When Electronic Arts released Battlefield 3 in October, the first-person shooter video game that puts players in the role of U.S. marines, it sold five million copies in its first week, becoming the fastest selling game in EA's 20-year history.
The majority of those purchased games came on physical discs that were shipped to brick-and-mortar game shops. For three decades, Electronic Arts' engineers, producers and graphic artists have focused on making video games that are loaded onto cartridges or discs, put in boxes, shipped to retail outlets like Toys 'R' Us and sold for $50 to $60 each. It's been a successful formula, growing EA into an $8 billion company by market cap as console games took off in popularity.
But like the newspaper and music industries before it, gaming is in the midst of an existential crisis. The Internet, and the digital technologies it has enabled, is giving established heavyweights like EA a run for their money. Zynga, the four-year-old gaming upstart that could have a market cap twice EA's when it issues its IPO, in particular, has been quicker to recognize the potential of reaching vast numbers of new gamers through social media platforms such as Facebook.
To compete, EA has been forced to revamp its executive structure and change the types of people it hires. It has cut layers of middle management and begun re-training its employees in skills around smartphones and social networks. EA's formerly monolithic culture has been "blown up" and re-formed into smaller, nimbler pieces, says Frank Gibeau, president of EA Labels and the man in charge of the company's transition to a digital company.
It's not a moment too soon. Within five years, Gibeau says, EA won't make any disc-based games at all -- everything will be downloaded online, either at EA's own online store, Origin, or at those of retailers. "It's going to be 100% digital, whatever it is," Gibeau says of the company's revenue breakdown by platform. "There's not going to be anybody left in the company that's not working on something digital in the very near future in terms of online connectivity or services."
One of the big ways that EA is making this cultural leap is through acquiring smaller, more digitally savvy companies and letting them thrive within. For much of its history, EA was seen by small game developers as a behemoth that bought innovative companies, then discarded whatever was innovative and interesting about them.
"It had a reputation as a big, bureaucratic bully that squashed entrepreneurship," says Sean McGowan, an analyst at Needham & Company in New York.
That's changing. Last summer, EA made its largest acquisition so far with the $750 million cash and stock purchase of Seattle's PopCap Games, a company known for its breezy corporate culture, perks, and for making hit games such as Bejeweled and Plants vs. Zombies. When the EA deal was first announced, "people were freaking out," says Katie Cox, who works on PopCap's culture team, responsible for keeping the company a fun place to work.
Barry Cottle, EA's president of Interactive, says the company has treated PopCap with a gentle touch to ensure its developers continue coming up with fun and popular games. "I want to be able to learn from them as much as they learn from us," he says. "PopCap will focus on building great intellectual property, but they'll also be including and teaching EA folks how to go about" creating new games.
Cox now believes PopCap will have a greater influence on EA than the other way around. "They see what PopCap does and our culture as an important step in going forward," she says. "We're hoping to spread our culture into the EA culture."
EA's new religion arrived with John Riccitiello, who returned to the company as chief executive in 2007 after a three-year stint founding and running private equity firm Elevation Partners. Riccitiello's appointment coincided with two game-changing developments: Facebook's decision to open its social media platform to third-party application developers and Apple's introduction of the iPhone.
The Apple and Facebook moves brought gaming to a whole new group of consumers who didn't need consoles sold by Sony and Microsoft with fancy graphics and movie-like quality. These new players were happy with so-called casual games, ones like Zynga's FarmVille and Mafia Wars that are played on Facebook with a desktop or mobile device. By 2009, the core business model of console video games had become "a burning platform," Peter Moore, EA's chief operating officer, told the PLAY Digital Media conference, a business conference organized by MBA students from the University of California at Berkeley.
EA announced a mass layoff of 1,500 in 2009, but Gibeau estimates that about 3,000 workers have been let go during the past several years as the company has revamped its workforce. "We had too many packaged goods games teams pursuing a packaged goods business in a world that was going online and digital," he says.
Meanwhile, the company's interactive division has grown from 300 people in 2007 to over 2,000, with about half that coming from acquisitions and the rest from new hires. The company plans to hire 5,000 engineers by 2020 to beef up its digital expertise.
One of Gibeau's challenges is to retain and attract employees, a problem that EA hasn't had until recently. Now, it's not only competing with Google and Facebook for talent, but with a slew of gaming start-ups that have attracted $1.91 billion in venture capital since the beginning of 2010, according to Dow Jones VentureSource. Two mid-level executives from EA's Tiburon studio, which produces the hit game Madden NFL Football, left earlier this year to found their own company and quickly raised $3 million. In April, EA's chief operating officer, John Schappert, departed for Zynga.
One way EA is striving to keep employees is by letting a single team work on console, mobile and social games. In the past, the team building the bestselling soccer game FIFA would have passed mobile development off to another team or a third party. Now the core team thinks about the game's Facebook and iPhone strategy from the beginning, Gibeau says. Talented engineers from the console games part of the company have been loaned out to non-console game projects so that they can learn how to program for the Web and the iPhone.
Gibeau himself has been approached by other companies about jumping ship. He might have been able to earn more money elsewhere, he says, but has stayed at EA because the other opportunities "weren't as interesting."
EA still attracts star brands like the National Football League, Tiger Woods and Harry Potter, giving game developers big, creative challenges to think about. "Just to go out and learn about the topics we're making games about, I've ridden on nuclear submarines, I've been to every Super Bowl for 10 years, I've flown stunt planes, I've raced cars, shot M4 machine guns," says Gibeau.
Write to Joseph Walker at Joseph.Walker@dowjones.com