IBIS Capital Global Video Games Investment Review

Transcription

Global Video Games Investment Review
2011
June transaction update
www.digi-capital.com
© Digi-Capital Limited 2011
Contents
Executive summary
Market trends: fundraising, investment, M&A and JV opportunities
Market analysis
–
Massively Multiplayer Online (MMO)
–
Casual/Social Online
–
Mobile
–
Console
–
In-game advertising
About Digi-Capital
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2
Executive summary
3
The rise of online/mobile, China and the time to invest for growth
Games investment has fundamentally shifted to online/mobile




Video games investment has changed fundamentally, shifting to online/mobile games
Many major console publishers are struggling to adapt to online/mobile, and are not driving online/mobile games investment
Quality investment demand still exceeds supply for high growth, high profitability online/mobile games companies
Despite major publisher/media consolidation, with multiple high profile acquisitions
China, not America, could dominate the global games market



Online*/mobile games should grow total video games market size to $87B and take 50% revenue share at $44B, with the historically strong pure console+ sector
flat to down
Asia Pacific and Europe should take 90% revenue share for online/mobile games (China 49%, Europe 17%, Japan 14%, South Korea 11% in 2014F), although
North America remains important
China’s domestic strength has produced high volume (up to 20M peak concurrent users), low ARPU**, cost efficient online/mobile games businesses with up to
50% operating margins, enabling significant investment in foreign markets
Online/mobile games independents: invest for growth or exit now




Online/mobile games are high growth (18% CAGR 09-14F), but the market remains unconsolidated
Games investment and M&A are accelerating, with the value of fundraising growing by 52% and M&A by 60% in 2010
But the opportunity will not last forever, particularly if the results from some of the high profile acquisitions do not deliver in 2011
The time to act is now, whether raising funds to accelerate growth prior to consolidation, create joint ventures and strategic partnerships to enter major foreign
markets (particularly from and to China, Japan and South Korea), or exit to take advantage of the strong M&A market and valuations
Conglomerates subsidising change, harder for console pureplays




Console game investment is accelerating, with investment no guarantee of success, with major console publisher strategies appearing to have converged on fewer
franchises, refreshed more often with higher marketing budgets
Large console franchises still remain highly cash generative, despite current market challenges to overall corporate profitability
Although adapting to meet fundamental changes in the market with online/mobile organic investment and acquisitions, pureplay console publishers must prove
that their repositioning can deliver sustainable profits
Conglomerates with diversified revenue streams may find it easier to invest in the change to online/mobile games
There is significant opportunity to invest in 2011




The video games market is changing across sectors (casual/social online, middleware, smartphone/tablet, browser based MMO ++, online skill based gaming, pure
console, retail MMO, gambling)
As online/mobile games grow and fragment the games market, supported by high growth, high profit business models
With opportunity for online/mobile games growth capital funds to invest in the strongest independent companies
And clear investment, M&A, JV and strategic partnership opportunities for corporate and financial investors
4
*Note: Online includes MMO, casual and social games
+Note: Pure console excludes MMO
**Average Revenue per User
++Massively Multiplayer Online
Games investment has fundamentally shifted to online/mobile
Global video games private placements
Video games investment has changed fundamentally



VC games investment approached 2007 levels in 2010 in terms of funds raised, but
number of investments declined
Top 10 investments accounted for ~60% of total games investment in 2010, with a
fundamental shift to online/mobile games company investments
General VC market weakness and limited knowledge and relationships across
complex, fast moving online/mobile games sectors still make generalist VC games
investment challenging
$1,200M
140
$1,000M
120
100
$800M
80
$600M
60
Major console publishers struggle to adapt to online/mobile





Major console publishers are focused on existing large console games franchises, as
the console games market is flat to down, with declining profitability
Major publishers’ core competencies focus on management of $20m+ serial, high
risk, complex developments, launches and commercialisation
Online/mobile games require rapid, multiple, small scale parallel development
platform investments, completely different to major publishers’ business cultures
Major publishers are not driving online/mobile games investment
Major publishers are wary of large scale online/mobile video games M&A in early
stage, fragmented markets where market dominance is not yet clear

