Is EA Going to Buy Zynga or Playfish in Social Gaming Bid?
In recent weeks we’ve been hearing rumors about gaming giant EA looking to acquire social gaming companies — specifically Zynga and Playfish. Both social gaming companies have denied the rumors, so assuming there are no deals that are about to be inked and announced, here’s what appears to be going on.
EA, as many in the gaming industry have expected, is starting to look around for acquisitions. If anything, we’re surprised we haven’t heard rumors about other gaming giants, like Activision/Blizzard and Ubisoft doing the same.
Zynga, as we wrote a couple weeks ago, has to our knowledge spurned funding earlier this year, and since grown revenue to possibly more than $200 million for this year. At some point recently, it was having “preliminary” talks with EA, according to multiple sources, with one person saying that the asking price was $1 billion. Zynga has flatly denied everything. We believe that Zynga could look to go public as soon as March, once its 2009 financials have been audited.
We have a few more details on what has supposedly been happening with Playfish. A reliable industry source says EA may have even acquired the company several weeks ago, with an announcement possibly happening in the next few weeks. We believe that Playfish could be on track to make as much as $75 million this year.
These companies have only gotten any serious traction in this past year. On Facebook, Zynga has grown from 60 million to nearly 150 million monthly active users in just the last three months, while Playfish has grown from 35 million to nearly 60 million in the same period, according to AppData. Those numbers do not include usage on other social networks nor on mobile devices. Zynga has a notably strong presence on MySpace. And, also, these numbers double-count users who have installed more than one game from the same company. So actual traffic is not totally clear. For what it’s worth, Zynga announced 129 million monthly unique users last month across all of its sites.
The third of the “big three” developers on Facebook is Playdom, which we recently heard is on track to make $50 million this year based on its 28 million monthly unique users on Facebook, MySpace and other platforms. It is in the process of raising more funding at a reported $100 million to $200 million valuation.
Fast Evolution
All in all, this growth has surprised the traditional gaming industry, which had not expected the primary revenue model — free-to-play games with virtual goods — to be nearly so popular.
The market dynamics at play are changing quickly. Besides cross-promoting new games with old ones, an effective means of growth has been advertising and especially on Facebook itself. Zynga is on track to spend $50 million on Facebook ads alone, we’ve heard from several industry sources. Ads have helped power the growth of farming simulation game FarmVille to more than 56 million and restaurant simulation game Café World to more than 10 million users in the week since it launched.
One reason for EA to move in and buy a social gaming company would be to use its financial power to spend money on advertising. If it were to buy Playfish, for example, it could start pumping money into advertising Restaurant City — Playfish’s months-old game that inspired Café World. Without as much advertising, Restaurant City has grown from 6.54 million monthly actives three months ago to 16.2 million today.
An EA acquisition of Playfish would also help validate many successful social gaming companies, as would a successful Zynga IPO. There have been no major liquidity events yet for social gaming companies, just purchases of small developer teams by larger shops.
There are other reasons why acquisitions may not happen quite yet. The holiday season is coming up, and social gaming companies are gearing up to introduce holiday-themed games and goods, especially virtual gifts. They may be hoping to execute especially well for the rest of the year, and push their user numbers, revenue — and valuations — up from what they’re at now.
Some risks have also not been allayed. Facebook itself is getting ready to roll out a new redesign to its homepage, which could slow down gaming app growth. The redesign the company introduced in March featured a raw stream of recent updates, including updates from apps. It may have helped fuel the explosive growth that some apps have been seeing. Now, Facebook is moving back to an algorithmically-tuned feed that may or may not de-emphasize apps. However, let’s say EA were to buy Playfish. This would mean potentially more ad revenue for Facebook, and a massive validation of its platform. For this reason, we would hope that Facebook will handle significant site design changes carefully so as not to damage the overall social gaming ecosystem.
Meanwhile, aspects of the virtual goods model are still not entirely proven. Advertising offers, which Zynga and Playdom have relied on for substantial parts of their revenue, may not sustain the relatively high rates that developers have enjoyed in the past year. Fraud, user exhaustion, and other factors may come into play too. For these reasons, we hear that Wall Street is most concerned about revenue sustainability for social games.
In sum, Zynga, Playfish, Playdom and the rest of the industry are frantically trying to grow and make money (sustainably) in order to prove themselves. Now still appears to be the time for execution, as the companies are hoping to increas their asking prices for any sort of purchase or public offering down the road. While EA or another big company could certainly swoop in now, we expect these companies to delay any liquidity event until next year, at least.
To dig deeper into the virtual goods market, check out our new report: Inside Virtual Goods: The US Virtual Goods Market 2009 – 2010.
Zynga has horrible support and uses the same engine for all of their games. The only way they make money are from those who just don’t know what to do with it. Any spending in the game does not really enhance the game experience. They had potential with Guild of Heroes, but that quickly was crushed since they just don’t have the development expertise for something more involved than click-a-button games. PlayFish has more potential, but they too are lacking in many areas. If a software giant was to buy either one of these companies, they’d need to do some major work to make them a viable component of their business. A purchase of Zynga would require massive culling, beefing up of support, stabilization of the platforms, and many other improvements to make it a long-term attraction to most sane people. I have already dumped all of their games except YoVille. The only reason I’m keeping it is because I have spent money on it, and it has potential.
