Electronic Arts (EA - Analyst Report) is facing a fresh lawsuit from National Collegiate Athletic Association (NCAA). NCAA has sued the video game maker, stating that EA did not agree to compensate NCAA, although it agreed to compensate the college athletes for the legal claims made by them.
Electronic Arts previously cited uncertainty about the future of the franchise due to the ongoing legal dispute between the NCAA and student players. Although Electronic Arts agreed to settle the claims of student players in Sep 2013 worth$40.0 million, NCAA was never a part of it.
Per the complaint filed on Nov. 4 in Fulton County, the settlement fees paid by Electronic Arts would have relieved the company from the contractual duty to indemnify NCAA for any liability, which includes attorney fees, arising from the NCAA-themed football and basketball video games.
The dispute between NCAA and students started when the latter asked for a share of NCAA revenues for the use of their images and likenesses. Student athletes also sued NCAA’s business partner EA for illegally using their likenesses in its popular NCAA Football video game.
Electronic Arts developed a NCAA-branded game each year and recently released NCAA Football 14 in Jul 2013. The practice is more or less similar to the games made under other popular banners such as the National Football League (NFL) and FIFA.
Electronic Arts made it obvious that there is growing risk faced by game developers in trying to profit from the likeness of the student athletes with that of video game characters. We believe that the cancellation of NCAA Football 2015 will have a significant effect on EA’s top-line over the long term.
Nevertheless, we believe that EA has a strong product portfolio that includes popular games such as Madden NFL and FIFA 14. We believe that the strong revenue contribution from these games will offset the loss of NCAA and the monetary compensation to be paid (if any) in the near term.
We believe that traditional gaming companies, such as EA and Activision (ATVI - Snapshot Report) have substantial growth opportunities due to the launch of new consoles by Microsoft (MSFT - Analyst Report) and Sony (SNE - Analyst Report) and strong spending expected in the holiday season.
We also believe that Electronic Arts continues to hold a competitive edge due to strong digital distribution and leadership position in the free-to-play games category.
However, a fragmented video gaming market and stiff competition are the major concerns.
Currently, EA has a Zacks Rank #3 (Hold).