Strategic Computing and Communications Technology: Individual Requirement 4

Strategic Computing and Communications Technology: Individual Requirement 4

12/6/2005

Strategic Computing and Communications Technology
Fall 2005

Individual requirement 4

Koji Murao (18468500)

Note

I intentionally focus on one industry, the game industry, for all the four reports and analyze the strategy of each player in conjunction with the news I chose. Focusing on one industry made me realize how much the strategic aspects that we have learned in the class are working to shape the industry dynamics.
News

A game-publishing giant Electronic Arts is being sued for allegedly failing to pay overtime wages. This reveals a rough working condition in game developer firms. A former EA software developer says his termination owed partly to his refusal to put in 80-hour weeks for months on end.

(CNet News.com, November 18, 2004, retried from http://news.com.com/2100-1022_3-5457274.html)

Analysis

Electronic Arts (EA) has rapidly grown to be the biggest game publisher.[1] Although the EA’s fast growth is mostly attributed to its acquisition of other game developers and licenses of movies and sports,[2] there are several characteristics of its products as digital contents to which the sustainability of its success can be attributed as well. First of all, the cost of reproduction of digital contents is substantially low despite the high initial development costs. Once EA creates a title, making a copy is an easy task. Secondly, digital contents are reusable. Fortunately, EA has several killer titles that are contributing to its financial stability, such as sports titles like “Madden NFL Football”, licensed titles like “Harry Potter”, or other titles like “The Sims”.[3] EA has released a series of those popular titles repeatedly. Each sequel was built upon the concepts and/or characters created in earlier iterations of the game.[4] EA also shares technology among studios, saving developing costs.[5] Thirdly, the distribution cost is nearly close to zero for online gaming. One of the important revenue sources for EA now is online gaming through EA.com.[6] When it comes to online gaming, EA does not have to deliver its products by means of any physical media, thus eliminating distribution costs.

However, games are becoming more and more complicated and the development costs of game software are skyrocketing, but EA is still under pressure to squeeze profits. It used to take only about 5 developers, 6 months to 1 year, and $100,000 to develop one game. But now, according to the news article, there are times when it takes about 200 developers, more than a year, and more than $2.5 millions to develop one game. The financial statements of EA shows relatively high COGS (38%) compared to that of other software companies such as Microsoft (18%). (Appendix 1) Despite the high costs, EA still has to manage to grow to satisfy its shareholders.[7] The EA seems to be achieving its strategy to sustain its growth by changing the landscape of rivalry through aggressively acquiring competitors in order to 1) keep dominating the market as the top game publisher, 2) increase revenue sources. Also EA is trying to keep “superior sustainable performance (SSP)” by reducing its development costs by making its employees work as hard as possible as this news suggests. However, the way EA locks out some competitors and buys up others are controversial,[8] and the way EA imposes hard work on its employees without pay could lead to a critical consequence for the future of EA. Game development is an art, which requires the talents.[9] This type of news could hurt the EA’s reputation and reduce a chance to attract such talents EA needs. If it wants to keep SSP by cost reduction, EA should find ways to optimize development processes, rather than imposing hard work on its employees without pay.

Appendix 1

Source: EA Annual Report 2005, p.19

Source: Lecture of Future of I.T. held on September 12, 2005

4

Koji Murao (18468500)

[1]Endnotes

Harvard Business School case, Electronic arts: The blockbuster strategy, p. 16, (9-304-013)

[2] Harvard Business School case, Electronic arts: The blockbuster strategy, p. 3, (9-304-013)

[3]

Harvard Business School case, Electronic arts: The blockbuster strategy, p. 1, (9-304-013)

[4] Harvard Business School case, Electronic arts: The blockbuster strategy, p. 4, (9-304-013)

[5]

Harvard Business School case, Electronic arts: The blockbuster strategy, p. 19, (9-304-013)

[6]

Harvard Business School case, Electronic arts in online gaming, p. 1, (9-804-140)

[7]

An interview of Slash Games with Neil Young, Electronic Arts Los Angeles Vice President, General Manager & Studio Head, held on September 22, 2005, in Tokyo, retrieved from http://www.rbbtoday.com/news/20050922/25755.html

[8] CNet News.com, (January 18, 2005), Electronic Arts plays hardball, retrieved from http://news.com.com/2100-1047_3-5537175.html

[9] Harvard Business School case, Electronic arts: The blockbuster strategy, p. 10, (9-304-013)

Reference

Shapiro C., & Varian. H. R., (1999), Information rules: A strategic guide to the network economy, Boston, MA, Harvard Business School Press