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EA to Pull the Plug on 3 FB Games

Zacks Equity Research

Electronic Arts (EA) recently announced that it will close down Facebook (FB) based games namely The Sims Social, SimCity Social and Pet Society from Jun 14, 2013. EA stated that the three games had lost their popularity compared with the likes of Bejeweled and Plants Vs Zombies, which the company has vowed to continue going forward.

Although Facebook continues to attract more than 250 million gamers each month, game developers and publishers such as EA and Zynga (ZNGA) have found it difficult to maintain subscriber base in recent times. Early this year, Zynga closed down a number of Facebook games as a part of its restructuring effort and also announced layoffs.

The primary reason behind the loss of subscriber base is the cut-throat competition EA has been facing from other developers, including Zynga, in the recent times. Most of the Facebook based games are free to play (i.e. they do not earn any money upfront) and generate revenues through the sale of virtual goods and advertisement.

The move to shut down these three social games forms a part of EA’s ongoing restructuring activity.  With revenue generation from social games slowing down, EA  is increasingly investing in mobile games. EA remains focused on developing a strong product pipeline for the mobile segment by bringing its legacy brands such as FIFA and Battlefield going forward.

We believe that the popularity of these legacy brands will boost EA’s penetration in the mobile games market going forward. Moreover, we believe that EA’s recent moves (including the shutdown of the Montreal studio) to realign costs in order to gain operational efficiency are a positive, which will boost profitability going forward.

Additionally, we believe that EA’s strong digital portfolio will drive top-line growth going forward. Reportedly, both Microsoft (MSFT) and Sony are expected to launch their next generation consoles this year, which will be a significant growth catalyst going forward.

However, we believe that weakness in retail sales amid an aging console system lifecycle, the cannibalizing effect of free-to-play games and tough competition remain major concerns in the near term.

Currently, EA has a Zacks Rank #3 (Hold).

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