Electronic Arts OKs Exclusive Deal to Supply Games to AOL
Electronic Arts Inc. agreed to be the exclusive supplier of games to America Online Inc., the No. 1 Internet service provider.
Redwood City, Calif.-based Electronic Arts, the world’s largest video game maker, also said it would form an online games division that will create a Web site next summer to allow consumers to play games online.
Electronic Arts also agreed to buy the Kesmai gaming unit of media conglomerate News Corp. for $30 million in cash and stock in a deal that will result in a charge against earnings, probably in the fourth quarter.
The news sent Electronic Arts shares up $16.25, or 16%, to close at $108.25 on Nasdaq. AOL shares rose $3.69 to close at $162.31 on the New York Stock Exchange.
Between the AOL and Kesmai deal, the Web site and other investments, Electronic Arts said it expects earnings “dilution” of 20% in the fiscal year ending in March 2001.
The company, which supplies a host of sports and adventure video games for personal computers, Sony Playstation and Nintendo 64, plans to issue new shares tracking the online games division. The company will time the division’s initial public offering to coincide with the introduction of the site.
America Online has committed to buy 10% of the new shares plus warrants for an additional 5%.
The deal with America Online spans five years starting in April and guarantees AOL $81 million. Electronic Arts will retain more than 95% of subscription revenue and more than 70% of advertising revenue, he said.
For its part, Electronic Arts plans to spend up to $125 million between now and March 2001 as it builds its online games division. It said it will spend $20 million to $25 million in the current fiscal year ending in March, plus another $100 million in the following year.
While the five-year deal and other factors will boost revenues in the coming years, they will first drag down earnings as the company makes investments in the online games business, Chief Financial Officer Stan McKee said.
The money would be spent on fees and shared revenue associated with the AOL deal and on product and infrastructure development and marketing, McKee said.
In the next year, Electronic Arts plans to offer 60 games online through AOL and its Web site through a subscription-based service. It currently offers one online game, “Ultima Online,” for a $9.95 subscription fee.
Electronic Arts said the deal for the Kesmai division includes a $22.5-million cash portion with the balance in Electronic Arts stock. The stock portion will be converted into a 5% interest in the tracking stock, McKee said.
The remaining shares will be retained by Electronic Arts and employees of the new division.
