NCAA Punts Video Game Contract

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The NCAA announced July 17 that it will not renew its licensing contract with video game publisher Electronic Arts (NASDAQ: EA) while it fights a lawsuit filed by former collegiate athletes over the use of their names and likenesses in video games.

The governing body for college sports seems intent on putting its focus on squashing the lawsuit brought by former basketball star Ed O'Bannon, and is looking to get all its ducks in a row as the litigation heats up.

The move means EA will not be able to use the NCAA's name or logo for its popular NCAA Football video game franchise. The game traditionally features a realistic simulation of college football and is one of the company's best selling sports franchises, next to its FIFA soccer and Madden NFL games.

With the news that next year's iteration of the game won't carry the name its had since NCAA Football 98 in 1997, gamers and investors are wondering what the long term impact of the NCAA's decision will be for Electronic Arts. One also has to question what the consequences would be for the company if it gets caught in any potential fallout from the O'Bannon lawsuit.

EA Sports Presents College Football?

EA's immediate reaction to the NCAA's decision can be summarized as not much more than a shrug. While the company may no longer be able to use the NCAA name or logo in its games, it still has the rights to use the likenesses of the schools and players thanks to its agreement with the Collegiate Licensing Company, which is still intact. This agreement means authentic pieces of the game like the team uniforms, stadiums and bowl games will still be used in future installments of the franchise. Next year's game may not even seem very different to the casual observer, other than a name change. ESPN reported the game will simply be called "EA Sports College Football," but EA has not confirmed this information.

At any rate, there doesn't seem to be a lot of concern on EA's Redwood City campus. NCAA Football might be a long running franchise but the $100 million it brings in yearly only makes up about six percent of EA Sports annual revenue. Add the fact that the company as a whole is one of the largest in the world and it's easy to see that EA's prospects would be fine even if there is a dip in numbers in the short term.

The question the company should be asking itself though, is if the continuation of its popular college football franchise could be opening up the company to its own legal problems.

O'Bannon lawsuit could be a game changer

The O'Bannon lawsuit is being used as the latest battleground over the NCAA's policies towards its student-athletes. Player advocates have long said that the student-athletes deserve a cut of the billions in revenue that the NCAA and its member colleges bring in every year in TV rights and other contracts. The argument goes that the only reason the NCAA is so strict about making sure that players maintain amateur status is because it doesn't want to give them a piece of the pie. If the court system strongly rules that players deserve to be compensated for the use of their likenesses, it could change the entire face of college athletics. 

No one knows what the exact landscape would look like in this hypothetical outcome, but if the ruling covers not just all athletes enrolling at NCAA schools in the future, but also all former and current student-athletes who have already had their images exploited for profit, the situation could get volatile quickly. 

While an O'Bannon ruling in favor of the players would hit the NCAA the hardest, it might also encourage supporters to expand their crusade to go after other parties viewed as complicit in making money off of these unpaid athletes. With a market cap of $7.3 billion and a reputation as one of the worst companies in America, EA would be an easy target.

The company isn't exactly a stranger to litigation over its sports titles. EA recently settled an anti-trust lawsuit over its exclusive contract with the NFL. While the NCAA would seem to have all of the legal liability in this scenario, don't be surprised if someone tries to pressure EA into another settlement if the chips involved in the O'Bannon case fall in the right spots.

We're a long way from that though. The judge in the case still has to rule if the lawsuit can receive class-action status and a potential trial would most likely not start until 2014. If the NCAA is found liable, you can expect the case to be appealed all the way to the U.S. Supreme Court.

End of exclusive contract could mean more competition

That class-action settlement over EA's exclusive contracts also contained a provision that the company would no longer hold exclusive rights for the NCAA in the event that a new contract was signed after 2014. That point is now moot as it turns out that no one will be signing a contract with the NCAA while the litigation is still going on. But the idea that EA could face competition from a new college football title is still on the table. There are at least two companies that would seem well positioned to go for the score.

The most well-known competitor to EA Sports in years past was Take-Two Interactive (NASDAQ: TTWO). The company owns 2K Games, which last released a football game in 2004. Take-Two engaged in a pricing battle with EA that year with its NFL 2K franchise going head-to-head with Madden. EA signed its exclusive contracts shortly thereafter and then, with no competition, raised the price of Madden the following year, leading to the lawsuit. 2K football is still remembered fondly by gamers even today and the brand is still recognizable as 2K has released current titles in other sports such as Major League Baseball.

Take-Two has not said a word about any future plans to get back into the football business, but 2014 is the first year that the company would have been eligible to make another NCAA branded game. But since no one will have an NCAA contract next year, the playing field is essentially reset. This could be a great opportunity for the company to rekindle its gridiron glory days.

Other companies like Sony (NYSE: SNE) are also able to take the field with a college football game starting next year. Sony's in-house studio already makes a popular baseball franchise called MLB: The Show. The game has consistently received rave reviews year after year and last year's edition has sold about 800,000 copies to date. With the move to the new generation of consoles coming this fall, the time may be right to take a shot at a new potential franchise in another sport.

Of course, any company jumping into the college football business right now would be navigating the same tricky legal landscape that EA should be cautious of. Still, it would not be surprising if the recent news surrounding EA's NCAA contract caused one or more companies to take a hard look at potentially stealing some of EA Sports' market share.

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