On Sept 5, 2005 EA said in a press release, “These promotions and changes also mark the end of an era for EA, with the departures of Studio President Don Mattrick and Executive Vice President Bruce McMillan from our executive team…”

Previous to that year, EA had an ever growing stock price. Since then though, the stock’s performance might politely be described as flat.

In contrast, Activision, one of EA’s main competitors, has seen their stock continue to rise over the same period.

Whether it was truly the departure of the Mattrick/McMillan power duo or something else, clearly something changed at EA and that change has been reflected in the financial performance of the company.

The company’s market cap in the past put it out of acquisition range by other entertainment companies. Given the beating the stock price has taken, it’s a more attractive target financially, but the question of “fit” with any suitor has to be addressed.

A Disney acquisition of EA would have a complicated integration process, with significant overlap on the sales and marketing fronts, as well as possible significant cultural differences.  Part of EA’s value is it’s ability to produce games and another part is it’s ability to get those games to customers through retail.

Disney already has the ability to get products to retail so the main value in the acquisition would be EA’s licenses and its game production capacity.

Looking at EA’s game production capacity, during the growth years, it was a production machine cranking out one top selling game after another, doing especially well with IP it licensed from others or purchased through acquisition of other game studios.

Could it be that EA’s flat performance over the past few years was due to an increased focus on creating original IP instead of cranking out more licensed games?

If so, matching the EA production talent and existing licenses with Disney/Pixar entertainment powerhouse could be a big win for both groups.

It would seemingly pave the way for more games based on Disney/Pixar/ABC/ESPN properties while simultaneously offering a more simple path for EA’s key IP such at “The Sims” to migrate to film/TV and other linear media.

EA knows game production. Disney and companies knows how to reliably create new IP.

Maybe it’s time to start a new era in entertainment with the combination of the two great companies.

I know Jeff, he’s a good guy and a master at public communication. He also makes some very clear comments (if he was quoted properly) about EA’s mindset about Take Two.

“Take-Two is just not a strategic priority for EA.”

“We think [Take Two’s studios are] really great teams, that they’re creative people, and we would very much like to give them a home and access to our publishing capability, but we just don’t need it.”

Sounds like EA is moving on to “other opportunities”, especially with his comment about all the new IP in development.

Still, developing new successful IP is much harder than simply buying currently successful IP.

Also, there’s still the question of how EA is going to quickly grow revenues another billion or two billion dollars. (Maxis & Spore to the rescue?)

If the Take Two deal does fall through, there should be some interesting acquisition news in the next month or two.

Everyone knows that EA always has multiple irons in the fire right?

It’s still a numbers game.

Literally.

EA needs to grow. It’s stock has been stalled for the past few years (forget for a minute that company execs have heavy stock option components to their compensation).

EA wants to acquire Take Two’s revenue (about $1bn) and have that revenue show up in EA finanicals.

Since EA has a Forward P/E of approx 30 while Take Two’s is approx 16, EA wins big time with an extra 900mm to 1bn in revenue run through it’s financial ratios.

Is Take Two worth 2 billion? Sure, more too, esp given EA’s ratios.

If EA can capture the 1 billion in revenue this year and get the huge upswing in it’s stock price, I think it’s worth more than 2 billion.

Even if Take Two’s revenues drop in 1/2 after this year, EA will be paid back in 3 years rather than 2.

The other hidden factors to consider. First are the gains from acquiring the IP from Take Two.

EA does amazingly well at exploiting IP it acquires - at least for the first few years - so there is more revenue to be had, even when sales of GTA4 drop off.

Second is the shift in sports games landscape once EA Sports and 2k Sports are brought together under one roof.

$2bn is looking like a bargin for EA.

I think Take Two knows it.

If EA doesn’t get the additional $1bn in revenue from acquiring Take Two…one wonders where it will come from…

Activision is too big now…..anyone else thinking “THQ”?

Check out the FAQ at : Spore FAQ

Fansite Kit at: Spore Fansite Kit

The trickier part is the current debate about the key talent from Take-Two and will they continue to work for EA after the deal is done.

The answer to this is actually quite simple.

EA has the resources to make it very compelling for this talent to stay for the term of an employment contact that comes with the acquisition. Whether the term of the contract is 2, 3 or 4 years, these post acquisition contracts really cover the time it takes to develop only 1 or at most 2 more games.

History shows this to be true with every major acquisition they’ve made over the years (exceptions are the situations which called for the immediate relocation of all staff to another state, country or painful commuting distance away).

The fact that the major talent stays after the acquisition makes for compelling headlines and a short term win. Good for the stock price too. Good for the public relations stories where every game company wants to be seen as “talent friendly”.

When you look at the statistics for which talent stays after the end of their initial employment contract, the story is less compelling. Unfortunately, history shows a trail of broken and shut down studios, including the departure of major talent from each. This kind of information is rarely examined in detail with each new acquisition. Beyond being hard to quantify, it’s old news.

Sometimes the talent departed because the “lottery win” of being acquired by EA gave them financial freedom to seek other opportunities or “spend more time with their family”.

