Electronic Arts, the long time leading maker of computer games has been on the big slide since about 2007, loosing lots of money to online games, which is becoming a new and cheaper alternative to computer games. Confronted with the rapid rise of social networks and online gaming companies like Zynga, Electronic Arts hasn’t wasted their time and acquired a gaming company Playfish in November 2009, a company producing social games for Facebook, MySpace, and other social networks. Their CEO, Riccitiello publicly admitted company is in the big hole now and to climb out of that hole might be quiet an adventure.
Online gaming and virtual gifts is multibillion dollar business today and is expected to steadily grow in the next few years. No surprise that Facebook has just decided to charge its gaming publishers 30% of the revenue, making it possible to bring in an additional $250 Million in high margin revenue. That’s about the same revenue that EA has been loosing each of the last two years.
It’s amazing how much revenue online games and virtual gifts can generate and some folks are wondering what’s driving it? The answer i think is in human behavior and psychology in regards to how humans are more likely to spend their money by playing. Online gaming is no different to gambling, where you are more likely to loose a big chunk of your money incrementally, rather then loosing it all at once. Instead of putting $100 dollars upfront for EA game, many would rather slowly spend that money playing with their friends, even though EA deal might be a better return on investment.
Will EA dig out of that financial hole remains to be seen in the next year or two, as there are some serious challenges out there. First it has to find its user base, whether it’s a Facebook, MySpace or any other social network. In addition it might have to cut 30% of its revenue to that user base provider.