Electronic Arts infuriate me. In John Riccitiello they have one of the most perceptive, incisive and lucid managers in the whole of video gaming. Yet as a company they continue to underperform. The value of shares in a company is decided by just one factor, sentiment. So it is instructive to look at the share price of Electronic Arts over the last five years. Basically it has been going nowhere, fluctuating between around 40 dollars and around sixty dollars then collapsing to 22 dollars in the recent turmoil. So for five years investors have seen no improvement in the value of Electronic Arts at a time when the gaming industry has been booming like crazy.

Other big global publishers, like Activision and Ubisoft, have performed much better.

There are two things, and only two things, that have value for a gaming publisher and which build profits and growth. The first is having the right people and the second is having the right IP. If you have these then everything else follows. Yet many times EA have spent fortunes buying companies only to squander the IP and lose the key staff. The new mix and match, user chooser, approach to corporate acquisitions should serve them better. But where is the organic growth? By making the best of what you already have and know well you can generate far more profits from a given investment.

I also wonder about the nature of much of EAs IP. Madden, Tiger, NHL and FIFA may well be cash cows but they are going nowhere and EA doesn’t even own the rights, they just rent them. Even with Warhammer they are borrowing someone else’s IP. But times have changed, we live in the age of Wii Fit. The market is now everyone, not just the narrow niches that gaming historically served. EA have moved with the likes of Rock Band and Spore. But they could move a whole lot further.

One thing EA are doing better than anyone else is gearing for the future. They got into casual gaming big and early. They are pushing microtransactions and subscription business models. And they lead the direct to consumer charge.

Over the last year they have been trying to buy Take Two primarily in order to get the IP of GTA and also to get a virtual monopoly on sports games. This involved billions of dollars. Instead they could have done a Saint’s Row making their own game to compete with GTA and could have grown their existing sports business organically.

And if they really wanted to take someone over then they would have done better buying the huge storehouses of IP that are EIDOS/Sci, Atari/Infogrames and Sega. All three of whom were available very cheaply.

Now EA have announced further disastrous results. Last year they lost $454 million, so far this year the losses are $310 million. You would wonder how they manage this on such strong sales. Their response is a 6% in their workforce. This seems strange to me. In an efficient organisation their surely isn’t that much dead wood. So aren’t they limiting their potential for future organic growth. Surely they would be better knocking the $50 million saving off the marketing budget and forcing the marketeers to make up the difference by being creative. That’s what they are paid for.

If staff really have to go I hope that means every executive assistant, secretary and PA before a single development person goes. And I presume that every executive is handing their frequent flyer rewards back to the company.

I still think that EA are a good long term proposition. But more than that, with a market capitalisation of under $9 billion, they are a ripe takeover target.