Electronic Arts plays hardball
Game publisher's purchase of a chunk of rival Ubisoft caps a year of aggressive business moves.
Sound familiar? Except this time it's not Microsoft or Oracle that's sparking the charges. It's a company whose specialties include James Bond games and "The Sims."
Electronic Arts, the world's leading publisher of video games, has riled the industry in recent months with a series of unusually aggressive business moves that could hamper rivals and close off competition in some areas of the computer game industry. The company recently bought a nearly 20 percent stake in competitor Ubisoft Entertainment, one of Europe's biggest game publishers, and it earlier bought exclusive rights to make NFL-licensed professional football games.
What's new:
A series of unusually aggressive business moves by Electronic Arts has riled the game industry in recent months.
Bottom line:
EA's recent maneuvers may be muscular, but they're not illegal, analysts say. What the game giant's moves will ultimately mean for the competition has yet to be seen.
On Monday, EA revealed its latest move: a 15-year licensing arrangement with sports giant ESPN, starting when the broadcaster's contract with rival game maker Sega runs out next year. EA said it will use the ESPN brand and network personalities on a variety of sports games.
Analysts and company executives say such moves, and earlier ones including last year's purchase of game studio Criterion, partly represent the company's attempt to position itself for an industry shakeout expected to accompany a new generation of game machines due to arrive late this year.
"It's downright predatory," said Wedbush Morgan Securities analyst Michael Pachter. "There's nothing illegal or unethical about what's EA's doing; it's just good business for them. They're making sure they have exclusive access to the best middleware out there and the best sports license out there, and they're precluding anyone else from taking out Ubisoft. Microsoft did the same kind of things to improve its position."
EA Vice President Jeff Brown said the company expects that soaring development costs for new consoles due soon from Sony, Microsoft and Nintendo will put at least a few game publishers out of business. EA would rather act now than pick over bones.
"The next couple of years are going to be marked by consolidation," he said. "It is our intention that EA be a consolidator."
Founded in 1982, Redwood City, Calif.-based Electronic Arts has ridden the video game boom of the past two decades to build an empire that dwarfs all competitors. The company has nearly 5,000 employees worldwide and saw revenue grow more than 19 percent--to $3.2 billion--for its 2004 fiscal year. The company's most recent regulatory filings showed it sitting on nearly $2.5 billion in cash. EA shares have appreciated 22 percent in the past year to give the company a market capitalization of $17.8 billion.
Such growth has given EA tremendous clout in the game industry--influence it most recently demonstrated with its purchase in late December of the stake in Ubisoft, best known for its popular series of games inspired by Tom Clancy novels.
Ubisoft CEO Yves Guillemot said in an interview that until EA convinces him otherwise, "I view this action on the part of EA as hostile."
David Cole, owner of research firm DFC Intelligence, said EA has basic financial incentives to want to take over one of its biggest competitors.
"Look at EA's market valuation now--you've got to support that, and that requires sustained, major growth," he said. "It's like the big dog you have to feed constantly."
But Cole said a full EA takeover of Ubisoft was unlikely given the attitude of Ubisoft executives and EA's tarnished reputation as an employer. "The idea of a hostile takeover is fairly unheard of in this business," he said. "A lot of what you acquire is development talent that can just walk out the door if they don't like the new boss."
EA's Brown said that once Dutch media baron John de Mol made it
clear that he planned to sell his stake in Ubisoft, EA executives decided they needed to make sure the shares didn't fall into hostile hands."Somebody was going to buy those shares, and we thought it was strategically important that we be the one," Brown said, adding that EA currently has no plans to expand its stake in Ubisoft. "We intend to act as good shareholders of that company," he said.
The Ubisoft deal is subject to review by U.S. antitrust authorities, but experts says there's negligible chance of interference in this or other EA deals.
Hillard Sterling, a partner and antitrust specialist at Chicago law firm Freeborn & Peters, said stable prices and ongoing competition argue against any regulatory interference in the video game market.
"Antitrust law isn't meant to perfect the marketplace--it's not enough to say the market would be better off without this conduct," Sterling said. "It would be very difficult to show an antitrust violation in a market like this where there are a number of competitors with new products emerging almost daily and prices are stable or decreasing."
