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A Hat Trick for Electronic Arts

By Cliff Edwards It looks like the real-life world of manufacturing video games is getting as cutthroat as those battles on the screen. Just a month after signing an exclusive five-year deal to use likenesses from players in the National Football League and a four-year deal with the Arena Football League, video-game giant Electronic Arts (ERTS) announced on Jan. 17 that it has locked up an unheard-of 15-year license with TV's leading sports network, ESPN (DIS).

The deal, which takes effect in 2006, gives EA access to ESPN's print, broadcast, and online content, including the popular X-Games extreme sports competition and poker, through 2020.

More important, it will effectively lock out rivals like Sega and Take Two Interactive from the video-game market's most lucrative segments. Sports games account for more than 20% of industry revenues. By preventing competitors from using the big brand names and images, EA will likely solidify the dominance it has had for more than a decade.

BARGAINING POWER. Threats over the past year to EA's business put this most recent flurry of deals into sharper focus. The Redwood City (Calif.) outfit's longstanding control of the football segment with it high-profile Madden franchise looked on the verge of cracking last year with Sega's and Take Two's ESPN NFL 2K5. Critics called the game as good as if not better than EA's Madden 2005.

Adding to the pressure, Sega and Take Two debuted its game at a rock-bottom $19.99 street price. EA, which typically prices its big games at $49.99, was forced to match that price in November, prompting a slew of analyst downgrades to the EA's stock.

With these new deals, EA execs have likely put themselves in the driver's seat. Microsoft's (MSFT) next-generation Xbox console is scheduled to hit the market in late 2005, with updated Sony (SNE) PlayStations and Nintendo (NTDOY) machines to follow soon after. No new game consoles have been launched successfully without a major sports game. That gives EA tremendous bargaining power with Sony, Microsoft, and Nintendo as the three set the fees they'll charge game-makers to license their technology.

"IT'S JUST CRUCIAL." An ESPN executive acknowledged the titanic shift in fortunes in an interview with BusinessWeek Online. ESPN's deal with Sega is set to expire this year, so talks with EA heated up after EA signed its NFL deal, says John Skipper, executive vice-president for ESPN/Disney. "Everything we do is about making sure we are wherever the fans are. Playing sports video games has arrived, and it's just crucial that we be there," Skipper says.

The EA-ESPN tie-up may be a sports fan's dream, but it could create nightmares for video-game competitors for years to come. Edwards is a correspondent in BusinessWeek's Silicon Valley bureau

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