High quality, high growth (100% annual revenue growth, 20-50% operating
margin) online/mobile games companies are seeking investment to accelerate
growth
Outside the major investment deals, online/mobile games companies still find it
challenging to find high quality investors
$200M
20
$0M
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Funds raised
Number of investments
Global video games mergers and acquisitions
80
70
$2,500M
60
$2,000M
50
$1,500M
40
30
$1,000M
Despite major publisher/media consolidation





40
$3,000M
Quality investment demand still exceeds supply

$400M
20
$500M
Console publisher/online: Electronic Arts/Playfish $400M
Media/online: Disney/Playdom $763M
Online/mobile: DeNa/Ngmoco $400M
Major online/online: Tencent/Riot Est. $350M-$400M
Online publisher/online: Shanda/Mochi Media $80M
10
$0M
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Transaction value
5
Number of transactions
Sources: CapitalIQ (excludes Vivendi Activision and Vivendi Universal
Publishing deals), NPD Group, Charttrack, GfK, Activision Blizzard, GamesBeat
Companies, Bloomberg, VentureBeat
Note: Funds raised/transaction value only includes disclosed or estimated
amounts
China, not America, could dominate the global games market
Online† and mobile games
should grow total video games
market size to $87B and take
50% revenue share at $44B
(18% CAGR 09-14F). The
historically strong pure
console* sector is flat to down
Asia Pacific and Europe should
take 90% revenue share for
online and mobile games
(China 49%, Europe 17%,
Japan 14%, South Korea 11%
in 2014F). North America
remains important
China’s domestic strength has
produced high volume (up to
20M peak concurrent users),
low ARPU**, cost efficient
games businesses with up to
50% operating margins,
enabling significant
investment in foreign markets
Global Video Games Sector Revenue ($B)
100
90
80
70
60
50
40
30
20
10
0
2004
2005
Console games
2006
2007
2008
Online games
2009
2010E 2011F 2012F 2013F 2014F
Mobile games
PC games
In-game Advertising
Regional Online/Mobile Games Revenue ($B)
50
45
40
35
30
25
20
15
10
5
0
2005
10%
17%
73%
2006
6
2007
2008
2009
Asia
Europe
2010E
2011F
North America
Sources: PWC (excludes hardware revenue), Companies
* Note: Pure console excludes MMO
† Note: Online includes MMO, casual and social games
** Average Revenue per User
2012F
2013F
2014F
Online/mobile independents: invest for growth or exit now
Online/mobile games are high growth but unconsolidated






Consolidation Curve for Video Games
2009 $19B revenue = 32% of global video games revenue
2014F $44B revenue = 50% of global video games revenue
>200M casual online unique users, >700M social online monthly active users,
>20M MMO subscribers, >10B iPhone apps (55% games) downloaded
Barriers to entry remain low (outside of Facebook social games), with strong
competition but limited market dominance by major competitors
Independents are competing successfully with more established competitors
High revenue growth (100%+) and operating margins (50%+) are being
delivered by strongest independents
Sector
Consolidation
Sector
Launch
Sector Growth
for Scale
Sector
Consolidation
Sector
Equilibrium
Pure
Console
High
Retail MMO
Investment and M&A are accelerating





Video games fundraising was 52% higher in 2010 than 2009
Video games M&A was 60% higher in 2010 than 2009
Online/mobile games valuations for both investment and M&A have been rising,
with major deals attracting significant interest
Major corporate acquirers are increasingly looking to external investments,
acquisitions, joint ventures and strategic partnerships for online/mobile games
growth and diversification
Strong Asian players (China, Japan and South Korea) are actively seeking foreign
opportunities to leverage their capabilities internationally, as well as to source
international IP and knowledge for large domestic markets
Casual/Social Online
Medium
Browser based MMO
Mobile
Middleware
Social-Mobile
But the opportunity will not last forever


Public companies are subject to intense analyst scrutiny of high valuation
investments and acquisitions
Not all current online/mobile games investments and M&A are likely to deliver
as expected during 2011, with a potentially negative impact on valuations
Low
- VC Investment
- Some small
M&A
The time to act is now



