EA, Zynga Settle Dispute

Electronic Arts (EA - Analyst Report) and Zynga (ZNGA - Snapshot Report) have reportedly dropped all charges against each other related to copyright violations and disputes on recruitment of employees. Both the companies also settled their lawsuits permanently in the U.S. District Court for the Northern District of California.

The lawsuits date back to Aug 2012 when EA alleged that some characteristics of Zynga’s popular The Ville had unmistakable similarities with the former’s The Sims Social, and pointed toward violation of the copyright act.

Zynga countersued EA in late 2012 accusing the latter of unlawfully preventing employees from shifting to Zynga.

We believe that the legal battle would have been detrimental to both the parties, as these kind of trials take a long time to yield any results. Thus, following the settlement, both the companies can now concentrate on the business they do best -- produce games.

It is noteworthy that Zynga has reduced its investments in The Ville as it failed to produce expected results. On the other hand, EA’s The Sims Social has gained traction among its users.

Moreover, with the lingering macroeconomic sluggishness taking a toll on the overall video game industry, both parties would rather concentrate on their core operations to improve their company’s fundamentals than get into a legal tussle.

From the broader perspective, soft video game industry performance, particularly due to soft retail sales amid an aging console system lifecycle and the cannibalizing effect of free-to-play games remain concerns in the near term for EA, a Zacks Rank #4 (Sell) stock.

Although we believe that the ongoing transition from the physical to the digital platform will ultimately benefit the video game industry (due to the cost effectiveness), low priced digital games have failed to offset the rapid decline of high-priced retail sales in recent times.

Zynga, a Zacks Rank #3 (Hold) stock, is well positioned to grow in the near term based on its innovative product pipeline and dominant position in the social and mobile gaming sector. The company’s expansion in the advertising space and renewals from companies such as McDonald’s (MCD - Analyst Report) and Honda (HMC - Analyst Report) are other positives.

However, we also note that barriers to entry are low in the social gaming market and this will attract new entrants, thereby further increasing competition for Zynga over the long term.