) have reportedly dropped all charges against each other related
to copyright violations and disputes on recruitment of employees.
Both the companies also settled their lawsuits permanently in the
U.S. District Court for the Northern District of
The lawsuits date back to Aug 2012 when EA alleged that some
characteristics of Zynga's popular
had unmistakable similarities with the former's
The Sims Social
, and pointed toward violation of the copyright act.
Zynga countersued EA in late 2012 accusing the latter of
unlawfully preventing employees from shifting to Zynga.
We believe that the legal battle would have been detrimental
to both the parties, as these kind of trials take a long time to
yield any results. Thus, following the settlement, both the
companies can now concentrate on the business they do best --
It is noteworthy that Zynga has reduced its investments in
as it failed to produce expected results. On the other hand, EA's
The Sims Social
has gained traction among its users.
Moreover, with the lingering macroeconomic sluggishness taking
a toll on the overall video game industry, both parties would
rather concentrate on their core operations to improve their
company's fundamentals than get into a legal tussle.
From the broader perspective, soft video game industry
performance, particularly due to soft retail sales amid an aging
console system lifecycle and the cannibalizing effect of
free-to-play games remain concerns in the near term for EA, a
Zacks Rank #4 (Sell) stock.
Although we believe that the ongoing transition from the
physical to the digital platform will ultimately benefit the
video game industry (due to the cost effectiveness), low priced
digital games have failed to offset the rapid decline of
high-priced retail sales in recent times.
Zynga, a Zacks Rank #3 (Hold) stock, is well positioned to
grow in the near term based on its innovative product pipeline
and dominant position in the social and mobile gaming sector. The
company's expansion in the advertising space and renewals from
companies such as
) are other positives.
However, we also note that barriers to entry are low in the
social gaming market and this will attract new entrants, thereby
further increasing competition for Zynga over the long term.
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