Facebook (NASDAQ:FB) is now a major player in the games market. This may not be a surprise to avid Facebook gamers, but this new reality carries important implications for investors interested in the space, regardless of their gaming habits on the social network.
Looking beyond FarmVille
Facebook's vision for its gaming platform goes far deeper than Zynga's (NASDAQ:ZNGA) FarmVille. With an increased focus on serious gamers, the company could draw in developers of console-like games, such as Microsoft, Electronic Arts (NASDAQ:EA), and Activision Blizzard (NASDAQ: ATVI) and their flocks of core gamers.
"Riveting games with intense graphical fidelity are possible on Facebook," says Games.com's Joe Osborne. While most Facebook members are probably familiar with casual games like Candy Crush Saga and FarmVille, Facebook is gearing up to become a competitive destination for action and console-like games.
At the Game Developers Conference yesterday, Facebook's director of games partnerships, Sean Ryan, named several games of this type that are set to release soon: Tome, Chronoblade, and Imperium.
Apparently the company's $3 billion share of the $15 billion games market isn't satisfying Facebook's ambition. Ryan told AllFacebook (the "unofficial Facebook blog") in February that one of its biggest goals this year is to be a go-to destination for core and mid-core gamers. He feels that this is inevitably where the social gaming market is headed. "Last year was primarily about casino, hidden object, and casual, and we'll continue to see those expand. But I think we'll see a rise in the core games as developers figure out how to make them social."
It's no wonder Facebook wants to push further into the games market. It is an area of astounding growth for the company, according to Ryan. Game installs on Facebook are up 75% from this time last year. Furthermore, paying gamers on Facebook have increased 25% over the last 12 months.
Can traditional gaming companies flourish in social gaming?
The trend toward higher-graphic action games on Facebook's platform is good news for gaming behemoths Microsoft, EA, and Activision. As Facebook makes inroads with core games, developers of console games will have to worry less about casual games stealing the attention and time of their serious gamers.
More importantly, as console-like games become possible on Facebook's platform, companies like EA and Activision can use their vast experience and resources to launch successful core games on the platform. In fact, both EA and Activision have already commenced social ventures.
In 2012, Activision unveiled a publishing segment devoted to developing third-party games for the social-mobile gaming world. Morningstar analyst Carr Lanphier describes the segment as important but still insignificant to the company's earnings. For now, "It allows the company to get the lay of the land -- no easy task in the volatile world of social and mobile gaming -- and figure out the best strategy to grow profitably in the newly emerging market."
EA has taken a more aggressive approach. The company already has popular socially appealing games like FIFA Manager. Plus, the company's acquisitions of PopCap and Playfish have given EA substantial market share in social gaming.
Success, however, won't come easy in the social gaming market -- even if Facebook's core-gaming undertaking pans out. Zynga has a meaningful advantage as the market's largest publisher. EA management must agree; it has lost considerable high-level talent to Zynga, including the company's COO, its executive VP of EA Play, and its executive VP of EA Interactive.
Should Zynga be worried?
All parties seem to benefit from a trend toward core gaming -- except Zynga. Even though it boasts a roster of 232 million average monthly active users, the company still lacks meaningful traction in console-like gaming. Furthermore, Zynga remains unable to generate any free cash flow, a snag that would place the company at a significant disadvantage should it need to develop games to compete with Activision and EA if they decide to pursue this market.
The biggest winner of the bunch is probably Facebook, who could benefit from new and loyal core gamers. Furthermore, there's a good chance that core games will be higher-margin contributors to Facebook's gaming segment than casual games.