Bloomberg News

Zynga Tops Electronic Arts as Social Games Spread

October 26, 2010

Zynga Game Network Inc.’s estimated worth surpassed Electronic Arts Inc. (EA:US)’s stock-market value, a sign of the ascendance of social-networking entertainment at the expense of traditional video games.

Zynga, the maker of such games as “FarmVille” and “FrontierVille,” is valued at $5.51 billion, according to SharesPost Inc., an exchange for shares of privately held companies. Electronic Arts, the second-largest game publisher by sales, is worth $5.22 billion on the Nasdaq Stock Market.

Started by Mark Pincus almost four years ago, Zynga has become one of the fastest-growing technology companies by using Facebook Inc. (FB:US)’s social network to distribute games. It makes money by selling virtual goods, such as vehicles and weapons that help players advance in games. The company has grabbed about a third of that market, which is worth $1.6 billion this year, according to Inside Network in Palo Alto, California.

“The valuation is not that crazy, given what’s going on in the market,” said Atul Bagga, an analyst at ThinkEquity LLC in San Francisco, who estimates the virtual goods market may reach $3.6 billion in three years. “It’s not that terribly expensive seeing the growth prospects.”

Retail Slump

Electronic Arts, meanwhile, faces declining retail sales of gaming hardware and software. More consumers would rather play online and social-networking games, rather than heading to a store to buy a shrink-wrapped program. That’s forced Electronic Arts to cut jobs and seek acquisitions for growth. Its shares have dropped (ERTS:US) 6.3 percent since March 1. Zynga’s estimated value has more than doubled in that period.

Electronic Arts was the world’s biggest video-game publisher until 2008, when Activision merged with Vivendi SA’s gaming business to form Activision Blizzard Inc. (ATVI:US) Founded in 1982, Electronic Arts helped pioneer personal-computer games and also ruled the market for console software, with titles like “The Sims,” “Need for Speed” and the “Madden NFL” series.

Dani Dudeck, a spokeswoman for San Francisco-based Zynga, said the company doesn’t comment on its valuation. SharesPost bases its number on data from trades of private shares, research estimates and venture-financing valuations. Jeff Brown, a spokesman for Redwood City, California-based Electronic Arts, didn’t immediately respond to a request for comment.

Facebook Players

Zynga is the largest maker of games on Facebook, with more than 210 million monthly active users, according to AppData.com, part of Inside Network, a research firm. Zynga, which has raised more than $350 million in private capital, has made six acquisitions since May and expanded its workforce by a third in the past quarter to 1,200 employees.

Six of the 10 most popular apps on Facebook belong to Zynga, led by “FarmVille” with 57.6 million users, AppData said. To reduce its dependence on Facebook, which is taking a bigger cut of virtual-goods sales, Zynga has developed its own websites for games and put its apps on sites run by Microsoft Corp. and Yahoo! Inc. This year, Zynga introduced a poker game in Hong Kong and Taiwan, and it bought companies in China and Japan.

Zynga’s value on SharesPost was $2.61 billion in March. That’s when SharesPost introduced a new index for venture-backed companies, including Facebook, Twitter Inc. and LinkedIn Corp.

Activision, Tencent

Both Zynga and Electronic Arts rank behind Santa Monica, California-based Activision, which has a market value of $13.9 billion. China’s Tencent Holdings Ltd. (700), which offers online games in addition to instant messaging and other Internet services, is even bigger. It has a valuation of $43 billion.

At Electronic Arts, Chief Executive Officer John Riccitiello has cut more than 2,500 jobs since 2008 to reduce costs and stem three years of losses. Retail sales of game hardware and software fell 9 percent in the first half of 2010, according to NPD Group Inc.

The company entered the social-games market last year with the purchase of Playfish Inc. Electronic Arts also bought the U.K.-based publisher of “Angry Birds” last week to add titles made for Apple Inc.’s iPhone and iPad.

Electronic Arts rose 19 cents to $15.81 at 4 p.m. New York time on the Nasdaq. The shares have declined (ERTS:US) 19 percent in the past year.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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Companies Mentioned

  • EA
    (Electronic Arts Inc)
    • $43.68 USD
    • -0.33
    • -0.76%
  • FB
    (Facebook Inc)
    • $77.62 USD
    • 1.99
    • 2.56%
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