BioWare, a subdivision of video game developer and publisher
Electronic Arts Inc. (
EA
)
recently announced that the free-to-play version of its massively
multiplayer online ("MMO") game
Star Wars: The Old Republic
is now live.
Players now can access all the eight classes of the MMO up to
the 50
th
level for free. BioWare also released a new game update "HK-51
Activated", which adds a new companion character. The update also
opens up new areas for players to explore, such as the Section X,
which gives them a chance to amass new deadly weapons.
Developed by BioWare in partnership with LucasArts,
Star Wars: The Old Republic
MMO is a story driven game, set a thousand years before the
classic
Star Wars
movies directed by LucasArts founder George Lucas. The MMO is one
of the costliest games from EA in terms of game development and
promotional expenses.
However, the MMO failed to live up to EA's growth expectations
as its subscriber base steadily declined since its release in the
third quarter of fiscal 2012. EA noted that the decline in
subscriptions was primarily on account of the exit of gamers
playing on a casual or trial basis.
One of the primary reasons for the dwindling number of
subscribers of
Star Wars
can be traced to the emergence of free-to-play MMOs by social
game makers like
Zynga Inc. (
ZNGA
)
. Moreover, EA's expanding portfolio of free-to-play games has
also been cannibalizing its own product.
EA believes that the new free-to-play version will provide
much needed boost to the game's customer base going forward.
Although free-to-play games do not earn any revenue from
customers, EA earns revenues through the sales of in-game items
and advertisement. We believe that the popularity of the
Star Wars
franchise coupled with a new free-to-play version will attract
online gamers going forward.
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.
With increasing consumer spending on free-to-play games,
mobile games and social games, we believe that EA's significant
exposure to these segments provide 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 and also 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. Further, a soft video game industry
outlook in the near term particularly due to weakness in retail
sales and lack of visibility around aggressive monetization of
social and free-to-play games capable enough to offset this
weakness, keep us cautious on the stock. This compels us to
remain Neutral on the stock over the long term.
We believe that cancellation of
NBA Live
and weak customer response to
Medal of Honor Warfighter
will hurt EA's top line in the near term. In such a scenario, the
loss of revenue due to the free version of
Star Wars
may further hurt the top line. Currently, EA has a Zacks #3 Rank,
which implies a "Hold" rating in the near term.
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