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EA Partners Could Be Bad News For EA

| 15 Aug 2008 18:00
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EA Partners has become a veritable "who's who" of the videogame industry, but at least one analyst thinks the growing list of high-profile games being published by EA represents bad news for investors.

Games published and/or distributed through the EA Partners program include Crysis and the upcoming Crysis Warhead by Crytek, Rage from id Software, Valve's Orange Box and its new title Left4Dead and Rock Band 2, in development at Harmonix. EA Partners also has deals with Grasshopper Manufacture of No More Heroes fame, Chronicles of Riddick creator Starbreeze Studios, and most recently, Gears of War and Unreal Tournament developer Epic Games. The impressive list will let EA stamp its name on some of the most anticipated and high-profile titles to be release in 2008 and 2009.

But it may also indirectly expose EA's soft underbelly, according to Signal Hill analyst Todd Greenwald, who said the plethora of deals "speak to EA's marketing and publishing strengths, but doesn't say much for their development talent." He added that he was "concerned to see how much top-line growth is coming from low-margin distribution deals out of EA Partners," according to an Edge report.

"[EA Partners' arrangements] generate two things for EA: Sales - so it helps the top-line - and cash. But the deals are low-margin. EA is trying to get its margins up to 20-25 percent, and these deals negatively impact that," he said. "[These deals] make EA look more like a distributor than a developer of world-class titles. It's indicative of the fact that they are not able to develop enough of their own titles to meet their revenue and earnings goals, that they need to fill in the gaps with these distribution deals."

In what must be turning into a disturbing trend for EA executives, Greenwald went on to compare the company unfavorably to the new big boy on the block: Activision. "If they had their own properties, say like what Activision has, they wouldn't need these distribution deals," he said. "In the past they haven't, but for some reason now there's a big push. I can see that they want to leverage their marketing and distribution platform with other people's content, but from an investor's perspective, when you're dealing with operating margins and whatnot, these deals hurt those margins. It makes it a lot worse."

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