Electronic Arts (EA - Analyst Report) recently announced that it is canceling its 2015 college football game. The game developer cited uncertainty about the future of the franchise due to the ongoing legal dispute between the National Collegiate Athletic Association (NCAA) and student players.
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. Reportedly, EA and student athletes have entered into a settlement agreement, which is subject to court approval.
Traditionally, EA develops 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 and FIFA.
EA’s move suggests the 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 significant effect on EA’s top-line over the long term.
However, EA has a strong product pipeline that includes the upcoming Battlefield 4. Moreover, the recently released Madden NFL and FIFA 14 are also doing well. We believe that the strong revenue contribution from these games will offset the loss of NCAA in the near term.
We believe that traditional gaming companies, such as EA and Activision (ATVI) have substantial growth opportunities due to the upcoming launch of new consoles by Microsoft (MSFT - Analyst Report) and Sony (SNE - Analyst Report) and strong spending expected in the holiday season.
However, EA continues to hold a competitive edge due to strong digital distribution and leadership position in free-to-play games category.
Currently, EA has a Zacks Rank #3 (Hold).