Video game developer and publisher, Electronic Arts Inc. (ERTS), commonly known as EA, recently announced a partnership with Shanghai, China-based mobile advertising solutions provider Madhouse. The partnership will enable Madhouse to deliver live advertisements into EA’s mobile games in China by deploying its SmartMad intelligent targeting technology.
China, with more than 900 million mobile users, has emerged as the biggest opportunity for many global players in recent times, particularly for the mobile gaming companies. However, given the high barriers to entry into the Chinese mobile gaming market, U.S. and international developers are facing a number of obstacles, including localization requirements and fragmentation.
EA primarily intends to penetrate into the huge Chinese market through diversified offerings, including social games and mobile games. As EA continues to expand its mobile gaming offerings by introducing more and more free-to-play games, advertising becomes the primary source of revenue in China. We believe the partnership with Madhouse will boost EA’s monetization efforts going forward.
EA expects free-to-play games, which include freemium games (free games that require extra features and functionalities to be bought separately), browser-based games and social network games to be a $10 billion industry in calendar year 2012, primarily driven by higher growth in advertising revenues. EA believes that the mobile gaming market will be a significant beneficiary of this trend. The mobile gaming market is expected to grow to $2.5 billion by calendar year 2013.
EA expects a massive transition in the mobile gaming market based on the increasing smartphone adoption rate compared to feature phones. The company expects more than 100.0% growth in smartphones over the next couple of years and EA is realigning its portfolio to capitalize on this trend.
This shift in platform is also driving revenue growth for EA. In the first half of 2012, mobile revenues increased 9.0% year over year. Further, in the second quarter of 2012, smartphone revenue increased 87% year over year, reflecting EA’s dominant position on Apple Inc.’s (AAPL) iOS platform.
EA also launched mobile versions of a number of popular games including FIFA 12, Madden NFL 12 and Harry Potter And The Deathly Hallows: Part 2 in the first half of 2012, which also drove revenues, in our view. EA recently launched the mobile version of the highly anticipated Battlefield 3 and Need for Speed The Run. Out of 22 new game releases in fiscal 2012, a mobile version is available for seven, clearly reflecting the growing importance of mobile gaming in EA’s portfolio.
We believe that mobile, social and casual gaming will be key growth drivers for EA over the long term. The strong growth in interactive gaming is expected to provide EA a significant competitive edge over its arch rival Activision Blizzard Inc. (ATVI) going forward.
We also note that on a non-GAAP basis, in the first half of 2012, EA achieved the strongest growth in Asia (36.0% year over year) as compared to Europe (17.0%) and North America (1.0%). We expect this trend to continue in the near term based on the belief that partnerships with local companies such as Madhouse in the emerging economies of the Asia-Pacific will boost growth.
However, whether the strong growth in Asia will be enough to offset the lackluster video gaming market in North America and a debt ridden Europe is something to watch out for. This coupled with cut-throat competition compel us to remain Neutral over the long term (6-12 months).
Currently, EA has a Zacks #2 Rank, which implies a Buy rating on a short-term basis, reflecting new releases and the solid growth prospects for the upcoming holiday season.
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