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EA Releases Real Racing 3

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Confirming earlier rumors, video game developer and publisher Electronic Arts (EA - Free Report) recently announced the availability of Real Racing 3 for Apple’s (AAPL - Free Report) iPhone, iPad and iPod touch. Real Racing 3 will also be available on Google’s Play and Amazon’s (AMZN - Free Report) application store.

Developed by EA’s Firemonkeys studio, Real Racing 3 comprises 900 different events and 600 hours of total gaming. But the game’s major attraction is its free availability. Unlike its predecessor Real Racing 2, the game can be downloaded for free and EA expects to earn revenues by selling in-game virtual goods.

Another important feature of Real Racing 3 is the use of time shifted multiplayer (“TSM”) technology. TSM allows players to compete against each other anywhere and anytime and on any device, even if they are offline. We believe that these new features will help the game to earn significant revenues going forward.

Real Racing 3 is the first freemium game of the Real Racing franchise. Free-to-play games, popularly known as freemium games, enable gamers to access the game for free. Developers and publishers earn revenues through the sales of in-game items (also known as micro-transactions) and advertisement. The freemium model has gained further momentum with the increasing popularity of social games, co-operative games and mobile games.

EA has been focusing on building its social free-to-play portfolio to counter strong competition and also to offset declining sales of its core packaging division. The company continues to bring its well known franchises such as Star Wars, FIFA, The Sims, Warhammer, Command & Conquer, Battlefield and Need for Speed in the freemium mode in order to gain significant customer base going forward.

In the recently concluded third quarter, revenues from mobile and other handheld devices increased 18.0% year over year to $99.0 million. Smartphones and tablets revenues were up 36% year over year to $79.0 million. Moreover, extra content and free- to-play revenues jumped 50.0% year over year to $185.0 million.

EA expects contribution from free-to-play, casual and social games to increase to approximately 35.0% of worldwide digital revenues by calendar year 2013. We believe that EA’s strong digital portfolio and continuing growth in the free-to-play and online segment will drive top-line growth in the near term.

Moreover, EA recently announced its intention to introduce micro-transactions in all games including packaged goods. However, packaged games cost much more than mobile and free-to-play, and the added cost will aggravate customer dissent toward packaged titles. We believe that this will hurt EA’s customer base going forward.

Additionally, we believe that soft video game industry performance, particularly due to weakness in retail sales amid an aging console system lifecycle, remains a concern in the near term.

Currently, EA has a Zacks Rank #4 (Sell).

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