Shares of Electronic Arts (Nasdaq: ERTS ) rose 7% yesterday, on ridiculous rumors of a Microsoft (Nasdaq: MSFT ) buyout.
A Microsoft spokesman ultimately refuted the chatter, but even that effort wasn't necessary. Even the briefest consideration reveals that such a deal would never work.
1. A console maker and major developer have entirely different goals
Every console values its exclusive franchises. From Halo on the Xbox to Resistance on Sony's (NYSE: SNE ) PS3 to all things Mario and Zelda on Nintendo (OTC: NTDOY.PK) platforms, caring isn't always sharing.
What would Microsoft accomplish with EA? Would it kill upcoming Need for Speed, Battlefield, and Sims releases on rival consoles? That might boost Xbox 360's popularity, but it'd also obliterate the game maker's earnings. EA is already trading at a loftier forward earnings multiple than Microsoft, even before we consider an appropriate buyout premium. Why would Microsoft buy a major studio, if the right strategic move -- making EA's franchises Xbox-exclusive -- would also make the deal even more dilutive to the bottom line?
2. Antitrust regulators would have a field day
EA has exclusive NFL rights when it comes to video games, but there's no way that it would get away with making next summer's Madden 2011 an Xbox-exclusive release. Even if the franchise supports all of the three major platforms, Sony and Nintendo would complain, and rightfully so.
EA Sports could get away with celebrity-specific releases such as Tiger Woods golf titles, but a Microsoft-owned EA would have a hard time keeping FIFA soccer.
3. Microsoft can cherry-pick on its own
As Take-Two Interactive (Nasdaq: TTWO ) prepared for the release of Grand Theft Auto IV, there was no doubt that it would be a monster hit. What did Microsoft do? It struck a deal with Take-Two, paying $50 million for a commitment to two episodic installments that would be available only to Xbox Live members.
This is the appropriate course for Microsoft. Buying a small studio with a promising franchise that would be great as an Xbox exclusive would be a smart move. But Microsoft has little to gain and plenty to lose in chasing giant EA. Frankly, I'm amazed that a rumor this illogical got as far as it did.
RSS Headlines
Fool UK