The only Zynga game I liked was MHA, but it seems that they pulled the plug on that last week with out notice. Hopefully it will make a comeback as it’s more than just a button pushing game.
For years those of us in the games business have talked about the ever elusive “mass market”. Like it or not, it looks to me like the public has spoken here, and hundreds of millions of players feel different than you or I do. Go figure, personally I don’t like these games either, but I can’t really argue with the gazillions of people who play them daily most of whom would never be caught dead in front of a PlayStation or Xbox. Clearly this is the sort of stuff that people want.
The social networks are going to start charging a “toll” on the gaming companies that have been generating all this revenue on their platforms. I would suspect that IF an IPO does take place for Zynga that the investors would hold off until the “toll” starts to take place as this does change the margins for the gaming companies. In addition, IPOs typically don’t take place while there is litigation pending, so I highly doubt an IPO would place as soon as March. Thoughts?
Shai, that’s an interesting point but Facebook’s platform philosophy has always been anti-toll. I have seen no evidence to indicate a change of heart.
My guess: Facebook will eventually start pushing its own virtual currency, Credits, by doing subtle things like finding ways to promote apps that use Credits over apps that don’t.
Jeeze Chris, have you turned into a social gaming guro at comnetix? what did L-1 pay for you guys in an acquisition? I believe it was $1.17 a share. Don’t run us over in your ferrari.
An Open Letter to Zynga CEO Mark Pincus and to Mark Skaggs, Eric Schiermeyer, Michael Luxton, Sim Sing, Scott Dale, Justin Waldron, Colleen McReary and Lisa Chang of Zynga News, Zynga Management and Customer Relations RE: Farmville Game
Incident: 090930-002104
Do you value your paying customers? Do you value your game testers?
If so…please do the right thing and hear my plea.
I have waited almost a week now to get my 300 plus Farmville bucks restored to my account because of some out of syncing problems after I tried the video professor offer.
All I got was a response saying that I have already been credited.
Thanks for your response but I don’ t think you got what I meant.
I know I was credited for that Video Professor offer but what I am writing about is what happened within 5 minutes after I was credited for 300 farmville bucks.
Can you check your records how many times the system went out of sync within that 5 minutes of me getting credit for the offer?
My credits were lost in the system due to that numerous glitches from the synching process….
I was writing to have my credits restored because I didn’t get the chance to use it.
If you notice several purchased items in my account…that is because I actually bought it using my credit card….and not because of the free trial bucks that I was supposed to have received.
If you cannot restore my 300 plus farmville bucks lost from your numerous out of sync messages on that problematic day on sept 24 when your system deleted my farmville bucks….
I would have no other option but to ask for a refund of my $40 dollars….and stop playing farmville.
It is just deceitful on Zynga’s part to offer these products only for you to actually erase it or lose it in the system by your “out of sync” messages.
If your system messages have a choice of “yes” or “no” in terms of when the “out of sync” messages appear and you give the players a notice in advance that if you press “yes” we will lose our farmville bucks…then I would have not pressed the button after the out of sync messages.
Please do the right thing and restore my missing farmville bucks because even though it was credited…I didn’t get the chance to use it because of the out of sync messages.
Thank you and I am hoping for your kind consideration.
Anthony J
Level 33 Farmville
Lveral 63 Mafia Wars
Yoville player
Vampire Wars player
Fashion Wars player
Pirates Player
Cafe World player
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facebook gets their tool from zynga in the form of marketing $$$ spent by zynga on facebook for player acquisition. i hear the number is running $50 million per year from zynga to facebook. which means zynga is chruning and losing players at stunning rate and so is spending massively to acquire new players. and also means facebook could crush zynga like a bug if it chose to — simply by raising zynga’s marketing costs
separately, has no one but me heard the rumor that zynga is under investigation by a couple of state attorneys general for violating gambling laws?
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To me the acquisition makes sense. Especially at that price. Merging the Pogo and the Playfish team or at least sharing knowledge could be a coup for EA.
Pogo has been essentially doing what the social networks have learned to do for years. Increasing engagement by letting players show off.
This is a perfect mix and I think that EA could be getting a deal!
For more check out the Libe Goad’s coverage on blog.games.com!
http://blog.games.com/2009/10/14/rumor-electronic-arts-snaps-up-playfish-for-250-million/
(yes it’s a plug!)
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Thanks for this article, I dropped by because I heard rumors of Zynga being sued for copyright violations by Nissan and others are lining up as I write. My SRPG of choice has been Street Racing since the day it came out. Over the past 4 months, the game has gone from bad to worse. Game developers fail to fix glitch after glitch, add items,then remove them. i.e.: they offered us (on Myspace) free favor points then took them away 3 days later claiming “exploitation” from players. The BBB gives them a big fat “F” in Customer Support and it is clear that players are dropping their apps at a much faster rate then they claim. The reason they look bigger, is thousands of folks make multiple myspace/facebook “dummy/imposter” accounts which adds to their growing account numbers. Zynga just does not care as long as their numbers go UP! Take off about 30 million users, and you would be closer to RIGHT about ligit accounts. Thanks for letting me post!!! -susan in AK
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Nice website, but a bit funny, I jumped straight to the comment page from your home page … Not sure if that was supposed to occur?
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