Video game publisher Electronic Arts (ERTS: Charts, News), which has been slumming in its battle against primary rival Activision (ATVI: Charts, News) on the console and personal computer fronts, has been tirelessly expanding into the next frontier of social networking games. With the purchase of Facebook game maker Playfish last November, the company has added a strong brand to its casual game portfolio, which complements its purchase of Chillingo, the U.K. publisher of the immensely popular “Angry Birds,” as well as its 2001 purchase of casual game site Pogo.com. The company is now making a push against its rival social networking game studio Zynga, which made headlines earlier this year with Google’s (GOOG: Charts, News) significant financial backing. How does EA plan to increase its dominance in this slippery field where startups prop up by the thousands daily?
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Frank Gibeau, the label president of EA Games, remarked that single players may no longer have a major role in the company’s vision, which will be led by fully online, multiplayer games. While gamers have been skeptical of Gibeau’s comments, as strong, single-player games are still dominant as well as multiplayer ones, EA’s tireless expansion into casual games, an arena where rival Activision has expressed little to no interest, signifies a paradigm shift for the company to achieve new channels of profitability.
Firstly, the company intends to offer its Pogo.com casual games on Apple’s (AAPL: Charts, News) iOS devices, such as the iPhone, iPod Touch and iPad. Through Pogo, EA is able to offer mobile versions of Hasbro’s (HAS: Charts, News) Monopoly, Scrabble and nearly a hundred other classic titles, as well as Pogo’s own games, such as “Word Whomp” and “Poppit.” CEO John Riccitiello has stated that “The dominant products on platforms like this are recognizable intellectual property,” meaning that EA’s branded versions of these games, which are often freely available in cloned versions, have more brand recognition and sales potential than their copies. For example, its rival Zynga, responsible for popular Facebook games such as Mafia Wars, Cafe World and Farmville, recently acquired Texas-based Newtoy Inc., a developer of “Words With Friends,” a multiplayer Scrabble clone for the iPhone. Zynga has been accused in the past of copying Playfish and other social game developers – for example, its popular Cafe World closely resembles EA Playfish’s earlier game, Restaurant City; and Facebook’s most popular game to date with 55 million users, Farmville, is a direct clone of a Chinese game, Happy Farm. However, the rules among Facebook game developers are slippery and there are plenty of gray areas, and copyrights are typically hard to enforce.
EA Pogo’s current games are offered in free ad-supported versions and full versions for $2.99. Pogo receives approximately 15 million visitors monthly and is currently ranked in the top ten American Internet sites by visitors. EA has also announced that its casual social games will also be available on Google’s Chrome Web Store. CFO Eric Brown has stated that digital distribution channels now account for 20% of gross revenue, up from 10% the previous year. Brown cited an accelerated release timetable for Facebook and smartphone games in the coming year, with its strong brands such as Star Wars, The Sims, Rock Band and Madden NFL all being potential candidates for the move to portable gaming. Brown also acknowledged the company’s struggles on the console and personal computer front against Activision, which has been on fire lately, with its Call of Duty, Starcraft, Guitar Hero, World of Warcraft and upcoming Bungie Studios production all dominating sales on the mainstream video game front, but claimed that its strong titles and brand awareness will help it maintain a stable, loyal customer base.
EA is taking a different approach to revenue growth in social gaming. Whereas Zynga’s profit comes from the sale of rare premium virtual goods to a more hardcore audience, EA has a three-pronged approach with advertising, premium membership pricing, as well as virtual goods. While in-game advertising in social games is forecast to grow, it’s still a fairly small market, poised to grow 33% next year to $192 million. EA’s stock currently trades with a forward P/E of 18.83, and analysts expect the company, as well as its industry peers, to be trading flat well into next year, when a revitalized economy should increase discretionary spending.
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Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.
