Once considered impervious to a stormy economy, the video game sector is starting to show signs of strain.
Electronic Arts Inc., which produces such franchises as the Sims and Madden NFL, said Tuesday that it probably would miss sales and profit targets for its fiscal year because of disappointing holiday sales in North America and Europe.
The world's largest game publisher also said it would find ways to cut costs, including canceling some game projects and making deeper job cuts than the 6% workforce reduction it had announced in October.
"While we saw significant improvement in the overall quality of our key products this year, we are disappointed that our holiday slate is not meeting our sales expectations," EA Chief Executive John Riccitiello said.
The Redwood City, Calif., firm's shares plunged $2.52, or 11.5%, to $19.35 before the announcement, then almost 10% more in after-hours trading.
The news came the same day that Sony Corp., which makes the PlayStation 3 game console and many other consumer electronics, said it would eliminate more than 8,000 jobs, or 5% of its workforce, and let go at least that many seasonal and temporary workers to cope with an "acute downturn in the economic climate." Sony also said it planned to slash investments in its electronics business by 30% during its fiscal year ending March 2010.
Analysts had predicted that the video game industry would hold up well to the broader economic problems because consumers would look for more cost-effective ways of entertaining themselves at home.
Most still expect the industry's overall revenue to grow this year. But with less consumer wealth to go around, companies such as EA are feeling the pinch as retailers order fewer games to avoid being stuck with too much inventory at the end of the year.
"The economy is negatively impacting the video game industry," said Arvind Bhatia of Sterne Agee & Leach in Dallas. "That said, the industry is performing much better relative to most industries."
On Oct. 30, EA said it planned to cut 6% of its 9,500 workers. About 2,550 work in four California offices: Redwood City, Playa Vista, Westwood and Emeryville.
But as a result of the slowdown in retail orders, EA said Tuesday that it would cut an unspecified number of additional jobs and miss its original financial forecast.
The company had projected revenue of $4.9 billion to $5.15 billion for its fiscal year ending March 2009, up 33% to 41% over the previous year, and per-share earnings of 7 to 21 cents, compared with a $1.45 loss a year earlier. EA did not give a new forecast.
Company spokesman Jeff Brown said consumers this year were buying more intensely from among the top five bestselling games, whereas in the past they had spread their purchases more among the top 20. So publishers are deciding to make fewer titles.
"We are going to make some changes in our publishing strategy to publish fewer games but making bigger bets on them," Brown said. "But that does not mean we will stop taking creative risks."
Analysts said overall game sales were still poised to grow by double digits this holiday.
"Unfortunately, other people have better seats at the table than EA," said John Taylor, an analyst at Arcadia Investment Corp. in Portland, Ore. "Activision is doing really well with Call of Duty: World at War. Microsoft is doing phenomenally well with Gears of War 2. And Nintendo is doing well with Wii Fit and Mario Kart Wii. EA's titles, on the other hand, have done somewhere between OK and a little disappointing. None of them have outperformed."
Riccitiello, who took the helm at EA early last year with the promise of reinvigorating the company, focused on launching franchises such as Spore and Dead Space, which EA publishes as both a comic book and a game.
"We did manage to put quality and innovation on the board," he told analysts during a conference call. But "the first edition generally doesn't generate the revenues that subsequent editions do. We established value in . . . our franchises that we can count on in the future."