Analyst: Dissolution of Contract with NCAA Won?t Hurt Electronic Arts

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

On Wednesday before the market close, the NCAA announced that it would not enter into a new contract with EA (NASDAQ:EA) for the license of its name and logo for the EA Sports NCAA Football video game. The current agreement expires in June 2014. As a result, EA?s next college football game will not include the NCAA?s name or logo. The NCAA made the non-renewal decision citing ?the current business climate and costs of litigation.? We have included the full text of the NCAA press release on the next page.

As reported by the Wall Street Journal and other media outlets, the NCAA is being sued by several former athletes who allege that the NCAA conspires with its partners to fix the price of an athlete?s image and likeness at zero. By doing so, the NCAA has prevented these former athletes from receiving compensation for lucrative TV and video game contracts that the NCAA enters into and that use the athletes? images and likenesses for the NCAA?s financial benefit.

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We do not expect the expiration of the NCAA contract to have a material impact on sales of EA?s college football games. We believe that EA has entered into two contracts for its college football content. One contract is with the NCAA and gives EA the right to use the letters ?NCAA? in its college football games. The other contract is with the Collegiate Licensing Company (NYSE:CLC), which represents a large number of the NCAA?s member schools, and allows EA to use the uniforms and logos of the members of different conferences and teams.

In our view, the second contract is the basis for the realistic college football gaming experience that gamers currently enjoy, as popular schools and rosters are accessible in gameplay. We believe that the CLC contract has over one year remaining, and that the bulk of the royalty currently paid by EA goes to the CLC, not the NCAA. We estimate that the total royalty paid is likely around $10 ? 15 million annually, with the CLC getting approximately $8 ? 12 million of that amount and the NCAA getting the rest. We don?t think that the NCAA share will be kept by EA; rather, we think that EA will continue to pay the same royalty overall and that the CLC and its members will benefit.

Source: http://wallstcheatsheet.com/stocks/analyst-dissolution-of-contract-with-ncaa-wont-hurt-electronic-arts.html/

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