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Activision and Electronic Arts: The Brewing War

Every industry has its rivals: Two big companies duking it out for customer loyalty and king-of-the hill status.

Electronic Arts Headquarters, Redwood City, California
AP
Electronic Arts Headquarters, Redwood City, California

In the cell phone world, it's AT&T vs. Verizon .

In the computer world, it's Apple vs. Microsoft .

Among video game companies, it's Electronic Arts vs. Activision Blizzard —and it's about as ugly a fight as you've ever seen.

While the rhetoric gets shrill in any corporate battle, it has moved well past that in this fight, with high profile employees being wooed away and gamer loyalties being put to the test. Ultimately, though, it's shareholders that, for better or worse, could be caught in the middle.

Monday saw the latest—and biggest—rift between the companies, when Jason West and Vince Zampella tied their new development house to EA, striking an exclusive distribution deal with the publisher. The pair formerly headed Infinity Ward, the Activision studio responsible for "Modern Warfare 2," 2009's top selling game. The publisher abruptly fired them last month, alleging breach of contract and insubordination.

The ripple effect from that could be felt for some time, as current Infinity Ward employees decide whether to join their old bosses or stay put. Already, four high-ranking developers have quit Infinity Ward. While none have officially joined Respawn Entertainment (West and Zampella's new studio), most industry observers expect they eventually will.

If it's the beginning of a greater exodus, that could have significant repercussions for Activision.

"All of this turmoil around Infinity Ward has certainly been a distraction, and if a significant portion of Infinity Ward's staff leaves for the new studio, it could impact Activision's 2011 release schedule," says Ben Schachter, an analyst with Broadpoint AmTech.

At the heart of the battle is two companies jockeying for the title of the industry's largest publisher. EA held that role for years until Activision merged with Blizzard Entertainment in 2008, putting it on top. Around the same time, EA saw some big titles underperform and was rejected in its efforts to acquire Take Two Interactive Software .

The rivalry goes much further back, though it used to take on a different form. Years ago, EA and Activision had booths across from each other at E3, the video game industry's annual trade show. Each would progressively turn up the volume on their speakers to drown the other out—until it was impossible to hear anything at either booth. In some ways, the shouting match of the past year or so is much the same.

Activision
Activision

There have been so many employees switching allegiances in recent years that it might be worth setting up a shuttle between the companies' two offices. West and Zampella (who, ironically came to Activision from EA in 2002) are just the latest examples.

Last July, the duo behind EA's "Dead Space" were recruited to Activision to form a new internal studio (which, ironically again, is now working on a "Call of Duty" game). A couple years ago Activision president Kathy Vrabeck quit the company, only to end up at EA.

While the fight is a fun one to watch from the sidelines, it could open doors for competitors to gain traction in the industry.

"It kind of takes the heat off of other people," says Billy Pidgeon, senior analyst with M2 Research. "Look at how Nintendo came out of nowhere because Microsoft and Sony didn't really consider them a threat when they were busy fighting over the console top spot last generation."

For investors, there is an upside to the feud. The highly competitive battle between the two companies is the type of thing that fosters and encourages innovation from developers. That often means popular games that boost sales.

The risk, though, comes with how distracting the fight is.

"For shareholders, the issue is: Where are the companies investing their resources and how [do] they expect to be making money in the future," says Pidgeon.

Of course, it's also possible that the small number of major publishers in the industry puts a magnifying glass on the EA/Activision struggle. There are, after all, mega-stars in any content industry—and if Brad Pitt became a free agent, it's a safe bet that Hollywood studios would go into feeding frenzy mode to bring him on board.

"EA and Activision have sort of separated themselves from THQ and Take Two, because they're the two largest players, while Hollywood has six to eight big studios," says Eric Handler, senior equity analyst at MKM Partners. "It looks like a bigger rivalry than it might be. … And I don't think it's too distracting for either studio."

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