January 21, 2011 / 7:10 PM / 8 years ago

Analysis: EA wins new friends with social, mobile games

NEW YORK (Reuters) - Electronic Arts ERTS.O, hurt by an industry-wide slump in video game sales, wants to become a big player in a new game — social and mobile media.

Visitors attend a show by Electronic Arts (EA) at the Gamescom 2009 fair in Cologne August 22, 2009. REUTERS/Ina FAssbender

EA is the top publisher of games by revenue on Apple Inc’s (AAPL.O) iPad and iPhone, and is concentrating more on its digital business. Sales of the more costly packaged games, like its “Tiger Woods PGA Tour” golf game, have taken a beating since the beginning of the recession.

This year, EA’s digital business could make $750 million in sales, about a fifth of its revenue and enough to draw notice from investors seeking exposure to hot trends in mobile and social games.

“EA is probably the best way for an investor in public companies like myself to buy into the mobile game business,” said Larry Haverty, associate portfolio manager of the $162 million Gabelli Global Multimedia Trust, which owns EA shares.

The top company in social gaming, Zynga, is hot, but privately held, meaning most investors have been locked out.

Investors have been pulling back from traditional game publishers, those that come up with action and sports games that people play on consoles and TV sets.

EA, the second-largest publisher and the company behind well-known franchises such as “Madden NFL” and “The Sims,” is a good example.

A retail sales slowdown forced it to cut costs and scale back its packaged titles to about 35 this fiscal year, compared with 50 or more games a year earlier. A stock that traded as high as $51 in 2008 is today trading closer to $15.

Analysts say its fortunes may improve as acquisitions in mobile and social gaming pay off. EA bought Playfish, a social gaming company, in 2009 in a deal worth up to $400 million. It bought Chillingo, which publishes the popular “Cut The Rope” mobile game, in October for $20 million.

“As social games and the mobile business become more prevalent, investors are going to give more credit to EA,” said ThinkEquity Analyst Atul Bagga.

Compared to packaged games, revenue from digital games remains small. But analysts say that side of the business offers growth. EA also dipped into that market as far back as 2005, when it paid $680 million for mobile games maker Jamdat.

EA’s digital business may grow more than 30 percent this year, while offering higher margins than its packaged products. That is because digital games costs less to produce and distribute than games that must be manufactured and shipped before people can play them on a console.

“This is one of the fastest growing areas of our business and we’re driving to a billion and beyond in digital revenue,” Chief Financial Officer Eric Brown said in an interview. He declined to provide a timeframe for that forecast.

A catalyst for EA’s digital business could be the release later this year of the massive multiplayer game “Star Wars: The Old Republic.” Multiplayer games can support hundreds or thousands of players who teem in a simulated universe.

Positioned to compete with Activision Blizzard’s (ATVI.O) “World of Warcraft,” the Star Wars game targets a more hardcore gaming audience. Yet Brown said it will still have the mass appeal of the Star Wars movies.

EA has spread its games across a variety of new platforms. On its version of Scrabble, which sells for $9.99 on the iPad, users play matches on devices against opponents on Facebook.

During the holiday season in 2010, Scrabble was the No. 1 download on Amazon’s (AMZN.O) Kindle, outselling The Girl with The Dragon Tattoo, based on the popular crime novel by late Swedish author Stieg Larsson.

“It’s only an opportunity that things like the iPad, tablets and iPhones come to market because it just gives us a greater chance to show off our games,” said Barry Cottle, EA’s head of social, mobile and online gaming.

Brown, the chief financial officer, said EA’s digital portfolio is something “people are starting to wake up to.”

“The market is slowly but surely moving in our direction,” he said.

Editing by Paul Thomasch and Robert MacMillan

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