As part of the deal for EA coming on to Xbox Live, Microsoft "gave-up" publishing NFL, NBA, NHL, and MLB series for the year.
Now Microsoft announces they are canning those games all together. The sports games that will remain are Tennis, Snowboarding, and Golf.
Why did Microsoft can their sports division?
Because there is no money to be made for them, due to Sega's permanent $19.99 price tag for their sports games. Microsoft realized the threat of Sega and did the right thing, because they could not compete on quality or price.
This is not good news for EA, because if Microsoft can feel the heat, EA can feel it even more. Microsoft can afford to pass on making sports games, but EA can't. Microsoft will still get their royalties from publisher's like EA and TTWO/Sega.
There are only two things that can happen with EA in the long term:
1. Keep the price at $50 for sports titles, and suffer market share loss (as evident this year 1.3 million copies of Madden in 7 days compared to 800k copies of ESPN in 5 days---last year Madden had 80% of the market).
2. Drop the price to compete with TTWO/Sega, which would end hurting profit margins.
Either way, it is not good for EA. There is no way it can be spun as a good thing. It is not only a football thing, all of EA's bread and butter sports games will have to compete with $19.99.
EA's spin is that price doesn't matter, and most gamers will by two copies of each football game, but basketball, hockey and baseball? And what about next year? This year not everybody will buy ESPN, but at least someone's friend will, and kids will have a chance to play it. When it comes time next year, after realizing the quality game they are getting, the price will become a great factor. Price does matter. How else would you explain the John Deere Farmer game for $20 outselling Doom 3 for $54.99 at EBgames.com?
EA's strongest IP is under attack from TTWO who will eventually buy the Visual Concepts studio from Sega. They have already shown their business savy by beating EA to the release date with all of their coming sports games, something Sega's never been able to do.
EA saw this coming. That's why they tried to buy the entire rights to the NFL $250 Million a year, for four years. The NFL brushed them aside, because the NFL CFO was mopre interested in taking a BOD position with rival TTWO.
This is shaping up to be nice. Gamers will love getting their sports games for $20. If EA wants to compete and maintain their market share, they will have to lower their prices. It's called Economics 101. If Company A offers a product of equal quality compared to Company B's product, but for 1/3 of the price, eventually nobody is going to buy the product from Company B anymore. If Company B wants to stop from going under, they need to re-assess their business plan. EA will lose significant market share all in a four major league sport's titles this year. If they don't lower their prices by next year, they will lose even more.
What amuses me most is the amount of fortune telling the "shorts" are doing. Too bad they don't actually put their money where their mouth is. Unfortunately, I think they're just bright enough not to.
That is 'someone's estimate'. It's what I've kept pointing out to Neto Insider - just because he makes up some figures in his head doesn't mean it has anything to do with reality - the same as if you started hearing voices in your head telling you that ERTS would double in the next ten days, you might want to double check the facts and probabilities on that one before betting the ranch ;-)
it's really hard for me to believe that a game that is RETAILING for 19.99 (and discounted further from there in some cases) is being sold into distribution for $17/copy.
does anyone have that from the company or is that someone's "estimate"?
Thanks for providing some facts to the topic - they're always helpful, and highlight what's true, and what's trash ;-)
I would add this to your rather perfect combination of facts and logic - ERTS marketing has been the best in the business, by a mile, both in terms of dollars spent, but more importantly in the effectiveness of the marketing. Quick example - when Monday Night Football starting using the Madden Engine to illustrate plays a couple years ago, the synergy between the real field or playback action and the computer=generated info created an association in fans' minds that if you wanted to play like the real thing, you had to play Madden. Simply throwing cash into ads can't create that kind of brilliant marketing effect, and ERTS seems to be the master of it.
Actually if you read the article from forbes, it says that the average game development cost is 10Mil and 10 more for marketing..
Based on your own logic:
TTWO is making money. The game doesn't cost much to develop. They all ready sold over 1,000,000 copies. That's $17,000,000 revenue minus $6,000,000 to MS and $2,000,000 to the NFL. That leaves them with $9,000,000 to cover their game development and marketing, which is ample enough.
Lets take only 50% of the development/marketing costs, which equals to 10mil..This number is greater than what you projected as the leftover for development/marketing (9Mil)..which means they are not making money yet.
Very nice, cogent post. Neto has no clue what it costs to produce and iterate a franchise, that's clear. Your point about y/o/y sales *is* the business point. What competitors may do isn't irrelevant, but to frame the main issue in those competitive terms is the true 'chest-thumping' cluelessness, that misses the forest for the trees. Maybe you should post more often, hmm?
"Thumping their chest and saying "we good because we sold more than last year" doesn't cut it."
I don't understand. If I owned a company and sold more units year over year for the same or higher price (i.e. $60 edition), I'd be estatic. Isn't that the goal of any company? To increase revenue and profits every year?
I don't see TTWO keeping the price at $20 next year. You say that it doesn't take much money to produce a sports game? What about after the console transition? Does TTWO just slap some roster updates onto the current engine and port it to the new systems? Who do you think will have the better game if ERTS uses its excess cash to invest in upgrading the game engine and graphics for the new cycle (which it's doing now)?
What's your short position? How low do you see the stock going?
Dear Cheeto Brain,
Don't want to be called names? Then why throw down such gauntlets?: <<Is that the best you can do? Thump chest and proclaim: "we sold more than last year, we good, we better than before!">>
Don't want to be accused of being blind to the important facts, then don't make numbnutz statements: e.g., <<But again you seem to miss the point; TTWO doesn't care to make oodles of cash. All they want to do is to take away as much money as possible from EA's coffer, so EA has less money to use for R&D. >>
Do you really think EA will be hurting for R and D money under any reasonable circumstances? What do they have in cash right now, a billion dollars in cash? As I keep saying, your dim command of the facts always hurts your already weak arguments.
And while you're in the process of blowing nonsense out your arse, you decide <<I am sorry, I can't devote any more of my time to your uninsightful diatribe>> - because.....why? - you have a glimmer that your arguments just won't stand up to reality.
Go for it, Ostrich Boy, hope that short works out great for you. BTW, you wouldn't be interested in gaining a grain of credibility by posting your ERTS trades in real time, as opposed to blathering on in flawed theory, would you? ;-)
new2stock, thinking of taking a long position. This discussion was helpful. Thanks...
1) Jamok is dumb money. Since his rebuttals were juvenile insults, I'll just leave it at that.
2) Neto is bringing up valid concerns about a price war that may hurt ERTS's profits.
1) Growth in total number of video game sales is mostly dependent on console sales. The more consoles, the more consumers. If the console makers lower their prices this holiday, then there will be more consumers for BOTH ESPN and Madden. If they don't then IMHO, neto is correct. Just think about it...a teen has 100 bucks to spend on games this x-mas, he can buy ESPN and a few others or he can buy Madden and one other. He is definitely not going to buy BOTH ESPN and Madden. With so many hyped games this x-mas, kids and parents will be making decisions in the stores. 19 or 50 for a football game...next...halo2...next...Consumers are still tight with their money this holiday season. 30 bucks = another gift/another game.
2) ERTS has already warned that stiff competition will affect their revenue in the coming quarters.
3) I disagree w/ neto that it's cheap to make sports games and TTWO can still make a profit w/ ESP. It's a price war and they just want more market share at the expense of profits. I do not think they can keep this up and survive.
3) IMHO, ERTS is a buy at this level only if you intend to hold for at least 2 year....for the next generation of consoles.