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At the end of September CFO Eric Brown of Electronic Arts (ERTS) addressed the challenges and opportunities in social gaming. Speaking at the Goldman Sachs Communacopia Conference, Brown highlighted the lessons EA learned since the August launch of The Sims Social, their Facebook-based social game. These highlights added some mid-quarter commentary on monetization progress and explained the complexity of the advertising model.

EA saw their original Sims franchise as a natural for adaptation to the social gaming environment. Brand awareness was high, its Facebook page already had 2 million “likes,” and 140 million units (including expansion packs) had already been sold. The job of building the social game mechanic was given to EA’s new creative studio Playfish. EA acquired Playfish in 2009 for over $300 million, a sizeable investment equal to 4% of the company’s market cap. Playfish worked with existing Sims developers to make the new social game consistent with past themes.

Monetization

The Sims Social has quickly grown to the number two Facebook social game, behind Zynga’s CityVille. This success is the first major challenge to Zynga’s control of social gaming. With 11 million daily average users (DAU) out of its 50 million monthly users, each Sims Social player’s level of engagement is relatively high. DAU is a key statistic for social games because no money is collected upfront. The monetization scheme calls for users to purchase in-game items. This is often referred to by the industry as micro-transactions.

Brown was very pleased with the level of engagement to date. However, the high level of engagement has not led to a high level of average revenue per user (ARPU). While Brown would not give the specific number, he gave a negative impression regarding the monetization. He stressed that it was “fairly early on” and called the current ARPU average. He considers the higher ARPU seen in a few other social games to be anomalies. One positive note was that “the spenders in The Sims Social are more female than male” and the franchise historically has a relatively high percentage of females compared to other games.

The possible difficulties monetizing a purely social-based game have kept EA’s rival Activision Blizzard (ATVI) from entering the arena. Activision has taken some criticism from analysts for not moving quickly to produce a title in the social gaming genre. Investment commentator Jim Cramer is known to prefer EA over Activision for this exact reason. However, Activision’s CEO Bobby Kotick is steadfast in his opposition to a Facebook-based game. He sees a difference between incorporating social aspects into his key franchises (which Activision already does through multiplayer online interactions) and building or converting a franchise into a Facebook-based low-margin title.

Advertising

Brown also discussed the differences between user acquisitions in Facebook social gaming versus traditional console gaming. Within a month of launching, The Sims Social grew to the number 3 position in the genre with no advertising. This early user acquisition comes through a viral referral mechanism when Facebook friends see updates about early adopters’ game play. As these initial acquisitions slowed down, EA began active advertising.

Brown describes a difference between advertising a packaged good versus advertising to acquire a social game user. The majority of this advertising takes place within Facebook itself. Since no money is collected upfront, EA must project the lifetime value of each customer and maintain a spread between this value and the specific advertising costs to acquire that customer. Adding to the complexity is the large number of demographics it is possible to target within Facebook, and the fact that the cost to advertise to these targets changes inconsistently throughout the day.

Summary

EA leveraged The Sims franchise to build a large, engaged user base for The Sims Social. Though focused on monetizing the new title, the company has not yet implemented a successful mechanism. Without knowing for how long each player will participate nor how much their average spend will equal, EA is unsure if their player acquisition activities will have a positive or negative impact on the bottom line. Based on the aforementioned uncertainties, The Sims Social cannot yet be declared a success.

Source: Profitibility Questions For Electronic Arts' New Social Game