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The mEgA corporation: a counterpoint

This feature should be considered as a counterpoint or response to our earlier article, which can be found here

Electronic Arts, the world’s largest video game software firm, recently inked a five-year deal with the National Football League for an exclusive license to portray its teams, players, and venues in video games on consoles, handheld game devices and PC’s. Nearly simultaneously, it has acquired a significant share in fellow developer Ubisoft. Some have decried these deals as harmful to consumers. However, a simple analysis tells us that this is not the case. In fact, EA’s efforts at expansion and consolidation should be lauded – they benefit the industry and all gamers.

There are two main benefits to consolidation in the video game software industry. The first and lesser is that larger firms can better withstand the downturns to which the industry has historically been subject. The second, and more important, relates to the particular cost requirements of video game development.

Since the video game business is currently booming, it’s easy to portray the firms in the market as greedy while they rake in profits. However, we should not be so naïve as to think the industry will be booming forever. Consider the 1984 collapse of the video game market, in which most of the biggest players went under; these fledgling firms were not able to withstand the dramatic downturn in their fortunes. A large company like EA, on the other hand, has the diversity and resources to weather declines that would irreparably cripple smaller players. Consolidation adds to the stability of the market and helps ensure that the industry remains strong through good times and bad.

While this argument can be applied to virtually any industry, video game development has specific attributes that make large firms useful. Almost all the cost of developing a video game comes as initial fixed cost – we know that the disc media itself costs little. This means that developing a video game requires a big initial investment before the first revenues are ever seen. A large firm like EA has ample capital to undertake such investment. This is exactly what we have to look forward to when a company like EA acquires a smaller firm like Ubisoft. EA could provide Ubisoft’s development teams with more capital than Ubisoft can on its own.

Even for those convinced that EA’s own games are lackluster – a conviction belied as inconsistent with common opinion by EA’s impressive sales numbers – EA can seek to redeem itself by acquiring and investing in other successful developers. Those who cling to an irrational desire to protect the “independence” of smaller developers, as if they could ever be independent of the same market demands that guide everyone in the business, really intend to starve such developers of vital capital. I, for one, don’t want the next great title like Splinter Cell or Prince of Persia to sit on the shelf because Ubisoft’s limited resources can’t afford to execute the idea.

I present the above arguments in defense of general consolidation on the software development side of the video game industry. However, the current debate focuses in particular on EA, and I feel compelled to counter three misleading arguments that have been presented regarding EA’s latest actions.

First, some have portrayed EA’s acquisition of Criterion and its widely-used Renderware development engine as inimical to the public good. It has been suggested that EA will use its control of this engine as a sledgehammer to demand high royalties. Why this would suddenly be the case is a mystery. Was Criterion a benevolent firm that offered up its intellectual property with no regard for profit? Unless we believe Criterion was managed incompetently, we can imagine that EA will continue similar policies regarding development tools. It will be forced to do so by the existence of other competing tools. There is little danger that EA will suddenly begin to jealously guard the Renderware engine and neglect the revenues available by continuing Criterion’s management style.

Second, let’s take a closer look at the much-bemoaned acquisition of the NFL license. We ought not to overestimate the importance of this event. Yes, NFL games sell a lot of copies. But so do Final Fantasy games, so do Mario games, and so do Zelda games. One company possessing the exclusive rights to these franchises has not decimated them at all; in fact, they have flourished. EA has long experience running the top-selling Madden franchise, and there is no reason to think it will suddenly stop doing the things that produced a hit franchise. Even so, should EA for some reason fail in its stewardship of the NFL license, there are NCAA football titles available as competition and countless other sports titles waiting in the wings to take Madden’s crown. EA now has exclusive rights to the NFL license, but this does not leave the Madden franchise without staunch competition.

Finally, the point has been made that EA’s increasing share of the video game market will allow them to put pressure on the console manufacturers themselves. This is an unrealistic vision. In the world of Sony and Microsoft, EA is small fry – does anyone really believe that EA is going to intimidate Microsoft? This is a corporate giant whose only real nemesis is the U.S. Justice Department. EA has market capitalization (that is, total value) of about $19 billion. Microsoft has cash reserves of close to $60 billion dollars – that is, it could more or less buy EA outright. Three times over. Nintendo and Sony will be equally difficult to terrorize – their market supremacy in the handheld and console fields, respectively, is far greater than anything EA possesses in the realm of software.

The ability of these three firms to create in-house games leaves them additionally immune to pressure from EA, which operates exclusively on the software side of video games. If EA takes a hostile stance toward the console manufacturers, the Big Three can turn to their in-house developers, perhaps using their extensive resources to snap up independent developers and expand their in-house operations. The console manufacturers have deep pockets compared to EA; if EA decides to play chicken with them, it will lose badly. Capital and market power are on the side of Microsoft, Sony, and Nintendo – they are the big players in the market. They dictate the capabilities of the machines; they dictate what sorts of games will appear on those machines. We do not need to protect them from developers like EA. In fact, it is just the opposite; we should encourage development firms that seek to strengthen themselves through expansion, because only large and powerful development firms will be able to escape total domination from the virtually omnipotent hardware manufacturers.

Ultimately, the fact of the matter is that the video game industry is hardly liable to pernicious market failures, because in addition to competition within the market – which is as fierce and extensive as it has ever been – the entire industry is competing with other leisure and entertainment industries. Even if EA were making 100% of games, and not less than a quarter, it would still have to compete with television, movies, and other media seeking consumers. This is not to say we should not be wary of a firm acquiring too much market power. We have regulatory bodies in place to maintain such wariness. However, EA’s recent actions are nowhere close to the appropriate sphere of such regulation. Right now, we need bigger development firms that have the strength to take risks, attract investment, and continue the impressive growth of the past few years.

The author of this fine article

is a Staff Writer at Thunderbolt, having joined in July 2003.

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