Other times, the departures came as a result of great talent getting fed up with “one size fits all” development processes and stock price driven mandates that come with working for a large public company or because the new “big company” culture and the resident politicos fighting turf wars all combine to actually destroy the very elements of the studio, talent and product which made them a target of acquisition in the first place.

So the real question is “Can EA retain the top talent beyond the term of the initial employment contract?”.

The answer to that question? I don’t think it matters.

Whether the top talent stays beyond one more game only matters if the costs of the deal and the justifications for doing it rely on benefits that must happen over 2, 3 or 4 years.

EA is smart enough to know this and structure their deal accordingly. Because so many variables regarding top talent are beyond their control, I would even go so far as to estimate that EA probably wouldn’t make the deal if they had to rely on the top talent staying past the initial employment contract.

So, oddly enough, the question of whether the top talent stays is moot.

If EA wants them, they’ll give them a deal (money, creative freedom, undocumented promises, etc) that simply can’t be matched by anyone else and the top talent will stay, at least for a while.

If EA doesn’t want them or doesn’t really care about them, they’ll be gone because other companies will woo them.

That’s the benefit EA has due to it’s size and financial assets.

So, let’s just get on with being clear whether the acquisition is in the best financial interests of EA’s and Take-Two’s shareholders and do the deal.

BTW - Does anyone out there think EA did their homework on all the scenarios on how this will play out? I would guess they pretty much already knew which talent would come on board before they made the offer and barring any “crazy out of the blue” offers by others, had a great idea on what they would need to acquire Take-Two.

The ones that I liked most:

Mario Galaxy, BioShock, Mass Effect, Drawn To Life, Pain (PS3 download), the free Hex game (360 download).

Loved finishing Mario Galaxy, but haven’t gone back yet like on Mario 64 to get all the stars, find all the secrets etc. The creepiness and world created in BioShock is lots of fun. I esp like how they tell the story with tape recordings. It doesn’t slow the action and I can listen or not.

A special note about “Drawn to Life”, can’t wait for the sequel. There seems to be so much opportunity with the basic concept just waiting to be played with.

Dave Perry, long standing industry vet (Shiny Entertainment) and super creative mind, has created “Project Top Secret” to build the “first professional community video game in history”. Good stuff!

Check in with is project at “videogameteam.com“.

Who would have figured the right handed joystick skills I developed on Mario64 could translate so easily to my left hand on the Wii?

In all seriousness, I’m finding the game enjoyable, interesting, not particularly challenging (yet), but very reminiscent of the experience I enjoyed while playing Mario64.

As a game developer, the things I find most interesting in the game design are:

1. How tossing in falling “star bits” can instantly liven up the game experience in areas where the game play might get a bit slow

2. The ability to have a second player collect star bits, stun enemies and in general help out the main player. Perfect way for the younger ones to get some great play time with an older brother or mom and dad.

3. How the new controller for the Wii takes the classic experience a step forward and then how “going upside down” takes it even a further step forward. There have been games that have done similar “upside down tricks” before, but in Mario Galaxy, it just seems natural. Bet it was fun for the designers to be thinking in all the directions 3D can provide.

4. Fun, light and bright levels that don’t draw on violence, nightmarish fears or shock to involve a player. The bee levels and the bubble level are great examples of content that feels fresh even though similar things have been done before.

I want to make a special note about the “upside down play” aspect of the game. It’s long been said that we “create worlds” when we make video games. Most worlds so far though are digital mockups of worlds fairly similar to our real world, especially in terms of things like gravity and time. The “Matrix” broke the barrier to freeing us from “regular time” by using “bullet time” and games followed suit. Mario helps break the barrier of “normal gravity” of platformers by introducing their new “relative gravity” concept. Very cool. Imagine what the future holds when more of these traditional type of constraints are broken….

Their data shows that less than 1 in 10 gamers buy a game after they rent it and then those people only buy 1 game for every 10 they rent.

Some might say this is a reason enough to shut down game renting or even make companies who rent games pay more to game publishers for each rental. What if instead, we turned the situation around and asked game publishers(and developers) to build better games?

The reasons sited for “not” buying included the games being too short and the quality being too low.

Imagine that…gamers are tired of paying full price for games they don’t think are worth the money. Then again, maybe they only have $50 to spend and would rather rent 10 games and play them a few days each instead of buying one game they can keep (and beat) forever?

As the installed base of game machines continues to grow in the US and worldwide, it seems logical that there will be more console players with less money they want to devote to spending on games.

The economic model of online games like “World of Warcraft” solves the rent vs buy issues by having the triple win of great content, a huge amount of content (can’t finish it in a weekend) and only being available with a monthly subscription or prepaid game card. With all the money they are making, it only makes sense that some of those features and benefits will start migrating their way to console products as well.

Link to the article at PC World.

Apparently it also sold more units than the next 9 top selling titles put together (more in this article from GamesIndustry.biz).

The next bit of interesting data from the same charts is how many of the top 10 titles were on each platform.

The tally:

6 of the top 10 selling games were on the DS

2 of the top 10 selling games were on the Wii

1 of the top 10 selling games was on the 360

1 of the top 10 selling games was on the PS2

Another sign of the strength of hand helds for sure. I love it when companies know their stuff and just execute no matter what the conventional industry thinking is. Go Nintendo!