Showing posts with label John Riccitiello. Show all posts
Showing posts with label John Riccitiello. Show all posts

Sunday, November 14, 2010

Electronic Arts: John Riccitiello's Reign of Pain

I usually like CEOs, but some of them rub me the wrong way. One CEO in particular–Electronic Arts’ CEO John Riccitiello–is particularly disappointing to me. Why? EA has the potential to be a great company, if not the coolest company in the Bay Area. In addition to making popular games, it has great employees, a nice enough Board of Directors (who are perhaps too nice), and a wonderful campus. Thus, it's not unreasonable to say that EA has underperformed when it comes to cachet and stature. Such under-performance might be forgiven if the company was rewarding shareholders financially, but that's not the case.

John Riccitiello has served as Electronic Arts' (ERTS) CEO since May 2007. On May 7, 2007, ERTS shares were selling for $50.07. Today, after three years of John Riccitiello's "magic," they sell for around $16.18--almost a 70% decline. In contrast, Activision Blizzard (ATVI) shares sold for $9.785 on May 7, 2007 and recently closed around $11.82/share--a 20% gain. Today, ATVI pays a dividend; ERTS does not. Recently, ATVI's popular game, Call of Duty, broke sales records.

At this year’s annual meeting, when asked to justify his salary in the wake of ERTS’s terrible stock performance, Riccitiello responded that EA’s executive team members had also suffered because the value of their options and shares had declined. According to Yahoo Finance, Riccitiello owns over 150,000 shares. If these shares are a fraction of his overall net worth, his financial position seems different from a middle class shareholder who uses his/her disposable income to invest in a company while hoping it won’t be run into the ground.

Even if Riccitiello has lost money as a result of EA's stock performance, he may have made up his stock losses elsewhere. Another website raised questions about possible ethical violations--see VentureBeat.com interview (2007):

VB: I never heard what you have said to those people who say there was too much conflict of interest for you on the BioWare/Pandemic deal, since EA was buying a company from your former firm and you made a lot of money on it. What is your answer?

JR: No comment. It’s not a conflict of interest.

Personally, I have no opinion or information about possible ethical violations relating to John Riccitiello. I just find it interesting that others have raised questions about possible self-dealing at EA. In any case, at the annual meeting, Riccitiello gave no real apology for EA’s poor stock performance and seemed to exhibit no remorse. He also had the audacity to say his company’s stock performance should not be compared against Activision or Chinese-based gaming companies, because EA was a different kind of company. (Yahoo Finance lists Activision as one of EA’s competitors.)

There have been rumors that Disney (DIS) might want to take over EA. I asked Riccitiello what he thought about Disney. He responded that his kids liked the park and then smirked, perhaps thinking my question was irrelevant. (I made my question deliberately vague to gauge his response.) His failure to immediately link Disney to a potential buyout makes me think Disney has not approached EA about a buyout.

After the meeting, I tried to approach Riccitiello to thank him for answering my questions, but a beefy, unsmiling man put his hand on my shoulder and stopped me, telling me in a stern voice that Riccitiello had someplace else to be. The beefy man turned out to be a security guard in civilian attire. (Before I could say anything, someone came up to him and must have told him to back off, because he immediately turned away.) Get this: Riccitiello or EA was so concerned about security at this year's meeting, they had several plainclothes security guards attend. Now, these weren't the guys most companies clearly post at the door or who are dressed in black, which usually identifies them as security personnel. These guys were trying to be incognito, emphasis on "trying."

Even though EA attempted to hide the presence of its plainclothes security guards, I was able to identify some of them before the meeting. First, the security people I identified never signed in. They just went to the shareholder table and picked up a name tag. No attempt was made to show shareholder papers or ownership. Second, they immediately demonstrated through their body language that they were very familiar with the employees manning the EA shareholder table. Third, some of the guards sat down at a table instead of walking around and acting like they didn't spend every single day at the company. Later, I wondered how concerned EA really was about Riccitiello's safety, because EA's inability to mask the identities of all their security personnel bordered on incompetence. If you're going to go through the trouble of passing off security personnel as shareholders, at least don't make it look so obvious. I don't expect James Bond, but I also don't expect Mr. Magoo.

I will say this: EA had the courtesy to play a video this year highlighting their various games, and they provided a complimentary game to shareholders who attended. Last year, EA didn't show its usually fantastic annual video, which basically sanitized its normally fun meeting. (Under the previous CEO, some executives demonstrated video games for shareholders. One year, an EA executive played a cool skateboarding videogame at the annual meeting.) After I complained to the Board of Directors that EA was missing out on an opportunity for free publicity, EA reinstated the video.

At the end of the day, I still don't understand how John Riccitiello continues to keep his job. What other CEO has been able to stay employed when a competitor's stock price goes up 20% while his own company's stock price declines by around 80%?

Disclosure: I own only one share of ERTS. I don't plan on buying any more shares as long as John Riccitiello has any substantial authority at Electronic Arts. It's possible that if EA doesn't get a new CEO and the stock continues to decline, the company might go private at some point.

Saturday, August 2, 2008

Electronic Arts Shareholder Meeting, July 31, 2008

Electronic Arts (ERTS) has a history of fun shareholder meetings. Its previous CEO, Larry Probst, seemed to enjoy being in the spotlight and demonstrating new games. In previous years, he had a member of the Board play a new skateboarding game in front of shareholders. ERTS also provides great sweets every year--no real food, but the non-Costco chocolate chip cookies, soda, mini-cheesecakes and Starbucks coffee are more than enough. The cafeteria is a few yards away from the auditorium where the meeting is usually held, and the panini I had was great. Wearing a buttoned shirt and slacks, I was obviously out of place among the jeans and t-shirt employee crowd. A group of employees was playing touch football on the lawn across from the cafeteria.

