Jeetil Patel Say Sell EA: Time to Buy ERTS Edition

I owned EA stock for a while. It happened to be wrong while for profit but a very good while for someone looking for a very good way to offset gains in the rapidly rising market. The stock flatlined since I sold it and I did not pay attention to it until I saw the "sell" articulated by Jeetil Patel of Deutsche Bank. Based on his past performance, this rating is a stronger buy indicator than the company's balance sheet could ever be. Forget the forecast he issued the day before the earnings release which was way off, and excuse him for not knowing EA would announce a USD 600 million stock repurchase - no one could anticipate that. These are only embarrassing. Focus on his reasoning. It is bordering on - I would really like to use the "R" word but it is so politically incorrect now and I do not want to say criminal because it really is not - fraud to hold oneself out as an expert and provide an analysis as stupid as Baron's reported him to provide.

Patel’s concern with Electronic Arts is that their product line is simply too broad, in contrast to Activision, where single hit titles have taken the lead, such as Call of Duty: Black Ops, which swept industry sales over the holiday, according to the same NPD report cited above.

This made an awful lot of sense when I heard it from Steve Jobs, but he was talking about an inventory carrying manufacturing company. Jobs explained the need to take Apple's product line down from tens of variations on the Mac, to four simple products. Mr. Patel seems to forget, or never learned, EA and Activision are in the entertainment business. Most people with a brain in their head see strength in numbers when it comes to franchises in an entertainment company. If Mr. Patel wrote this last year he probably would have admired the two prong attack of Guitar Hero and Call of Duty. Does his reasoning mean Activision is better for the collapse of a billion dollar market? If this is the case, then Activision should really focus on burning out Call of Duty so it can put all of its effort into Warcraft. While they are at it, tell Blizzard to scale back on Starcraft and stop production on the new MMO.

The shame lies in Mr. Patel’s failure to identify, or acknowledge what is turning out to be the only publisher positioned to move forward into the next decade. Every other publisher that fell from the number one slot either disappeared or continued as a hollow shell of what they once were. EA looks like it may be turning itself around. There is a glimmer of hope in their core business, and unlike the other publishers who are either in denial or chasing their own tail in social, iOS and freemium, the places where money is being made, EA is making money and leading the field.

A few clicks of light research would have revealed Dead Space 2, EA's strongest launch in years to Mr. Patel. With Dead Space, EA shows an EA internal team other than Bioware is capable of launching a title in the 90's. No small feat considering as only Take Two and Ubisoft join EA on the list of publishers with multiple internally developed franchises scoring above 90 and each of those companies spent significantly more than EA to get there. Couple this with the Syfy feature and a top selling iOS title and it looks like the breadth of EA's production did not preclude their ability to properly market and support the franchise either. This glimmer of hope in the core business is interesting, but the rest is exciting.

Even though this post was read by hundreds of people from the EA domain, I can't take credit for the company's focus on digital distribution. Riccitiello has been talking about it for years now. But in a very unusual move for a publishing CEO, he is actually following through on his promise. The company showed over USD 200 million in revenue from digital distribution and is still on track to show USD 750 million for the year. Perhaps more significantly, EA dominates the app store and while it is a distant third to Zynga, it is the only console publisher in the top 15 developers of social games. Each of these delivers significantly higher margin revenue than console and provide an opportunity for game makers to take risks on new franchises.

I am not saying I am ready to put in my purchase order, but I am certainly ready to let Mr. Patel and the other naysayers know, the game publishers are not quite dead yet.


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