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Financing an Interactive Project The Truly Creative Endeavor


Digital Media The Competitive Landscape ... Gamestop. 4. Target. 5. EB Games. 6. Toys R Us. 7. Circuit City. 8. Blockbuster Rental. 9. Hollywood Video ... – PowerPoint PPT presentation

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Title: Financing an Interactive Project The Truly Creative Endeavor

Financing an Interactive Project The Truly
Creative Endeavor
  • University of Southern California
  • August 29th, 2005

What you will hear from me today
  • My Background
  • Electronic Arts Overview
  • Digital Media The Competitive Landscape
  • Overview of Interactive Industry Distribution
  • Financials Needed To Fund A Project
  • EA Example Financials to Green Light a Project
  • Questions

My Background
  • BA in History
  • MBA, emphasis in accounting
  • CPA, Deloitte Touche
  • Worked in the interactive games business for over
    20 years
  • At EA going on 16 years
  • Corporate Finance, controller 5 years
  • Head of EAD distribution business (2 years)
  • Head of MA (2 years)
  • CFO/COO for (3 years)
  • CFO, Worldwide Studios (3 years)

Prepared tax returns in grad school to pay for my
gamer PC…
Electronic Arts
  • Founded in 1982
  • IPO in 1990
  • Revenues of approximately 3.2bn
  • Nearly 5,000 employees
  • Structured with three divisions
  • Publishing sales, marketing, distribution
  • Studio research development
  • Online Pogo brand, online technology platform
  • Direct distribution in over 70 countries
  • 2nd largest employer of software engineers in the
    Silicon Valley

Rapidly Changing Competitive/Technology Landscape
Electronic Arts WW Studios
  • 9 Primary Studios - 4 smaller satellite Studios
  • EAC, Vancouver BC, EAX WWS HQ, Vancouver, BC,
  • Tiburon Orlando, Florida,
  • EALA Los Angeles,
  • EAUK Chertsey, England,
  • Maxis, Redwood City, EARS Redwood City,
  • Criterion/RenderWare Guildford, England,
  • EAP Asia, RWS, UK
  • Satellite Studios Chicago, Japan, Montreal,
    Warrington - UK
  • 4,000 employees peaking to 5,000 at high points
  • 34 titles (140 SKUs) ? FY08 200 SKUs

Rapid Growth, New Technology, Changing Model
Relative Market Size
  • Compared to other consumer-focused media
    sub-sectors, the video games market is now a very
    large market

US Market Size (B)(1)
  • Source PriceWaterhouseCoopers Entertainment and
    Media Outlook, June 2004
  • Dashed lines represent console and PC games
    total includes online and mobile games

Moving From the Game Room into the Board Room
Distribution, Sales Marketing
EA Publishing today…
  • Four primary regions NA, Euro, Asia-Pac and
    Japan. Online hybrid of Studio/Publishing
  • Responsibilities market, sell and distribute
    packaged goods globally. 1,300 employees.
  • Publishing partners with studio on game
  • Market and consumer insight are critical in
    developing X
  • Collaboration produces higher quality games and
    increases segment share

Marketing is Integral to a Successful Game
Publishing Drivers and metrics
Publishing can maximize profitability through
volume generating retail/marketing campaigns,
pricing and cost control
Class of Trade North America
Mass Merchants Werent on the Radar Screen 5
Years Ago
Mass Merchants
  • Retail Profile
  • General merchandise (food) at everyday low
  • Consumer Profile
  • Lower income, value shopper, skewed towards
  • Merchandising Strategy
  • Item/price retailing
  • Modular focus
  • Product assortments customized by location
  • Retail and TV advertising focuses on brand image,
    then items
  • Customer traffic builds businesses
  • Premium video game business is under glass value
    is emerging as live sell
  • PC business is a modular presentation
  • First to market a challenge street dates are
    the norm
  • Retail Marketing Wins
  • Strong Sunday insert presence
  • WalMart implemented pre-sell gift cards, shrouds
    on key releases
  • WalMart invested in television donuts
  • Live sell of PC and Video Games presented in

