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[sonicfan]

I see that EA shares are up over 3 bucks today, after being up big yesterday on a JP Morgan upgrade of the whole group.

Here are a few highlights from Wall Street on the NFL deal ......

From Citigroup:


EA’s Strategy & Contract Details:

Last night’s announcement is a significant positive for the EA Sports franchise from the perspective of market share and pricing power in the next generation, as well as olidifyingthe company’s relationship with an important strategic partner. In addition, it also highlights the willingness of major sports leagues to reach exclusive agreements at terms acceptable to Electronic Arts’ management. (Exclusives are not unprecedented; EA already has a few in place, as with PGA golf, NASCAR racing and FIFA soccer.) We note that game licenses are typically for 5%-15% of revenues. No specific information is available regarding the terms of the new NFL contract, but we expect the deal is likely priced towards the higher end of the 5%-15% range or possible above that level and also likely includes an upfront guarantee as well as a minimum requirement. That being said, we demonstrate here how the profit impact of the new deal is still expected to be positive for EA.


1. Revenue should improve with higher unit sales in the absence of competition and
improved pricing. Previously, we had expected that Madden NFL 2006 might
launch at $40 (retail price) but now we forecast a $50 launch price with a $60
special edition version. In the next generation, we think it is likely that Madden
NFL game pricing could come in at $60, versus $50 expected previously.
2. We show a sensitivity analysis here (on a per unit basis) for EA’s revenue minus
IP license cost related to different potential NFL contract terms. This chart
demonstrates how higher pricing can more than compensate for a significantly
higher percentage of revenue licensing fee. Specifically, a 25% licensing fee on a
higher price point still results in greater income to EA than a 10% licensing fee on a
retail price point that is $10 lower. (We expect that the fee or NFL is likely below
that 25% level.)

From Pipper Jaffery:

TERMS OF THE DEAL - $90-$100M PAYMENT?: We believe Electronic Arts made a sizable up-front payment (advance on royalty) to the NFL and NFL Players Association to garner exclusivity - perhaps as much as $90-$100 million (roughly 2/5 of the contract). In addition, it's a certainty that EA granted the NFL more attractive royalty rates on sales of licensed products. We estimate the royalty increased from 7% to 12% of gross sales. While the deal is modestly positive for EA, it's disappointing for the consumer, who now has only one choice for a football product - and likely at higher price point (we now estimate pricing at $55/unit next year).

From ThinkEquity Partners:

The Cost of Content Just Went Up (Again) - The potential industry implications are widespread and the deal increases the likelihood of the signing of additional sports leagues to exclusivity contracts (by EA or others) or a potential industry-wide bidding war for similar exclusivity deals. We wouldn't be surprised if David Stern, Bud Selig and Gary Bettman were feverishly working the phones last night on behalf of their respective properties. Given EA's comparatively large cash position and historical dominance in the sports genre, it is likely in the driver's seat for any potential follow on opportunities from our perspective and, apparently, willing to do the right deal to ensure exclusivity.

Citi report

Piper report

ThinkEquity report


I'm sure all your loyal Madden fans are so happy they will have the privilege of paying $60 for your games now....

 

[PhatSaqs]

While the deal is modestly positive for EA, it's disappointing for the consumer

All that needs to be said.

 

[Deku Tree]

TERMS OF THE DEAL - $90-$100M PAYMENT?: We believe Electronic Arts made a sizable up-front payment (advance on royalty) to the NFL and NFL Players Association to garner exclusivity - perhaps as much as $90-$100 million (roughly 2/5 of the contract). In addition, it's a certainty that EA granted the NFL more attractive royalty rates on sales of licensed products. We estimate the royalty increased from 7% to 12% of gross sales. While the deal is modestly positive for EA, it's disappointing for the consumer, who now has only one choice for a football product - and likely at higher price point (we now estimate pricing at $55/unit next year).

So all it costs is $250 mil + an extra 6% royalty rate in order to kill competition? Dissapointing..

