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Did EA Bust the Social Gaming Bubble?

Wednesday, 17 Apr 2013 | 12:11 PM ET
Source: thesimssocial.com

When Electronic Arts bought social games maker Playfish for $300 million—plus a $100 million buyout—in 2009, it sent shock waves throughout the videogame industry. Spurred by growing speculation about the value of then-private Zynga, some tech pros say it was the beginning of a bubble for developers who specialize in Facebook games.

On Monday, EA once again surprised the tech world – this time by announcing plans to axe several games on the social network, including The Sims Social, SimCity Social and Pet Society. When those titles shut down on June 14, Playfish may not have any active games—thus raising questions about its fate. (EA declined to discuss the future of Playfish, saying it was "not commenting on individual teams.")

The Sims Social was once one of the most popular games on Facebook, with daily active users topping 10 million. It has fallen off of those highs, though, in a big way: Today, the game boasts just 500,000 daily players, according to App Data – and may soon fall out of the Top 100 Facebook titles; it's currently ranked 98th.

(Read More: EA Puts Faith in 'Next Gen Consoles')

EA is just the latest videogame maker to distance itself from social network (though games from its PopCap division will continue to be playable there). Zynga, once the king of Facebook games has been steadily shifting its focus to mobile games and real world gambling to increase revenues.

(Read More: Gaming Industry's Latest Idea: Free Games)

While Facebook officials have recently begun talking up games as part of the company's strategy, analysts note the site has failed to find a way to handle notifications without them appearing spam-like, causing players to lose some interest and developers to move elsewhere. A Facebook spokesman has disputed this, recently telling Gamasutra game installs are up 75 percent compared to a year ago.

While EA won't confirm the shutdown, Playfish staffers seemed to hint at the situation on the Playfish forums. The developer encouraged players to use their Playfish cash cards—gift cards bought at retail stores that can be used to purchase in-game items in any of the developer's titles—before The Sims Social sunsets. "After that date, you will need to contact customer service regarding your Playfish cash cards," the developer said—indicating no future games were forthcoming.

The apparent end of Playfish games is just the latest in a series of recent misfortunes for EA. In March, CEO John Riccitiello announced his resignation (chairman Larry Probst is filling the position in a temporary basis now). In the weeks leading up to that, the launch of a much anticipated reboot of "SimCity" was marred by online server problems that prevented many players from being able to access the game, which required an Internet connection.

And just last week, EA laid off an undisclosed number of employees as part of a streamlining movement to become more efficient and sharpen its focus. And that action came days after EA was named the "Worst Company in America" by consumer watchdog website The Consumerist for the second year in a row. (In an open letter to gamers last week, EA chief operating officer Peter Moore said the company could do better, but added the label of "worst company" was undeserved.)

Analysts say Playfish appears to have been a bet that just didn't work out for the company. "In the final analysis, Riccitiello probably didn't manage the company's cash well enough," says Michael Pachter of Wedbush Securities. "They made a lot of acquisitions that, in 20/20 hindsight, weren't worth it—including Playfish."

The Playfish acquisition was the spark that led to enormous valuations and takeover prices of social gaming companies. Soon after EA's purchase, Disney laid out $563 million for Playdom—a company which, at the time, had a much smaller reach than Playfish. And in 2011, EA paid $750 million for PopCap Games.

Facebook, though, has become a less important platform for games in recent years as mobile games have shown a significantly stronger growth pattern. Playfish never really made that transition. "The perception was Facebook would grow unabated," says Pachter. "There's still money to be made, but it's hard to stand out. The opportunity for growth is much smaller than people thought."

"There have been a lot of [developers and publishers] pulling out of Facebook," adds Billy Pidgeon, an independent market research analyst. "But I would have like to have heard [EA is] keeping some other aspect of social. Certainly, they can keep it going to some degree with PopCap, but most other people are moving aggressively toward mobile and away from social."

Despite the recent move, Pachter remains bullish about EA's future. He rates the stock an "outperform," and recently raised his target price on the company from $23 to $25 to reflect improving industry outlook ahead of the launch of next generation consoles. "They will have huge earnings growth next year," he says. "They'll be fine."

Others area bit more cautious, noting the company seems to be at a crossroads. "EA faces a number of crucial decision points regarding resource allocation and franchise planning in the hit-driven video game business," said Baird Equity Research's Colin Sebastian in a note to investors. (Sebastian is neutral on EA.)

And Pidgeon notes that the company needs to become more realistic with its projections. "Activision has always done better at maintaining expectations to the point where they were projecting growth for each quarter and they were able to under promised and over-deliver," he says."With EA, it's been the other way around. And that's not the way to keep investors happy."

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