In-game
Advertising
Raising funds to accelerate growth prior to consolidation
Joint ventures and strategic partnerships to enter major foreign markets
(particularly from and to China, Japan and South Korea)
Exit to take advantage of strong M&A market and valuations
7
- Growth equity
investment
- High volume,
mid-market
strategic M&A
- Leveraged
buyouts
- Low volume,
large scale
strategic M&A
Sources: Digi-Capital, PWC, CapitalIQ
*Note: some outlier deals may occur, e.g. Microsoft/Massive acquisition
- Limited
M&A/
investment
- Cost focus
- Alliances or
spinoffs
Expected
Deal
Activity*
Conglomerates subsidising change, harder for console pureplays
Console game investment is accelerating

Console games are hit driven, with investment no guarantee of success
120
16
100
14
80
12
10
60
8
40
6
4
20
Although video games now rival Hollywood





18
2
0
Hardware: $22B Revenue*
Software: $55B Revenue*
Total $77B video games vs $85B film global revenue*
Up to $60 per game sold vs $10-20 per cinema ticket/DVD
Console games are flat to down, with console growth hoped
for from next console hardware cycle in 2014-2016
0
Development Cost ($M)
Conglomerates have the best chance to adapt




Major console publisher strategies appear to have converged
on fewer franchises, refreshed more often with higher
marketing budgets
Although adapting to meet fundamental changes in the
market with online/mobile organic investment and
acquisitions, pureplay console publishers must prove that
their repositioning can deliver sustainable profits
Conglomerates with diversified revenue streams may find it
easier to invest in the change to online/mobile games
Disney has invested significantly with the Playdom social
games and Tapulous smartphone games acquisitions, as well
as an apparent intention to invest less in console games
Microsoft invested significantly in developing and launching
Kinect, revitalising the sales and market share of XBox360
and related games software
Franchises selling tens of millions of units are lower risk
250
200
Global Unit Sales (M)

Sales (M Units)
150
100
50
0
Mario
Pokemon
8
Tetris
The Sims
Need for
Speed
Final
Fantasy
Grand Theft
Auto
FIFA
Sources: Companies, IDC, Gamasutra, VGChartz, Gamezone, IndustryGamers,
Mainichi Shinbun, The Ledger, News Limited, GameSpy, GameSpot, VideoGaming247,
LA Times, NTV, Digital Battle, IGN, Time Magazine, Forbes, MontrealTechWatch,
Newsday, Gamesindustry.biz, Wired
Note: Development Cost excludes marketing and distribution
* Global revenue figures from 2009
Madden NFL Legend of
Zelda
M Units



Average game development costs have grown:
 XBox360, PS3: $15-30m
 Wii: $5-7M
Strong development project management is crucial
Marketing costs can equal development costs or more
Retail, distribution and hardware royalties are significant
 30-40% of retail turnover
500K to 1M units just to break even (ex-overheads)
$M

Market trends: fundraising, investment
M&A and JV opportunities
9
The video games market is changing across sectors
Casual online
Browser based Massively Multiplayer Online (“MMO”)
 Simple single player online games
 Played on online casual games platforms
 Example company: PopCap Games
 Thousands of simultaneous online player games
 Played on browser based online MMO platforms
 Example company: Bigpoint
Social online
iPhone/iPad and other smartphone/tablet
 Multiplayer online games
 Played on social platforms (e.g. Facebook)
 Example company: Zynga
 Mobile casual, social and MMO games
 Played on smartphones/tablets
 Example company: Rovio
Online/smartphone/tablet middleware
Retail MMO
 Technology for online/smartphone/tablet games
 Software as a Service B2B business model
 Example company: Jambool
 Thousands of simultaneous online player games
 Played on PC/Console via retail or digital download
 Example company: Activision Blizzard
Pure console
 Retail/digital download console games
 Played on PS3, XBox360 or Wii
 Example company: Electronic Arts
10
As online/mobile games grow and fragment the market
Online*/mobile growing scale and share


