French Connection, Not OK

Much has been made in the last couple of days over EA's newfound 25 per cent share of voting rights in French rival Ubisoft - a move which, if sensational news headlines around the web are to be believed, is a clear sign that an acquisition bid is imminent.

In fact, nothing of the sort is happening - and EA's increased voting rights don't actually reflect any action by the publishing giant, which hasn't acquired a significant block of shares in Ubisoft since mid-2005.

Instead, this entire furore has been kicked off by a slightly obscure piece of stock market law in France, which allows certain shares to gain additional voting rights after they've been held for a given amount of time. It's a system designed to encourage long-term shareholding, and in Ubisoft's case, voting shares double their votes after two years.

In other words, it's business as usual for EA and Ubisoft's somewhat uneasy relationship - nothing has happened this week which couldn't have been predicted two years ago, no new moves have been made, and the change in voting rights just represents the perfectly normal maturing of EA's shareholding.

It is, in other words, a much less interesting story than it seems on the surface.

However, it does give us a timely opportunity to consider the relative fates of Electronic Arts and Ubisoft since the dramatic (in corporate terms, at least) events of late 2004 and early 2005. It's worth recalling just how unusual the situation was in those few months, as Ubisoft reacted to EA's sudden acquisition of almost 20 per cent of its stock like an animal stung by a bee.

The fiercely independent French firm hotly denounced the acquisition as "hostile", which only sent speculation over EA's intentions into overdrive. Fearful of losing control over their resurgent firm, the Guillemot family openly discussed a variety of strategies to prevent EA from gaining a controlling stake.

French government intervention was mooted, as were a variety of "poison pill" strategies - which would have seen the firm performing quick mergers with subsidiaries such as mobile game publisher GameLoft, in order to render its stock less attractive for hostile takeover.

In the end, however, no such moves were required. EA has largely remained quiescent regarding its Ubisoft stakeholding since then. Minor transactions, various Ubisoft stock movements and this week's voting rights maturation have left it with around 15 per cent of the firm's shares, and 25 per cent of voting shares.

It's highly unlikely that a takeover bid will result from anything that has happened this week. EA will certainly enjoy a little more leverage at shareholder meetings, but it has chosen not to capitalise immediately by requesting a seat on the board.

The simple fact is that at present, EA probably isn't in any position to try and absorb a large, directly competing, rival business. Ubisoft's stock market performance has largely been excellent this year, while EA's share price has generally remained tethered within a pretty stagnant six-dollar range for the year to date. Any buy-out, as a result, would have to come at an incredibly hefty premium in order to satisfy Ubisoft's shareholders.

Not only would it be costly to buy Ubisoft, it would also be an extremely expensive and difficult task to integrate its operations with EA's. There is a great deal of duplication between the two firms, and removing such inefficiencies after a merger would be painful and contentious - especially considering the language and culture barrier that would exist between the American and French companies.

EA, we're sure, knows this - and Ubisoft certainly does, if its furious reaction to the original share acquisition is anything to judge from. This combination of factors makes a takeover extremely unlikely in the short to medium term.

The irony, however, is that now more than ever, Ubisoft certainly has something which EA needs. When the original 20 per cent acquisition took place, much of the commentary focused on Ubisoft's recent successes with titles such as Prince of Persia, and the recently re-invigorated Tom Clancy licence - successes which were put in sharp perspective with EA's apparent difficulty with generating new, self-owned IP.

The hardware transition has only widened this gap. Electronic Arts has made some major changes to its executive team in recent months, with the appointment of key figures such as John Riccitiello, Peter Moore and Kathy Vrabeck. However, the impact of those changes has yet to be felt, and EA still suffers from the same core problems which have dogged it for years.

Those problems are simple, and they all boil down to the fact that EA has grown huge without ever developing the kind of structure or culture which would allow it to remain nimble. Development costs, especially next-gen console development costs, are enormous, not least because the firm's head-count is vast, with additional warm bodies being flung at projects in difficulty as a kind of universal panacea.

The environment at the firm is politically charged, and efforts at change are damaged by empire-building on the part of managers - all of which creates a culture which is risk-averse, and which completely fails to nurture new, innovative ideas. Even when efforts are made to incubate new IPs and projects, they are not protected within EA's massive ecosystem, and often steamrollered at crucial points in development by the needs of the punishing 12 to 18 month development cycles of existing IPs.

Many managers and executives in the industry would dismiss such concerns out of hand - at least the concerns related to innovation. After all, EA's vast success in the last ten years has been built on yearly updated franchises in which innovation crawls along at a snail's pace, drip-fed into the product from year to year. EA has never been risky, and EA is huge - so, aside from the worrying development budgets, where's the problem?

The problem is illustrated clearly by Ubisoft, which continues to enjoy vast success thanks to brand new IPs, or original products based on existing IPs (an approach not dissimilar to Nintendo's system of using the Mario character branding to sell entirely new, innovative games).

Ubisoft's willingness to try new concepts and launch new IPs has given it an enormously high profile on the next-gen system. Games like Assassin's Creed and the independently developed, Ubisoft-published Haze have raised the firm's stock among gamers and the media alike.

Even more importantly, however, Ubisoft's willingness to take calculated risks in its development (and, arguably, far superior management of its studios) has made it into a more nimble company than EA by far. Nowhere is this more evident than in the two companies' relative success on the Nintendo Wii platform - a system which has absolutely demanded innovation, risk-taking and lateral thinking from its developers.

Ubisoft has been one of the most successful third-party publishers on the Wii, with games like Red Steel attracting huge attention (although failing somewhat to live up to its promise), while Rayman Raving Rabbids has become a great sleeper hit on the console.

EA's efforts, meanwhile, have largely fallen flat. As with the DS before it, the Wii has proved to be a challenge EA doesn't know how to meet. Its aversion to risk, its reliance on existing franchises and determination to replicate similar experiences across multiple platforms, and most of all its executives' short-sighted decision to focus almost exclusively on Xbox 360 and PS3 development, have left it largely unprepared for Nintendo's success.

The Wii and the DS have turned the market on its head, creating platforms which require radically different game concepts as opposed to tarted-up ports. Xbox Live Arcade and PlayStation Store, too, are changing the market by altering customers' expectations and their relationship with content in subtle but powerful ways.

Ubisoft has demonstrated that it has what it takes to adapt quickly to new platforms and new markets. Electronic Arts, meanwhile, continues to demonstrate solid revenues, and its franchises remain key forces in the market - but the landscape has moved more rapidly than anyone predicted in the last two years, and the giant publisher looks decidedly rattled.

So there is much that EA could learn from its smaller, more nimble competitor - but it is a match that is not to be. Aside from huge financial and structural concerns, there is one vast and seemingly insurmountable problem which hangs over any takeover bid by EA. The industry's 800 pound gorilla has proved itself, time and time again, to be a most disagreeable bedfellow - one which consistently smothers its partners under its sheer bulk.

Were EA to buy Ubisoft, it's almost inevitable that the pattern would be repeated; in the merger, the firm would lose the creative spark which makes it so attractive in the first place. EA's goal is clear; it must put its own house in order, rather than hoping to solve its problems with a merger. For now at least, Ubisoft can sleep soundly, safe in its independence.