The DeanBeat: Being a tortoise isn’t so bad, but the water is choppy, EA’s top game studio boss says

A few years ago, it was easy to write Electronic Arts off as a dinosaur. Zynga passed it up in social games and held the most successful initial public offering in U.S. gaming history. But Zynga has faltered, and some of the mammals that made EA seem like a dinosaur are having troubles of their own.

“That’s a tortoise and the hare story,” said Frank Gibeau, the president of EA Labels and the head of the company’s game development efforts. “I would never say, ‘I told you so,’ but we’re a multiplatform company. We’re not a single-platform company.”

As others falter, EA has emerged as a broad-based company that is transforming itself from a packaged goods retail gamemaker to a live services firm, he said. In a wide-ranging conversation at Bloomberg’s San Francisco office this week, Gibeau acknowledged that he learned a lot from Zynga in terms of responding quickly to user demand. But he told a group of reporters that social network games are slowing down because mobile games are pulling people away from their desktop computers.

“People have stopped playing FarmVille, and they’re on their phones,” he said. “How that shakes out and those dollars shift will continue to accelerate in the next year.”

And Gibeau likes that because EA has the top position in mobile, in part because it made its major mobile gaming acquisition in 2005. (That’s a frustrating secret, said Gibeau.) And mobile is monetizing much better than Facebook, he said. But Gibeau, like his boss, EA chief executive John Riccitiello, acknowledges that the water is “choppy” in games. Life is far more complicated for game industry leaders than it was when the industry moved from the PlayStation to the PlayStation 2.

“It’s a very dynamic time, and it is really wiping out a lot of conventions that companies have held,” he said. “A lot of new companies have emerged, soared high, and gone back down…. We expect this chop and complexity will continue for the next year.”

Zynga is starting to lose high-profile executives and may be in the same position that EA was a few years ago. The first iteration of OnLive, the cloud gaming service, has gone belly up, says Gibeau, because “they needed to pay more attention to the economics.” (Cloud gaming proved too expensive to implement with current server and broadband technology.)

“They tried to take the hardest games in the world to stream, and your backend economics become difficult,” he said. “I think that cloud gaming is an enabling technology for IPTV [Internet protocol television], for sure,” particularly for those bundling games and video services. “Streaming will be a big part of the gaming sector, but not for a while.” Gibeau believes that Apple and Google will fight it out in IPTV, but there won’t be a large-scale game market for apps on TVs for a while.

The troubles at Zynga and OnLive don’t mean that gamers are simply boomeranging back to EA games. EA has had its share of layoffs, and just last week its PopCap Games division lost 50 jobs.

Console games are slowing down because they are at the end of their long life cycle. And EA’s Star Wars: The Old Republic, which was six years in the making, has lost a considerable number of subscribers. EA launched it in December in the hope of challenging Blizzard Entertainment’s World of Warcraft, but Gibeau said that the amount of free content in the industry has forced EA to switch to the free-to-play business model (where users play for free and pay real money for virtual goods) a lot earlier than Gibeau thought.

“We always knew we would move to free to play, but in all honesty, I didn’t think we would have to pivot this fast,” he said. “We were worried that when we announced that, we would have a lot of subscriber flight. We have not seen that.”

Gibeau admitted that he “coveted Blizzard.” Overall, free to play has become 17 percent of EA’s mobile and PC revenue. The trick is to grow it to a massive scale, he said. EA is making a bet on free to play with the announcement last week that its next Command & Conquer game (pictured right) will follow the model. With consoles, EA may invest $50 million over two years in development and marketing, and then it won’t make a dime until it launches. But with free to play, EA can invest $3 million to get the game to its launch point and then continue to invest after that as users deliver feedback.

Gamers may not start making purchases until they get deeper into a free-to-play game, well after launch. And maybe only 10 to 15 percent of gamers will buy something. (The conversion to paid is higher for hardcore games than it is for social games.) But the profits can be similar to console games in the long run.

“With free to play,” said Gibeau, “you can fail fast and fail cheap, but get back to break even and then build it out slowly over time.”

The new waters are treacherous. But Gibeau counts himself as an optimist because of the growth of gaming platforms and users. In 2005, there might have been 200 million gamers. Now, thanks to new platforms, the number of gamers has grown to 1 billion and is on its way to 2 billion. Mobile gaming is expected to grow for the next five years. Tablet sales are exploding. Russia, Brazil, the Middle East, China, and North Africa are starting to produce real revenues. We’re on the verge of the launch of “Gen 4” consoles — EA’s name for the next-generation of game machines.

“At no other point in the history of games has there been this many viable platforms, this many addressable markets, or this many gamers,” he said. “I see long-term fundamental growth drivers that don’t stop growing for five years.”

And the free-to-play business model is expanding the market.

“If it wasn’t for free-to-play, Asia would be a black hole of piracy,” said Gibeau. “In the next four years, Russia will probably pass Germany as a game market. You never thought that was possible 10 years ago.”

The core gamers will rally back when the next Xbox and PlayStation consoles launch, he said.

Consoles are “an entertainment form and type that are still resilient even with mobile gaming,” he said. “I read a lot about the demise of the console. I don’t buy it. If you look at the intensity of gamers, we are not losing them to mobile. There is a mass-market slowdown, but it’s natural. In the sixth or seventh year of a hardware cycle, there is fatigue.” In that kind of market, the big will get bigger.

But now EA’s investing in many more platforms beyond consoles, mainly to catch up with users who have limited time with any given platform. In China, browser-based games are starting to take off and challenge the heavy-download online games. EA is also investing in its own ecosystem, so that its gamers can play EA games across any platform and pick up where they left off in their last session.

“The next five years is going to be a war of ecosystems,” said Gibeau.

Production values on mobile will rise, and simultaneous multiplayer sessions will be the norm. The tablet experience will very quickly become like an Xbox 360 or PlayStation 3 experience, and that kind of change in mobile gaming tastes will play into EA’s hands, said Gibeau. At the same time, he says, the mobile market will be diverse enough to accommodate both hardcore and casual games.

“As I look at tablets and mobile, it will be the largest platform, bar none,” said Gibeau.

“Mobile is complimentary to your console experience,” he said. “A lot of the long-range trend lines are positive for engagement.”

Gibeau said that EA doesn’t really need to acquire more companies to fulfill its vision. Last year’s $750 million-plus acquisition of PopCap Games gave it more talent in casual games.

“I feel I have all the talent and development capacity we need right now,” he said. “Acquisition is not in my top five priorities right now.”

Neither is the upcoming Wii U, he said. EA is developing some games for the new Nintendo game console coming this fall, but it is not heavily investing.

“I don’t know how their platform is going to do,” he said. “The Wii U is not in my top five priorities.” He said it is “not as breakthrough as the Wii was.”

The path through the choppy waters to the good times is still visible. But hopefully EA won’t be a tortoise in getting there.

“I can definitely see a path through the turbulence, and that is the one I’m betting the company on,” he said.