EA-Activision Rivalry Reaches Court

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Electronic Arts Inc. (NasdaqGS:EA - News) and Activision Blizzard Inc. (NasdaqGS:ATVI - News) have been battling it out on the games front, but now they face each other in the court room. California Superior Court Judge Elihu Berle ruled out EA’s claim to dismiss Activision’s $400-million contract-interference claims. The judge in Los Angeles admitted that Activision had provided sufficient evidence against EA in the aforesaid suit. Thus, the judge ordered the case to move to trial.

When it all started…

It was in March 2011 that Activision had filed the $400 million suit against EA and alleged that the latter had talked to two of the formers’ employees who were still under contract. The employees happened to be Jason West and Vince Zampella, the founders of Infinity Ward, famous for the Call of Duty series.

Activision alleged that the two developers had hired agents and secretly met and negotiated with EA executives while still working at Activision in 2009.

Activision complained that EA, aided by Creative Artists Agency, allegedly flew West and Zampella by a private jet from Southern California to San Francisco to attend a barbecue at Electronic Arts CEO John Riccietello's house, in August 2009.

Activision also said that EA had planned to finance and co-own a new studio that was run by West, Zampella and other employees of the Infinity Ward studio, which Activision had 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.

Our Take

Basically, EA had the intention of snatching Activision’s intellect behind the Call of Duty series, as it has been rapidly gaining market share against its own Medal of Honor series. In the present scenario, Activision does not seem to be under any pressure as Call of Duty has been its most successful franchise to date. The latest release of Call of Duty: Modern Warfare 3 has been working wonders for the company’s top line. In this particular case, Activision is in a comfortable position as its stands to gain $400 million if it wins the trial.

EA’s Battlefield 3 also has been going good since release and the company has high expectations from Star Wars: The Old Republic. However, EA could be in a bit of a bind if it has to pay off Activision, as it would definitely dent its cash balance.

EA and Activision 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.

EA with its strong product pipeline for fiscal 2012 and beyond will drive top-line growth going forward. We believe that high quality titles, an impressive product line, increasing online exposure, social games and portfolio diversification guarantee market share gains over the long term.

We believe that Activsion Blizzard’s strong product pipe line and expansion into the online digital segment will drive the top-line. However, the company’s limited presence in the social gaming circuit may act as a headwind going forward.

In the long run, we maintain our ‘Neutral’ rating for both Activision and EA. We currently have a Zacks #2 Rank for Activision Blizzard Inc., which implies a ‘Buy’ rating in the short term. For EA, we have a Zacks #3 Rank implying a ‘Hold’ rating in the short term.

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