EA Smart To Buy Playfish, Valuation Fine

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Electronic Arts’ $400 million acquisition of social gaming company Playfish was a smart deal for the gaming company in our opinion, for the following reasons:

  • Valuation of 4X 2010 revenue is reasonable given growth rates, margins, and secular casual-gaming growth story.
  • In addition, EA can also exploit synergies between console and social gaming.
  • EA needed to make a big move into social gaming either through internal development or acquisition.


Industry sources estimate Playfish’s 2009 revenue to be anywhere from $35 million to $50 million.  The deal was therefore a multiple of 8-11 times 2009 revenue, a fair price in our opinion given healthy double-digit revenue growth and extremely high profit margins.  (Playfish’s gross margin should be in excess of 90%).

The real question is what kind of numbers Playfish will generate in 2010.  Most analysts are looking for around $100 million of revenue next year, which would be a 4X multiple (also reasonable) and about 100% to 200% annual growth. 

Is this estimate reasonable?  It’s not a layup, but it seems achievable.

We think virtual goods will grow upwards of 150% this year, and likely continue that kind of growth next year.  To hit $100 million Playfish will also need to put up some seriously strong ad-revenue numbers to achieve that kind of overall growth.  The risk of missing aggressive forecasts is alleviated, in our opinion, by a $100 million earnout representing 25% of the total purchase price.   


There are potential cross-platform synergies between console and social games that can help boost EA’s struggling console-gaming business in addition to driving a more concerted effort into social gaming.  These include:

  • Social games are so prevalent on Internet platforms and reach millions of people, creating the opportunity to develop brands that can then be sold as console games, or as elements of console games.
  • Interactive, online features can be incorporated into console games and downloaded from them for Internet use as an added value to the sale of a console game.
  • Virtual goods for console games can be sold online and vice versa, boosting the fastest-growing part of the social gaming industry.

EA has already been investing in social gaming.  It recently launched a new Pogo Puppies game on its casual games site Pogo.com and has launched social network versions of its Tiger Woods game.  In addition, it spends about $150 million to $200 million a year on online initiatives, so a $400 million acquisition (with 25% of the price in the form of an earnout) is not a huge amount of money.


Industry sources tell us that very small amount, if any, of Playfish’s revenue is made up of low-quality “scam” offers that put rival Zynga in the headlines of late.

In these scams, users are given free virtual goods and inadvertantly sign up for expensive products on their credit cards (the companies making the offers pay the game providers). 

In fact, Playfish only recently allowed rewards to be offered on its games and monitors them closely, prohibiting scams.  We estimate that these offers could account for about 10% to 15% of total social gaming revenue.  At Playfish, the percentage is likely less than that.

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