Electronic Arts: Expect Additional Estimate Reductions As Battlefield V Sales Disappoint
Dec. 19, 2018 4:54 PM ET
About:
Electronic Arts Inc. (EA), Includes:
ATVI
John Miller
Gaming, social networking, brick & mortar retail
@PoliticsOfMoney
Summary
- Battlefield V suffered from consumer backlash as a less authentic portrayal of WWII was revealed.
- EA formally revised FY 2019 net bookings guidance; the outlook was revised from $5.55 billion to $5.20 billion.
- The limited nature of Battlefield V’s single player campaign at launch, unimplemented cooperative missions and the delay for the battle royale mode frustrated players.
- All the major retailers currently have the title on sale for 33% to 50% off.
- As hard sales data comes forward in January, look for additional downward revenue revisions from analysts and corresponding pressure on the stock price.
Since peaking in July, shares of Electronics Arts (
EA) have fallen over 45% and set a fresh 52 week low on Monday. Though the broader technology market has suffered in recent months, EA’s outsized declines are caused by concerns over unit sales of the company’s tent-pole
Battlefield franchise. This year’s release, titled
Battlefield V, suffered from consumer backlash as a less authentic portrayal of WWII was revealed over the summer. At the end of August, the company announced they were pushing back the game’s release date from October until November “to deliver the best possible experience for gamers”. Alongside this announcement, full-year net bookings guidance was cut by $350 million dollars. While the reviews for the new game mechanics and play style have generally been positive, the level of initial content and the new content release model is dragging down review scores and frustrating players. Sales and engagement stats from the post launch weeks point to underperformance versus the now lowered analyst expectations and the revised company guidance.
Politics Injected Into Battlefield V
Players got their first look at
Battlefield V in May with the drop of the official reveal trailer. While players had expected an authentic World War II setting, the first trailer primarily focused on the female soldier seen below. Note her prosthetic arm and blue face paint. Other shots included nontraditional melee weapons such as a katana and a cricket bat. The trailer served to confuse gamers about the title’s direction and reaction was overwhelmingly negative. To date the YouTube trailer has garnered 13 million views with 340 thousand upvotes and 500 thousand downvotes. For a qualitative comparison only, the 2016
Battlefield I release trailer has received 60 million views, but with 2.2 million upvotes to 44 thousand downvotes.
In an
interview by Gamasutra at the E3 event in June, EA’s chief design officer Patrick Söderlund responded to the negative reaction to the trailer and to women in
Battlefield V.
These are people who are uneducated—they don't understand that this is a plausible scenario, and listen: this is a game… There are a lot of female people who want to play, and male players who want to play as a badass [woman]… We stand up for the cause, because I think those people who don't understand it, well, you have two choices: either accept it or don't buy the game.
During July, the online game commentary community reacted negatively to Söderlund’s “uneducated”, “don’t buy the game”, and “for the cause” messages. In August, EA
announced plans for Söderlund to leave the company after more than a decade of service. Later in the month, an analyst with
Cowen reported to CNBC that preorders for
Battlefield V were tracking 85% behind
Call of Duty: Black Ops 4, Activision’s (
ATVI) 2018 shooter category title. In past years the
Battlefield titles had performed “substantially” closer to their
Call of Duty counterparts, according to Cowen.
Guidance Revision and Game Delay
A week following the CNBC report EA formally revised 2019 net bookings guidance; the outlook was revised from $5.55 billion to $5.20 billion. The change was broken into three parts. $115 million of the lowered expectations was driven by movement in exchange rates. Though the company noted that these rate changes would also lower operating expenses. The remaining $235 million was attributed to mobile business expectations and the push of some net bookings into fiscal 2020 due to a one-month postponement of
Battlefield V’s release.
Note that EA’s fiscal third quarter 2019 corresponds with calendar fourth quarter 2018.
Battlefield V was initially set to launch October 19th and actual launch came November 20th, both during the middle of the third fiscal quarter. Of key importance when looking at the revised guidance is the notion that most sales of the main title will still come in fiscal 2019, during the first few months after launch. Any pushout of net bookings would be caused by less time to sell in game cosmetics, experience boosts and similar items, and would not particularly account for poor sales of the main title.
Chief Studios Officer Laura Miele
explained the postponement as follows:
We believe we've got one of the best Battlefield games ever coming in Battlefield V. Tens of thousands of players have been hands on with the game so far, and we've been honored to receive best multiplayer awards at E3 and Gamescom. We've had valuable feedback from our community, and we're going to take the time to make some final adjustments and deliver a great experience for our fans.
Pushing back the game allowed EA time to refocus the game, deemphasizing the role inauthentic aspects play and making final gameplay adjustments. The push back also lessened competition from Take-Two’s (
TTWO)
Red Dead Redemption 2, released October 26, and Activision’s
Call of Duty Black Ops 4, released on October 12. EA had a negative experience facing a similar set up in the past. In 2016, also during the often-competitive October release month, EA attempted to launch a similarly well-reviewed shooter title called
Titanfall 2. Morgan Stanley later estimated its sales were half initial expectations.
