NEW YORK (CNN/Money) - Electronic Arts' first steps into the world of online gaming were pretty surefooted ones.
The launch of "Ultima Online" in 1997 was a watershed event in the industry - and while it wasn't the first online-only, subscription-based game, it was the first that could be termed a breakaway success. Loyal fans of the role-playing games rushed to join the persistent virtual world, where they could slay dragons with friends for the cost of $10 per month.
From there, things started to go downhill.
These days, EA.com, the company's online division, is stumbling, beset by disappointing sales, cancelled products and multimillion-dollar losses. Tuesday morning, the company announced plans to consolidate the assets and operations of EA.com into its core operations, meaning it will no longer break out the division's profit or loss in its quarterly earnings report.
If nothing else, the move is good damage control. For the quarter ending Dec. 31, 2002, the online unit lost $3.5 million. That's better than the $6.7 million loss during the same period in 2001, but a bigger loss than the company had anticipated.
In conjunction with the consolidation, EA (ERTS: Research, Estimates) will take a pretax charge between $55 million and $75 million this quarter. Just last October, another resturcturing carried a $14 million price tag and resulted in 270 lost jobs.
The plan was for EA.com to become profitable during this fiscal quarter. That's not going to happen. And in its Form 10-Q, EA conceded "long-term profitability of this business segment cannot be assured."
|"The Sims Online" hasn't seen the success EA had hoped for.
The game the company had hoped would lead the way to profitability - "The Sims Online" - has not lived up to expectations. As of last month, the game had 85,000 subscribers paying $10 per month. (An EA spokesperson says the number has grown since then, but the company won't be providing an update until April.)
Bad timing might be partly to blame for the numbers. "The Sims Online" came out later than expected last year, which had a negative impact on sales.
"By the time 'The Sims Online' was ready, we were well into the holidays and most kids had their wish lists ready," said John Taylor, managing director and analyst for Arcadia Investment Corp.
Poor reviews didn't help matters. Neither did the company's sky-high expectations. (Originally, EA forecasted it would have 200,000 players registered by March 30, 2002.)
"Getting people to pay for content online takes time, not three months," said P.J. McNeely, research director at GartnerG2.
Other online titles have performed even worse. Last week, the company announced it would shut down "Motor City Online" at the end of August. Released in October 2001, "MCO" hoped to capitalize on the success of the company's "Need For Speed" franchise. It got so-so reviews initially, but gamers were never willing to pay $10 per month for virtual drag racing. EA won't break down how many paid subscribers the game currently has, but Wall Street estimates the number to be somewhere between 20,000 and 25,000.
|Though innovative, "Majestic" was a flop.
The collapse of "MCO" isn't the first high-profile failure. "Majestic", an innovative, though poorly received conspiracy game, crashed and burned once it went live. Of the 800,000 people who started to register for the free, first installment of the game, only 71,200 completed the process. That number fell to 10,000 to 15,000 subscribers when it came time to pay. The experiment cost EA between $5 million and $7 million.
Next on the hit list could be "Earth & Beyond", an online role-playing game that eschews dwarves and dragons for outer space exploration and combat. Again, EA will not break down how many paying subscribers it has for the game, but The NPD Group, which tracks game sales, reports the game has only sold 53,000 copies since its launch in September 2002 – and sales are barely registering these days despite a significant reduction to the retail price.
About the only thing really firing for the online business is its oldest title; "Ultima Online" boasts between 220,000 and 230,000 subscribers. Still, that's only half the number of subscribers of Sony's (SNE: Research, Estimates) "EverQuest", whose monthly fee is $5 higher.
It's worth noting that the online world is still a nascent one in the gaming industry. So far, no publisher has been able to achieve mass-market success, as most consumers are still uncomfortable giving their credit card information to a gaming company.
And the online division is a small part of EA's empire. The company is the industry's leading publisher and shows no signs of ceding that title anytime soon. Its confidence, perhaps even arrogance, in that role has worked against it as it tries to expand its boundaries, say analysts.
"The thing they've done wrong is anticipate if they build it a mass market would show up," said Taylor.
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Even EA concedes in its 10-Q that "we have limited experience with online games and may not be able to operate this business effectively."
Analysts credit the company, though, for positioning itself well for the future. If online gaming does eventually become the force everyone expects it to be, "they have the infrastructure in place to let it explode," said McNeely.
The hitch is, with Tuesday's announcement, we won't know when that explosion takes place.
Morris is Director of Content Development at CNN/Money. Click here to send him an email.