Hammered by a steep drop in the sale of traditional packaged video games, Electronic Arts Inc. on Monday said it would cut 1,500 jobs, more than 16% of its workforce, even as the game publisher announced plans to acquire online game developer Playfish Inc. in a deal valued at up to $400 million.
The dual moves -- one aimed at trimming expenses by about $100 million a year and the other at increasing profits -- came as the Redwood City, Calif., firm released its fiscal second-quarter earnings showing a 17% decline in revenue from its packaged games business, reflecting an industrywide malaise.
"In a tough economy, the consumer is not showing up as consistently as we like," EA Chief Executive John Riccitiello told analysts.
EA said those hardest hit by the cuts would be research and development workers, whose jobs will depend on whether games they are working on are canceled.
For EA, whose fortunes were built on blockbuster franchises such as the Sims and Madden NFL that sold for $40 to $60 a disc, the silver lining this year was modest games played on mobile phones or online. That business, which contributed 12% of EA's revenue last quarter, has become its most profitable division, Riccitiello said.
"A lot of people focus on the sale of packaged console games," said Eric Brown, EA's chief financial officer. "But the reality is that roughly 35% of the overall game market is online. Five years ago, it was not even 10%. What we're doing is going after the highest rate of growth" by acquiring Playfish.
The transaction calls for EA to pay $275 million in cash, plus $25 million in retention payments for Playfish executives. It also includes up to $100 million in bonus payments should Playfish meet certain undisclosed financial targets.
Privately held Playfish did not release its financial data, but has said it is "substantially profitable." The London firm has not touched the $21 million in venture money it raised in its last round of funding.
With 125 employees, Playfish has focused on a lean operation with 10 titles played on social networks such as Facebook, MySpace and Bebo. The games attract about 60 million users who play them at least once a month, said Kristian Segerstrale, co-founder of Playfish. Its most popular title, Pet Society, has 21 million monthly players. The games are free to play but make money by selling ads or charging for extra features.
"The entire category of gaming has experienced explosive growth," said Jeremy Liew at Lightspeed Venture Partners. "They're bringing huge numbers of people who don't consider themselves video gamers and who have shown that they will pay money for a lightweight gaming experience. Playfish represents a massive disruption to the traditional video game industry."
As consumers turn to online games as cheap sources of entertainment, U.S. sales of disc-based games have dropped 12% in the first nine months of the year, according to NPD Group.
At EA, sales in the quarter ended Sept. 30 dropped 13.5% to $788 million. Its net loss widened to $391 million, up from $310 million a year earlier. The figures reflect a deferral of $359 million in sales that will be spread out over the next few months. Without the deferral, revenue was up 2% from 2008 to $1.1 billion, and EA swung to a $19-million profit from a $20-million net loss a year earlier.
EA shares rose 53 cents to $19.53.