EA's Medal of Honor: Open Beta - Analyst Blog

Video game manufacturer and publisher Electronic Arts Inc. (ERTS) announced to launch Open Beta of its flagship title Medal of Honor multiplayer game on October 4. This will be available only for a short span of time, ending on October7.

Electronic Arts has come up with an advertising strategy, enabling PC gamers worldwide to play two diverse maps and two action-packed multiplayer modes free of cost by logging into Electronic Arts website, but for a limited time.

Medal of Honor’s original scheduled release during the second quarter of 2010 was rescheduled to October 12, 2010, in North America and to October 15, 2010, in Europe. This is expected to reduce second quarter earnings per share by 25 cents.

The first person shooter Medal of Honor game will be launched simultaneously on Microsoft Corp. (MSFT) Xbox 360 videogame platform and Sony Corp.’s (SNE) PlayStation 3 (PS3) and PC.

The eleven-year old Medal of Honor video game has historically driven success at Electronic Arts. The new version of the game is set amid the rugged and hostile battlefields of present day Afghanistan.

Gamers will play Medal of Honor as Tier 1 operators, a relatively unknown battalion comprising fictional characters, guided by the National Command Authority.

Game Negatives

The game, based on modern day Afghanistan war-based shooter, allows players to take the role of Taliban forces and has already created controversies. The game has been widely criticized for its content. The British Defense Secretary, for instance, wants to ban the game as it objects to one of the options in the game’s multiplayer mode that allows players to take up the role of Taliban troops and slaughter U.S. soldiers. Electronic Arts, however, does not intend to pay any heed to the controversy.

Electronic Arts expects to sell 3 million units of its first-person-shooter title Medal of Honor. However, management disclosed to the New York Times that if it fails to reach its sales target, it may discontinue launching any other series of the game in the near future.

According to reports, GameStop stores in the U.S. military bases have stopped selling or advertising Medal of Honor and will avoid taking customer pre-orders for the game as a result of increasing content related controversies. This could definitely hurt sales and lower volumes at Electronic Arts.

Intense competition from the release of two of the biggest titles this year – Microsoft’s Halo: Reach and Activision Blizzard‘s (ATVI) Call of Duty: Black Ops – and lower sales at GameStop could also negatively affect overall sales.

Game Positives

We believe management could be conservative in their sales estimates of just 3 million units. Activision’s Call of Duty: Black Ops will be released on November 9 while Halo: Reach has already been released on September 14, 2010. Therefore, the game could prove to be a success due to its non overlapping release timing.

Further, customers who wish to reserve Medal of Honor via GameStop stores would be directed to the nearest GameStop location off base to get the game. We believe Medal of Honor could significantly boost Electronic Arts’ top-line growth in the second half of 2010.

Activision’s Call of Duty: Modern Warfare 2, a similar first-person shooter video game released in November 2009, had sold approximately 4.7 million copies worldwide in a single day and over 20 million copies worldwide as of June 15, 2010. This indicates a large number of gamers interested in such war based games. Thus, Electronic Arts has a fair chance of beating its own target.

Maintain Neutral

Electronic Arts’ improving title fundamentals (higher quality and revenue per title) will provide a fillip to 2011 revenues. Electronic Arts will release just 36 titles in fiscal 2011, with 15 titles in the third quarter and 8 titles in the fourth quarter. This compares with 54 titles released in 2010 (33% fewer titles) and 67 titles in 2009 (46% fewer titles).

Electronic Arts is poised for growth as it posted non-GAAP net revenues of $4.16 billion and had 27 titles that sold more than one million units in fiscal 2010.

Despite reducing the number of titles by 20% in fiscal 2010, Electronic Arts achieved market share growth with fewer than 20 titles released so far in 2010. Twenty of its titles in fiscal 2010 received the Metacritic rating of 80, indicating increased users. Management expects non-GAAP revenues per title to increase to $84 million from $66 million in 2010 and $55 million in 2009. Lower titles imply an increased focus on quality that will push up revenues and margins.

Electronic Arts projects a consistent revenue growth for the rest of fiscal 2011 with approximately 21.0% of total revenue to come in the second quarter, 38.0% in the third quarter and 26% to 27% in the fourth quarter.

Electronic Arts remains focused on developing and publishing quality games. With the increasing number of adult video game players (approximately 67.0% of U.S. households play video games whose average age is 34, according to Entertainment software association data), quality is becoming the ultimate benchmark for the video game industry.

Although the company continues to face stiff competition from Activision and Take-Two Interactive Software Inc. (TTWO), Electronics Arts will continue to gain market share due to its high quality game portfolio, in our view.

We have a neutral recommendation on a long-term basis for Electronic Arts. Electronic Arts has a Zacks Rank of 3, which implies a Neutral rating on a short-term basis.