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Analyst Blog

Video developer and publisher Electronic Arts (EA - Analyst Report) recently announced the upcoming sequel of the Dragon Age franchise. Developed by Bioware, the new game called Dragon Age 3: Inquisition is expected to release in late 2013.

Dragon Ageis one of the most popular franchises of EA. The company has sold more than 8 million copies since its release of Dragon Age: Origins in 2009. EA released the second part of the game Dragon Age II in 2011. Both the titles were followed by numerous downloadable contents (“DLCs”) and expansion packs that kept the gamers captivated.

We believe that the much needed sequel will boost the game’s popularity going forward. The new storyline of the upcoming Role-Playing Game (“RPG”) will be powered by DICE’s (another EA studio) Frostbite 2 technology, which supported games such as Battlefield 3 and Medal of Honor: Warfighter. This is expected to be the additional attraction of the game in our view.

The video game industry is going through a lean phase for some time. U.S. retail sales declined for the ninth consecutive month in August 2012, primarily due to the ongoing transition towards mobile and free-to-play gaming coupled with lack of new physical game releases.

We believe that new games such as the upcoming Dragon Age sequel are needed to boost U.S. retail sales going forward. Superior graphical quality due to technological advancement, intriguing storytelling, new plots and effective packaging are essential to drive a recovery in the retail market, in our view.

We believe that EA is well positioned to benefit from this pent up demand for new packaged games going forward. The company’s strong product pipeline along with regular digital updates will boost top-line growth over the long term.

However, EA will face significant competition from its close competitor Activision Blizzard (ATVI - Snapshot Report). Moreover, an aging console platform and improving monetization of mobile games remain concerns. We believe that EA’sgrowing Play4Free game portfolio will cannibalize packaged goods sales going forward.

This compels us to remain Neutral on the stock over the long term. Currently, EA has a Zacks #3 Rank, which implies a Hold rating in the near term.

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