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EA's Riccitiello sees bright skies ahead--no, really

Even with the threat of low consumer spending this holiday season, the CEO says he thinks innovation will be able to keep game manufacturers afloat.

NEW YORK--This may be the last year that video game giant Electronic Arts releases a title that doesn't log on to the Internet, CEO John Riccitiello said in a keynote address at the Media & Money Conference here Tuesday.

That's a testament to how quickly the game industry is evolving, Riccitiello explained. "If you go back three, five, seven years ago, a video game was entirely captured on a disc that we sold. We were in the packaged goods business." Things have changed: "Today what we do, more typically, is we build an online game which often has as much code on a server as it does on a disk and the CPU in your household."

"Spore" box
"We chose a particularly aggressive form of DRM," says EA's John Riccitiello. That earned the company some very vocal complaints.

It's also a time when the gaming industry is continuing to grow beyond its central demographic of young males and its well-stocked library of first-person shooters and race car rallies. That's evidenced by Riccitiello's return to EA; he left the company in 2004 to make a career detour into private equity, but returned last year when, he implied, the company needed his leadership.

"Relative to where we'd been historically, our game growth was down, our sales were down, and our profits were down," Riccitiello said. Plus, there was stagnation. "The game industry had gotten a little overhooked on sequels, and EA is not immune to that. We just released our 18th Madden."

EA then restructured its business into four different "labels," with new emphasis on casual games and atypical releases like its smash hit Spore, which Riccitiello described as "a spectacularly original and interesting game."

"There are more species in Spore today than there are species on the planet Earth," Riccitiello said of the game, in which players raise a creature from a one-cell being into an advanced society. "It's a staggering degree of diversity."

But in an ironic twist, Spore, as ground-breaking as it is in the entertainment world, has been plagued by complaints about the alleged backwardness of its digital rights management system (DRM). Riccitiello said that he personally isn't a fan of DRM, but that the technology isn't there yet to make a game piracy-proof without it. "We chose a particularly aggressive form of DRM, which 99.8 percent of consumers would never notice, but that two-tenths of one percent got incredibly focused and formed an online PR cabal," he claimed. "We can eliminate piracy by essentially blocking the online service from the pirate. That's the future of DRM. The present of DRM isn't quite there yet."

DRM or no DRM, Riccitiello said that Spore is the start of a revolution. "I ultimately believe that a consumer is going to want to be involved with a game that they help build rather than one that they just watch or experience," he said. "Spore is probably the industry's first big step in that direction, and I would encourage you to look out for The Sims 3, which comes out this spring and which is another big step in that direction."

In-game advertising is in
EA is also experimenting on the in-game advertising front, which Riccitiello said is still not a mature business but is slowly getting there. "Presently, Barack Obama is advertising in one of our games today," he said. "We think it's very forward-thinking on the part of a presidential candidate."

When asked whether he would consider using Google's nascent AdSense for games, Riccitiello replied, "The quick answer is, of course we would partner with them and anybody else who would write us a check." Though he admitted to being "more bearish than bullish" on in-game advertising in the short term due to both psychological and technological hurdles, he says there's big potential for it down the road.

Innovation's nice, but a bigger question right now is whether the game industry will take a big hit amid economic downturn. Riccitiello said he doesn't think it will, but remained cautious. "I think it's going to be a strong holiday season...the video game industry so far this year has been stunningly strong," he said. Typically, innovation like what the industry is seeing now is "enough to overcome underlying recessionary trends."

But he admitted to the obvious: "We don't have a game industry index that goes back to 1929, so I don't have any data from what happens to the game industry in a market meltdown."

EA did lose a battle earlier this year when it tried to acquire smaller rival Take-Two Interactive in a bid that ultimately fizzled because the two companies couldn't see eye-to-eye on a price. After months of back-and-forth negotiation, Riccitiello said that the deal's potential relevance had passed.

"We wanted it to influence the holiday sales of their big franchise, Grand Theft Auto," he said. When it drew too close to the holiday season, that's when things really fell apart(though they'd been pretty messy all along).

The journalist interviewing Riccitiello onstage, Wall Street Journal editor Kevin Delaney, suggested that perhaps the EA chief could relate to Microsoft CEO Steve Ballmer, a veteran of a high-profile failed takeover bid himself.

Riccitiello laughed and replied, "Steve Ballmer's got his own challenges."