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EA's New Free Ultima Game This Year

Zacks Equity Research

BioWare, a division of video game developer and publisher Electronic Arts Inc. (EA), recently announced a new free-to-play game from its well known Ultima franchise. The new game called Ultima Forever: Quest for the Avatar is expected to release later this year on personal computers as well as on Apple’s (AAPL) iPad tablet.

Launched way back in 1981 by Origin Systems, Ultima was a series of role playing games (“RPG”) set in the fantasy world of Britannia. The last title from the franchise was a browser based online strategy game known as Lord of Ultima in 2010, which failed to create much fanfare.

The new game is a true copy of the 1985 release Ultima IV, one of the most successful games of the franchise to date. Typical of the BioWare developed games, the latest from the Ultima franchise follows a story line, based on which gamers are required to collect the eight virtues in order to end their quest in Britannia. Based on the cross-platform feature of the game, it offers both single-player and multi-player options from anywhere at any time.

Ultima Forever: Quest for the Avatar is the latest addition to EA’s strong portfolio of free-to-play games segment, which includes popular franchisees such as Warhammer, Command & Conquer, The Sims, Battlefield and Need for Speed. Last month, EA announced a free trial version of Star Wars: The Old Republic, which will allow gamers to play the game up to the 15th level.

Although most of these games can be played for free, EA earns revenues through the sales of in-game items and advertisement. EA’s digital gaming segment Play4Free boasts more than 25 million active players worldwide, primarily driven by the popular titles from these franchises.

EA expects the digital segment to generate revenues of $1.15 billion to $1.2 billion in fiscal 2012. 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 the sluggish market conditions going forward.

With consumer spending on free-to-play games, mobile games and social games on the rise, we believe that EA’s significant exposure to these segments provides it a competitive edge over traditional peers such as Activision Blizzard Inc. (ATVI).

Further, EA’s accretive acquisitions of Klick, PopCap games and Playfish over the last couple of years have bolstered its social free-to-play portfolio to counter strong competition from the likes of Zynga Inc. (ZNGA) and also to offset declining sales of its core packaging division.

However, the highly fragmented video game market continues to witness increased competitive pressures, which are hurting its overall profitability. This compels us to remain Neutral on the stock over the long term.

Currently, EA has a Zacks #3 Rank, which implies a Hold rating in the near term.

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