Video game developer and publisher, Electronic Arts Inc. (EA) recently launched a mobile version of the long-running animated series “The Simpsons.” The mobile game called The Simpsons: Tapped Out is currently available in Apple’s (AAPL) App stores and can be played on iPhone, iPad and iPod touch for free.
The Simpsons: Tapped Out challenges gamers to build their own version of Springfield, a city accidentally blown up by one of its residents, Homer. Players are expected to complete a number of levels to unlock virtual goods and money that they can use to beautify their city according to their choice.
Moreover, with the help of EA’s origin platform players can visit his/her neighbors Springfield and is allowed help in completing different tasks. This co-operative gaming mode is one of the major attractions of The Simpsons: Tapped Out, in our view.
We believe that the popularity of “The Simpsons” brand, coupled with its availability on Apple devices such as the iPhone 4S, will benefit the new game going forward. The Simpsons: Tapped Out is EA’s second free-to-play mobile game after it launched The Sims: Freeplay during the third quarter of fiscal 2012.
To date, in fiscal 2012, the company has released mobile versions of some of its well known titles such as FIFA 12, Madden NFL 12 and The Sims 3 Pets. EA is expected to release a mobile version of Mass Effect 3 in the upcoming fourth quarter. We expect that EA will continue to release mobile versions of its popular games going forward in order to gain market share in the mobile gaming sector over the long term.
Social and Mobile Gaming: Long-Term Trends
According to research firm IBISWorld, social gaming is expected to reach $11.3 billion by 2016. According ABI research, mobile gaming is expected to generate $16.0 billion in revenues at the same time, a massive increase from approximately $5.0 billion reported in 2011. As per Juniper Research, social and casual games will account for a major chunk of mobile game downloads going forward.
We believe that the social gaming market will further benefit from the increased usage of smartphones and tablets going forward. As smartphones and tablets become more powerful with faster processors and improving telecommunication technologies (such as 4G), massively multiplayer online (MMO) games have become easy to play on the move. This will further boost the demand for social and co-operative games going forward.
Most of the social games are free to play (freemium) and 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. As per Juniper Research, revenues from purchases of virtual goods totaled $2.1 billion in 2011 and are expected to grow to $4.8 billion by 2016.
On the other hand, advertising spending on mobile games is expected to reach approximately $900.0 million by 2015. We believe that the freemium model will continue to remain the primary revenue contributor for social game developers over the long term.
EA Better Placed than Zynga?
We believe that social gaming is currently a duopoly market with the major players being EA and Zynga Inc (ZNGA). With the launch of new social games such as The Simpsons: Tapped Out, EA has thrown a significant challenge to the dominance of Cityville, Farmville and other popular social games from Zynga. We note that Zynga’s Cityville and EA’s The Sims Social are ranked #1 and #2, respectively, as the most popular games on the social networking website Facebook.
We note that mobile revenues form approximately 5.0% to 7.0% of both EA’s and Zynga’s revenue base and both the companies expect it to play a big part going forward. We believe that it is extremely difficult to point a winner right now as both the companies boast significant market share, talented development teams and significant product pipelines.
However, we believe that EA has a slight competitive edge over Zynga owing to its well established product portfolio for the mobile segment and its acquisition of Zynga’s direct competitor PopCap Games in July 2011. Moreover, Zynga’s lack of revenue diversification is a major advantage for EA going forward, in our view.
We remain Neutral on both EA and Zynga. Currently, EA has a Zacks #3 Rank, which implies a Hold rating on a short-term basis. On the other hand, Zynga has a Zacks #2 Rank, which implies a Buy rating in the short term.
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