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 video game 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 video game industry. 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 Electronic Arts is a video game developer, 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