CALIFORNIA: Electronic Arts held its earnings call for the fourth quarter of its fiscal year 2016 yesterday, and shared its own thoughts on whether or not Microsoft and Sony are prepping new console designs, as well as information on how such plans might impact its own business. Historically, transitions between console generations have always been a bit rocky for game publishers. They must manage higher R&D costs associated with new platforms and modest initial sales due to an obviously limited install base. Then they must juggle additional costs related to supporting both older and newer platforms, until the last generation of hardware finally shuffles off to the great video game cabinet in the sky.
While EA obviously can’t comment on any launch plans Sony and Microsoft might be making, CFO Blake Jorgensen did share some insight on the potential refresh from EA’s perspective.
In terms of any mid-cycle upgrades, once again I can’t predict. But what I can tell you is that what was heard I think publicly from the console makers is they’re realizing that the compatibility issue across consoles is an important consumer issue. And as Microsoft has shown, they’ve tried to do with some backward compatibility on to older titles and new titles. I think that’s going to be an important part of what a mid-cycle might look like if there is one, which removes a lot of the risk associated with what we’ve seen historically with console cycles. We don’t spend a lot of time worrying about it, because we feel like our ability to develop for whatever new technology comes, the risk of that’s been minimized because we’ve moved towards one single engine, Frostbite. And we’re able to port that to whatever platform or point that to whatever platform is evolving or is upgraded.
In addition, our business model is so much more diverse now than it has been historically, that the notion of a console cycle becomes somewhat irrelevant in our ability to generate strong earnings and cash flow. So we’ll all be interested to see where Microsoft and Sony come out if they do something at E3 or sometime in the year to come, but we’re excited about the continued growth in the business and not afraid of a cycle change if that was to occur.
In other parts of the call, EA predicted a net sale of 25 million consoles this year (compared to 55 million consoles already in-market since 2013), implying continued robust demand. AMD’s remarks at its own conference call last month also implied strong sales through the end of the year.
Both MS and Sony have released consoles with higher-capacity drives, but this refresh cycle should bring much larger improvements to both.
What’s interesting about EA’s statement is what it implies about the entire console ecosystem moving forward. One of the arguments we’ve heard in favor of the console industry shifting to the “iPhone model,” in which both companies would support a limited number of discrete SKUs but mandate cross-compatibility backwards and forwards across the product line, is that it would cut development costs by not forcing programmers to learn a new architecture from the ground up for every new generation.
Up until now, only Nintendo has launched multiple generations of hardware built around the same CPU core. And Nintendo has made enough changes to other aspects of its consoles from the GameCube to the Wii U that it doesn’t really fall into the same category. Maintaining compatibility is a win-win for everyone: Gamers with older consoles are still guaranteed a playable experience, publishers don’t have to hedge their bets on next-gen support while still bringing up titles on previous hardware, and developers can spend less time learning how to program each new generation of hardware and more time building great games.
Jorgensen might not be able to formally confirm that a new generation is coming, but his response reveals it anyway. After all, if no products were in the pipeline, he’d have no reason to address the backwards compatibility issue or speak to how such launches wouldn’t impact EA’s bottom line, even if they didn’t go well.