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Analyst Questions EA Partners Deals
By Kris Graft
August 15, 2008
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"If they had their own properties, say like what Activision has, they wouldn't need these distribution deals."
With recent agreements signed with id Software, Grasshopper Manufacture and Epic Games, EA Partners will bring to market some very compelling software.
But are these deals good for Electronic Arts investors?
On Friday Signal Hill analyst Todd Greenwald asked, "...Why the need for more distribution deals?" He said the most recent deals with Grasshopper and Epic "speak to EA's marketing and publishing strengths, but doesn't say much for their development talent."
Greenwald, who has a "hold" rating on EA stock, said he is "concerned to see how much top-line growth is coming from low-margin distribution deals out of EA Partners."
EA Partners has published games from Harmonix (Rock Band) and Valve Software (The Orange Box), and will be publishing id Software's upcoming Rage (pictured) as well as new IP from Epic Games and Grasshopper Manufacture.
In a phone interview with Edge, Greenwald further questioned EA Partners' deals, from an investor's standpoint.
"[EA Partners' agreements] generate two things for EA: sales--so it helps the top-line--and cash. But the deals are low-margin.
"EA is trying to get its margins up to 20-25 percent, and these deals negatively impact that."
He said EA is willing to take on low-margin projects because publisher needs to flesh out its product pipeline.
He added, "[These agreements] make EA look more like a distributor than a developer of world-class videogame titles. ... It's indicative of the fact that they are not able to develop enough of their own titles to meet their revenue and earnings goals, that they need to fill in the gaps with these distribution deals.
"If they had their own properties, say like what Activision has, they wouldn't need these distribution deals. In the past they haven't, but for some reason now there's a big push.
"I can see that they want to leverage their marketing and distribution platform with other peoples' content, but from an investors' perspective, when you're dealing with operating margins and what not, these deals hurt those margins. It makes it a lot worse."
That "analysis" is just plain silly. It's one thing to criticize EA for the quality of their profits, but to say these deals with top video game brands are not good business doesn't hold water. EA has a huge distribution infrastructure they can leverage for many partners.
Talk about a short. I would call that one irresponsible if not borderline criminal for trying to talk down the stock.
How does the guy know the margin on these deals? but lets give him the benefit of the doubt (even though i would tend to believe that a pure distribution deal requires very little investment by EA thus making it a profitable deal).
Why would EA make those deals?
I dunno maybe they are trying to turnaround the company, and become a more respected name so that the HIGH MARGIN deals make themselves... after all lately EAP can do no wrong, right?.
"It's indicative of the fact that they are not able to develop enough of their own titles to meet their revenue and earnings goals" are you kidding? have you seen this fall/holiday lineup the most new IPs by far.
Further out it may be more hazy so lets also give him the benefit of the doubt, but herein lies the problem, if thats the case then hes answering his own question!!!
Q: Why would EA make those deals?
A: To fill the gaps, and make the company more profitable. (sounds reasonable)
ah yes i forgot the margins... i think these are more appropriate questions
Can the following games sell better than expected?
-Spore
-Madden (looking like it may surpass expectations)
-Warhammer
-DeadSpace
-MirrorsEdge
Can they make inroads on the Wii/casual/mobile
-Hasbro deal
-Skate it
-Spielberg project
Wow i think i should have stopped at irresponsible.