It’s been a lot longer since I’ve written a blog post than I envisioned when I wrote my last blog in December. I’m still active on Twitter and Reddit regularly, but the time required to research and write these blog posts has been elusive this year. However, with the release of EA’s Annual Report in the form of its Form 10-K filed with the SEC this morning, I had to make time to share a few thoughts as follow up for my previous analysis of the past years of financial reports back in December. As a frame of reference for this analysis, I’ll start by quoting that December analysis because I think this section provides solid footing for the rest of the post.
Why Does It Matter?
The reason that I decided to review the financial reports for myself is that our recent discussions as a community often seem to devolve into arguments about whether various types of content are more or less desired by players or profitable for BioWare. There is an answer to these questions, but no one outside of BioWare and EA can say with absolute certainty that they know the exact financial state of the game. My analysis simply takes my experience in extracting useful information from financial reports that all publicly traded companies file on an ongoing basis and applying it to Star Wars: The Old Republic within EA’s financials.
My hope is that by providing an accurate picture of the game’s revenue trends over the past four years we can have more informed discussions about the current concerns of the community regarding the game. My goal is to make the concepts accessible to everyone, so I will try to provide clear statements and avoid too much finance and economics minutia. It is important to note though that EA’s fiscal year (FY) ends on March 31st of each year, so fiscal year 2015 (FY15) was the period of April 1st, 2014 through March 31st, 2015. We are currently about 65% of the way through EA’s 2016 fiscal year even though that is counter-intuitive.
The Annual Report
Star Wars: The Old Republic has received a lot of attention for its episodic story content cycle that began in October 2015 with the release of Knights of the Fallen Empire and opinions vary widely. There is little doubt that the financial success or failure of this content cycle will be the largest factor in determining the future path of the game. There is one paragraph that provides essentially all of the information in the entire 97 page report regarding Star Wars: The Old Republic specifically:
For fiscal year 2016, service and other revenue was $1,899 million, primarily driven by FIFA Ultimate Team and Star Wars: The Old Republic. Service and other revenue for fiscal year 2016 decreased $48 million, or 2 percent, as compared to fiscal year 2015. This decrease was driven by a $421 million decrease primarily from Titanfall and Battlefield 4 Premium. This decrease was partially offset by a $373 million increase primarily from the Madden NFL franchise, Need for Speed 2015 and SimCity BuildIt.
The game is doing well enough to appear as the second named attribution for the category’s revenue for the fiscal year. This indicated a continued strong position within the category which has value in terms of the game remaining a large contributor for EA and remaining a development priority moving forward. However, despite being hailed as the most successful expansion that Star Wars: The Old Republic has ever released, it did not significantly change the revenue for the game compared to the prior year and more traditional content cycle of the Shadow of Revan expansion.
The precious little information that can be extracted from such high level financial reporting is fairly neutral. The stabilization of the revenue trajectory for the game would actually be success story if it were not for the hyperbolic adulation that’s constantly showered on the game by the team at BioWare Austin. That is not to say that it might not be the most profitable expansion the game has released, because stable revenue being achieved by an anemic expansion devoid of almost any content associated with the MMO genre, and the commensurate cost savings of only developing a fraction of the content that was seen in prior expansions and typically in other MMO video games, implies a massive profitability increase compared to prior expansions.
The chasm between the financial success of the game and the state of the once vibrant MMO player base of the game has never been wider. By all discernible metrics, the amount of players and the total amount of play time in the game appears to have decreased significantly in the past 6-12 months. The game has been altered to its core and now resembles a TV series nearly as much as an MMO in many ways. As a player, as a GM, and as an active community member, the state of the game is discouraging and heartbreaking. It is never easy to admit an error in prior analysis, but while the December analysis correctly predicted the negative impacts on the player community, the analysis of the financial impact of that deterioration has so far been woefully inaccurate.
As an analyst, there is no longer any doubt that the most profitable path has been selected. There are clearly enough consumers willing to pay for what is being provided to maintain revenues consistent with the prior fiscal year. However, it is unfathomable that the cost of providing the current content cycle could be anything but a fraction of prior content cycles based on the amount of content being provided. I can only assume that this content cycle and business model will now persist indefinitely until a revenue decline significant enough to outpace the cost reductions. The questions that loom large are how EA will react when this model of cost reduction can no longer maintain profit margins when revenues inevitably stumble due to reduced content production and how the broader genre and industry will react to the (at least short-term) success of episodic story without any significant investments in repeatable content and especially repeatable group content.
I’ve grown quite accustomed to remaining emotionally detached from analysis in my line of work. Any indication of emotion is often a sign of flawed analysis in the industry as well. I find my emotions inextricably linked to my analysis in this case though. It feels more like slowly losing contact with an old friend than objective analysis of a changing product that is finding ways to remain profitable over time. In almost any other situation I would likely admire the ability of management to find new customers while reducing costs and be indifferent to the loss of existing customers as long as the client acquisition rate exceeded the client attrition rate over time. Such detachment eludes me and I fear the day when that is no longer the case because this isn’t just any product, it’s a game I’ve come to appreciate more than any game I’ve played before and a community that welcomed me warmly from my first posts here. It makes my analysis objectively weaker, but hopefully more interesting if nothing else.
As always, thanks for reading and I apologize for the long delay between posts. Maybe I’ll return to a more frequent writing pattern at some point, but I’m not sure when or if that might be at this point.
Andrew | SWTOR Economics