Electronic Arts Inc. (ERTS) must defend a $400 million contract-interference lawsuit that was filed by its strongest competitor, Activision Blizzard Inc. (ATVI), as per the latest judgement by a California Superior Court Judge.
California Superior Court Judge dismissed Electronic Arts plea that Activision had failed to provide facts to support its allegation that the rival company had talked two of Activision’s executives out of their respective contracts.
The judge, without ruling on the merits of Activision’s claims, said that the company had provided sufficient facts supporting the complaint for the case to proceed to trial.
In December 2010, Activision Blizzard filed a lawsuit against two of its former developers Jason West and Vince Zampella, who were the heads of Activision’s Infinity Ward subsidiary before they were fired in March 2010.
Activision alleged that the two developers had hired agents and secretly met and negotiated with Electronic Arts executives while still working at Activision in 2009.
Activision also said that Electronic Arts had planned to finance and co-own a new studio run by West and Zampella and other employees from the Infinity Ward studio, which Activision bought from West and Zampella in 2003.
West and Zampella had previously filed a $36 million lawsuit against Activision alleging that they were terminated to avoid making royalty payments on Call of Duty: Modern Warfare 2, the top-selling game in 2010.
Eventually, West and Zampella formed Respawn Entertainment, which agreed to produce games for Electronic Arts.
In addition, 38 current and former employees of the Infinity Ward unit sued Activision in 2010, alleging they weren’t paid bonuses and royalties for their contribution to Modern Warfare 2. Their case has been consolidated with West’s and Zampella’s lawsuit against Activision.
Our Take
Electronic Arts and Activision Blizzard are two of the biggest developers in the gaming industry. Both companies wield franchises that are worth millions and their rivalry is also well known in the video-game industry.
In 2010, Activision Blizzard’s Call of Duty: Black Ops was the top-selling video game, while Madden NFL 11 from Electronic Arts came in at #2.
Activision reported fourth quarter 2010 earnings of 52 cents, beating the Zacks Consensus Estimate of 49 cents. Activision reported revenues of $2.55 billion, up 2.5% year over year in the fourth quarter.
However, Electronic Arts failed to beat the Zacks Consensus Estimate of 47 cents. The company reported earnings of 45 cents on revenues of $1.41 million (up 4.8% year over year) in the fourth quarter of 2010.
Electronic Arts continues to face a nation-wide class-action lawsuit based on allegations that video game consumers were forced to overpay for popular sports titles including Madden NFL. Any negative result from this lawsuit will hurt the company’s pricing strategy over the long term, in our view.
Moreover, weakness in the overall packaged-goods sector, compounded by intense competition from Activision Blizzard and Take-Two Interactive Software Inc.(TTWO) will hurt profitability over the long term.
We remain Neutral on Electronic Arts on a long-term basis (6-12 months). Electronic Arts remains focused on delivering quality titles, which we believe will drive significant top-line growth going forward. The company’s impressive product pipeline could also bring market share gains over the long term.
Currently, Electronic Arts has a Zacks #3 Rank, which implies a short-term Hold rating.
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