Early Signals From Electronic Arts' Star Wars Positive: Analyst

Electronic Arts officially launched Star Wars: The Old Republic, the long anticipated online multi-player video game.

"Early feedback from the video game indicates there is significant interest in the game, and we expect positive initial data points," says Colin Sebastian, an analyst at Robert W. Baird.

"Moreover, with shares down 15 percent since Dec. 1 versus. S&P 500 down 2 percent, we see near-term upside potential from initial sales data and achievable fiscal third quarter financial guidance. Longer term, however, we believe that expectations for 1.5 million to 2 million sustained paid subscribers could still prove overly optimistic," says Sebastian.

Sebastian expects healthy initial conversion to paid users. Over the first few months post-release, he expects Star Wars game sales to exceed 3 million units, with conversion of roughly 1.5 million to paid subscriptions during the year.

To put this into perspective, very few massively multiplayer games (MMOs) achieve sustained subscriber levels of more than 1 million monthly users: World of Warcraft, Lineage, Aion and Runescape, are the few examples.

In fact, most large scale MMOs in western markets peak in the 300,000 to 600,000 paid subscriber range, according to industry data.

Sebastian says his Star Wars assumption is based upon the nearly 2.5 million people registering twice on the SWTOR Web site, and more than 2 million signing up to be beta testers.

Moreover, the unmatched Star Wars brand, significant EA marketing effort and publishing expertise provide a strong foundation for the game, says Sebastian.

Sebastian expects solid Metacritic review scores of at least 85-plus, a reasonable target for a game five years in development and requiring hundreds of millions of dollars in development costs. Based on early checks, many of the game's 200-plus servers are full, indicating heavy usage.

Despite the potential for upside in shares from initial Star Wars data points, the eventual success of the title is difficult to predict, and the outcome for the stock is somewhat binary, in Sebastian's view.

"Illustrating the difficulty in projecting MMO subscriber levels, we note that EA's last MMO (Warhammer) reached roughly 800k subscribers before quickly declining and then converting to a free-to-play business model," says Sebastian.

He views the video game industry as one of the most attractive areas of media and entertainment, in particular with the success of HD console games and fast growth from emerging online platforms (e.g., Facebook, iOS, Android).

He says over the past 3 to 4 years, Electronic Arts has suffered more than its share of disruption from the ever-changing video game market, first with the emergence of a strong Wii console platform early in this cycle (the company bet heavily on the PS3), followed by the dislocation of second-tier console titles in favor of emerging online, social and mobile platforms.

While the perception of EA in many industry circles is that the company is in constant "catch up" mode, Sebastian believes EA has largely executed on its restructuring, albeit at a high cost.

On one hand, Electronic Arts has successfully reduced its expense structure, enabling a return to positive earnings, and narrowed its product slate to its best performing franchises. As a result, Electronic Arts has an enviable lineup of game franchises, both owned IP and licenses.

On the other hand, Electronic Arts has aggressively expanded into digital platforms (browser, social, mobile) through a combination of expensive acquisitions and organic initiatives, and the company may approach $1 billion in digital revenues next year.

Shares of Electronic Arts is trading up 0.68 percent at $20.71 on the NASDAQ Stock Market at 10:15 am EST.