Although Zynga is generally considered a major mobile developer, Electronic Arts, through its subsidiary PopCap games, is better positioned. Its Plants vs. Zombies franchise is poised to dominate the mobile space, while Zynga's future remains uncertain.
Mobile gaming takes off
The widespread adoption of tablets and smartphones has helped to fuel the rise of mobile gaming. Gaming-focused investment bank Digi-Capital called mobile games the "highest-growth large technology market today" in a report released back in July (via AllThingsD).
The bank noted that, when it comes to using apps, mobile device owners spend 43% of their time gaming. For just tablets, it's 67%. Moreover, games monetize four times better than other types of apps, and the market for games is growing -- by 2016, it's expected to be an $83 billion market, with over half of that coming from online and mobile games.
While some companies -- like Zynga -- have struggled, others have done quite well. Candy Crush's creator, King, is currently raking in over $600,000 per day (over $200 million per year) in revenue from the app -- and that's just American players. Rovio, the creator of Angry Birds, took in over $200 million last year, more than double its 2011 revenue.
Plants vs. Zombies 2 will be the next big hit
Electronic Arts is sitting on the next big mobile hit. The sequel to Plants vs. Zombies (itself still a top grossing app), Plants vs. Zombies 2, was released in the U.S. last week. Already, it's shot up the app charts, blowing past Candy Crush and becoming the most popular free app on the iTunes app store.
It has also received rave reviews. Gaming publication IGN gave it an 8.7 on a 10 point scale; Eurogamer gave it an 8. As someone who has played both titles extensively, I can testify that the sequel keeps everything that was great with the original, but adds amazing new content.
But the biggest change EA made will ultimately be the key to the game's financial success -- unlike its predecessor, which cost $10 at launch, Plants vs Zombies 2 is completely free to play. If players wish, they can fork over cash for optional upgrades. This is the model that Candy Crush has used to fuel its financial success.
Theoretically, users can spend as much or as little money on the game as they want. If they want to purchase all the available upgrades, they'll be spending well over $30 -- more than three times the price tag of the original game.
Obviously, given that it's free, it's likely that it will attract many more players. This alone is great for EA, as the company already has plans for at least one spinoff game. Moreover, the cartoony nature of the plants and zombies that make up the game's characters lend themselves to merchandising. EA already sells plush toys and t-shirts based on the game, and if it really takes off, the potential merchandise-related sales could be significant.
If Plants vs Zombies 2 sees similar success to Candy Crush, it could have a meaningful impact on EA's financials. In fiscal years 2011 and 2012, EA reported total revenue figures of $1.09 billion and $1.36 billion, respectively. Adding another $200 million per year would increase EA's total revenue by 15-18%.
It's harder to quantify the value of merchandise sales and successful intellectual property, but both these factors offer potential for upside. Consider that, last quarter, Disney made more money from merchandise than movies. At the same time, EA's rival Activision-Blizzard relies heavily on its Call of Duty franchise -- in the fourth quarter of last year, a single Call of Duty title brought in 40% of Activision's revenue.
Zynga is in the midst of a transformation
And unlike Zynga's titles, Plants vs. Zombies 2 will have staying power -- people will still be playing it years from now.
Although Zynga is commonly viewed as a mobile game developer, it is more accurately identified as strictly a social game developer -- while its games appear on mobile devices, the key element is their social aspect.
Because of their social nature, Zynga's games can -- like a virus -- explode in popularity. It's no fun to play Words With Friends alone -- you need other people. So you'll encourage your friends to download and play it with you. But the opposite is also true. Once enough people get tired of a given Zynga game, the popularity of the title drops drastically. If your friends quit playing, you will quit as well.
This is why, just months after Zynga spent $200 million on OMGPOP, the popularity of its hit title, Draw Something, plummeted. Last fall, Zynga wrote off nearly half the purchase price, and then, earlier this summer, moved to close the studio down.
In contrast, Plants vs. Zombies 2 (and Candy Crush, and other successful mobile games) is single player. Even if your friends stop playing it, you can still have fun with the game.
Zynga's new CEO, Don Mattrick, has begun to reshape Zynga, shuffling around its top executive team. Yet, he has not detailed his strategic plans for Zynga. Until he does, Zynga remains a speculative investment.
Investing in mobile gaming
Mobile gaming is a growing industry. As consumers continue to adopt tablets and smartphones, demand for mobile games increases.
When it comes to gaming stocks, EA might be the best positioned. Investors commonly think of Zynga as a mobile game developer, but the studio's reliance on social gaming and the ongoing management turmoil make it a difficult investment.
Soon, Plants vs. Zombies 2 is going to be recognized as the next great mobile game. And when that happens, EA will benefit.