Walt Disney (NYSE: DIS) would have a made a smart move in acquiring Playdom, but how much returns Playdom should deliver to justify Disney's purchase price is yet to be answered.

Late July, Walt Disney took a big jump in to the fast-growing online social gaming space with its deal to buy Playdom valuing the social game-startup for as high as $763.2 million, including performance earn-outs.

The acquisition of Playdom, which makes social games for Facebook, makes sense for Disney as it sets the stage for Mickey Mouse and Iron Man to feature in games on the world's largest social networking site.

In just two and a half years of operation, Playdom has established itself as a pacesetter in building popular games for social networks including Social City, Sorority Life, Market Street and Bola.

The deal is expected to close by the end of Disney's 2010 fiscal year, which is September 30.

Playdom means more value for Disney
Playdom is the largest social game publisher on MySpace and the third-largest on Facebook. Disney expects the worldwide social gaming audience to grow at an annual rate of 30 percent going forward.

Meanwhile, companies ranging from multi-media conglomerates, traditional game distributors to Internet giants want to take a pie in the social gaming space, which has the potential for explosive revenue growth.

Social games are free to play and generate revenue by charging users to buy virtual goods. Those games are tied with social networking platforms, which are presently being ruled by Facebook and Twitter.

Disney, which competes with News Corp. (Nasdaq: NWS), Time Warner and Viacom, estimates that 50 million Facebook users currently belong to various Disney, ESPN and ABC groups. This should make them a natural audience for Disney-themed Playdom games.

The real attraction of social gaming is its scalability, as once the software is developed, the additional cost of servicing new customers is negligible. No wonder, Disney believes it has identified an incredible investment opportunity.

By acquiring Playdom, Disney will strengthen its already-robust digital gaming portfolio, acquire and provide consumers new ways to interact with the company on popular social networks like Facebook and MySpace.

Is the deal worth the price?
In any business, revenue and margins is deciding the profitability of a venture. A few months ago, Techcrunch estimated that Playdom rival Zynga had operating margins of about 30 percent.

Zynga boasts over 200 million monthly users on Facebook, whereas Playdom engages an estimated 42 million active players each month.

"Because Zynga has a much larger user base than Playdom, we believe that Playdom's operating margins are lower," stock analysis firm Trefis said.

Zynga, the giant in the social gaming space, is said to be generating revenue between $500 million and $700 million a year and many analysts expect the company to pursue an initial public offering as early as next year.

Despite its soaring popularity, social networking-based gaming industry is not without its odds.

For example, revenue could be a major issue. Anita Frazier, an analyst at the NPD Group, said only 10 percent of social networking gamers have spent real money playing these games. An additional 11 percent said they intended on spending real money.

This data assumes significance as social games are free to play and generate revenue by charging users to buy virtual goods.

"While social network gaming has caught on with a mass market audience, it's not without its challenges. Players are frustrated by slow loading and performance issues and report getting bored by the games easily. Clearly, these types of games will have to continue to evolve if they hope to hold their audiences and incentivize them to spend money playing," Frazier said.

But Disney's consumer product business should benefit from Playdom, which generated revenues of about $50 million in 2009.

Trefis expects the segment's revenue to touch $4 billion in the next few years, with margins rebounding nearly 20 percent going forward.

The stock analysis firm said assuming after-tax margins of around 15 percent, Playdom would need to maintain an average annual revenue growth rate of 30 percent during its forecast period to justify Disney's purchase price.

"We think this growth target (30 percent revenue) is achievable with Disney's backing," Trefis noted.

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