EA hints competitors acquire "one-hit wonders"

During Electronic Arts' earnings call, CEO John Riccitiello was asked about acquisitions, and specifically the two large acquisitions of the last 6 weeks (OMGPOP and Funzio). Riccitiello spoke at some length on the matter, clearly annoyed at Zynga in particular, without naming names. "We're the leader in all mobile, iOS and Android, on a 2011 basis, and we're second in social," Riccitiello said. "Our competitors in San Francisco have a very strong lead in social and best I can tell, they're #2 in mobile, and my guess is we're going to trade leads and we're going to gain share in social."

Riccitiello thinks some of his competitors have a questionable strategy. "In terms of acquisitions, to be honest with you I'm pretty anxious about acquiring instant one-hit wonders in this space. There's an awful lot of noise that grows up around an individual franchise as it rises, not so as that individual franchise when it declines." This is an obvious reference to Zynga's acquisition of OMGPOP and Draw Something, and the subsequent rapid loss of a third of Draw Something's audience.

The valuations that are being put on properties just don't make sense to Riccitiello, and he's probably seeing most of the properties that are being shopped around. "At lot of times when people are acquiring individual new intellectual properties in mobile and social, they try to put an earnings multiple on it, typically a 10x or a 20x. The problem is, to put anything on it more than a 3x or a 4x you have to have a belief that this thing is going to last a very, very long time," noted Riccitiello. "If something's gonna come and go in three or four years, you can't put a multiple, you've got to add up three or four year's profitability to figure out what to pay for it, and then do some sort of a risk-adjusted discount on that."

Riccitiello's comments got more pointed after he waxed lyrical about EA's own properties. "We actually think with The Sims, Sim City, what we've got in Bejeweled, and the rest of the PopCap IP, we are blessed with an unbelievable portfolio of brands," he said. "We don't need to buy a brand just to get a temporary lead on top of the charts for whatever is hot this quarter."

It's clear that EA doesn't want to close off the possibility of another acquisition, after so recently acquiring PopCap. Riccitiello clarified his M&A strategy: "That doesn't mean that we would never buy or never invest; we would. But right now, what I'm starting to see, is valuation expectations that assume that these things are all hockey sticks moving up and to the right with no end in sight. I think those are bad assumptions. Some of them will work, some of them won't, but they can't all be worth the multiples that I'm seeing in the market right now."