Electronic Arts Continues To Invade Zynga's Turf

| About: Electronic Arts (EA)

Electronic Arts (ERTS) is best known for the Madden NFL and Battlefield franchises. However, these franchises are not why I am bullish on Electronic Arts. Electronic Arts' most significant area of growth is the browser-based gaming business. While Zynga's (ZYNG) IPO has captured most of the attention in this industry, Electronic Arts has been quietly expanding.

The Wall Street Journal reported on November 2, 2011 that EA was "nipping at the heels" of Zynga's social game dominance. "EA has cracked Zynga's hold on the top games played on social-networking site, Facebook Inc." It goes further to state Electronic Arts has one hit so far, The Sims Social, but now Electronic Arts has produced a second hit - Lord of Ultima.

Lord of Ultima is a strategy game, marketed in the Google Chrome App Store. It combines Dungeons and Dragons, Risk, and Sim City. Players join alliances, build castles, and battle to control eight shrines over periods of 18 or more months. In order to do this, they use ministers to manage the many cities supplying resources and troops. Players buy ministers using diamonds, Lord of Ultima's currency.

Diamonds allow the players to gain an advantage over the competition. The amount of time invested results in epic battles for control of key positions. The selling of diamonds is the games source of revenue. Unlike traditional console games, which profit from the initial purchase of the game, Electronic Arts designed Lord of Ultima to encourage the purchase of diamonds to gain an advantage over other players, as the game progresses.

The most striking aspect of Lord of Ultima is not the game play; it is the players. They include high school students, stay at home moms, programmers, and bankers. The demographics are amazing. Electronic Arts succeeded in creating a game every generation plays. In an industry catering to young adults, this is an amazing feat. Electronic Arts has expaned into an untapped niche video game producers have not accessed.

Over the next 3 quarters Electronic Arts' main revenue growth will come from social gaming and free-to-play games []:

Source: EA 2nd Quarter 2012, Slide Presentation (pdf)

The free-to-play/pay-to-win business model is extremely innovative. It allows Electronic Arts to continue to gain revenues from a game ad infinitum, as players leverage their buying power to crush their opponents in these virtual worlds.

Another innovative concept from Electronic Arts is charging a flat $9.99 fee, to enter its Playstation 3 online service. The initial purchaser gets a card to waive the fee. However, pre-owned buyers have to pay, allowing EA to collect revenue throughout the life of the product.

Electronic Arts' willingness to change the profit paradigm of the video game industry, as well as its ability to provide excellent video games, makes it an excellent investment this holiday season.

Disclosure: I am long ERTS.

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