Mr. Probst was replaced by John Riccitiello in 2007. Mr. Riccitiello brings an East Coast bluntness to ERTS and is more intense than Mr. Probst. ERTS usually has a great video showing new and old games and its different franchises, such as Harry Potter, Spore, and other famous games. This year, the video seemed shorter. It was still a good video, but it's clear Mr. Riccitiello seemed to take the meeting as a more serious matter than a time to show off his company's numerous games. Some people in the audience privately complained no images of the new Batman game were shown. No live demonstration of any new games occurred.

The slides and presentation during the informal part of the meeting seemed to have two themes: cost-cutting through outsourcing, and the Pogo acquisition. ERTS has several top-selling titles, while competitors such as Take Two (TTWO) only have one (Grand Theft Auto). Riccitiello talked about cutting costs by using engineers overseas, and singled out Romania and India as desirable locations. ERTS also has workers in Shanghai and Montreal.

ERTS indicated the mobile segment was the new growth area and it was well-positioned to do well. (Yahoo made a similar point in its annual meeting.)

The Q&A session was brief. Only two people asked questions, including myself. One person asked about an online forum that criticized some ERTS games (I am not sure about the exact website, but the speaker basically asked about how the company responded to online criticism of its games). ERTS mentioned it had no control over the online forums but generally listens to consumer complaints.

I asked about diversity and whether ERTS was concerned about having a 100% Caucasian-looking management while its workers and employees were incredibly diverse. I received a stock answer about the company's commitment to increasing diversity. The officer pointed out there were now three women on the board, which was an improvement. Being in California and a tech company, it seems unusual to have no Asians or Indians on the Board or in upper management.

My second question was about the rumored Take Two (TTWO) acquisition. I asked how ERTS planned on incorporating a controversial game like Grand Theft Auto into its portfolio, which includes games geared to teenagers and children, like Harry Potter, Spore, pogo.com, Simpsons, and Madden football. Riccitiello first declined to answer my question because of ongoing discussions with Take Two. I then asked him to speculate and pretend as if the company might end up buying Take Two. Riccitiello said ERTS had several Mature-rated games (MA rated), and the Godfather games were similar to Grand Theft Auto. He smartly added that ERTS was looking to increase the diversity of its gaming portfolio, a jab back at my criticism of the company's homogeneous management look.

There are a couple of problems with his comments. One, Grand Theft Auto was actually rated "AO," or "Adults-Only," at one point, not Mature. Thailand just banned sales of the game after a Grand-Theft-Auto-related homicide. [Update on 7/6/08: apparently, the Thai government had nothing to do with the ban--a local distributor stopped selling the game.]

Two, no one mentioned risking the ire of conservative-minded consumers. Riccitiello did not seem to take seriously a potential backlash from marketing sex and violence to children. In 2006, the FTC reported, "In 2002 consumers purchased nearly 40 percent of M-rated video games for children younger than 17 years." Also, "69 percent of unaccompanied children aged 13 to 16 years participating in its mystery shopper survey successfully purchased M-rated video games." If ERTS is going to sell many games to children and teenagers, it needs to take its public image seriously. The juggling act of selling games to children and "AO" games to adults is even more difficult because Grand Theft Auto revels in its smashmouth, rebel-without-a-cause persona. If you're a one-trick pony like Take Two, having an in-your-face image is fine; however, when you're a larger company with ties to Hollywood and major media outlets, there are other considerations at stake.

After the meeting, I went to the ERTS company arcade and played some games. I always look forward to my annual John Madden playtime. A new game was there this year, a very realistic EA NASCAR racing game--I had a great time playing it. Some sports items were in the arcade also. I had not noticed these items before. Several autographed items were in clear locked boxes, including an autographed Karl Malone basketball shoe. My favorite was the picture of a young Michael Jordan in a Bulls jersey typing on a 286 desktop computer (with the old floppy drives and tiny green screens). That one was classic--if anyone at EA is reading this, one hit at next year's meeting would be having copies of that picture for shareholders.

As for my thoughts on shares, I bought Take Two shares after the meeting. If ERTS is successful in buying TTWO, then their stock price might take a small hit when the deal is announced. I continue to believe ERTS should have bought TTWO prior to both companies' earnings releases. Back then, TTWO's share price was in the mid-teens and represented a good value. TTWO has since released great earnings, while ERTS released not-so-great earnings. Any stock deal that occurs now will be more dilutive of EA's stock.

ERTS clearly has a strategy of acquisitions to feed its growth. To be fair, it's hard to create a lasting video game franchise, so acquisitions are a good way to grow in the video game business; however, timing is everything when it comes to buy-outs, and ERTS's timing is not ideal. ERTS might want to wait a year or two, when TTWO might miss their numbers, causing a correction in its stock price. When any company bets its future on one franchise, especially one like Grand Theft Auto, it takes a large risk. Meanwhile, ERTS is more diversified and can afford to wait.

I still don't blame EA for its impatience--if EA doesn't buy Take Two, it runs the risk that Microsoft might, especially after the failed Yahoo deal. EA cannot afford to have a competitor like Microsoft get immediate talent and a firmer foothold in the gaming industry because MSFT could potentially limit EA's future X-Box game sales. At the end of the day, EA's impatience may be TTWO's gain.

Update on August 19, 2008: WSJ today reported today that Grand Theft Auto sales were 78% of TTWO's total sales.