Electronic Arts Dials a Deal


Sometimes when an impatient gamer can't beat a level, he enters a cheat code -- a quick shortcut to help him skip the hard part. On Dec. 8, market leader Electronic Arts (ERTS) did just that. After a year of trying to make a dent in the international mobile-games market on its own, the gaming giant tapped a few buttons and agreed to acquire Jamdat Mobile (JMDT), the U.S. leader in mobile gaming. The deal was for $680 million in cash -- a 32% premium over Jamdat's stock price.

The acquisition will put EA in front in the U.S. mobile-gaming market, giving it over 28% market share. "Yeah, we could build it over time...[but] we prefer to be No. 1," EA Chief Executive Larry Probst told analysts in a conference call following the announcement. "This allows us to do that immediately in North America." EA's shares closed down 61 cents in trading Dec. 9, to $55.14. Jamdat's shares were up $4.29, or nearly 19%, to $27.06 the same day.

IFFY START. But while the deal will send U.S. competitors scrambling to play catchup, EA still faces two more tough levels in the mobile-phone game: Europe and Asia.

The mobile-gaming market is growing fast, and companies from all over the globe are battling to get in on the game. Sales of mobile-phone games -- which sell for a few dollars apiece -- doubled in the last year, totaling just over $2 billion worldwide in 2005, with sales in North America accounting for roughly 25% of revenues, according to British research firm Screen Digest. While projections vary, analysts expect that the worldwide market could reach anywhere between $5 billion and $8 billion by 2010.

The market may be booming, but EA's initial venture into mobile gaming fell flat. Since it first ventured into this market in September, 2004, EA has managed to sign agreements with just five wireless carriers worldwide -- a far cry from Lost Angeles-based Jamdat, which has deals with 90 carriers. EA's market share lags far behind that of small companies like Jamdat and Mforma, the No. 2 wireless-game outfit.

INCHING FOR ROOM. "EA underestimated the amount of time it takes to win [carrier] deals," says Screen Digest mobile analyst David MacQueen. "While it's a fantastic games company -- it just doesn't have a track record in Europe and Asia." EA declined to break out 2005 revenues from mobile-game sales, with CEO Probst characterizing it as only "very, very small" in a Nov. 1 conference call.

For its go-round, EA decided to reach into its deep pockets and purchase Jamdat. That's a tough act to follow for the company's U.S. competitors, which will likely also try to make acquisitions, says Citigroup analyst Elizabeth Osur. Ahead of the deal, EA had $2.4 billion in cash, more than three times what Activision (ATVI), the next-biggest U.S. gaming company, had.

EA's move looks smart, but competition in mobile gaming is white-hot. "Deck" space -- the amount of room wireless carriers budget for listing games in their Web browsers -- is shrinking as they make room for new services, like mobile TV, says MacQueen. Because cell-phone screens are small anyway, no much space is available for a deep list of games.

HOME-TURF ADVANTAGES. On many platforms, 200 games vie for the tiny bit of prime real estate available at the beginning of the "Top Games" page, which usually fits just four or five titles. "Being in the top five [in mobile gaming] is very, very important, far more important than your position in a [bricks-and-mortar] store," says MacQueen. "Even if you're in the top 25, you're five pages down."

Plus, the low cost of developing mobile games floods the market with titles, and gaming companies still have little leverage with huge wireless carriers. "Phone companies control the distribution," says Trip Hawkins, former CEO of EA, and now founder of mobile-gaming startup Digital Chocolate. This makes it even harder to carve out a small piece of digital shelf space.

Those competitive challenges make EA's new partnership with Jamdat particularly advantageous in the U.S., where Jamdat's popular mobile titles -- including Bejeweled, Tetris, and Jamdat Bowling -- are firmly established top sellers. Combine that with mobile versions of EA's American console hits, which include best-selling franchises Madden NFL, Need for Speed, and The Sims, and EA can likely remain a dominant player.

CHALLENGES AFAR. Yet those same challenges make beating European and Asian competitors that much tougher. Abroad, Jamdat has a much smaller position. It's in fifth place with just 6% market share in Europe, and it has "virtually nonexistent" share in Asia, according to Screen Digest's MacQueen.

Moreover, while the European market is currently ruled by small-cap players with names like Gameloft and In-Fusio, Asia's biggest gaming companies, including Sega (SGAMY), Namco Bandai Holdings (NMBCFM), and Square-Enix, are well entrenched. The outfits in Asia have deep pockets and strong relationships with Japanese wireless providers to help them fight off foreign entrants.

EA is betting that its strength in international sports games, like FIFA Soccer and EA Cricket, combined with Jamdat's numerous carrier agreements, will help propel it toward becoming the market leader all over the world.

A JUMP-START? "If there's a word in our mind that could describe why we did this it's 'acceleration,'" CFO Warren Jenson told analysts, "What we've come to appreciate over the last few months is that with combined forces it allows both our organizations to go that much faster globally."

Whether the shortcut will work remains to be seen, but EA is clearly making its move in the global gaming race.


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