Take Two (TTWO) signs semi-exclusive with MLB; responds to Electronic Arts (ERTS)
Take-Two is bringin' a gun to a knife fight, if they think the MLB deal is enough to ward off ERTS
Video Game maker Take-Two (TTWO) is on the wires this morning with their first strategic move to oppose Electronic Art's (ERTS) knee-capping agreement to be the exclusive company for NFL-sponsored games.
As is often the case in this particular industry, the "enthusiast" web sites have a better grip on the story than do the major news distributors. In this case, the best article I've found comes from Gamespot.com. The author not only clarifies exactly what "exclusive" means in this case but also includes an interview with TTWO CEO Paul "We are NOT 'the Grand Theft Auto guys'" Eibler.
In the interview Eibler discusses TTWO's plan to issue baseball titles more frequently. More clearly logically, he is also planning expand the presence of baseball titles in the handheld platform market which has traditionally featured limited baseball games (not much demand, hard to fit baseball on a handheld). The sub-sector of handhelds is booming and the computing power in the devices has grown enough that they may be able to better support baseball.... making targeting those platforms a logical strategy.
The Meaning of "Exclusive" in this Deal and How (if at all) the deal Changes the Competitive Landscape
In assessing the deal beyond that, the first thing to note is that all exclusive deals are not created equal. In the Electronic Arts deal with the NFL exclusive meant, basically, "any football game for any platform" that currently exists. Games for cell-phones or the internet (100% online games, not online forums like X-Box live) are not included but are also not yet an economic factor of any sort.
The bottom line of the ERTS/ NFL deal was that anyone hoping to make a "pro-football-like" game was going to need to resort to fake teams and players. In other words, the deal killed any conceivable competing football games, as a practical matter.
In contrast, the Take-Two deal with MLB is a "long-term, third party exclusive licensing relationship". Translating that, it means that Sony (SNE), Microsoft (MSFT/ X-Box), Nintendo (ADR: NTDOY) or anyone else who has vertically integrated consoles and software is free to strike their own deal with MLB. (Take-Two offers that this little window is something they didn't close due to their "long-standing interest in encouraging a competitive market"... Latin for "MLB asked too much for the totally exclusive rights and we just wanted to tweak ERTS")
Is that good enough? It's impossible to criticize Take-Two fighting back with something, if only in terms of Street perception but even TTWO themselves must wonder if MLB is enough to anchor a sports catalogue. As an executive from Take-Two who shall remain nameless emailed to me (prior to today's deal):
"The (ERTS NFL exclusive) was a monster bone in the... [editor's note: "it caused we at Take-Two no small amount of discomfort"]. Maybe we can do well in NBA and MLB games but the NFL just dominates both in the sports video game world. I've done the back of the envelope and almost no matter what ERTS paid the NFL, and even assuming enormous royalties, that monopoly is going to make ERTS some very nice coin.
"As far as ESPN goes, I don't think it is that big of a deal in the marketplace: a great MLB game is going to sell just as well as a great ESPN/ MLB game. The only place the ESPN deal hurt was on the Street and that should be a short term blow"
The Winner of the MLB/ Take-Two Negotiation is... ERTS?
If you saw this news this morning it may seem odd to have the stock of Electronic Arts making a stronger move than Take-Two today.
Then again, maybe that move makes a ton of sense. The fact that console makers can still produce baseball titles to compete with Take-Two's future releases, just not with third parties, gives a shot of life to one of the oldest rumor chestnuts on the Street: "Microsoft will buy Electronic Arts to make the next gen X-Box the best supported console on earth by far!" (in this case, because baseball would presumably be a) very important to Microsoft and b) too difficult/much of a hassle for MSFT to do an MLB alone).
Microsoft shopping for some video game maker makes sense. After playing Hamlet on video games for years, Microsoft has made it clear that they are going to stick around for at least one more console round. For that you need a lotta good software. Though putting much of a premium on a $20B ERTS, which also has twice the p/e multiple of MSFT, would be a very serious undertaking for Gates' crew and it would certainly make the combined companies the dominant force in video games for the forseeable future.
A MSFT bid for ERTS would also come as an enormous relief to Ubisoft (UBI, traded on the Premier Marche) and other potential ERTS targets ("the hunter has become the hunted!").
Alas, Major League Baseball is a nice but wee franchise with about 10% (at best) the sales of the NFL games. Getting stuck with only a Take-Two produced MLB title isn't likely a big enough problem for Microsoft to make ERTS more attractive than they were last week. Given the additional fact that the only pro for selling out to Microsoft as far as ERTS is concerned at this point is that a deal would jam Take-Two yet again... a friendly buyout of Electronic Arts to Microsoft or anyone else seems a long shot (unless, you know, someone like Disney's (DIS) Eisner loses his mind and overpays or something).
The bottom-line opinions I come to after reviewing the news, for whatever they are worth (not advice) are as follows:
- I still don't see a Microsoft/ ERTS deal but this gives the "buzz" fresh life.
- Take-Two is doing the right stuff but not even they think this is enough to ensure success in sports titles.
- The between-console refresh video game industry hot-stove league is heating up. Anyone with a war chest (Activision (ATVI), TTWO, ERTS) will be looking to buy this year but none of them are entirely safe from getting a hostile bid themselves.
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