large-scale)

Softbank and GungHo acquire 51% stake in Softcell ($1.5bn) (new console cycle) Nintendo launches 8th gen console cycle with Wii U

Tencent Holdings acquires majority stake in Riot Games ($350m) (conglomerate / developer)

EA acquires PopCap Games ($1.3bn) (conglomerate / developer)

Walt Disney acquires Playdom ($763m) (conglomerate / developer)

EA acquires Playfish ($391m) (conglomerate / developer) Activision merges with Vivendi Games ($18.9bn) (consolidation, large -scale) EA rumored to make a $2bn bid for Take-Two Interactive (consolidation, mid-size) EA acquires BioWare and Pandemic Studio (conglomerate / developer)