Video Game Industry and Electronic Arts Positioning - Essay Example

The Electronic Arts Report Introduction Electronic Arts is an established market player in the global video game industry with primary focus on production of sports video games. The purpose of the report is to give an overview of the industry analysis and strategic choices faced by the EA, as well as derive the recommendations for enhancing company's position and future performance. Video Game Industry and Electronic Arts Positioning Video game $31 billion market has been rapidly developing, embracing new technological advances and new segments. The rate of growth is forecasted to increase in the upcoming several years. The console market is dominated by several large players while the game programming industry is more segmented with both large and small players present. The EA has a significant market share of sports and hero-based video games. The Electronic Art's core competence is its ability to develop high-quality sports and feature games and offer a fascinating gaming experience to the kids, teens, and young adults in many countries around the world. Porter's Five Forces Analysis Industrial Rivalry Concentration: Although there are relatively few large competitors in the worldwide video game industry, it is still a heavily saturated market. The high fixed costs of developing a new game lead to increasing competition among the game programmers for the additional unit sales. Product Differentiation: Attributable to EA's efforts to diversify its products from other video games, it has been able to gain a competitive advantage over its competitors. They have a few areas in which true product differentiation exists - graphics, price, use of celebrities and licensed themes etc. Exit barriers: game programming industry requires moderate investment into equipment and availability of skilled game developers which constitute exit barriers. Cost Conditions: due to the short product life and low customer price sensitivity the economies of scale do not have significant impact on the industry performance. Nevetherless, the learning curve effects are present. Threat of Entry There is little threat of entry from companies outside of the video games market, however, within the market there is possible threat from manufacturers not yet fully established in the video games (i.e. manufacturers of game consoles), and even then there are significant barriers. Capital Requirements There are moderate capital requirements associated with entering the video games market as supplies can be outsourced and no major investment into R&D and equipment is needed. Access to Channels of Distribution The channel of distribution is another barrier to entry. This has to due to the fact that the retail channels are already saturated with a variety of competing products from established brands. In addition, there may be preference for distributors to sell products with higher margins or greater marketability and volume, making entry difficult. Threat of Substitutes/Complements Buyer propensity to substitute: There are very few other forms of entertainment that can be considered as direct substitutes for video games. However, within the video games market segment there are a number of substitutes because each manufacturer offers their own product range and the customers rarely have high brand loyalty. Complements: video games constitute a complementary good themselves with regard to the game consoles. Although the demand for them can not be considered purely derived, the video games market capacity does depend on the spread of the gaming devices. Bargaining Power of Buyers Price Sensitivity: the end customer perceives price as an indicator of quality and, therefore, is often price insensitive within certain price range. Concentration: Size of the end customer (i.e. consumer) is small and size of one purchase is small, so the end customer itself lacks the bargaining power. However, the wholesale distributors and retailers are bigger in size and their purchases have impact on the total amount of purchases, so they have also more bargaining power. Bargaining Power of Suppliers The suppliers of disks and other devices have relatively low bargaining power because of EA's procurement practices. It is also possible, that EA could start producing its own components if it is unhappy with the current suppliers. Although this alternative somewhat decreases the bargaining power of EA's suppliers this scenario is highly unlikely. On the other hand, the game consoles suppliers can strongly influence the performance of the video game industry players. Industry Key Success Factors The key success factors for the video game industry operator are as follows: Creativity and technological expertise of the game creation team Strong distribution coverage Alliances with major producers of the game consoles and playing devices Adequate financial resources and capacities to launch the new games periodically SWOT Analysis for Electronic Arts Strengths: Established position in sports and 'safe-content' video games Portfolio of hit games and creative talent International distribution coverage Weaknesses: Strong dependence on the agreements with game consoles manufacturers, especially within online gaming segment Unsteady financial performance over recent years Turnover of creative professionals Opportunities: Increasing number of households with access to the internet Expanding video games markets worldwide, including emerging markets Rapid technological advances Threats: Expected launch of more powerful game consoles in the near future Pressing competition from the game consoles producers. Financial Analysis of Electronic Arts The EA Company has demonstrated quite steady upward trend in net revenues and gross profit, with the exception of the year 2001 when the change to the new generation of consoles and extensive investment into online business development had hurt the gross results. The gross margins increased from 51.63% in 1999 up to 56.78% in 2003. EA experienced net loss in 2001, however, got back in black the next year, and in 2003 the net income tripled as well as EPS. The company is not extensively leveraged and keeps favorable assets to liabilities ratio of approximately 0.25. In general, the financial position of EA can be assessed as strong and the company's turnover allows it to undertake several resource-intensive developments simultaneously. Electronic Arts Competitive Strength Assessment In order to assess the competitive strength of Electronic Arts the Competitive Profile Matrix (CPM) has been constructed: THQ Acclaim Electronic Arts Critical Success Factors Weight Rate Score Rate Score Rate Score Advertising .10 2 .20 2 .20 3 .30 Product Quality .15 4 .60 4 .60 4 .60 Price .05 3 .15 3 .15 3 .15 Product range .15 3 .45 2 .30 3 .45 Financial Position .15 3 .45 1 .15 4 .60 Alliances .10 3 .30 2 .20 3 .30 Global Expansion .10 2 .20 2 .20 3 .30 Market Share .20 3 .60 1 .20 4 .80 TOTAL 1.00 2.95 2.00 3.50 The EA's score of 3.50 is well above the competitor's 2.95 and 2.00 correspondingly. The areas of strength include market share, financial position, and global expansion. Strategic Issues to be Addressed The EA Company needs to decide on future strategy and scope of the operations. Management faces the choices of horizontal, vertical, or geographical expansion, or keeping the scope of the operations. It should as well decide what is more feasible: to concentrate on programming games for the current type game consoles or heavily invest into the development of games for the next generation playing devices. Recommendations It is recommended for the Electronic Arts to focus on its core competency of producing high-quality state-of-art technology video games and seize the first mover advantage in the next generation games devices programming. The company should also expand internationally to capture the underdeveloped markets' potential. Read More