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The old saying “you scratch my back and I’ll scratch yours” is a timeless way of explaining to someone that if you do a favor for me, I will do a favor for you. Unintentional or not, this idiom can also apply to companies in the market. However, the results may vary, as seen on recent conference calls of two digital heavy-weights.
Social media giant Facebook (NASDAQ:FB) recently held their first earnings conference call as a publicly traded company. While the company’s growth figures disappointed investors, there were some interesting nuggets on the call. Facebook noted that companies benefited from specialized advertising on its site by strong returns on investment. Sheryl Sandberg, chief operating officer, explains, “Electronic Arts (NASDAQ:EA) recently spent $2.75 million promoting Battlefield 3 on Facebook. They attributed $12.1 million of their sales to these ads, translating to a 4.4 times return on their Facebook marketing spend.”
Facebook was clearly displaying their ad effectiveness, but the comment was also a pleasant acknowledgment of EA’s success in the gaming world. Unfortunately, EA did not return the favor. Late Tuesday, the gaming company held a conference call to discuss its fiscal first quarter results. EA notes that Facebook is making the discovery and use of new games a “little bit easier,” but as Peter Moore, chief operating officer of EA, explains, “But from our perspective, certainly we’re not increasing any guidance on social because of any changes that Facebook is making.”
Furthermore, EA explains that it is experiencing a slowdown in social network games, but strong growth in mobile games on smartphones and tablets, an area where Facebook is still lacking. The company explains, “Our revenue guidance also considers a change in mix in the gaming sector. Our overall calendar 2012 expectations for the sector and the Western world remain consistent with our previous forecast. We continue to expect overall low single-digit percentage growth, with digital growing over 20 percent. However, we are now expecting more growth in mobile and free-to-play, but this is offset with slightly less growth in social and greater weakness in packaged goods.” Moore later added on the call, “So from the focus that we’re putting on as a company, we do recognize that the growth in social is slowing down.”
While the comments from the call were not a death blow to Facebook or social games, another strike against the industry was the last thing it needed. Social and internet related names have been struggling more than usual recently. In the past month, Facebook and Zynga (NASDAQ:ZNGA) shares have plunged 30 percent and 50 percent, respectively. Other companies such as Pandora (NYSE:P) and LinkedIn (NYSE:LNKD) have declined 7 percent in the same period. On Wednesday, Facebook and Zynga shares both hit fresh all-time lows. Facebook dipped to $20.87, while Zynga hit as low as $2.75. Zynga is now facing lawsuits due to extreme declines in user and revenue growth.
Investor Insight: SOCIAL MEDIA: $1 Trillion Value Added or Tech Bubble 2.0?
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