Stumbling Giants: EA And Take-Two

Chris Morris

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Not too long ago, Electronic Arts and Take-Two Interactive Software were the giants of the videogame world. With their "Madden" and "Grand Theft Auto" franchises consistently dominating the sales charts, they seemed an unstoppable force.

Over the course of the past few months, though, weak sales and questionable deals have left both companies looking remarkably vulnerable. Share prices are dropping as takeover chatter about both companies grows louder.

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It would be easy to point to the failed merger negotiations of the two gaming companies as the start of the trouble. It would be just as easy to blame the recession. But neither reason deserves the lion's share of the blame. Both EA and Take-Two have had a series of recent stumbles that are catching up with them.

Changing course at EA has proven easier said than done, though. The company brought back former president John Riccitiello, who had left to form venture firm Elevation Partners, to be its chief executive in 2007. (Elevation is an investor in Forbes).

Riccitiello had the right idea: Spend less and make better games. But EA's spending remains high and some games aren't resonating with the audience. The company is still franchise dependent--and when those franchises tank, earnings suffer. Disappointing sales of this year's installment of "Need for Speed," for instance, are part of the reason for last week's additional layoffs and studio closures at EA.

Franchises are a critical part of a videogame publisher's success, but EA long ago fell into the habit of barely changing a game, updating the title on the cover and waiting for the money to roll in. While the company is less guilty of this now, consumers got wise to the practice shortly before Riccitiello came on board. As a result, EA is still feeling their wrath.

EA's "Rock Band 2," for instance, isn't performing as well as expected this year. The game hasn't changed dramatically enough for players. Fans of the original are able to extend the life of the first game with downloadable content, making them less eager to spend $60 (or considerably more) for the follow-up. And people who weren't enticed by the original game don't see enough difference with this one to spend their money.