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Electronic Arts deal with NFL raises questions
By Cody Willard 12/16/2004
The deal between Electronic Arts (ERTS, news, msgs) and the NFL underscores the importance of the video game world.
The Street and the sell-siders obviously love this deal, which gives Electronic Arts exclusive rights to use the players, teams and stadiums in its games, as the company will now have a monopoly selling NFL-themed games. Piper Jaffray's analyst says the deal could add 6 cents to earnings in 2006.
But I have no idea how we're supposed to analyze the impact that the deal might or might not make on Electronic Arts' earnings over the next five years; the company didn't release any financial details of the exclusive deal. Did the company overpay for it? Will it be able to recoup that cost? Such an exclusive arrangement certainly didn't come cheap.
The bear case on Electronic Arts (away from the standard "it's a bubble stock trading at six times sales!" argument) has been that the company is facing pricing pressure from ESPN's NFL and NBA games as well as from other game makers' competing games, which have in some cases been priced at less than half Electronic Arts' competing products.
The shorts were especially focused on the NFL franchise at Electronic Arts, which is known as "the Madden franchise." Madden games have been typically priced at $50 a pop, while ESPN's NFL 2k5 is priced at about $20. As is often the case, the bear case missed the point that this is a huge secular growth segment and not a zero-sum scenario.
Beneath the glow, questions linger
The industry remains in a secular growth cycle, and Electronic Arts is one of the finest companies out there, and it will probably continue to grow for years to come. But the real issue here is that I just don't think paying for exclusive rights to the NFL was necessary, much less a positive thing. Rather than a so-called pricing war undermining these companies' growth, I think some elasticity was kicking in, as increased sales volume was more than offsetting the declines in prices. But now Electronic Arts has paid some undisclosed amount of money for these exclusive rights, and to my mind this has only raised more questions.
They can try to keep competition out of the market, but will people who ponied up $20 for the ESPN game pay 2 1/2 times that to buy the Madden game next year?
Maybe Electronic Arts' NFL game will see sales explode as the new game consoles from Sony and Microsoft (MSFT, news, msgs) are rolled out over the next couple of years. But wouldn't that be true whether they have this exclusive deal or not?
Maybe Electronic Arts got the deal on the cheap. But does any price paid make Electronic Arts better off than it was Monday morning? I'm just less than convinced.
I bought some in-the-money January calls off Cramer's column on Dec. 13, and I sold about half of those Dec. 15 and am now playing with the house's money. I'll let my remaining calls ride for a bit.
The NFL, the NBA and all the other sports leagues build their brands and engender all kinds of loyalty with these games. For example, I was the undefeated champion of the Blinn basketball dormitory Tecmo Super Bowl leagues, and in achieving that "feat" I ended up memorizing the entire lineup of every team of the 1990 NFL season. I don't watch sports much at all anymore, but to this day, any time I hear Ricky Proehl's name, I recall that he was a wide receiver for the Phoenix Cardinals back in 1990.
Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney. He also produces a premium product for TheStreet.com called The Telecom Connection and is the founder of Teleconomics.com. At time of publication, the firm in which Willard is a partner was long Electronic Arts calls, although positions can change at any time and without notice. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback and invites you to send it to cwillard@thestreet.com. Click here to read our conflicts and disclosure policy.
© 2004 TheStreet.com, All Rights Reserved.
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