Last week, Ubisoft (OTC:UBSFF) and Walt Disney's (NYSE:DIS) Lucasfilm announced a new collaboration to create a Star Wars video game. Details on the title are slim, but it was a potential shot across the bow toward Electronic Arts (NASDAQ:EA). EA has been considered Disney's exclusive Star Wars partner for many years, so at first glance, this new partnership with Ubisoft could indicate the relationship has turned sour.
Here's what investors need to know about the deal, and why it shouldn't worry EA shareholders.
What we know about the deal
There is no set date for the game's release, and outside of it being "open-world" according to Ubisoft, the characters and locations are not known. Choosing Ubisoft to build an open-world game is likely a smart move. This is the studio behind the Assassin's Creed franchise, one of the most successful open-world titles of all time.
Why announce the partnership way before anything comes out? Well, for one, it drives buzz in the media, which can build anticipation years in advance for a game like this. Two, it helps attract talented developers to Ubisoft to work on the game. This may not matter much for shareholders, but it was interesting that Ubisoft used the press release to try to recruit people to come work on the project, even going as far as to say it could be "career-defining."
From Disney's perspective, it likely wanted to announce something to show gamers and Wall Street that Lucasfilm is ramping up its gaming investments. More companies are now able to work on the group's coveted IP, potentially setting the department up for many years of future growth.
Why EA investors shouldn't worry
Investors might think Lucasfilm is replacing EA with Ubisoft, it doesn't look like that is necessarily the case. When asked by tech website The Verge about EA's future with Lucasfilm, head of the division Douglas Reilly said the company has "a number of projects under way" with EA at the moment. EA is responsible for building the hit Star Wars: Battlefront franchise and recently launched the highly rated Star Wars: Squadrons game, so there's no reason to think Lucasfilm would be upset with the quality of content EA is producing.
It also should be noted that Star Wars games are not EA's top-grossing assets. FIFA, Madden, and The Sims all generate over $1 billion in net bookings each year, with Apex Legends also on pace for $500 million this fiscal year. EA doesn't release specific booking numbers for each of its games, but with guidance for $5.9 billion in net bookings this year, we can deduce that the majority of its sales come from the four titles listed above.
EA uses bookings as its main sales metric instead of revenue because accounting standards require gaming companies to defer revenue over the estimated life of a game. So, even if EA is collecting 100% of the money at the time of the transaction, it still can't recognize all that as revenue immediately. Bookings add back this deferred revenue and can be a better proxy for the health of a gaming business than its revenue line.
Overall, while EA may be upset about losing its exclusivity with the Star Wars franchise, it still has a working relationship with Disney. And even if the partnership eventually ends, it is not the end-all-be-all for EA's business. Taking both these factors into consideration, investors in EA should not be concerned with Disney's new partnership with Ubisoft.