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EA's New Free-to-Play Game

Aniruddha Ganguly

Reportedly, video game developer and publisher Electronic Arts’ (EA) upcoming title Real Racing 3 will be available as a free-to-play game. Unlike its predecessor Real Racing 2, the game can be downloaded for free and EA expects to earn revenues by selling in-game virtual goods. Real Racing 3 is set to release on Feb 28, 2013.

According to Bloomberg, Real Racing 3 will be available on Apple’s (AAPL) iPhone and iPad in addition to Google’s (GOOG) Play and Amazon’s (AMZN) application store. The racing game features 900 different events and 600 hours of total game. We believe that the free availability on all leading mobile platforms will benefit the new game going forward.

As retail video game sales continue to suffer due to continuing consumer migration to digital platforms (smartphones and tablets), companies such as EA are expanding their mobile gaming product portfolio to lure gamers. According to market research firm NPD Group, spending on packaged video games declined 21% year over year to $8.88 billion in 2012.

The major reason behind this transition is that games on digital platforms, particularly mobiles are less costly than consoles. While a console game on an average, costs $60, a mobile game is generally available for less than $1.0. Most of these games are free-to-play (freemium) and generate revenues primarily through the in-game sale of virtual goods.

Another reason behind the growing popularity of mobile games is the availability of advanced smartphones and tablets with big display, fast processors and improving telecommunication technologies (such as 4G). This has enabled users to play more sophisticated games such as massively multiplayer online (:MMO) games.

The staggering growth projection for mobile gaming has attracted many developers thereby heating up competition. In such a scenario, EA has been moving some its premier franchises such as The Simpsons and FIFA to the mobile platform and is offering them for free to boost its penetration in the platform. These franchises are well known to gamers and they have a significant cult following, which boosts the game’s revenue earning capacity.

This is evident from the fact that EA’s The Simpson’s: Tapped Out was the 10th highest grossing game in 2012 as per data available from Apple’s Best of 2012 List. In the recently concluded third quarter, revenues from mobile and other handheld devices increased 18.0% year over year to $99.0 million. Smartphones and tablets revenues were up 36% year over year to $79.0 million.

EA expects contribution from free-to-play, casual and social games to increase to approximately 35.0% of worldwide digital revenue by calendar year 2013. We believe that EA’s innovative product pipeline will boost its market share in the online gaming market. Moreover, EA’s strong focus on the digital segment will help it stand out even amid sluggish market conditions going forward.

However, we believe that soft video game industry performance, particularly due to weakness in retail sales amid an aging console system lifecycle, remains a concern in the near term. Although we believe that the ongoing transition from the physical to the digital platform will ultimately benefit the video game industry (due to the cost effectiveness), low priced digital games have failed to offset the rapid decline of high-priced retail sales in recent times.

Currently, EA has a Zacks Rank #4 (Sell).

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