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Electronic Arts: Whither the Gaming Hits?

Analysts and investors both cheered Electronic Arts’ better than expected first fiscal quarter earnings Tuesday, but the video game publisher is still a long way from recapturing its glory days.

2009 has been a dismal year for the video game industry so far, but EA , once the industry’s biggest publisher, has had a particularly rough

Playing Guitar Hero
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Playing Guitar Hero

time in recent years. The company’s franchise titles perform adequately, but new properties haven’t exactly set the gaming world afire. And analysts aren’t convinced that one strong quarter marks the beginning of a lasting turnaround.

“We remain concerned that the second half of (Electronic Arts’) fiscal 2010 could end up looking like its FY'09, when disappointing sales of high-profile (and expensive) launches from its EA Games unit were a drag on margins/profitability,” said Broadpoint AmTech analyst Ben Schachter in a note released before EA’s earnings. “From what we have seen of EA's 2H line-up, we see few reasons to give management the benefit of the doubt that things will improve much this year.” (Read more on ERTS earnings here)

To its credit, there are a few things EA appears to be doing right. The company’s decision to focus heavily on the Nintendo Wii is paying off. Year to date, EA is the top selling third-party publisher for the game system, beating THQ , Activision and a slate of Japanese developers.

The crown jewel in that Wii catalog is “EA Sports Active,” an exercise title that sold 1.8 million copies in the first fiscal quarter. Encouraged by the success of the game, EA plans to rush an expansion pack to market for the holiday season, shifting resources away from its struggling tennis game.

Meanwhile, “The Sims” continues to be an incredibly popular franchise. The third iteration of the game sold 3.7 million copies last quarter – 1.4 million of those were sold in the first week. The number is particularly impressive for a title that was released solely on the PC.

There are, though, some worrying signs. “NCAA Football 2010,” normally a solid performer for the company has performed “weaker than expected,” the company said on its conference call with analysts. Some analysts fear this could bode poorly for this month’s release of “Madden NFL 2010”. (EA says pre-orders for the game are slightly ahead of where they were last year.)

The music genre also saw its popularity wane dramatically last quarter, with sales falling 52 percent, according to EA CEO John Riccitiello. Many expect “The Beatles: Rock Band,” which EA will publish next month, to reverse this trend, but the severity of the drop could be cause for concern. And Activision will be rolling out a new “Guitar Hero” game as well.

EA also deliberately set release dates of early 2010 for some of its new games in order to avoid the rush of holiday titles. With the number of games that have been delayed until next year, though, it now faces stiff competition from established brands – exactly the scenario it was trying to avoid.

Its two big titles for the holidays – “Brutal Legend,” an comedic action game centered around

Wii
AP
Wii

heavy metal rock music, and “Dragon Age: Origins,” a new role-playing game from well-respected developer Bioware – are both new properties, which often underperform in the holiday period.

Beyond the company-specific problems, EA will have to deal with larger-scale factors within the video game industry. Retailers are scaling back initial orders of games, to reduce risk. This means unproven games could have a harder time standing out from the competition.

Game hardware prices, meanwhile, are still seen as prohibitively high for many consumers. Sony is widely expected to cut the price of the PlayStation 3 – and there is speculation Nintendo will lower Wii prices – but there is no guarantee either company will make any such adjustment.

Riccitiello seemed to subtly lobby for price cuts during Tuesday’s call.

“(We) try not to comment too much on plans that others get to decide and implement,” he said in response to an analyst question. “We anticipate price cuts at some point, and we would like to see price cuts later in the year, but we can't speculate beyond something that (it) would be welcomed in the marketplace.”

The fact that EA isn’t out of the woods doesn’t mean it’s a lost cause, by any stretch of the imagination, though. Many analysts, in fact, see it as a very good buy.

The company has successfully cut its operating costs this year. It has also identified some of its weaknesses and is working to correct those.

Perhaps most encouraging for developers is the looming presence of what is almost certain to be a significant blockbuster. A new installment of the popular “Medal of Honor” franchise will likely be released in late 2010, which could give EA’s stock a noticeable boost.

More: As Earnings Slump, Video Game Price Cuts More Likely