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Electronic Arts Needs Change Investors Can Believe In


Here are three suggestions.

If you've seen the headlines, you know that Electronic Arts (ERTS) is in trouble. So bad in fact, that I'm waiting for Bruce Springsteen to sing an acoustic ballad about yesterday's addition to the company's endless stream of guidance disappointments.

EA's not alone. THQ (THQI) and Take-Two Interactive (TTWO) are also feeling the effects of a crappy economy, a lack of hot trends, and far too many gaming platforms. The difference comes in that EA has far more room to fall from here.

Company-specific issues have taken their toll. I still can't figure out why the number-one name in sports games allowed the UFC franchise (read: a sport that's actually growing by leaps and bounds) to slip through its hands to THQ (see Rumors About THQ Takover May Be Right On). And while EA's acquisitions have more or less floundered, Activision (ATVI) soared by making two of the best deals in video-game history: the 2006 purchase of Guitar Hero publisher Red Octane, and 2007's merger with Vivendi games, which brought in blockbuster franchises like World of Warcraft and Starcraft.

But, enough of the 20/20 hindsight. Like Mark McGwire, I'm not here to talk about the past. Let's talk about the future.

What EA needs is change investors can believe in. The company has definitely made improvements in quality control, and I'm glad to see that it's actually scaling back on the number of game releases. But it's not enough.

EA needs to do something extreme to get on the road to recovery -- and by extreme I don't mean shoveling a Need for Speed game onto every gaming system on the planet.

Here are three options:

1. Management Change

I have nothing against EA CEO John Riccitiello. Most of the problems from which EA is suffering began prior to his appointment as CEO in 2007, and he hasn't ignored them. However, he was an EA executive from 1997 to 2004, and that makes him an insider from the company's glory days. An outsider's perspective would be far more helpful in a turnaround situation. EA needs to find its Lou Gerstner.

2. Bust Up the Company

The gaming industry is incredibly fragmented in terms of platforms, and the problem will only get worse with the arrival of cloud-based systems like OnLive, and Sony's (SNE) and Microsoft's (MSFT) forays into motion-based gaming. EA's product lineup is equally confusing, and that makes for what can only be the messiest strategic-planning process this side of GE (GE). A break-up would allow EA's individual units to get more aggressive without the interference of a larger corporate objective. I'm willing to bet we'd see riskier projects get the green light, and less me-too games.

3. Sell Out

The final solution is a complete sale of the company to a media conglomerate like Disney (DIS), assuming one would be willing to put up with EA's own product, planning, and accounting complexities.

I like option two best. It would give EA's employees a much-needed restart by giving them the chance to build something new, rather than simply serve at the hands of the monolith.

See also, Electronic Arts Not Scoring on the Bottom Line.
No positions in stocks mentioned.
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