On Tuesday, Motley Fool Stock Advisor selection Electronic Arts (NASDAQ:ERTS) officially released Madden NFL 2006 -- the latest update to the perennial best-selling video game football series. As usual, the game was delivered with much fanfare. For example, specialty video game retailer EB Games (NASDAQ:ELBO) stores across the country held a special midnight launch Monday night for the typical throng of Sony (NYSE:SNE) PlayStation 2 and Microsoft (NASDAQ:MSFT) Xbox owners. This followed a weekend of tailgate parties and Madden NFL 2005 tournaments held by a number of GameStop (NYSE:GME) locations.
With that in mind, I will make a bold prediction: Madden will blow away the competition.
Q: Hold on, Jeff. What competition?
A: Exactly.
As astute Fools may recall, EA signed five-year deals this past December with the NFL and its players association, granting the company exclusive rights to use NFL teams, players, and stadiums -- among other things -- in its football games, a lineup which includes Madden and the arcade-style hit NFL Street series. In other words, there is no competition. EA clearly paid through the nose for the exclusivity but, in exchange, received certainty and protection of the most important brand in its catalogue.
However, last year, smaller rival Take-Two Interactive (NASDAQ:TTWO) wreaked havoc on EA's stock when it partnered with Sega to release ESPN NFL 2K5 -- a game in a series many considered to be equal to Madden in terms of game quality, if not better -- at $19.99 per copy.
As a result, through the end of 2004, Madden had only outsold Take-Two's ESPN by just over a 2-to-1 margin on a unit basis for the PS2 console, while ESPN actually managed to outsell Madden on the Xbox, according to data compiled by the NPD Group. Worse, Take-Two extended the $19.99 price point to its basketball and hockey games, forcing EA to eventually drop its prices on its football, basketball, and hockey simulations -- thereby cutting into EA's margins and profits.
But that time is over. EA has locked up the NFL and NCAA football licenses while stealing Disney's (NYSE:DIS) ESPN brand away from Take-Two and Sega, although Take-Two did come away with Major League Baseball. EA has at least five years of exclusivity, but the barrier to competition actually extends further than that. With the rising cost of video game development, any potential competitors are less likely to commit capital to a new football game without assurance that they would even get a chance to compete. And even then, EA will still have the far superior brand and an extended first-mover advantage.
That said, EA has assured investors that it will be king of the video game gridiron this year and for years to come.
For related Foolishness, check out:
- Madden Sticks Around
- Madden Moves to NBC
- Sega vs. EA Sports
- Sega's Madden Challenge
- EA's Madden Dash
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Fool contributor Jeff Hwang owns shares of Electronic Arts.
