Jester,

Considering that EA has had several of its franchises selling below expected unit sales for several years now, how is it keeping its level of profitability at decent levels?

Is it:

1.- Increased Mobil sales - and how much as a percentage of revenue

2.- Increased Downloads - and how much as a percentage of revenue

3.- Significant Cost Reductions over the past several years

I presume it is all of the above, but is there one that stands out?

LT, I think it's exactly what you described: digital as a % of revenue has been rising, which carries higher margins. They get 70% of a digital sale, compared to 50%-60% of a disc sale after retailer cut, platform royalty, distribution, and allowing for reserves to support the price promotions which happen more frequently at retail due to limited shelf space and increased competition with other stores. Also, cost cutting.

They have been focusing on the winners. For instance, the Dead Space developers made Battlefield Hardline, which although it was a relative disappointment in BF terms, it still did better than another Dead Space would have, and now they're on a story based Star Wars. They have been getting a Battlefield related game out nearly annually too, with BF3 in holiday 2011, followed by BF4 holiday 2013, Hardline Spring 2015 (delayed from holiday 2014) and Star Wars holiday 2015. So that's 4 BF games in 5 years.

They've been doubling down on the IAP too, like Ultimate Teams in Sports, and microtransactions in action games. They are also coming out with "Deluxe Editions" of most of their games for $70, along side the regular edition at $60. Typically these Deluxe editions contain little more than digital items of limited use and which effectively cost EA nothing. For instance the Star Wars Deluxe version consists of 5 weapons and gear which every play unlocks at certain levels anyway, and an emote. In other words, earlier access to some gear, and an emote, for $10. That's bound to sucker enough people who want the "Deluxe" version over what must be the "inferior" version. 

Presumably the earnings growth from this margin expansion and cost cutting which led to the explosion in price to earnings multiple is slowing now. They have a strong slate for next year though, including Titanfall 2 not just Xbox exclusive now, Mass Effect, and more.

Thanks, as you might have already surmised, the intent of my questions were to determine if EA's underlaying fundamental trends are sustainable.  To me, the margin expansion fueled primarily by both Mobile and Digital Downloads of their premier games not only have legs but promise to continue for some time.  After all, IIRC digital downloads are still below the 30%(please cirrect me if this is not the case).  Suggesting there is significantly more to come.  This too should reduce piracy, correct?

I agree that margin expansion may continue since full game downloads will continue to rise. GameStop says total full game downloads are about 20% of sales. Some analyst estimates it may be higher, especially on Xbox One. I think it's probably around 20%-25%. I'm saying I think that will be organic expansion with the market, and the pace of their recent margin expansion may not be sustainable. That was aided in part by cutting their product catalog of likely mediocre sellers, coming out with $70 Deluxe editions that didn't used to exist a few years ago, company wide cost cutting, etc. They can't do those things again. It's also worth considering that GameStop weakened by loss of used sales is good news for the publishers, but if/when GameStop closes hundreds of stores, that should really be considered bad news for the publishers. In the ideal scenario, GameStop (the business I mean, not talking about the stock price) is weak, but not too weak.

The $67 range has been good for a bounce multiple times recently. It's gone to $66-67, and a couple of times lower than that in August, then rebounded to $70 or higher about 6 times lately. The 200sma is now around $66 so that trend is likely to continue with the next sell-off.

I agree that the pace of the margin expansion is not sustainable, after all, the cost cutting is all behind it and probably was the initial catalyst to start a margin expansion period.  However, if there was an inflexion point where digital downloads increases markedly, say from 20 to 50% in a short period of time  (a terminal rate of decline for GME, i.e. an inverse relation), then the margin growth could still be significant enough to still be considered bullish for the EA. 

I am simply wondering if this is another trend that could grow longer legs, after all, trends tend to behave this way.  Just a thought.

I think if digital downloads were becoming that strong, then in a vacuum where game sales continue as they do, it's good news. However, if digital was that strong, GME would be closing hundreds of stores, which would have a large negative effect on total game and console sales.

Just to clarify, my point on acceleration of digital downloads in a short period of time, was meant to mean to happen in the next 6 months to a year.  That would be a quick uptick if we consider that we have reached 20% but have been predicting this for 3 to 5 years.

That said, I agree that when GME starts to close hundreds of stores, they are experiencing it in real time.

I see. IMO the acceleration of console digital downloads has been by the early adopter high tech hardcore gamer, possibly more affluent gamer. Going forwards, the console install base starts to pull in more casual gamers as the price gets lower, more price sensitive gamers who perhaps like to be able to sell their disc games to fund the buying of more games. Basically, not the type to be paying $60 for pre-ordering digital games, or buying 5-10 games a year. The digital slice of the pie will continue to grow, and maybe some will see their own personal split of digital vs physical purchase lean more to digital. Again though, I think the pace of that growth will slow, because of the types of gamers and when they enter console cycles.

I understand your point and agree with it.  Thanks