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This Price War Has EA Cheering

By Cliff Edwards At Electronic Arts (ERTSA), nothing could be better than a good street fight. With Microsoft (MSFT) slashing the price of its Xbox game console in April to $149 from $179, the threat of renewed price war has EA execs hearing cash registers ringing.

Why? The lower the price of a game console, the more likely new users will be lured to buy. And what does that mean for EA? First-time users will buy games to play on their new consoles. In the next few months, it expects to sell more games, lots of them.

SAME STORY. For shaky investors, that's welcome relief. Even diehard fans were beginning to wonder whether the only way to go was down for the nation's top video-game maker. With 12 studios around the world, the Redwood City (Calif.) publisher in 2003 delivered 27 big hits that sold more than 1 million copies each. Thanks to franchises such as Madden Football, MVP Baseball, and FIFA Soccer, EA had grabbed 22% of total game-software sales, helping boost revenues 44%, to $2.5 billion, by yearend.

So far in 2004, the story has been no different. EA's February sales jumped 38.3% year-over-year, according to researcher NPD. Its stock had been in a slump for months as analysts and investors fretted that console sales are in decline, with no new platform introductions scheduled for at least a year. But shares bounced back in late March, reaching a 52-week high of $55.91, and closing on Apr. 8 at $53.07.

Microsoft's move could change the rules of the game. With console sales starting to slip, Microsoft, Sony (SNE), and Nintendo (NTDOY) are expected to be locked in heavy competition to gain market share. Sony's PlayStation 2 continues to outsell both Xbox and Nintendo's GameCube, despite being the oldest console on the market. To maintain that dominance, analysts expect Sony to match any Microsoft price cut in coming weeks.

MATCHING BLOCKBUSTERS. And what good is a new console without games to play on it? That's where Wall Street figures EA comes in. About 70% of analysts covering EA now rate it a buy or better, with many upgrading the stock in late February and early March. Wedbush Morgan on Mar. 15 became the latest to upgrade it, citing the potential new business and the fact that EA's stock now trades significantly lower than its historical average.

In the cutthroat video-game business, no bets are sure. But EA has taken much of the risk out of delivering new titles to avid gamers. It has locked up many sports franchises by striking deals with well-known figures like legendary National Football League coach John Madden. And like the movie business, it can deliver sequel after sequel, thanks to its early decision to sign high-profile franchise deals with studios and the music industry that match potential blockbuster movies and music with their own release schedules.

With a stable of established titles, EA is less likely to cut its games' prices. That gives it industry-leading gross margins of 63%, compared to 39% for its closest rival, Activision (ATVI). "We don't place a whole lot of risky bets. We're highly conservative," says EA President John Riccitiello, who announced on Apr. 7 that he was stepping down to join a private equity firm.

SPACE TO RISE? Looks like the maker of The Lord of the Rings games can become lord of the games, solidifying its dominance in the field. Even short-sellers -- investors who bet that EA's stock price will drop -- appear to be giving up. During February, short interest slipped 22%, to 10.7 million shares.

With its stock recently trading at about $53, the average analyst target price now stands at $57.50. If console prices drop again later in the year, analysts may need to place their target even higher. Edwards is a correspondent in BusinessWeek's Silicon Valley bureau

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