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At a time when new genres and upstart publishers are challenging big videogame makers’ established franchises, companies with widely played sports games have a defensive advantage, according to new research.
That, Bernstein analysts suggested, is a good thing for investors in
Electronic Arts
(EA), owner of the FIFA soccer franchise, and
Take-Two Interactive Software
(TTWO), which has a valuable deal with the NBA.
“A central tenet of our view on videogames stocks has been our belief in the strong and unique durability of sports franchises,” analyst Todd Juenger wrote Thursday. He spelled out three principal reasons:
• The deals publishers strike with leagues and governing bodies are extremely valuable.
“The competitive advantage offered by an exclusive licensing agreement is pretty straightforward: no other game can use that specific piece of intellectual property for the duration of the agreement,” Juenger wrote. “This is a huge deal for a sports videogame. Fans want to play with the real-world players in their real-world teams and stadiums and won’t settle for less.”
• Broadcasting a sport and building a popular game around it are two different competencies, making it harder for the leagues and sports to cut game publishers out of the equation. Fans, meanwhile, know who’s good at it and who isn’t.
“Gamers demand photorealistic portrayals of real-life players, venues, realistic animations, in-game commentary, and a faithful recreation of the real-world physics and tactical complexities of the actual sport,” Juenger wrote. “Developers literally scan the heads of thousands of players per league to achieve a realistic 3-D depiction of their faces. Tattoos and hairstyles are also portrayed. The same goes for stadiums/venues. All that takes a lot of time and money.”
• Established games have large player bases that represent valuable communities, supporting good playing experiences and potentially offering large sustained revenue from in-game sales.
“Engagement in modern videogames is driven by multiplayer in general, and increasingly by live services,” wrote Juenger. Those features “create significant economies of scale that favor the games with the largest current market.”
An expected long-term move toward gaming as a streaming service, which Jack Hough explored last year for Barron’s, also offers potential for publishers with sports licenses,
Barclays
suggested in a Thursday note.
“The NFL’s multiple broadcasting deals with TV networks and streaming services are an example of how we think a company like EA could leverage certain or all of its sports content to multiple streaming providers,” wrote analyst Ryan Gee. “EA could reach a much wider audience in aggregate than it may otherwise by building its own streaming service.”
None of this necessarily means an unpopular game—or, at a higher level, changes in consumer interest in various sports—might not reduce the value of these franchises. Royalty rates, meanwhile, could theoretically change, endangering margins.
But the potential for enduring business is clearly of value for long-term investors. That is especially true given the overwhelming, unexpected popularity of games like Fortnite and the risks all franchises generally face. Consider, for example,
Activision Blizzard
’s
(ATVI) decision to let go of Destiny or the costly delays EA experienced with its latest Battlefield game.
“Shorter term, there is always the debate about the growth rate for this year or next,” Juenger wrote. “Is Ultimate Team ‘over-monetizing’? Will FIFA 19 outsell FIFA 18? Those are all important questions and matter to the stock—but it is a whole different debate than worrying about whether the franchise will go to zero.”
Email David Marino-Nachison at david.marino-nachison@barrons.com. Follow him at @marinonachison and follow Barron’s Next at @barronsnext.