New Content Model & Initial Content
EA’s important release during the holiday quarter last year was
Star Wars Battlefront 2. Prior to launch the company clashed with players over the game’s monetization scheme. They had initially planned to partially gate some non-cosmetic gameplay content behind microtransactions. Unit sales came in 12% below the conservative expectation, even though EA had rectified the issues before launch. And importantly, fiscal third quarter 2018 net bookings were $29 million below the usually conservative company guidance.
With the above in mind, EA adopted a customer centric monetization scheme for
Battlefield V. Unlike previous titles, all future game updates are free with no season passes, DLC fees, etc. No longer will the player base be segregated by level of content purchase. Importantly, non-cosmetic gameplay content will not be predatorially gated behind microtransactions, as with the initial plans for
Star Wars Battlefront 2.
Purchasers of the main game title receive a limited initial single player campaign alongside a full-bodied multiplayer with eight maps for multiple modes. In the coming months, EA is extending the single player campaign, adding cooperative play missions, expanding multiplayer content and introducing a limited battle royale game similar to Fortnite’s squads mode.
When thinking about the quantity and phasing of content in Battlefield V, it is useful to note that for the first time this year’s
Call of Duty title does not have a single player campaign, though it features a robust battle royale mode at launch.
Battlefield V would be the natural fit to fill those unhappy with Activision’s new direction. But because of the limited nature of
Battlefield V’s own single player campaign at launch, unimplemented cooperative missions and the delay for the battle royale mode, both reviewers and players have expressed frustration with the level of initial content. Gamers from the growing battle royale player base are likely choosing the
Call of Duty title while a significant portion of the campaign oriented base is focused on
Red Dead Redemption.
Uncertain Sales and Low Engagement
The Cowen analyst discussed above estimated EA’s initial guidance was based on sales of
Battlefield V between 13 and 14 million units. For comparisons, estimates for 2016’s
Battlefield I sales are approximately 15 million units. Sales for this year’s
Call of Duty: Black Ops 4, Activision’s holiday shooter, are expected to reach the low twenty millions. As mentioned, the analyst reported preorders for
Battlefield V were tracking 85% behind
Call of Duty.
Numbers out of the UK for physical box copies sold during launch week were approximately half of
Battlefield 1’s. However, there is some uncertainty as to how meaningful this number is. The secular shift from physical to digital delivery since 2016 accounts for a portion of this decline. Additionally,
Battlefield V is also offered free with EA’s premiere online game subscription membership, reducing demand for physical.
Other evidence sales are running significantly below forecast comes from a survey of retail prices. Within a week of the official launch, retailers began marking down their inventory. All the major retailers currently have the title on sale for 33% to 50% off. The quickness and level of discounting is not standard.
It should be noted EA includes sold-in inventory in net bookings and the discussion above is primarily based on sell-through numbers. However, where discounting at the retail level affects what EA ultimately receives, it should be reflected in net revenues.
To further confuse this issue, EA has adopted ASC 606 revenue recognition standard for the current fiscal year. Video game companies defer a portion of revenue from online enabled games to future quarters when they will be providing ongoing services for that title. Under the new standard, EA is generally deferring less revenue than under the previous regime. Though net bookings remain the best metric for year over year comparisons, be aware FY2019 net revenues will be substantially inflated versus FY2018’s.
Offering a bit of mixed evidence, GameStop (
GME) added color on new gaming software sales during a November 29th
earnings call for their fiscal third quarter ended November 3rd:
Red Dead Redemption 2 was the top-selling title despite only a few sales days being captured in our fiscal quarter. Black Ops 4 and the sports titles were not as successful as we had hoped.
Company officials were also asked about sales to date in November. They indicated a couple of launches had disappointed, though they did not specifically name
Battlefield V.
Looking at engagement for
Battlefield V, the following chart details hours viewed during the past 30 days on Amazon’s Twitch platform for various titles related to our discussion:
Fortnite Black Ops 4 Red Dead 2 Battlefield V
Viewer Hours 116 million 22.5 million 6.5 million 6.3 million
Source:
TwitchMetrics
Takeaway: Tempered Expectations
Since August analysts have reduced fiscal third quarter 2019 revenue expectations from an average of over $2.2 billion to under $1.8 billion. As discussed above, company guidance for the entire year was reduced $350 million to account for exchange rates, lower mobile expectations, and the push-back of the
Battlefield V launch. While analysts are factoring additional declines due to slower sales for EA’s key holiday franchise, they are likely underestimating the shortfall versus the 13-million-unit forecast. Additionally,
Battlefield V is not aggressively monetized with ingame content and is already selling at a discount. Lastly, when comparing netbookings from the year ago quarter also note this year's slate of smaller titles is weaker. As hard sales data comes forward in January, look for additional downward revenue revisions from analysts and corresponding pressure on the stock price.
