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E3 Notebook: Is Electronic Arts Undervalued?

To hear

Electronic Arts


CEO Lawrence Probst at the

Electronic Entertainment Expo

(E3) in Atlanta last week, online gaming is a terrific opportunity -- over the long haul. In the short term, it's a money pit he wouldn't wish on his worst enemy, judging from what he said at an industry roundtable discussion.

Probst sounded awfully glum about

Ultima Online

, EA's flagship online game, referring to the 150,000 copies of the software he had sold as a "pittance." He disclosed that the company had spent $10 million on the game in development and infrastructure. The infrastructure costs have been "surprising," he said, and the company was still trying to figure out the business model. Meanwhile, his industry cohorts on the panel expressed their gratitude, amidst nervous laughter, that it was he, not they, who was blowing his money on this trailblazing experience.

But, spend a few minutes with EA's chief financial officer Stan McKee, and, lo, what do you learn about

Ultima Online

? EA is making money off of the darn thing. With about 100,000 players paying $10 a month to play, the game is pulling in online revenues of $10 million a year. And it's operating at a profit, EA says. No gimmicks, McKee insists -- the $10 million doesn't include online merchandise sales, nor the money EA gets from selling the

Ultima Online

CD-ROM at retail. It's not a big contributor to the bottom line, McKee says, but "here's something that's really worked," he says.

How significant is that $10 million number?

Ultima Online

analysis is only part of his assessment that EA isn't fully valued by the market. Apply the "crazy" valuations that Internet companies are getting, and the online revenue from that single game alone would translate into a bigger market cap for EA than the whole company gets now. McKee blames much of the situation on other companies in the video game sector. "A lot of companies in our business have blown up," McKee says. "That makes the investment community nervous."

Meanwhile, one of the small companies Probst was trying to warn away from the hazards of online games, Multitude, made an impressive show of


, its debut online-only contest. The privately held Multitude hopes to get FireTeam, a sort of online combination of paintball and capture the flag, on the market this year, starting out with sales solely over the Internet.

The company plans to charge no usage fees at all, just $60 for the starter software. But let's see what happens when the company tries to handle more than the 200 simultaneous players who are testing the game right now.

Activision Hassled


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CEO Bobby Kotick was another industry executive at E3 who felt the market doesn't appreciate his stock, which is trading nearly 50% lower than it was in December. "We had a bad quarter," he said. "Some momentum guys bid up the stock," and when the company missed estimates, "they just puked out loads of stock."

For fiscal year 1999, ending next March, the company plans to release 35 titles. If only 28 of them come out, Activision will still meet its estimates of about $360 million in revenues, Kotick said, and earnings per share of 60 cents.

In the meantime, Kotick complains that his company has a third of Electronic Arts' revenues, a similar fraction of its earnings per share -- yet its market cap is a seventeenth the size. (Actually, on Monday it was less than a thirteenth the size.) "It's not rational," Kotick said.

Especially judging by the respectable reception that Activision got for its titles at E3. The narrow booth was crowded as players took a look at games like the first person shooter


, a 3D rehash of the old


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arcade game and the combat simulation game

Heavy Gear II

. The company also has

The Fifth Element

, due this summer for PlayStation, which has the advantage, among lust-crazed male gamers, of featuring the female character from the Bruce Willis movie wearing not much more than packing tape.

Realism Abounds at Broderbund

Winner of the most-realistic looking character at the show was the Prince of Persia, the title character of a game that

Broderbund Software


, better known as publisher of




, hopes to get out early next year. Like most other PC games at the show, it will require some heavy hardware -- at minimum, a Pentium 166 and a 3D graphics acceleration board -- but the adventurer's walking, jumping and climbing are remarkably lifelike. One hopes the game, when complete, will move as well as the Prince does.

Another one of the half-dozen games for older gamers that Broderbund displayed at the show, was

Baja 1000 Racing

, an off-road car contest whose motion simulation was realistic enough to induce carsickness. The company is also releasing two


CD-ROMs for October, timed to coincide with the movie based on the Nickelodeon series.

THQ Looks to Rebound

Game distributor and publisher



, whose stock dropped sharply in March after the company said it would no longer be making wrestling games under a World Championship Wrestling license, showed an interesting but inconclusive variety of games in its booth at the show. THQ's Game Boy version of

Small Soldiers

, the heavily licensed movie debuting this summer, should be in stores by August. The incomplete version at the show was neither good nor bad, making the license the major selling point.

A more interesting title from THQ, which Sony showcased in the PlayStation booth, is the slated-for-August

Devil Dice

, a simple game in which you play a tiny, mouselike creature walking over a board full of oversized dice. Tip them over or push them around, and you can make them disappear by grouping matching numbers. One of the, say, 2 or 3 games at the show without racing, fighting, shooting or sports simulations,

Devil Dice

was fun to play, though it didn't quite have the alluring simplicity that made


a phenomenon.