2009 $19B revenue = 32% of global video games revenue
2014F $44B revenue = 50% of global video games revenue
As consumer markets fragment






Wii grew Casual Console market (85M+ Wii’s sold)
Apple grew Casual/Social Mobile market (10B+ Apps sold)
WoW grew Hardcore Online market (12M+ subscribers)
Zynga, Spil, Playfish, Yahoo!, Big Fish Games grew Casual/Social
Web market (700M+ Monthly Active Users+ [“MAU”])
Bigpoint bridged Casual to Hardcore browser market
Onlive hopes to expand delivery across TV and web (no console)
Console/PC
Supported by profitable business models







Best companies growing revenue 100%+ annually while also
generating 20-50%EBITDA margins
App Store: free (with in-game virtual items) to $10 per game
WoW: $12.99-$14.99 monthly fee
Spil: free, advertising supported
Zynga: free, micro-transactions
Bigpoint: free, subscription, micro-transactions, no advertising
Big Fish: try before you buy, downloads, retail, multi-platform
Casual
Gamers
Hardcore
Gamers
And requiring specific skills and approaches






Multiple, parallel game development business platforms (not “one
game” hit driven companies)
Multiple distributors (not just Facebook) across platforms and
geographies
Rapid, low cost game development and continuous daily
redevelopment cycles for rapid market response
Fast failure (cut commercial losers, back commercial winners)
Strong analytics (to maximise commercial returns)
Aimed at delivering true scalability and category leadership, with
profit margins increasing as revenue grows
Web/Mobile
11
Sources: PWC, Bigpoint, Companies, Casual Gaming Association,
TechCrunch, Inside Network
*Note: Online includes MMO, casual and social games
+Note: MAU is total monthly active users, not unique users
With opportunity for online/mobile games growth capital funds
Investing in quality online/mobile video games companies*






Example Fund Structure
50-100% annual revenue growth
20-30%+ operating margins or potential
$10M+ revenue
Domestic strength with East/West ambitions (Asia to Europe/US or Europe/US to Asia)
Strong management teams, intellectual property and commercial track records with clear exit
strategies
Specific sector focus+

Casual/social online

iPhone/iPad, other smartphone/tablet

Browser based MMO

Online/smartphone/tablet middleware
With a clear investment strategy to manage risk and optimise returns






$10M average investment ($5-15M range)
Focus on growth capital investment returns (30%+ IRR, 3-5x money multiple)
 Working capital (debt convertible into equity via convertible loan notes)
 Pure equity capital
 Equity capital plus bank debt
Direct Western and Asian investments
US investment with Tier 1 co-investment partners
Clear exit paths via trade sale to strategic video game and media corporates as market consolidates
IPO potential for later stage investments depending on market conditions
Growth capital fund structure