 

[cja]

Wedbush Morgan and Pacific Crest have downgraded EA, they feel ERTS has overpaid for a license with limited upside.

Good to see you back with your pdfs sonicfan

 

[StoOgE]

Who cares what wallstreet likes? We are about to bend over and take it.

 

[cja]

Wall Street liking it confirms you're going to bend over and take it!

 

[sonicfan]

Yeah, I saw the downgrades, but the market doesn't seem to care, at least today. JPM upgraded the group yesterday as a play on the next cycle, I was planning on buying some EA myself awile back when it was at $45, of course, I sat and did nothing......

I really see EA now, especially if they snare the other leagues, as almost didctating to MSFT/Sony how the networks will be set up for their next systems.

EA must feel like Mel Brooks in History of the world Part 1, "It's great to be king!"

 

[sonicfan]

Here's what Wedbush said:

The exclusive arrangement did not come without cost. We estimate that in the
past, the NFL received a relatively small royalty (approximately 1.5% of
wholesale sales) and the players' association received a larger royalty
(approximately 5% of sales). We estimate that in order to accept the exclusive
terms of the EA offer, the NFL required a payment of at least 5% of sales and
the players' association required payment of at least 10% of sales, with
substantial minimum guarantees and up front cash payments. In total, we
estimate the NFL and the players' association earned approximately $15 million
annually over the past four years (with EA paying around $12 million), and we
expect the EA exclusive license to generate between $30 - 35 million annually.

It is important to note that payments from EA represent the lion's share of
royalties paid to the NFL over the last five years. According to NPD Funworld
TRSTS data, EA's dollar share of NFL-licensed games increased from 49% in 2000
to 82% in 2003 and has remained at 82% so far in 2004. We think that for the
next five years, an exclusive arrangement with EA will benefit both sides,
although we are skeptical that the NFL will have any bargaining leverage in
2010. In our view, there will likely be few bidders willing to compete against
EA, particularly given the fact that EA will at that time be the only company
that has published a football simulation game over the prior five year period.
We think that the NFL and the players' association were extremely shortsighted
in granting a five-year exclusive license, given the complexity of building a
football simulation game. Such games require complex player models, and a
start-up game could cost as much as $20 million.

We think that EA, the NFL, and the players' association will profit from an
exclusive arrangement, and think that consumers will bear additional cost with
no real choice. It is our belief that competition drives innovation, and we are
concerned that without competition from Sega/Take-Two, Microsoft, Sony, Atari
and Midway, EA will have less incentive to continually improve its franchise.
We also believe that competition drives pricing lower, and in the absence of
future competition, we expect EA to charge premium pricing for its NFL titles so
long as the market will bear it. As EA's market share has grown, so has the
price of NFL-based games (until this year). We note that consumers paid an
average of over $38.91 per NFL game (including GBA games and earlier versions)
in 2000 and note that the average price increased to $40.94 in 2003, only to
drop to $36.82 in 2004 once EA faced price competition from the ESPN game. When
the ESPN game is no longer available, we expect average prices to migrate to
new highs.

Our sensitivity analysis assumes that EA will capture an additional 2 million
units of NFL game sales in FY:06, resulting in an $80 million revenue increase
(assuming a $40/unit wholesale price) accompanied by an increase of $25 million
in cost of sales and marketing, and an incremental $30 million in operating
expenses (attributable to the exclusive agreements), resulting in additional
earnings of $0.08/share for FY:06. We assume that the upside from the exclusive
arrangement is offset by lower overall sales of EA's other titles compared to
our prior estimates, and we have adjusted our estimates for these other titles
to reflect no net change for FY:06.

Although we think it likely that other sports leagues (NBA, MLB, NHL) and their
respective players' associations may attempt to follow the NFL's lead, we do not
expect many exclusive agreements with one video game publisher instead of the
current arrangements allowing games to be published by multiple publishers. We
believe that EA made a statement with its NFL arrangement, but note that since
it is the leading publisher of sports games, it is most likely successfully bid
on any exclusive agreements that may become available. EA currently already has
exclusive agreements with FIFA, NASCAR, and the PGA.

