After a COVID-driven 2020, sales for video games in 2021 are expected to smash more records.  This is despite the fact that new console systems continue to be in short supply and major product releases have been delayed.  This raises the question of whether the video game industry really needs AAA video games.

Historically game industry sales have been concentrated in the fall/winter holiday season where big product releases encourage consumers to upgrade to the latest hardware.  However, in the post-COVID era consumers are opening their wallets year-round.  Furthermore, companies are generating record sales without releasing major new games.

The games-as-a-service model now drives the video game industry.  A key goal is no longer to release the latest hit but instead to drive more revenue from existing products.  The 2021 holiday release slate is limited but the industry will still see record sales.

For investors looking for long-term value this is good news as stock prices no longer fluctuate dramatically based on the prospects for the latest release.  Video games are no longer a major target for day traders.

Of course, old habits die hard and big new releases still attract major attention.  Last week Electronic Arts announced its key holiday 2021 title Battlefield 2042 would be delayed from its October 22 release date.  The stock declined as the assumption was it would miss the holiday season.  However, EA quickly announced that Battlefield 2042 would only be delayed a month to November 19.

Electronic Arts stock still declined about 10% in the week following the announcement of the delay.  Some of the concern was that Battlefield would lose sales to Activision Blizzard’s Call of Duty: Vanguard, due to release November 5.

The bigger concern was that Battlefield 2042 will not be up to snuff.  The disastrous release of Cyberpunk 2077 in holiday 2020 has shown investors what can happen when a product is rushed to market.  However, unlike Cyberpunk publisher CD Projekt, Electronic Arts is no longer a hit driven company.

For years, EA has been looking to move to a games-as-a-service business and the company has been largely successful in that regard.  The company now reports its revenue in two major categories: 1) full games and 2) live services.  Full games include sales of major new releases whether they are packaged or digital downloads.

In Electronic Arts’ fiscal 2021 (ending March 31) full games accounted for only 29% of revenue.  The remaining 71% of revenue came from live services.  Even in the key holiday season of 2020, full game revenue was only 43% of quarterly revenue.     

Investors looking at the long-term prospects of Electronic Arts are better looking at growth prospects in areas like mobile and among key franchises like Madden NFL football.  In the past month, EA has launched the latest version of Madden and made a major investment in mobile games by acquiring Playdemic for $1.4 billion.

Madden Football has a great deal of growth prospects as a service but it also faces challenges.  In 2020, EA renewed its contract with the NFL through 2026.  This gives EA an exclusive right to NFL simulation games.  However, it also leaves competitors a great deal of wiggle room to release competing NFL products that do not fall under the simulation category.

The Playdemic acquisition is interesting because it gives EA the hit Golf Clash.  However, mobile games is an area where large game publishers have struggled.  Despite many investments, EA’s mobile game revenue has actually declined in recent years as the rest of the industry soars.

A major question for investors is can Electronic Arts finally grow its mobile business and can it expand its sports franchises beyond the core simulation products.  These issues, not the holiday 2021 release of Battlefield 2042, are what will drive future success.

As we go into fall, DFC will continue to monitor major product releases, but unlike previous years, key releases are not a major driver of our forecasts.  Yes, AAA titles are still important and can be key sales drivers.  However, the video game industry has grown far beyond the holiday sales season.  This is a year-round industry and the key to success is now capturing ongoing spending throughout the entire year.   

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