Sherwood News

Video game economics aren’t what they used to be

EA is looking to the future, but its profitability still depends on the performance of past hits like The Sims and its sports franchises

William Coulman

9/20/24 5:44AM

Video game giant Electronic Arts (EA) — the company behind household hits like The Sims, Madden, Battlefield, and the FIFA series — held its first analyst meeting in 8 years on Tuesday.

Despite unveiling a number of projects; a social app, AI initiatives, and a Sims movie to be produced by Margot Robbie’s company, the event left analysts underwhelmed. Most disappointing for investors was the lack of financial detail on the company’s bigger goals, like doubling its audience to more than one billion by 2027. EA’s stock has slipped 3% this week, while the rest of the market has powered to record highs.

Now the largest pure-play publisher after Microsoft's acquisition of Activision Blizzard, EA continues to ride the success of its classic franchises. "College Football 25" lived up to its hype by shattering sales records, while "EA Sports FC" sold 11.3 million copies in its first week, proving that its rebrand away from FIFA hasn't killed its appeal. The ongoing prosperity of those cash cow titles is vital, as video game economics have changed dramatically in the last 10-15 years.

In the past, success in the gaming industry was straightforward. Make a game, generate buzz about it, and sell as many copies of it as possible. If it went well, you make a sequel and do it all again.

But, in 2024, the cost to the consumer rarely stops after they buy the game. EA's true financial engine is its "Live Services" segment — a broad term encompassing sales of extra content, subscriptions, in-game rewards, and other digital goodies. This accounted for 73% of the company’s revenue last year, fueling growth not just for EA but the entire gaming industry, which in the US is ~6X the size of the box office.

Developing a quality video game is expensive, EA spent an eye-watering $2.4 billion on R&D last year. But no matter how much you spend, the outcome is always unpredictable: many video games flop, and the competition is only getting fiercer — this year’s biggest hit is from a little known Chinese video-game studio.

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The $640,000 Luce makes the average Ferrari look like a bargain

Put aside the shape; put aside the smoothing out of Ferrari’s iconic sharp edges; put aside, even, the calls from former Chairman and President Luca Cordero di Montezemolo to “take the Prancing Horse off.” On the grounds of price alone, Luce detractors might have a point.

By now, many of us will have read the criticisms of Ferrari’s first fully electric vehicle, as the Luce — which was unveiled to the world earlier this week and promptly saw the company’s shares crash out in New York and Milan — gets subtly shaded by competitors online and not-so-subtly shaded by basically everyone else.

What makes all of this worse for Ferrari is that, even by the luxury car maker’s notoriously high standards, they’ve slapped a pretty hefty price tag on the Luce, and the company’s CEO, Benedetto Vigna, has already been forced to defend the €550,000 ($640,000) price point, saying yesterday that it’s “fair to pay for innovation,” per Reuters.

While Ferrari’s cars have been getting more expensive of late, as recently as 2022, Ferrari’s average revenue per car sold was around $340,000. At nearly twice that price, this new electric model is obviously proving a little much (visually, conceptually, and financially) for many loyal and long-standing fans of the Prancing Horse to stomach.