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Archive for May, 2011

Electronic Arts LogoThere is a lot of emerging competition for traditional video game makers. For instance, Zynga’s estimated $10B valuation is larger than EA’s, yet the firm only has a tenth of the revenue in contrast and a possible over-dependency on Facebook. This almost sounds like the dot com era again to me. How will this story end?

This is the question that my class discussed with Peter Moore, President of EA Sports, when he visited my class on May 16, 2011.

Peter opened by saying digital is the growth driver in the gaming industry. The gaming industry is expected to grow an estimated a 5-10%* from the years 2010 to 2014; while digital gaming alone has grown at a 67% pace to $20B in just the last two years of business. It sounds great, but there is a big challenge – growth isn’t coming from a single digital source.

What is inspiring about EA’s approach to digital is that they are taking it on with enthusiasm – no heads are buried in the sand. Everyone knows that they adapt or become irrelevant. The digital transformation for EA means that they must face disruption on multiple fronts. New revenue generating business models include micro-transactions, downloadable console content, game add-ons and advertising; shifting revenue away from traditional physical disc sales. Platform proliferation dictates an expansion strategy that crosses just about anything that enables true ubiquity for the gamer; allowing them to play where and when they want.

With such a wide array of changes and challenges present, Peter doesn’t ignore the business case for making smart digital decisions across ecommerce, merchandising and device platforms. His rigor is demonstrated in the ability to deliver 30% margins as an operating business unit.

Peter Moore in John Schneider's Spring 2011 MGMT 162 Class

Peter Moore's visit to John Schneider's MGMT 162 course

With Peter’s second visit over the past year, one thing becomes evident. EA and the gaming sector are in for a wild ride. It is truly exciting to watch a large firm embrace Schumpeter’s theory of creative destruction; one that encourages the opening of new markets by tearing down traditional business models and placing emphasis on redesigning industry boundaries as new technologies introduce tremendous growth opportunities.

* Source: PwC Global Entertainment & Media Outlook 2010-2014

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Photograph: Susana Bates/Reuters

Analysts are questioning Microsoft’s $8.5 billion purchase of Skype this past week for good reason. Skype isn’t turning a net profit and Microsoft wasn’t truly in a competitive bid. This sets up the question as to what synergies can be created between these two firms that drives such a valuation. We’ve all heard about Skype’s role as a key technology across many Microsoft technologies such as Xbox and Outlook, but I think there is one focal area that takes the lead over all others – mobility.

Microsoft announced Windows Phone  7 Series at Mobile World Congress in February 2010 with the goal of re-invigorating their position in the smart phone space, one they pretty much created but have since lost. In a recent opportunity to meet Robbie Bach, Retired President of MS Entertainment & Devices, he emphasized the point that they learned that MS had made a key mistake in the past by allowing handset manufacturers and carriers to manipulate the user experience on the phones with little to no restrictions (which can be likened to the approach Android is taking today). Now Microsoft is tightening controls and limiting what modifications, if any can be made. With this new strategy and reach into both enterprise and consumer markets on a global scale, what was missing until last week?

Microsoft did not have a unique value proposition. Nothing to disrupt the space. Apple has the tightest user experience and ubiquity across devices. Android is in just about everything now. In order to thread the needle between these two heavyweights, Microsoft needs something that changes the current market trajectory which looks to be building towards a duopoly a few years out.

Let’s look at the dynamics on the buy side of the industry, specifically the carriers, as an example of what could happen next. With AT&T’s recent proposed acquisition of T-mobile, Sprint is concerned with extinction due to its relatively low market share. Until now, no carrier has been a big advocate of changing their lucrative business model by allowing highly integrated VoIP calling that negates the use of their airwaves for voice transmission. Why would Sprint or another carrier consider disrupting the industry with a low cost VoiP solution that uses MS Windows 7 and Skype? The simple reason is that that Microsoft can create cross subsidies with search advertising through Bing. Suddenly, the carrier doesn’t lose financially. The consumer wins as well with lower subscription costs. Thus, the industry is disrupted with a network effect between search advertising and VoiP.

Microsoft captures market share, perhaps just enough to be worth $8.5 billion.

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