Electronic Arts plays hardball

Game publisher's purchase of a chunk of rival Ubisoft caps a year of aggressive business moves.

A huge software maker uses its dominant market position and mammoth cash reserves to lock out some competitors and buy up others.

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.

More stories on Electronic Arts

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.

Credit: Electronic Arts
Major EA moneymakers include "Madden NFL."

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

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