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EA Releases Amalur's First DLC

Zacks Equity Research

Since Kingdom of Amalur: Reckoning released on January 7, 2012, the franchise has enjoyed tremendous response from all quarters. To build on this success, Electronic Arts Inc. (EA) has launched Kingdom of Amalur’s first downloadable content pack (:DLC), The Legend of Dead Kel.

In The Legend of Dead Kel, gamers will encounter new challenges and battle new enemies with eight new armor sets, eight new shields and 18 new weapons with unique features. The content pack is based in the island of Gallows End.

The downloadable content will be available on Microsoft Corp.’s (MSFT) Xbox Live and SonyCorp.’s (SNE) PlayStation Network from March 20, 2012. The Legend of Dead Kel can also be downloaded from EA’s Origin and Steam, a digital distribution platform.

In the past, DLC related to some of its famous franchises has always been beneficial for EA. The phenomenon continued through the last concluded quarter, when mobile and other handheld devices and DLC drove significant digital revenue growth. DLC and free-to-play micro transaction content spiked 86.0% year over year to $123.0 million in the third quarter.

EA’s digital platform Origin is crucial to the availability of EA’s games in the digital format. Origin has led to enhanced customer satisfaction, which has translated to stronger revenue.

Moreover, shift in EA’s business mix towards the digital format rightly complements the current trend in the video gaming industry’s massive transition from physical to digital gaming. We believe that high-quality titles, along with increasing online exposure and social games guarantee market share gains over the long term.

However, competition from Activision Blizzard Inc. (ATVI), Zynga Inc. (ZNGA) and Take-Two Interactive Software (TTWO) may act as a headwind going forward. Adding to its woes is the gloomy macro-economic environment, relative weakness in consumer spending and weak video game sales results over the last 12 months. Thus, these challenges compel us to maintain a cautious stance in the near term.

However, analysts are optimistic about the forthcoming quarters, expecting games such as Mass Effect 3 and Kingdom of Amalur to steady the ship.

We have a Neutral recommendation on Electronic Arts over the long term (for the next 3-6 months). Currently, Electronic Arts has a Zacks #3 Rank, which implies a Hold rating in the short term.

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