Dopamine plays a key role in the pleasure derived from enjoyable activities, including gaming, exercise, and music. In video games, dopamine is released when players receive rewards for their participation or skill, such as scoring a goal, achieving a kill, or opening a loot box. Casinos understand this principle well, which is evident when players hit a jackpot or hear the winning sounds of a slot machine.
When evaluating gaming and wagering products, a central question arises: "Will the product be exciting for the customer? Is there a thrill?" In the realm of gaming, this thrill could manifest as large jackpots or smaller, more frequent rewards. A crucial element must keep the player engaged.
The global gaming landscape is expansive, with 3 billion video gamers. A survey by the Entertainment Software Association (ESA) revealed that 54% of frequent gamers feel that gaming enhances their connection with friends.
The first PlayStation launched in 1994, followed by the Xbox in 2001. A similar milestone occurred with the launch of Runescape in 2001, marking the rise of MMORPGs (Massively Multiplayer Online Role Playing Games), enabling millions of players to connect, communicate, and compete.
In the 1990s, the increase in popularity of PC and console gaming led to a revenue model that relied solely on the upfront sales of games, often priced around $40 (£32.70/€38.70). Once the game was purchased, there was little ongoing interaction between players and developers.
With advancements in technology, online marketplaces like the Xbox Live Marketplace emerged, allowing gamers to receive software updates, purchase additional games, and make in-game purchases. This shift, along with the popularity of MMORPGs, paved the way for the rise of 'live service games' that provide ongoing content post-launch, enhancing player engagement and significantly increasing developers' revenue per player. Companies began identifying the significant revenue potential of live service games as early as 2010.
John Riccitiello, former CEO of Electronic Arts, noted, "I used to buy a whole bunch of titles and play them for three weeks and move on and never look at them again… the business model needs to evolve and recognize a little bit that there’s a big service component."
Live service games such as Fortnite and GTA V regularly introduce new features like weapons, skins, maps, player outfits, and missions. The monetary possibilities are extensive. Notably, nearly a decade after its 2013 launch, GTA V (owned by Take-Two Interactive) continues to generate over $250 million in revenue each quarter.
Founded in 1982, Electronic Arts (EA) has grown to become one of the largest digital entertainment companies, servicing 580 million active players across consoles, PCs, mobiles, and tablets. The company, valued at $36 billion, owns a portfolio that includes renowned brands like Apex Legends, Battlefield, FIFA, F1, Madden NFL, Need for Speed, Plants vs. Zombies, and The Sims.
EA's 'Live Services and Other' segment has become its fastest-growing category, accounting for 71% of total revenue in FY2022, compared to 59% in FY2017, largely driven by FIFA Ultimate Team and Apex Legends.
Apex Legends ranks among the industry's top live service games, with over 113 million active players and 28 million new players added in the year ending March 31. FIFA, the largest sports video game franchise, has sold over 325 million copies since its inception in 1993, outpacing all other sports video game franchises.
In 2021, EA CEO Andrew Wilson expressed confidence in doubling the company’s mobile business to $2 billion in annual net bookings by 2024, driven by an increase in mobile device usage and the popularity of free-to-play mobile games. The live services model allows players to engage with games for free, monetizing through in-game purchases. EA's FIFA Mobile, a free-to-play mobile version, recently reported its most successful quarter ever with an almost 80% increase in unique new players compared to the previous year.
Loot boxes, purchased with real money, allow players to discover the contents of in-game mystery boxes. These virtual items, which may include skins or upgraded weapons, have attracted scrutiny for their gambling-like features. In March, EA successfully contested a fine in the Netherlands over loot boxes in FIFA Ultimate Team, with the court defining the game as primarily "a game of skill" with loot boxes introducing "an element of chance." The ruling emphasized that the prizes were only in-game objects rather than physical items.
Though loot boxes enhance player experience and stimulate dopamine release, game developers must ensure they are not a central feature. For video game companies, loot boxes can only serve as a revenue source if they are integrated ethically and seamlessly.
EA generates substantial cash flow, reporting $1.9 billion in operating cash flow for 2022, which supported $1.5 billion in share buybacks and dividends the same year. The company currently has an EBITDA valuation of 11.4x, compared to a peer group median of 17.4x.
In terms of earnings growth and valuation metrics, EA maintains a 12.4% five-year EPS CAGR and a free cash flow yield of 4.7%.