Although the Ubisoft bid mainly rang bells in the business community, consumers complained about EA's business tactics early in December when the publisher announced it had signed an exclusive five-year licensing agreement with the National Football League. The move protects EA's cash-cow "Madden NFL" franchise, which received serious competition this year from "ESPN NFL," a joint project by game makers Sega and Take-Two Interactive Software.
"Sports games are EA's bread and butter," Cole said. "When they start seeing that being attacked, they're going to react very strongly."
Neither EA nor the NFL disclosed the cost of the deal, but Pachter said EA likely paid way too much--this time. In five years, though, when it's time to renew the contract and no other publisher remembers how to make a pro football game, EA is likely to get its payoff by negotiating a much cheaper deal, he said. "They're going to rape the NFL in five years--you've got to respect them for that," he said.
EA's Brown said the NFL came up with the idea of awarding an exclusive license for video games, a practice that has worked well for the league in other merchandising areas. Once it was clear there was only going to be one winner, EA adjusted its bid accordingly to protect the "Madden" franchise.
"I think it's amusing that some of the people who are saying this is bad for the industry were bidding aggressively for the exclusive license," Brown said.
Besides competitors, the NFL deal drew widespread criticism from consumers, including the 17,000 to date who have signed an online petition protesting the deal.
Steve Bell, the Lansing, Mich., computer technician who started the petition, said the quality of "Madden" games has slipped in recent years and is unlikely to improve now that EA has an effective monopoly on pro football games. "They have no competition, so why bother working hard to improve the game?" he said.
Brown said that's not the case, as much of EA's "Madden" revenue comes from repeat customers. "We don't compete with Sega so much as ourselves, and that dynamic doesn't change at all," he said. "Every season, 'Madden' has to get better, so the people who bought it last year will buy it again."
Further behind the scenes, EA last April bought up development
studio Criterion, a division of imaging giant Canon, for $48 million. While Criterion has several popular game franchises, including the racing series "Burnout," it's more significant as the owner of RenderWare, the most popular piece of "middleware" used to create video games. RenderWare tools were involved in the development of about one-fourth of all game titles released last year, according to company estimates.RenderWare is an important asset to Electronic Arts as the company prepares to make games for high-powered new consoles expected to arrive on the market late this year, said Brian O'Rourke, an analyst for research firm In-Stat. Game makers will have to do a lot more work to exploit the capabilities of the new machine, he said, and a uniform development environment will help keep costs under control.
"The consoles are becoming very expensive to develop for, and they are going to get more expensive," O'Rourke said. "Publishers need to be ready for this more expensive publishing environment, and that means doing whatever they can to be more efficient. These guys (EA) are thinking way, way in advance for the next generation."
The big question behind the scenes is whether EA will continue to license RenderWare to outside developers or keep the technology in-house, forcing competitors to adopt potentially expensive new technology in the midst of a difficult hardware transition.
David Doak, director of Free Radical Design, an independent developer best known for its "TimeSplitter" games, noted that some of EA's biggest competitors, including Take-Two's "Grand Theft Auto" series, rely on RenderWare.
"The middleware market, certainly for this generation of consoles, has been quite monopolized by RenderWare," Doak said. "For people not working with EA, that's going to come as quite a bit of a shock that EA now has control over those tools."
EA's Brown said the company plans to continue licensing RenderWare to other developers, and he characterized the middleware products as a minor part of a deal motivated mainly by the "Burnout" game franchise.
"Controlling RenderWare was just not a big part of the rationale for this agreement," he said. "We hope other developers continue to use RenderWare middleware, but whether or not they do has very little impact on how we measure the success of that acquisition."
Looking ahead, Wedbush Morgan Securities analyst Pachter expects EA to continue to make aggressive moves to expand, possibly into the burgeoning Asian market for online games, where EA has minimal presence now. The company is also in the midst of a bid to take over Swedish development studio Digital Illusions, which has worked on EA-published games such as the "Battlefield 1942" series.
Pachter expects EA to continue working on acquisitions and other business maneuvers to ensure the company remains No. 1 with the next generation of game machines. "They don't like it one little bit when anyone challenges them," he said. "They're trying to prove to people they're the big fish in the small pond."