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Video game developer and publisher, Electronic Arts Inc. (ERTS), better known as EA, recently launched a new mobile version of its popular life-simulation franchise “The Sims,” exclusively for Apple Inc.’s (AAPL - Analyst Report) iPad, iPhone and iPod Touch devices.
The new mobile version, namely The Sims FreePlay is available to Apple users for free. For the first time in the franchise’s history, The Sims FreePlay will be available on Apple’s iconic tablet computer iPad, and is expected to further boost the game’s popularity going forward.
The Sims FreePlay enables gamers to build, customize and coordinate a whole town for free on their mobile devices. Gamers can play 16 different characters and the free application offers 1200 customization options for the homes and other surroundings of the Sims.
The game poses a number of challenges and by solving those, gamers can earn Simoleans (in-game virtual currency), which they can exchange in lieu of virtual goods. Moreover, gamers can purchase lifestyle points by paying real money and this will allow them to complete the levels quickly.
EA believes that the new game will be well received given the significant fan following of The Sims franchise. EA has sold more than 140 million copies of The Sims and its sequels in 22 languages across 60 countries around the world. Such has been its popularity that The Sims franchise became the company’s first game to be released on the social networking site, Facebook, in August 2011.
The Facebook version known as The Sims Social emerged as the second most popular game on the social networking site just behind Zynga Inc.’s (ZNGA - Snapshot Report) CityVille, with over 8 million daily active users and 40 million monthly users as of September 2011. We believe that the new mobile game will also drive EA’s top-line growth going forward.
EA and Social Gaming
The gaming industry is going through a transitional phase with the advent of social and mobile gaming. Given that most of the social games are free to play, they are gaining huge popularity. The game developers’ earn revenues primarily through the in-game sale of virtual goods and The Sims FreePlay is no different (EA will earn revenue by selling lifestyle points).
According to the market research firm eMarketer, the U.S. social gaming market is expected to be worth $2.18 billion in 2012. eMarketer expects revenues from virtual goods to drive the biggest share of dollars through 2012. Advertising spending also contributes significantly to the revenue growth. eMarketer forecasts an increase of 41% in advertising spending in 2012 compared with 2010.
For sometime, EA has been pushing hard to gain a strong foothold in the emerging mobile and social network market by launching digital versions of its popular titles such as The Sims, Monopoly Millionaires, FIFA Superstars and Scrabble. Despite the strong customer base of these titles, EA has found it difficult to grab market share from social game developer Zynga, which remains the dominant leader in this space.
To counter Zynga’s popularity and strengthen its foothold, EA has been utilizing its strong cash balance to acquire some of the best intellectual properties in the mobile and the social networking market. Over the last couple of years, EA has acquired a number of companies including Playfish, PopCap Games and KlickNation to strengthen its portfolio and further drive market share in the social gaming arena.
We believe that EA is better equipped than most of its competitors including Activision Blizzard Inc. (ATVI - Snapshot Report) to gain traction in the digital format with its variety of titles and massive fan following. Moreover, EA’s strong cash balance ($1.50 billion as of September 30, 2011) will help pursue accretive acquisitions going forward, in our view.
However, the gloomy macroeconomic environment and weak video game sales results over the last 12 months compel us to remain cautious in the near term. We also note that digital contributes only a small portion of EA’s revenue growth (21.0% in the second quarter of 2012). On the other hand, EA’s major market (packaged good) is more saturated due to overcrowding and this will hurt its growth going forward.
We remain Neutral on EA over the long term (6-12 months). Currently, EA has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.
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