Video game developer and publisher, Electronic Arts Inc. (EA - Free Report) and one of the largest global games advertising network operator, WildTangent Media, recently entered into a partnership, under which Pogo’s (a division of EA) online games will be accessible through WildTangent’s website.
Players based in North America and United Kingdom can play Pogo’s popular online games such as Poppit!, SCRABBLE, MONOPOLY World Edition and Plants vs. Zombies for free. Subsequent to the deal, players can also access these games through WildTangent’s Games App, which is compatible with multiple devices. Additionally, players can join Club Pogo’s subscription service, which will allow them to play more than 40 exclusive games barring any advertisement.
The partnership reflects EA’s focus on consolidating its position in the rapidly going social and casual gaming sector, which is expected to grow at a staggering rate over the next couple of years. According to market research firm eMarketer, social gaming is expected to reach approximately 62 million US internet users by the end of this year (one-fourth of total online users). By 2013, eMarketer predicts the figure to reach 73 million.
The popularity of social and casual games primarily rests on the free-to-play business model, where the players do not have to pay any upfront fee or rental. The games generate revenue primarily through the in-game sale of virtual goods. According to market intelligence firm In-Stat, the worldwide market for virtual goods was worth $9.0 billion in 2011 and is expected to reach $15.0 billion by 2014.
Players accessing the WildTangent website can buy virtual goods and in-game items by using WildCoins (much similar to Facebook Credits, a form of virtual currency). However, WildTangent generates much of the revenue through brand advertisement as compared to virtual currency; hence the cost of playing free games does not pass on to developers and publishers, thereby making it an attractive low cost platform for them.
We believe that the partnership reflects EA’s policy of expanding its social gaming publisher base beyond Facebook. As the video gaming market continues to struggle, social game developers are looking for new ways to boost revenues and profitability. In such a scenario, a 30.0% cut in sales, which Facebook charges for its services has been a concern for developers such as EA and Zynga Inc. (ZNGA - Free Report) . Both the companies have exclusive agreements with Facebook, under which they are bound to use Facebook credit for any in-game transaction on the social networking website.
We believe that the WildTangent partnership will expand EA’s subscriber base going forward. Moreover, an increase in the number of social gamers will boost spending on virtual goods, lead-generation offerings and advertising, which bodes well for EA over the long term. We also believe that expansion of publisher base will provide EA a significant competitive edge over Zynga (which generates 90% revenue from Facebook) going forward.
Despite weak consumer spending and volatile macroeconomic conditions, we believe that EA’s significant exposure to digital and social gaming will boost its fundamentals over the long term.
We have a Neutral recommendation on EA over the long term (for the next 3-6 months). Currently, EA has a Zacks #3 Rank, which implies a ‘Hold’ rating over the short term.