Video game developer and publisher, Electronic Arts Inc. (ERTS) recently launched World Series Superstars, a game carrying a Major League Baseball (MLB) license, on Facebook. World Series Superstars is the first official Major League Baseball game on Facebook.
Electronic Arts was shut out of the baseball segment for the last six years, as one of its prime competitors Take Two Interactive Software Inc. (TTWO) had an exclusive third party agreement with MLB. However, the facebook game opens the door for Electronic Arts.
The game allows players to create and manage their own team and compete against friends on the social networking site. World Series Superstars is free to play with the option of paying for virtual goods to advance the game further.
World Series Superstars follows in the footsteps of Electronic Arts’ previous releases on Facebook, such as FIFA Superstars, Madden NFL Superstars and Sports PGA Golf Challenge, which increased Electronic Arts’ market share on Facebook significantly.
Online social gaming has gained tremendous popularity following the unprecedented success of social networking sites such as Facebook and real-time simulation games.
The global social gaming market is expected to grow from $1 billion in 2009 ($600 million from the US) to just over $3 billion in 2012, representing a compounded annual growth rate (CAGR) of 45%.
Electronic Arts intends to expand its footprint in the online social gaming sector by undertaking a number of initiatives, including a partnership with Facebook and suitable acquisitions.
The company acquired leading social games company Playfish in 2009, enabling Electronic Arts to expand in the social gaming sector and strengthen its focus on new gaming platforms in the digital and social gaming genres. The Playfish acquisition is expected to be accretive to the company’s earnings in fiscal 2011.
Electronic Arts’ acquisition of social gaming platform Chillingo is also expected to drive its growth in the social gaming market.
Electronic Arts signed a new five-year agreement with Facebook to enhance its reach on social networking sites and deliver an enhanced gaming experience to gamers. Facebook currently has approximately 250 million active gamers.
As part of the agreement, Facebook credits become the exclusive form of payment for Electronics Arts’s Facebook games and Facebook will receive a 30% share of Electronic Arts’s Facebook revenue (the standard share for Facebook publishers). Playfish is currently the publisher of two of Facebook’s top ten games.
At the end of the second quarter 2011, Electronic Arts had 49 million monthly active social game users and 8.5 million daily active users.
Our Take
We believe the social gaming market is well positioned for continued growth, primarily attributable to its casual, social and interactive environment compared to the more conventional platforms.
Electronic Arts remain focused on developing its social gaming market as its packaged business continues to face significant headwinds. We remain highly positive on the social gaming sector and expect it to contribute significantly to the company’s core business going forward.
We also believe growth in the social gaming platform will have a positive impact on gross margins as developing a social game is less costly (approx. $100K to $200K) and time consuming (3-6 months) than traditional console and PC games (cost approx $50.0 to $100.0 million).
However, weak consumer spending, intense price wars and postponement of game releases such as NBA ELITE 11 and Crysis 2 can hurt profitability going forward.
Electronic Arts also faces stiff competition from Zynga (market share higher than Electronic Arts, with approximately 66.4 million daily active users and 42 social games available on Facebook), Crowdstar, Take-Two Interactive and Playdom in the social gaming arena.
We maintain a Neutral rating over the long term (6-12 months). Currently, Electronic Arts has a Zacks #3 Rank, which implies a Hold rating over the short term.
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