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.
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.