  • Retail Profile
  • Best in class servicing day one, week one demand
    for new releases in your neighborhood
  • Consumer Profile
  • Early adopter avid gamer game trader/renter
  • Merchandising Strategy
  • Presell all new releases in-store and online
  • Store associates are experts on new releases
  • Offer everything that will sell, new and used
  • Focus on in-store POP, funded by suppliers
  • Recent adoption of Sunday inserts to promote new
    and used products
  • Retail Marketing Wins
  • Strategic investment against in-store
    presentations for December
  • Enthusiastic participation for EA Sports in-store
  • Consistent presence in-store and online as
    presell vehicles for new releases

Specialty Helps Set Opinions/Word of Mouth
Consumer Electronics
  • Retail Profile
  • Technology leadership
  • Consumer Profile
  • Early adopter older, more affluent consumer
  • Merchandising Strategy
  • Hands-on environment
  • PC and Video game categories are live sell
  • Weekly Sunday inserts
  • Online/brick and mortar integration
  • High/low ad pricing
  • Solution-based retailing
  • First to market aspirations for PC and video game
  • Retail Marketing Wins
  • Strong Sunday insert presence
  • Need for Speed sponsorship at Best Buy
  • Best Buy focus title success

Top 10 Videogame Retailers North America
Retail Account
December Month end
Top 10 Accounts Comprise Majority of NA Sales
Retail Accounts Covered - Europe
Over 25 Key Buyers Per Country, No Overlap Across
  • Only 6 out of 50 accounts have cross border
  • Only Media Market has any cross border buying

Complex Distribution Channels in Europe
European Supply Chain
7 Warehouse and Transport Solutions, Low
Retailers Own Distribution Centres
Centralised Majors
Store-front direct
One Stop Manufacturing
Distribution Solutions
Development Financials Funding a Project
Studio Finance Wearing a VC Hat
  • Studios allocate resources based upon biz model
  • Product Title SKU including internal or
    license IP
  • Market Platforms Unique demographics,
    pricing, and performance by territory and genre
  • Team Unique core competency, track record,
  • Long-Term Upside Franchisable IP, lowers
    early risk

Scarce Development Talent High Opportunity Cost
VC Model
  • A VCs goal is to maximize return on investment
  • Factors a VC considers
  • Product Must have a compelling proposition for
    the customer
  • What are the key differentiators, competitive
  • Market opportunity Is there enough upside, given
    the risk
  • What is the market upside, is it a global IP?
  • Team You bet on people
  • ? People are the key to executing on any plan

Financial Measures are the lingua franca of
Financial Metrics
  • Revenue Basis for starting investment pitch
  • Gross Profit Foundation for covering development
    costs platforms and licenses
  • Development costs Resources to be invested
    what is it going to take to make the game?
  • Studio Profit Key internal measure of success
    target 50
  • Exec Producer HC Whos leading the team and
    how big is the team

PLs Measure the Effectiveness of our Allocated
External Development Process
External Development Deals
  • External development supplements internal
  • Deals generally involve a series of payments to
    an external party (called advances) and royalty
    rates that allow the external party to earn out
    the advances (recoupment)
  • Advances should correlate to level of effort
    (cost )
  • Advances can be expensed immediately or
    capitalized (put on the Balance Sheet in the
    Prepaid Royalties account)
  • Royalty rate is generally applied to net
  • Deal Structures
  • Flat rate - one royalty rate over contract life
  • Tiered or stepped rate structure
  • Pre-recoup / Post-recoup rates (Not using going
  • Pre-recoup / Post-recoup with tiered rates (Not
    using going forward)
  • Effective Royalty Rate - (Total amount paid to
    external developer/Net Shipments)

Deal Example
  • Example - Modeling The Next Big Thing

Studio PL / DCF
Example Summary PL
Example Summary PL (continued)
Some Deal/Model Questions
  • Have I captured all the development spending?
  • Incremental, fixed costs
  • Direct, O/H, other Touch Costs, Tools,
    licenses, capital equipment, taxes, misc.
  • What is the appropriate profitability measure to
    use and corresponding hurdle rate
  • Have I left enough buffer for the unexpected?
  • What is the quality of my talent, their skills,
    ability to execute?

In the rock, scissors, paper game of a biz
model… Cash flow trumps the Balance Sheet and
Income Statement
Factors to consider…
  • Be inclusive consensus building where
  • Understand your own biases
  • Consider non-financial factors/inputs
  • Ground your analysis on good fundamentals
  • Expect the unexpected and its usually bad
  • Be objective gather the facts all the facts!

Trust that inner voice instincts are important