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Electronic Arts Takeover Is Almost Inevitable... But by Whom?

by: Bruce Everiss December 10, 2007 | about stocks: CBS / GOOG / MSFT / NTDOY.PK / NWS / SNE / TWX    

Bruce Everiss

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The video games business is currently going through an unprecedented phase of consolidation. This phase is characterised by big global media companies investing very heavily to rapidly increase their presence, mainly by the aquisition of independent specialist game companies. They are doing this as a matter of survival as many traditional media areas such as TV are experiencing ever reducing revenues whilst gaming continues to expand rapidly as a business.

The recent acquisition of Activision by Vivendi is symptomatic of this phase and the size of this particular deal has focused attention on the whole consolidation process. Electronic Arts (ERTS) are the largest independent specialist game publisher in the world at $3 billion annual turnover, so they are the biggest prize. Who could be in the frame to buy them?

  • Nintendo (NTDOY.PK) The popularity of Nintendo platforms has raced ahead of the availability of games for them. Nintendo need all the game making capacity they can get their hands on. And, as the most profitable video gaming company ever, they have the money.
  • Microsoft (MSFT) In the war against Sony the most powerful weapon is the AAA platform exclusive. Electronic Arts could give Microsoft a huge stream of such exclusives, making the 360 a must have purchase and effectively handing Microsoft victory. And they can afford to do it.
  • Sony (SNE) are in a worse position than Microsoft regarding AAA platform exclusives. They would love to address this weakness, but how much money do they have to do so?
  • Google (GOOG) is a company with an increasingly wide portfolio of software products. And the huge gap in its portfolio is gaming. It could easily afford to buy EA and if they applied the possible synergies it would move the whole industry along a lot. Downloadable content, pay per play, server based gaming, episodic content and user generated content would all become mainstream realities either far sooner or to a far greater extent.
  • News Corporation (NWS) already own Myspace (recently opened up to developers as a gaming platform), IGN Entertainment (which includes GameSpy) and a small Danish game developer ITE. Obviously they are missing out and need to move quickly. They have a history of speculate to accumulate (Sky TV for instance) so a bold move, such as buying EA, is entirely possible.
  • National Amusements controls CBS (CBS) and Viacom (VIAB) (which owns MTV (who are investing $500 million in gaming), Xfire, Harmonix, GameTrailers and Neopets) and Midway Games. So they look set probably to grow their gaming organically and by smaller acquisitions. But don’t rule them completely out of the frame.
  • Warner Brothers (TWX) are very active at buying game industry assets , they have seen the writing on the wall. I am sure they would love to own EA.
  • Walt Disney (DIS) are yet another media giant who are already in gaming with Disney Interactive Studios and who need to rapidly increase their presence.
  • NBC Universal are in a slightly complicated position of being 20% owned by Vivendi (VIVEF.PK) who now own Activision (ATVI). However the other 80% is owned by General Electric (GE) who certainly have the money to buy EA. NBC have lots of good IP which they could make gaming use of, they are also heavily dependent on the lacklustre TV industry so need a growth area.

Of course there is a chance that EA remains independent, but the economic and commercial forces are so strongly in favour of them being taken over that it is just about inevitable. The main way to remain independent is to rapidly become a lot bigger. To merge with, say Ubisoft (UBI) and/or Konami (KNM) to make a global gaming giant. If the regulators would allow this.

The above businesses seem to be the ones with the most to gain from a purchase, but that does not preclude other suitors. As I keep saying, we live in interesting times, and it will be fascinating to see the outcome.

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This article has 5 comments:

  •  
    Dec 10 09:08 AM
    Why do you think ERTS would be willing to sell to a console maker or why would a console maker be willing to buy it? Why not just co-create certain franchises? THe reason I am skeptical is because historically the PS2 was the biggest revenue driver for software players and I'm betting the PS3 will be too as the cycle matures. Wii IMO is a novelty, a cheap and fun console that non-gamers will buy and younger kids but will eventually collect dust. Sales are juiced in recent years due to the cost but I think the installed base will outweigh the benefits over time because I really don't think the people that were early adopters are necessarily long-term gamers.

