After several weeks of speculation from analysts and industry observers on the subject, Electronic Arts announced earlier today that it has acquired Playfish, one of the leading creators of social games that appear on networks like Facebook, MySpace and Bebo, for $275 million in cash, and approximately $25 million in equity retention arrangements. In addition the sellers are said to be entitled to additional cash considerations of up to $100 million, contingent upon a variety of undisclosed performance goals. In case you're wondering what Playfish is, or why it's a big deal, its actually something that's no doubt much closer to your daily online life than you realize. The company's most popular games are those distributed on Facebook, and your daily News Feed is no doubt filled with updates from friends that are playing Pet Society, Restaurant City or Country Story. In all, Playfish states that more than 150 million of its games have been installed and played across a variety of social platforms on the web, and there are currently over 60 million monthly active users across its 10 different titles. The bottom line? In buying Playfish, Electronic Arts was buying entertainment time and ensuring that it was controlling a growing market that's rapidly occupying more and more of people's daily lives. In doing so it has also set a price point that raises questions about the value of other larger companies providing the same kinds of experiences.
With this being such a volatile time for the games business, and for Electronic Arts in particular which just confirmed 1,500 layoffs after poor second quarter financial results, does this deal signify an acknowledgment of a dramatic change in the way people play games? What does the acquisition mean for Electronic Arts going forward, and what does it mean for the future of the social games space? There are other, even larger, social games companies out there, such as Zynga which boasts nearly 200 million monthly active users - should we expect to see them selling soon too?
"It's hard to say that a purchase of Playfish is a good idea since they've only been around two years," said Michael Pachter, managing director of equity research at Wedbush Securities. "It's not clear to me that EA gains very much buying them that they couldn't build themselves, and the barriers to entry seem pretty low. However, if EA is committed to the social gaming space (again, not clear to me that they are or should be), Playfish is one of the larger players, so an acquisition gives EA some size right away."
"As for whether it's a good deal, I would say no," he continued. "The social games space is in its infancy, it is not yet clear how big the market is or who the winners will be, and it is not clear what level of investment is required. I would estimate that EA could replicate what Playfish has done for less than $100 million (that's 100 people working full time for ten years), so paying that much for some $100 million in revenues sounds a bit pricey to me."
On the subject of other possible moves in the social game space, Ubisoft's producer of social games Omar Abdelwaheed told us that he thinks Playfish makes "good" social games, and states that he believes that while the acquisition amount is "a lot of money" he wonders if a larger company like Zynga, which is almost four times the size of Playfish, is really worth four times as much - which would make it worth more than $1 billion. "I'm not sure a large publisher or other company can successfully continue operating a social games developer in the manner they currently operate," he said. "Alternatively, it's not simple to convert these users into other monetized opportunities.
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