 

[sonicfan]

EA shares finished at $60.61, up $3.04 5.28%. Stock now at all time high.

I now feel even more stupid for buying SEGA shares instead of EA back in 1998.

What did old Gordon Geko say???

 

[kaching]

All that needs to be said.

Not disappointing for all consumers. Those who already preferred Madden aren't going to be disappointed. And those of us who never took any interest in licensed football videogames to begin with have reason to be happy in the hope this will free up dev resources to pursue other types of games at the companies who failed to make a successful bid.

 

[pilonv1]

Not disappointing for all consumers. Those who already preferred Madden aren't going to be disappointed.

So they should be happy with EA jacking up the price? Or charging for online play?

 

[PhatSaqs]

Ignore kaching. He has an obsession with responding to my posts regardless of whether he makes sense or not.

 

[Mrbob]

This is obviously a case of EA fearing their NFL empire is about to crumble. This year ESPN took a HUGE CHUNK of Madden sales. EA hasn't been challenged since Gameday on PSOne. So what they did is protect their cash cow empire from crashing and burning. Can't say I blame them for trying to protect their biggest asset.

Of course Wall Street loves this deal.

Higher game prices = more profit

 

[Drensch]

It didn't make a whole lot of sense to me. EA isn't gonna increase their market share as far as football a whole lot imo. Sure, it nips Sega in the bud, but I don't think it's worth the cash.

 

[AstroLad]

It didn't make a whole lot of sense to me. EA isn't gonna increase their market share as far as football a whole lot imo. Sure, it nips Sega in the bud, but I don't think it's worth the cash.

Agreed. Either EA perceived Sega as a way bigger threat than any of us (well, maybe except for Konex) did, or EA just blew a whole lot of money for very little benefit in return.

 

[Ecrofirt]

EA can fucking blow me.

I'd love to see Sega come out with a football game next year that doesn't use the NFL, and still take a big chunk out of EA's profits.

Motherfuckers.

 

[Ryoni]

I wonder why Microsoft didn't bid like 500 million dollar for the exclusive licence and made it xbox only. I mean they paid like 600 for rare. This would make more sense then that.

 

[Unison]

I guess every big release next gen is going to be $60. That solves the issue of higher development costs. :-/


Suddenly, $40 DS games don't seem so bad.

 

[StoOgE]

I wonder why Microsoft didn't bid like 500 million dollar for the exclusive licence and made it xbox only. I mean they paid like 600 for rare. This would make more sense then that.

That would have been hilarious.

 

[explodet]

That would have been hilarious.

No kidding!
And if you thought people are yelling monopoly now, if it was Microsoft it would have been ten times worse. :lol

 

[kaching]

So they should be happy with EA jacking up the price? Or charging for online play?

Have those things been announced and confirmed by EA, or is that just speculation on your/Wall Street's part? Should that occur, I'm sure Madden fans would be none too happy, but that still doesn't mean all consumers are getting shafted by this deal. Some could even benefit.

Ignore kaching. He has an obsession with responding to my posts regardless of whether he makes sense or not.

An obsession, is it? I'll have to make it a point to live up to the role you've assigned me :lol Sounds more like you're making me scapegoat for the fact that you shrink away from any kind of serious debate.

 

[mashoutposse]

This is perfect timing; they will be the only game in town for the next gen and can make their PS3/XBOX2 tidal wave-like splash without worry of being upstaged. Imagine the reception a PS3-powered Madden will receive with no competition to compare it to... This whole episode will be forgotten.

 

[LakeEarth]

Kinda funny. If ESPN didn't do so well, this might not of happened. Basically 1 year of success causes EA to just slap them down.

 

[mashoutposse]

I think the fact that the competition was at $19.99 was worse than the actual sales numbers.