    In contrast I think people are just starting to see the power the Xbox 360 and PS3 will have, the first run of games isn't going to showcase the hardware just yet. But that goes back to why I question whether ERTS would be a buyout target for a console maker.

    If MSFT bought ERTS, wouldn't the value of ERTS be reduced immediately or be a major washout? Big titles by ERTS sell well across the Xbox and 360 and I would expect MSFT to hoard ERTS's titles and not put it out for PS3, conversely the same would probably happen if SNE bought ERTS. MSFT doesn't make Halo available for the PS3 so why would it make Madden available for PS3?

    So that might have some say, that's the key and why a console player would go after ERTS, they can crush the other players because they capture that content. That could be true but current valuation for ERTS is based on streams from all consoles and you'd be paying for that and then having to build out/expect that owning Madden and other franchises drives more than enough people to your console platform. It could work I guess and guys like MSFT have shown a lot of patience and deep pockets in trying to develop their home ent division but it seems like the value of these software players could be a better fit for pure media companies.

    I think THQI and TTWO are prob the better targets, THQI could be perfect for DIS with Buena Vista since they have licenses to Pixar movies and other children's titles.
    Reply
  •  
    Dec 10 10:09 AM
    A console maker will not pay for ERTS only to watch over half ERTS revenues disappear when they stop making games for other platforms (and don't forget the handheld market). This does not make dollars and cents.

    Second, I want to address the new bearish comments about Wii in the above comment. People who think the console is just a novelty have not done their research on other NTDOY consoles. Most recently, GameCube was still selling well at $99 at the end of the last cycle. Hardcore gamers who love their XBox or PS3, and who also do not like NTDOY internal games (e.g., Super Mario, Zelda, etc.), cannot see the big picture nor put themselves in others' shoes. So, they think Wii is a fad. The sales numbers and demand speaks for itself. The console has been out for 2 holiday seasons now and there is plenty of opportunity for word of mouth to be negative IF the Wii were truly not popular. Again, such is not the case, and those taking that bet have and will continue to be wrong. Do your research on past cycles ...
    Reply
  •  
    Dec 10 11:19 AM
    Nintendo is a great company and has done some innovative things like the DS but my comment was mainly towards those who say the Xbox 360 and PS3 are "failures" vis a vis the Wii. I have a pretty good grasp of console history, the PS2 was heavily outsold by the Gamecube and Xbox during the last console cycle and we know where it ended up.

    Gamecube and Xboxwere cranking out over 600k units per month in the beg of the last game cycle, and PS2 was around 400k and even dropped to just 200k but eventually was firing off close to 3MM units per month by xmas time in 2002, basically the middle of a recession.

    Right now, every analyst loves the Wii and is taking the first year of sales and expecting these monthly sales to go on forever. There are not that many skeptics of the Wii and I think it's a "real system" but also that the inital results overstate its long-term run rate while conversely the slow sales rate of the PS3 are not reflective of where it will be as the cycle matures.

    The more advanced consoles require more time to adopt because the first cut on games usually doesn't showcase the power of those consoles. Now with Halo out and with GTA on the horizon in spring, I think the new games are really going to showcase what those platforms can do which will drive a lot more buyers towards those consoles.
    Reply
  •  
    Dec 10 08:09 PM
    Sorry for the intrusion, but I would like to say both have valid points. As of now, I would agree that Wii is still a novelty as most games that utilize the motion controls are just simple shaking. This will grow old over time.

    But I would also like to point out just like PS3 and XBox 360, where it takes time for the real power of the system to be recognized, it is also the same case for the Wii. It will take time for the developers to figure out how to fully integrate Wii's unique control scheme with the games and create something that would define the system.

    My position overall is much more bullish on the Wii. Just like how GTA and Final Fantasy will be showcasing the power of XBox 360 and PS3, House of Dead 2 & 3 from SEGA and Wii Fit would show new potential for the Wii.
    Reply
  •  
    Dec 19 10:03 AM
    ERTS will definitely get bought! Here's a preposterous list of potential buyers, half of whom make no sense at all!

    I'm embarrassed I even read this. This site just gets worse and worse.
    Reply
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