$100M+ committed funds
2011-2014 investment period (aim to invest 75%+, remainder for follow on rounds)
2011-2017 fund lifetime
Committed funds fee basis
2% annual management fee 2011-2104, reducing to 1.5% in 2015-2017
20% General Partners carry
 Return of funds invested before carry
 Return of fees before carry
 8% hurdle return before carry, with catch-up
12
Limited Partners
Investors
Tencent, Shanda and
Giant Interactive have
invested in games
funds
Game Fund
$100M+ funds committed
4 year investment period
7 year fund lifetime
General Partners
Source, invest in, oversee
and exit portfolio companies
Portfolio Companies
* Corporate investments, not project funding/publishing of individual games
+ Not pure console or retail MMO due to investment risk
There are clear investment, M&A and JV opportunities
For Major Video Games Companies
Sector
Investment, M&A
and JV
Opportunities
Console
MMO
Casual/
Social
 Core franchise organic
investment
 Limited new IP
investment until 8th
generation consoles
 Avoid large, value
destroying M&A
 Acquire economically
challenged AAA
independents to control
internal costs
 JV with major media for
licensed games/
marketing investment
 Explore strategic options
for underperforming
assets
 Invest in growth
capital game fund
 Mid-market
strategic M&A
destroying M&A
 Focused new IP
investment in nonfantasy MMO market
growth
 Focused new IP
investment in
casual/ social
subscription/ microtransaction MMO
market
 JV with major media
for licensed MMO
marketing/
investment
capital game fund
 Mid-market strategic
M&A in subscription
/micro-transaction
and middleware
markets
destroying M&A
 Focused new IP
investment in parallel
low cost
subscription/ microtransaction game
development
for licensed
casual/social
marketing/
investment
13
Mobile
capital game fund
 Small strategic M&A
destroying M&A
 Focused new IP
investment in
parallel, low cost
mobile game
development
for licensed mobile
games marketing/
investment
In-game
Advertising
destroying M&A
 Limited organic
investment due to
small market size
There are clear investment, M&A and JV opportunities (cont)
For Independent Video Games Companies
Sector
Investment, M&A
and JV
Opportunities
Console
MMO
Casual/
Social
 Organic investment (if
possible)
 Exit to major video games
company
licensed games/
marketing/ investment
 Restructure to focus on
self publishing,
downloadable content,
casual/ social or mobile
markets, with parallel
development and low
cost/ offshoring
 Organic investment
for new IP in nonfantasy MMO
market growth (if
possible)
 VC fundraising for
casual/social
subscription/
micro-transaction
non-fantasy MMO
market
 Growth equity
buyout for
casual/social
subscription/
micro-transaction
MMO market
for licensed MMO
marketing/
investment
subscription/ microtransaction and
middleware markets
 Growth equity buyout
for subscription/
micro-transaction
market
 Exit to major video
games/ media
company
for licensed
casual/social games
marketing/
investment
14
Mobile
 VC fundraising
games company
for licensed mobile
games marketing/
investment
In-game
Advertising
 VC fundraising
games/ media
company
For Venture Capital and Private Equity Firms
Sector
Console
MMO
Casual/
Social
Mobile
In-game
Advertising
Venture Capital
Investment
Opportunities
 Avoid pure console
investments due to risk
profile and sector
consolidation
 Invest in
casual/social
subscription/
micro-transaction
non-fantasy MMO
market
 Avoid hardcore
MMO market due to
risk profile
 Invest in
casual/social
middleware markets
 Avoid pure
advertising
supported market
because of business
model
 Invest in parallel, low
cost mobile game
development
 Invest in in-game
advertising
technology
 Avoid in-game
advertising agencies
due to business
model
Private Equity
Buyout
Opportunities
buyouts due to risk
profile and sector
consolidation
 LBO in hardcore
MMO market
 Growth equity
buyout in
casual/social
subscription/
micro-transaction
MMO market
in casual/social
middleware markets
 Avoid pure
advertising
supported market
because of business
model
 Develop sector
relationships in
anticipation of sector
maturity
 Develop sector
relationships in
maturity
15
For Major Technology, Media and Telecoms Companies
Sector
Investment, M&A
and JV
Opportunities
Console
MMO
Casual/
Social
Mobile
 JV with major/
independent video games
companies for licensed
games/ marketing/
investment
 Strategic M&A of
independent studios to
build internal capability
for significant IP
portfolios and leveraging
marketing platforms
 Explore strategic options
for underperforming
assets
capital game fund
 JV with major/
independent video
games companies for
licensed MMO
marketing/
investment
M&A to build
internal capability
for significant IP
portfolios and
leveraging
marketing platforms
destroying M&A
capital game fund
 JV with major/
independent video
games companies for
licensed casual/social
games marketing/
investment
M&A to build internal
capability for
significant IP
portfolios and
leveraging marketing
platforms
 Avoid standalone
organic investment
due to different core
competencies
capital game fund
 JV with major/
independent video
games companies for
licensed mobile
games marketing/
investment
to build internal
capability for
significant IP
portfolios and
platforms
organic investment
competencies
16
In-game
Advertising
to build internal
capability for
significant IP
portfolios and
leveraging client
relationships
destroying M&A
organic investment
competencies
Massive Multiplayer Online (“MMO”) Sector
17
The MMO sector is both high growth and consolidated
The MMO sector is highly cash generative




