Video Games Learn How to Take More of Your Cash
(Bloomberg Opinion) -- EA micro-transactions: They’re in the game.
If you’re like me, you grew up hearing a similar catchphrase, likely while playing the FIFA soccer video game on an earlier iteration of the PlayStation system. EA refers, of course, to Electronic Arts Inc., the game publisher’s parent company, which nowadays is valued north of $30 billion. FIFA is still its most popular franchise, but selling a disc at a local GameStop is no longer the primary way companies like EA make money. Increasingly, the industry model is centered on digital downloads, subscriptions, mobile play, live online events and — for the big moneymaker — tiny in-game purchases, also known as micro-transactions. That notable shift makes a year like 2020 an interesting one.
Expected later this year are the launches of Sony Corp.’s PlayStation 5 and Microsoft Corp.’s Xbox Series X, the next generation of video-game consoles (and potentially the last, as gaming shifts to the cloud). Traditionally, that would mark a pretty important stage in the business cycle for EA and its publishing rivals, such as Activision Blizzard Inc. and Take-Two Interactive Software Inc.; new consoles need new games, which means a big sales boost is on the way. But this time, it comes without the lull that usually occurs leading up to it. And that’s thanks to — gamers, you love to hear it — micro-transactions.
“Because of all that ancillary revenue, primarily from micro-transactions, games aren’t as tied to console cycles as they used to be,” Michael Pachter, an analyst for Wedbush Securities, said in a phone interview.
EA’s quarterly results released last week showed that the category it calls live services, which include in-game purchases, was the biggest driver of net revenue, bringing in $677 million. That compares with $469 million from packaged goods (e.g., physical discs) and $286 million from full-game downloads. Activision Blizzard and Take-Two are both scheduled to report their earnings Feb. 6.
Live services can extend the useful life of a game, giving EA more opportunities to make money from users long after the initial purchase. A popular version of this is FIFA Ultimate Team, which is a bit like fantasy soccer in that users try to assemble the best team possible by paying for points that can then buy packs of players, hopefully some star names. According to one fan site, a “silver players pack” costs the equivalent of 83 cents, while a “jumbo rare players pack” is about $17. For a different kind of example of a micro-transaction: Activision Blizzard’s World of Warcraft players can buy Argi, a digital pet, for $10. There’s also a Call of Duty: Modern Warfare “battle pass bundle” for the equivalent of $24, according to the Washington Post.
EA got off to a rough start with micro-transactions. In 2017, the company’s Star Wars Battlefront II was originally developed with virtual loot boxes that could enhance a character’s abilities. It turned into a major controversy, the concern being that when in online-multiplayer mode, users who shelled out more money were more likely to win. Amid the backlash, EA got rid of the loot boxes and instead left micro-transactions for benign cosmetic upgrades.
Then in November, EA released Star Wars Jedi: Fallen Order to a much warmer reception. The company originally predicted it would sell 6 million to 8 million units by the end of March, but it has already surpassed that number and now sees 10 million in sales. And this time, it’s treading carefully in bringing live services to the game. “We’re very conscious about not trying to get people to spend beyond what their spend levels are,” Blake Jorgensen, EA’s chief operating officer and chief financial offer, said on the earnings call.
On top of the success of live services, EA — along with its competitors — is preparing to introduce new hit games for the next-gen consoles, such as a new version of Battlefield and another Star Wars. Walt Disney Co.’s Lucasfilm makes the movies, but for now, the force is with EA.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
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