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Why Social Gaming Is Ripe For A Major Acquisition

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Reports have been flying around about Electronic Arts (NSDQ: ERTS) potentially buying hot social-gaming company Playfish — with sources telling Inside Social Games that the deal may have closed “a few weeks ago”, and reporting that it was worth $250 million. EA’s response to us: “We don’t comment on rumors about our acquisition strategy.” Playfish, meanwhile, said “this is a rumor, nothing more.”

But both companies have recently made comments that have helped fuel the speculation. Two months ago, EA’s former COO John Pleasants told me the company had its eye on some social-gaming investments, and in September, Playfish COO Sebastien de Halleux said that potential buyers had been sniffing around. Whether or not this particular deal gets done, the social-gaming space is ripe for a major acquisition.

Social-gaming firms are making money: While the companies themselves aren’t releasing hard numbers, based on sound bytes from various conferences and interviews, the consensus is that companies like Zynga and Playfish are averaging around $15 million in revenue per quarter from their most popular games.

That’s revenue — not profit — but the key point is that they’re getting most of the money directly from users, through micro-transactions. They’ve essentially cracked the code for how to make money on social networks, while keeping overhead low and spending very little on marketing.

The deals shouldn’t cost more than a “few hundred million dollars”: “It’s always hard when you talk about valuing social media companies,” said Jesse Divinich, director of analyst services at game industry research and marketing firm EEDAR. “Fox got burned on MySpace and had to devalue it a few times. But if a big publisher like EA could get one of these companies for no more than a few hundred million, it would be a very positive move.”

So is Playfish worth $250 million? No stats on its valuation, but the company has raised around $21 million over two rounds of funding; Zynga on the other hand, has raised $40 million and has been rumored to be looking at an IPO in 2010. Playdom is the only company that hasn’t disclosed funding, though VentureBeat reports that it’s in the process of raising a double-digit round at a $100-$200 million valuation.

Physical disc and console sales are drying up: Some analysts are expecting the videogame industry sales slump to rebound in time for the holidays, but there’s no stopping the digital revolution. People continue to flock to game-download platforms like Valve’s Steam, and the soon-to-launch OnLive — meaning less money left over for actual disc sales. While companies like EA and Take-Two (NSDQ: TTWO) are dipping their toes into digital distribution, buying a social-gaming company would give them the chance to experiment with subscriptions and micro-payments and then use that intelligence to influence their core (disc-based) business models.

“A company like EA, Activision (NSDQ: ATVI) or Ubisoft could buy them, own the brand and spin them off into products that drive a significant amount of revenue,” Divinich said. “Look what Disney (NYSE: DIS) did with Club Penguin — it essentially took a popular online community and turned it into one of the best-selling games for the Nintendo DS.”

2 Responses to “Why Social Gaming Is Ripe For A Major Acquisition”

  1. Mikhail Palikar

    Not sure who that analyst is, but News Corp has not "devalued" or written down its investment in MySpace to date (although it has for other acquisitions, including IGN and Photobucket). MySpace was highly profitable when News Corp acquired it, grew its users 500% post acquisition and signed a $900MM deal with Google. Insiders say that News Corp recovered the full purchase price in the first 3 years of ownership.