EA calls Take-Two's MLB deal "stupid money"

Analysts recommended keeping a close eye on Take-Two Interactive (TTWO) following yesterday's news that the Grand Theft Auto publisher had secured a licensing deal with the Major League Baseball Players Association.

The move shows Take-Two's willingness to stay in the sports-game market, just a week after competitor Electronic Arts clinched a 15-year contract with the sports network ESPN. "Take-Two appears confident in its ability to compete in the sports video game arena, and appears intent upon challenging Electronic Arts' leadership in the category," said Wedbush Morgan Securities analyst Michael Pachter in a memo released yesterday.

Pachter said the deal should be "mildly positive" for the company, although he cautioned that Take-Two will have to raise its game prices and sell about 2 million games in 2006 to reap the benefits. The deal with the MLBPA won't take effect until next year.

Electronic Arts (ERTS), on the other hand, was a bit cooler, even icy, in its reaction. Electronic Arts vice president of corporate communications Jeff Brown said the deal is one his company wouldn't have made. "As far as we're concerned, this looks like stupid money," he said. "They are paying an exclusive price for a nonexclusive agreement." But, Brown added, "[this] proves that there is still competition in sports games." A genre, Brown said, "we [at EA] take real serious."

Elaborating, Brown said, "We really made our name on sports and now even though it's only 40 percent of our business, it is still very, very important recurring income. It's the business we built the whole idea of franchise annuities on, [where] year after year a high-quality game will generate good income."

The Wedbush memo projects that Take-Two will spend between $205 and $220 million between 2006 and 2012 on baseball-related games, including the cost of the MLBPA deal, its pending purchase of Visual Concepts, and anticipated research-and-development costs. That's about $30 million a year, and about $15 per unit.

If that's the case, the company will need to rethink its price of $16 per game wholesale ($20 retail) if it hopes to get ahead. Bear Stearns analysts said today that Take-Two should be able to bank on the success of a brand like Grand Theft Auto, which has sold more than 35 million units around the world.

Both Wedbush and Bear Stearns said the news should mean good things for Take-Two's stock price. Bear Stearns gave TTWO an "outperform" rating yesterday, adding, "We believe that current multiples make the stock too compelling to ignore." Wedbush advised investors to consider Take-Two stock, adding that it expects the price to rise from its current position around $33.50 to about $40 by the end of the year.

Yesterday, the stock opened at $34.09 and hit a peak of $34.16 before closing at $33.45, down .98 percent. TTWO stock prices rose again today.

On the MLB deal, Boris Markovich of TerraNova Institutional said that it suggests more deal announcements are likely. "With the recent losses of the NFL and ESPN licenses to EA, the agreement with MLB Players indicates to us that [Take-Two] will continue to look for strategic licenses in the sports arena," he said. "We believe that both EA and Take-Two are talking to the NBA for continued licensing rights. In addition, we expect Take-Two to partner with an established sports media brand to offset the loss of the ESPN license."

How badly will the deal between Take-Two and the MLBPA deal hurt EA, overall? "It's a blow, but not a fatal one," Pachter told GameSpot.

Downplaying the deal, Brown contextualized, placing sports in EA's larger strategy. "Let's start with the fact that baseball is a very small part of our business," he said, adding that it is, "smaller than football, basketball, and soccer. It is also smaller than NASCAR, PGA Tour, and typically would be smaller than hockey. It is not a big piece of our business."

Pachter sees the immediate impact as not necessarily affecting Electronic Arts. "EA did around $60 million from baseball last year, and should do that much every year," he said. "Assuming that EA doesn't get cute and try to copublish with Sony and Microsoft, that share is up for grabs. Sony will get some, TTWO the rest."

EA offered no comment on that kind of speculation, but of note is Microsoft's acquisition of the 3DO engine for High Heat a couple of years ago. "So maybe they're planning something," said Pachter.

Mike Wallace of UBS also considers a deal with a first-party manufacturer a possibility. "The loss of MLB partially hurts ERTS's near-term ability to offer a comprehensive sports-game portfolio, though a deal with a hardware company is possible," he said in a recent memo.

Asked if the recent grab by Take-Two might spark EA to pursue exclusives with the NBA or NHL, Brown would only say, "We're in regular, ongoing conversations with both of those leagues." But he would not say to what ends.