April 4, 2008 / 6:58 PM / 10 years ago

EA aims to put history behind it in Take-Two bid

By Scott Hillis - Analysis

SAN FRANCISCO (Reuters) - As it pursues its $2 billion offer for Take-Two Interactive Software Inc (TTWO.O), Electronic Arts Inc ERTS.O is trying hard to prove it wouldn’t drive the “Grand Theft Auto” video game series to mediocrity, a fate that has befallen some of its other acquired franchises.

It’s an important theme in EA’s current takeover drama with Take-Two, home to some of the industry’s leading lights, including Rockstar, the crown jewel studio behind the upcoming “Grand Theft Auto 4.”

The company has a spotty history in getting hard-won talent to stick around. Its 1990s acquisition of well-regarded studios such as Bullfrog, Westwood and Origin led to mass defections and the marring of once-proud franchises with ho-hum games.

Chief Executive John Riccitiello, who rejoined EA a year ago after heading private equity firm Elevation Partners, acknowledged as much at an industry conference in February.

“I would state simply that we at EA blew it, and I was involved so I can say I blew it,” Riccitiello said of past acquisitions that ended badly. “The command and conquer model, the command and direct model, doesn’t work.”

More than a decade later, those missteps are still etched in many gamers’ minds and have created lingering doubts about EA’s ability to care for its best and brightest.

One industry watcher compared EA’s record of acquisitions with the destruction and joyless conformity left by a rampaging alien organism from the television series “Star Trek: The Next Generation.”

“To gamers it was kind of like the Borg; they would take over a studio and make them function on the EA clock or schedule,” said Sam Kennedy, site director of 1UP Network, a gaming news and reviews site.

Riccitiello said he envisioned a “city-state” approach that would give EA’s game studios more creative freedom.

Weeks later, he disclosed that Take-Two had rebuffed his $26-per-share offer. With hindsight, many in the industry felt the “city-state” speech was a preemptive strike against fears that EA would succeed in acquiring Take-Two but fail to win over the notoriously independent folks at Rockstar, whose publishing deal with Take-Two expires next February.

EA would still own the rights to “GTA” in that event but could lose the creative team that has made it one of the industry’s most powerful franchises.

Riccitiello’s new approach is a departure from the centralized system that allowed EA to crank out updated games at a breakneck pace -- but that many analysts and gamers blamed for plummeting quality that has hurt the top line.

EA’s fiscal 2007 revenue of $3.1 billion was just 4.5 percent higher than three years earlier even though the overall industry grew 25 percent in that time.

“Only time will tell if he can avoid some of the mistakes EA’s made in the past. Right now, Wall Street has a pretty good level of confidence in him,” UBS analyst Ben Schachter said of Riccitiello.

To be fair, not all of EA’s purchases have ended in tears.

    The company has provided a comfortable home for more than a decade for Will Wright, one of the industry’s quirkiest talents and the man behind the wildly successful “Sims” games.

    A Swedish studio called Digital Illusions bought in 2006 is thriving and plans two eagerly awaited installments of its hit “Battlefield” series this year, including an innovative free Web-based version.

    After years of losing market share -- EA says it lost three points to end 2007 with 18 percent of the North American games market -- to competitors such as Activision Inc (ATVI.O) and France’s Ubisoft (UBIP.PA), it was clear EA had to do something to reinvigorate its business.

    Acquisitions are one way to do that. Last year, EA bought a highly regarded pair of studios -- BioWare and Pandemic -- for $800 million and promises of autonomy.

    Riccitiello has also not balked at delaying games, even when it means sacrificing near-term sales. The best example is “Spore,” a highly anticipated game made by Wright. Originally slated for release late last year, Riccitiello pushed it back by a year to add features and polish. He approved similar delays for the online fantasy game “Warhammer” and mercenary combat title “Army of Two.”

    One question is whether Riccitiello’s emphasis on higher quality will translate into higher profits. He has a goal of doubling annual revenue to $6 billion by 2011 but has not given a picture of how much the quality drive is inflating costs.

    “We’ve already started to see EA’s quality stabilize and it probably will improve a little in 2008. The question for investors is does that make sense financially? There comes a point where you spend so much money in development of a game that it doesn’t become profitable,” said Evan Wilson, an analyst with Pacific Crest Securities.

    “He’s doing the right thing for gamers, but we still have no certainty that he’s doing the right thing for shareholders.”

    Reporting by Scott Hillis, editing by Gerald E. McCormick

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