EA ready to rule gaming world

Analysts say Electronic Arts is sitting pretty: It has Tiger, Ali and Jordan in its corner, and has correctly bet big on PlayStation2 and the next-gen game consoles.

It has important endorsement agreements with Muhammad Ali, Michael Jordan and Tiger Woods, but it doesn't make athletic shoes or movies. Instead, Electronic Arts Inc. is the largest independent publisher of computer and video games.

Why the endorsements? "The big names attract the attention of the gamer," said John Riccitiello, president and chief operating officer of Electronic Arts in Redwood City, Calif. "They bring a sense of character and personality to the game."

If only the celebrities could steer Electronic Arts (erts) through a looming shakeout in the games market, the company would really be onto something.

Video-game companies have morphed into big software companies that fuel a $14 billion games industry worldwide. But investors have recently bailed out of the game companies' stocks, mainly because they expect the market for console games, as opposed to PC games, to plunge as gamers wait for next-generation consoles to arrive.

In recent weeks, Midway Games Inc., Acclaim Entertainment Inc., Eidos PLC and Activision Inc. have warned of market weakness and falling prices as players wait for new consoles due out later this year and in 2001. Although the console transition is expected to be less jarring than the one of five years ago, odds are good that some game companies won't survive it.

Wednesday, Electronic Arts announced it beat earnings estimates but that it also sees uncertainty in the market related to slowing console-game sales.

The company reported earnings of $3.4 million, or five cents a share, for its fiscal fourth quarter ended March 31, compared with $21.9 million, or 35 cents a share, a year earlier. Excluding special items related to acquisitions, the company reported earnings of $10.8 million, or 16 cents a share, compared with $23.6 million, or 37 cents a share, a year earlier. Analysts had expected 14 cents a share, according to a consensus of estimates compiled by First Call Corp./Thomson Financial. Revenue rose 6 percent to $294.3 million from $277.7 million.

Electronic Arts rose 68.75 cents to $54.0625 in 4 p.m. Nasdaq stock market trading Wednesday.

But Electronic Arts is still likely to weather the transition better than many rivals, analysts say. It publishes more than 60 games a year and has brands known in 75 countries, with big market shares in categories such as sports and PC-simulation games.

Once the industry bounces back with next-generation console sales, "Electronic Arts should be the biggest beneficiary in the coming phenomenal growth phase for the video-game sector," said Stewart Halpern, an analyst at Banc America Securities in New York.

The company has made its mark through a combination of spreading its risks and focusing on developing games for the hardware platform with the most potential. In the last hardware transition, Electronic Arts correctly diagnosed that Sony Corp.'s PlayStation would smash Sega Enterprises Ltd.'s Saturn, and it is now the No. 2 maker of PlayStation games behind Sony.

Electronic Arts prepared for the current downdraft. During the past couple of years, it bought Westwood Studios and Maxis to add some well-known PC-game brands as a cushion for the console downturn. Maxis, which was bleeding money and talent, has turned around nicely and scored major hits with "SimCity 3000" and "The Sims."

In the Maxis deal, Electronic Arts installed new management, but it made a smart move in reviving the moribund "Sims" project, which had been canceled even though it was spearheaded by Maxis's co-founder and creative genius, Will Wright.

"The Sims," in which players manage the day-to-day lives of simulated human families, has dominated the Top 10 chart since its release in February.

The Maxis deal illustrates why Electronic Arts' 13 acquisitions during the past decade have been successful. The company supports its creative talent. It also creates brands and milks them. But rather than flood the market with "Sims" games as Maxis did, Electronic Arts launches only major titles.

Electronic Arts's biggest bet is in developing titles for the PlayStation2, which Riccitiello believes can sell more than 100 million units in its lifetime, at least 20 million more than the original PlayStation.

Electronic Arts was one of the few U.S. companies launching games for the Japanese version of the PlayStation2, which had its debut in March. And Electronic Arts has as many as 10 games coming for the U.S. launch of the PlayStation2 this fall. A total of 20 major PlayStation2 games are in the works.

Electronic Arts has skipped doing games for Sega (segny) to date, and rivals say that was a big mistake since Sega's Dreamcast has sold a surprising two million units in the United States during the past seven months. But missing out on Sega sales may not hurt that much.

PC game sales are holding up, and Electronic Arts currently has seven games on the industry's Top 20 list. It continues to dominate sports games such as soccer and football, has enormous marketing and distribution clout and fields an army of 1,800 in-house game developers and 1,000 more among affiliated developers.

"If you're going to do games, you have to work for Electronic Arts," said James Edmonds, producer of Electronic Arts's upcoming "Motor City" hot-rod online game. "The resources are incredible. You have to hit your schedules, but no one pushes you to put out a game that isn't finished."

So it might seem odd that the company can't spare a few pennies for a side bet on the Sega Dreamcast. But Electronic Arts sees companies such as Microsoft Corp., Walt Disney Co., Hasbro Inc., Mattel Inc., Vivendi SA unit Havas and the big Japanese game companies as its competition, particularly as games spill over the traditional borders of entertainment and become a part of mass culture. In that respect, Electronic Arts sees itself not as a behemoth with unlimited resources, but as a small player in the media business. As such, it can't afford to lose on even minor bets.

In time, Riccitiello said, 20 percent of Electronic Arts's revenue will come from Internet games. Electronic Arts has more than 40 online games in the works and it has one of the few profitable online games with "Ultima Online," a fantasy universe in which players pay $10 a month to act out roles as wizards or ogres.

Electronic Arts signed a deal with America Online Inc. (aol) to be its exclusive online-games provider, and it has set up a tracking stock for its Electronic Arts.com online-games subsidiary. Wednesday, Electronic Arts.com reported pro forma revenue of $6.8 million and a pro forma loss of $13.1 million, before merger-related expenses. Analysts expect online gaming to grow fast, particularly as broadband, or high-speed, Internet access spreads.

"Unlike a lot of people out there, we didn't pull a business plan for online out of a Cracker Jack box," Riccitiello said.