EA flies into mobile

Contact: Jarrett Streebin

Electronic Arts (EA) recently shelled out a reported $20m for mobile game publisher Chillingo. The UK-based startup published the popular iPhone game Angry Birds. Although the acquisition didn’t include the game or its developers, it will help EA market and distribute its mobile games. This small deal is the latest in a hot streak in mobile entertainment transactions this past year.

Last year, EA bought mobile and social game developer Playfish for $300m, plus an additional earnout of up to $100m, making EA one of the largest developers for mobile and social games. The company followed that up with the purchase of mobile game developer IronMonkey Studios earlier this year. The Australian company had already built mobile games for existing EA titles such as Medal of Honor and Need for Speed. Now, Chillingo will provide the channels to better market and distribute these and future titles to iPhone as well as handheld consoles such as Sony’s PSP Mini and Nintendo’s DSiWare and WiiWare platforms. It’s likely that this distribution will extend to Android titles as well.

Not that EA is alone doing deals for mobile gaming companies. In mid-October, DeNA dropped a whopping $400m on ngmoco, one of the largest acquisitions ever involving the iPhone. These are just a few of the transactions that have helped double the M&A activity in the mobile gaming sector. So far this year, there have been 29 deals, up from 17 last year, according to The 451 M&A KnowledgeBase.

Zynga buys beyond Facebook

Contact: Jarrett Streebin

Zynga has become a serious collector of small to medium-sized game development studios, acquiring seven companies so far this year. Beyond just buying more titles, the company has used M&A to get into other markets. For instance, Zynga has expanded internationally with XPD Media in China, Dextrose in Germany and Unoh in Japan. With the latest purchase of Bonfire Studios, which was announced October 5, it goes beyond Facebook gaming altogether into console and PC gaming.

Founded in 2007, Zynga has grown from a small social games developer into the largest shop on the block. The San Francisco-based firm is the leading developer of Facebook games and makes its money by selling virtual goods in its games. (We looked more fully at the market for virtual goods in a recent Sector IQ.) Users can pay real cash to buy weapons for their mafia or crops for their farms. Things were going well until Facebook unveiled Facebook Credits earlier this year. There was even a standoff between Zynga and Facebook due to the 30% cut that Facebook takes. Eventually, Zynga gave in and signed an exclusivity agreement.

Still, we sense that the company learned a valuable lesson about being overly dependent on a platform that it doesn’t own. At least that’s how we might read the fact that six of Zynga’s past seven deals are in other areas of gaming. The diversification has seen Zynga broaden its international business with the acquisitions of Chinese firm XPD Media, German game engine developer Dextrose and Japanese social gaming company Unoh. And most recently, Zynga’s reach for Bonfire Studios added a startup that was founded by three gaming veterans with PC and console experience.

Virtual goods, real interest

Contact: Jarrett Streebin

It turns out there’s a real business around buying and selling make-believe items online. Although it’s still early in the so-called virtual goods market, companies have already begun positioning themselves for what looks to be a fast-growing market for personalizing and developing online games. On a small scale, e-Rewards acquired Peanut Labs last week, less than two months after Google announced a purchase of its own. Peanut Labs will become part of e-Rewards’ Research Now online sampling and data-collection business unit. We expect more activity in this nascent market, which is likely to be shaped by three main players: Facebook, PayPal and Google.

Each of these tech giants has shown serious activity around virtual goods, either through organic development or acquisitions, and each has a slightly different approach to the market. Earlier this year, Facebook unveiled its Facebook Credits, a payment system for the Facebook platform. These Credits can be used to buy gold or guns in games on the platform and are even sold in gift cards at Walmart. Meanwhile, PayPal currently handles roughly 50% of the volume for virtual goods. It’s a payment option for Facebook Credits and PayPal continues to improve upon developer relations with its payment platform X and developer conference. And finally, Google bought into the space in early August with the purchase of Jambool and its virtual goods payments processor Social Gold. We will have a full look at the approaches of each of these three companies, including where they might look to buy, in a Sector IQ on virtual goods in tonight’s Daily 451 and 451 TechDealmaker sendouts.

Buying and selling at Disney 2.0

Contact: Jarrett Streebin

If we look at the recent M&A moves by Disney, it’s clear what the media giant sees as its future. Just today, Disney divested its Miramax division, only days after its $563m purchase of social gaming startup Playdom. Taken together, these deals show that 86-year-old Disney is leaving the box office behind and betting big on social gaming.

Earlier this month, Disney bought its first social gaming company, Tapulous. The 30-person startup based in Palo Alto, California, specializes in mobile social games for Apple iPhone and Google Android devices. Playdom, which specializes in online social games, rounds out Disney’s offerings and provides it with roughly 38 million users, according to Playdom’s website. Combined, it’s likely that Disney will use Tapulous and Playdom to push its signature brands such as Marvel Comics, Pixar and ESPN to both mobile and online audiences.

It’s clear that Disney is recognizing what the rest of the industry has already seen: it has to buy its way into this market. Internet gaming acquisitions have gone through the roof this year. The 40 transactions year-to-date is more than twice the number (17) during the same period last year. Disney isn’t the only major buyer in the space, though. Playdom had inked a half-dozen deals of its own, and Electronic Arts dropped $300m on Playfish late last year, as well as reaching for IronMonkey Studios and J2Play within the last 12 months. The business of social games, although once stratified by a coterie of geeky developers, is quickly being consolidated by the major media and entertainment players.

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.

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.