EA pays $48 million for Criterion

With R&D costs climbing, the money spent to purchase the Renderware shop seems a bargain.

According to a 10-Q form filed with the SEC, Electronic Arts spent somewhere in the range of $48 million to buy Criterion Studios, creator of sought-after middleware technology Renderware. According to Criterion, the technology has been used in about 500 games, including the Grand Theft Auto franchise, NBA Ballers, kill.switch, and upcoming titles The Movies and Burnout 3.

While that level of spending qualifies for much more than chump change, when put in perspective, the cash outlay seems a bargain. EA's most recent quarterly report says that during the three months ending June 30, 2004, it spent over 30 percent of its net revenue, or $130.64 million, on research and development expenses. That is a whopping 43 percent more than it spent on R&D the previous year--and it makes the purchase price of Criterion Software and the Renderware toolset remarkably easy to justify.

Schwab Soundview Capital Markets analyst Colin Sebastian concurs that "in dollar terms it's not a huge acquisition for EA." However, Sebastian sees a more complex issue flowing from the acquisition. "It will be interesting to see how other publishers react to EA owning Renderware," he added. The rub is that now the licensing and royalty fees to use the toolset will go directly to their fiercest competitor's coffers. Publishers who can expect to start writing checks to Electronic Arts include past Renderware licensors Activision, Konami, Sony Online Entertainment, THQ, Rockstar, and Ubisoft.

Bottom line: EA walks away from the negotiating table a winner. For a relatively modest outlay of cash, EA puts itself on the receiving end of both licensing and royalty fees and, in addition, picks up an extremely valuable toolset that will reduce costs and facilitate internal development within its own organization. "This should help to boost the volume of EA's output of new titles in the next cycle," says Sebastian.

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