Tag: casual gaming

Bets on casual games are paying off

-Contact: Thomas Rasmussen, Brenon Daly

Fittingly enough, on the one-year anniversary of our piece predicting continued consolidation of the social and casual gaming space, Electronic Arts announced the industry’s largest acquisition. The Redwood City, California-based videogame giant acquired Playfish on November 9 for $275m, although an earnout could mean that EA will pay as much as $400m over the next two years for the company. We estimate that Playfish, which will be slotted into the EA Interactive division, generated about $50m in trailing sales. Overall M&A continues to be strong in the still-niche gaming sector, with deal volume up about 25% from last year with about 35 transactions inked so far in 2009.

With the gaming industry seemingly in recovery mode after not-so-horrible earnings announcements from industry bellwethers EA and Activision Blizzard, we’re confident that more videogame and media companies will look to add social networking games. (After all, the big gaming players have used M&A as a way to buy a piece of a fast-growing, emerging market. For instance, EA spent $680m in cash four years ago for Jamdat Mobile to get into wireless gaming.) With Playfish off the board, which other social gaming startups might find themselves targeted by one of the big gaming vendors?

While there are literally hundreds of promising startups, most are too small to be important enough for a big buyer. Nevertheless, there are a few firms that have grown – both organically and inorganically – enough to make them attractive acquisition targets. For instance, Playdom, which develops games primarily for MySpace and Facebook, recently reached for a pair of smaller gaming startups. The company also recently raised $43m. Similarly, Zynga recently raised a funding round ($15m) and has also picked up two small startups this year. Two other names to watch in the emerging social gaming market are Digital Chocolate and Social Gaming Network Inc.

EA’s South Korean embrace

-Contact Thomas Rasmussen

Even as business at home deteriorates sharply for US-based videogame giant Electronic Arts, it has been quietly – but quickly – using acquisitions to build up its presence in South Korea, a country that has some of the highest broadband penetration rates in the world. In the past year EA has gone from a mere sales presence in Korea to a significant developer and marketing operation, adding about 50 employees there. It has done this by two acquisitions in the past six months. In May the company purchased Hands-On Mobile Korea for $30m to shore up its mobile and casual gaming business. And this month it added J2MSoft, a company with some 55 developers, for an estimated $30m.

If the pickup of J2MSoft represented simply an EA land-grab in a relatively small market, the story would end here. But beyond simple geographic expansion, the purchase indicates a strategy to focus on a quickly growing part of the industry: online gaming. The region is known for these offerings. J2MSoft, for instance, has already launched three successful online games in Asia. We recently profiled the growing interest in casual gaming as a viable business. But the shift to online is just as big, if not bigger.

EA certainly wouldn’t have missed the blockbuster success of the online division at rival Activision Blizzard. That company attributed more than 40% of its $649m revenue in the third quarter to this phenomenon. That was driven by its online game World of Warcraft, which single-handedly took in as much money as all of its properties across the four major videogame consoles. In addition, World of Warcraft‘s subscription-based model has generated billions for Vivendi (which owned Blizzard when it merged with Activision) since it launched four years ago. Along with casual gaming companies, we suspect shopping of online gaming companies will continue to dominate gaming M&A well into 2009.

Select shopping of online gaming companies

Date Acquirer Target Deal value
December 9, 2008 Atari [Infogrames Entertainment] Cryptic Studios $27.6m
December 8, 2008 Perfect World Global InterServ China $23m
August 1, 2007 Walt Disney Club Penguin $350m
October 11, 2007 Electronic Arts VG Holding $620m
June 20, 2006 Electronic Arts Mythic Entertainment $76m

Source: The 451 M&A KnowledgeBase

Betting on casual gaming

-by Thomas Rasmussen

Casual gaming is a serious business. Amid a decline in M&A across the overall gaming industry, casual gaming acquisitions are trending up slightly. So far this year there have been 28 social and casual gaming deals inked, which compares to 25 for all of last year. This is in stark contrast to a sharp decline of more than 30% in tech and gaming M&A in general. What might the reason be for this and what does it portend for the year to come?

The past month has authoritatively invalidated a long-held belief by those in the gaming industry: It is not a recession-proof sector. In fact, lackluster earnings from Electronic Arts (EA) and others have the industry anxious. EA posted a negative EBITDA of $310m, provided dire forecasts and announced across-the-board job cuts for the most recent quarter ended September 30. The bright spot, however, is the continuing growth in casual gaming among not only the big videogame companies such as EA, but other companies, as well. For instance, RealNetworks’ recent third-quarter earnings report boasts another 20% increase in its gaming business compared to last quarter. As the casual gaming industry continues to be seen more as a viable business model, we expect the shopping to continue for not only the gaming conglomerates, but also for large media companies looking to get in the game. Amazon’s recent acquisition of Reflexive Entertainment is an example of new acquirers shopping in the space.

Not that it is a hard trend to spot, but for what it’s worth, VCs, angels and serial entrepreneurs have been touting this development to us all year, and are putting their money where their mouths are. Among some of the startups to receive sizable funding recently are Playfish, which raised a $17m series B round last month for a total of $21m to date; Social Gaming Network Inc, which has won about $20m in funding so far; and Zynga Game Network, which has taken in $39m. That is a lot of money for companies in an industry previously regarded as a niche. And given the heavy consolidation experienced in the traditional gaming industry, all of these vendors are likely to be part of the many names mentioned in M&A chatter in the near future.