MMO subscribers (M)
MMOs are video games with thousand of simultaneous players
Business models are retail, subscription, micro transactions (in-game
currency commission and items) and advertising
WoW customers pay $12.99-14.99 monthly fees
MMOs operate across all major platforms
Market growth rates are forecast to accelerate



There are currently over 20M paying MMO subscribers globally, with a
strong presence in China and South Korea
The MMO subscription market is forecast to reach 30 million by 2012
based on regression analysis
The substantial Chinese MMO market is dominated by domestic Chinese
companies
But MMOs are also hit driven and high risk




Many retail MMOs have grown during their launch year, followed by up to
3 years of stability before an often sharp decline
MMOs that rely purely on digital distribution tend to grow slowly
MMO expansion packs help to manage churn and ongoing retail presence
Poor launches are generally fatal: NCSoft shut $69M Tabula Rasa after 15
months of sales and a 7 year development
Global MMO subscriptions
Second Life, 1%
City Heroes - Villains,
1% Age of Conan,
D&D, 1%
1%
LOTR,
1%
EVE Online, 2%
Final Fantasy XI, 2%
Others, 5%
Everquest II, 1%
World of Warcraft currently skews the market




Global MMO genres
Science
Fiction, 2%
Other, 3%
Dofus, 3%
World of Warcraft accounts for ~60% of subscriptions, and is a significant
profit driver for Activision Blizzard
The strength of the “fantasy” MMO market (>90% subscriptions market
share) has prompted many copycat offerings, with 35+ males the largest
player demographic
There appears to be significant untapped potential for MMOs in other game
genres, suggesting a “Blue Ocean Strategy” approach to opening new
genres (as with Nintendo Wii in the console market)
Yet opening a new segment is not without risk: RealTimeWorlds raised
>$100M in total, then went into administration after launch of APB
Lineage, 4%
Lineage II, 4%
RuneScape, 6%
World of
Warcraft, 60%
Aion, 12%
18
Sources: MMOData Feb 2011, Companies, CapitalIQ, GLG
Note: data not publically available for all MMOs
Fantasy, 95%
Yet remains an early stage market with evolving dynamics
Subscription
NCSoft takes MMO mobile
NCsoft released Aion Exchange in
October 2010, a new
iPhone/iPad application enabling
subscribers to MMO Aion to
track their accounts, virtual
equipment, and trends
Warner Bros/LOTR
Post-acquisition, Lord
of the Rings Online
triples revenue with
change to freemium
Casual
Hardcore
Tencent/Riot
Tencent continues its
international expansion
with purchase of League
of Legends developer
Virtual items/micro-transactions
19
Sources: MergerMarket, IMDB, Companies
And a clear hierarchy of successful business models
Business models are solidifying
Revenue Potential
• Subscription-based models generate
highest revenue, but require
substantial development and
Tens of
Advertising /
• Browser based “freemium” models
millions
of
Marketing
have established a significant
dollars
presence, delivering solid results and
blurring the line between MMO and
casual/social games. The business
model allows the majority of users to
play for free, with a minority paying
Freemium /
for additional virtual items (“microHundreds of millions of dollars
Micro-transactions
transactions”) and subscriptions
• Browser based games are cheaper to
develop and market, but generally
generate less revenue with lower
Average Revenue per User (“ARPU”).
This is changing.
Pure Subscription /
Hundreds of millions of dollars
Time-based
Hybrid retail sales
and subscriptions
Billions of dollars
20
MMO is helping to deliver strong public company valuations
USD millions, except per share data
Company
Activision Blizzard, Inc.
Changyou.com Limited
Giant Interactive Group, Inc.
NCSoft
NetEase.com, Inc.
Perfect World Co., Ltd.
Shanda Games Limited
Shanda Interactive Entertainment Ltd.
Sohu.com Inc.
Tencent Holdings Ltd.
Enterprise Value Multiples
Price
(10-Jun-11)
% of 52
Week High
Market
Cap
Net
Debt
Enterprise
Value
11.46
36.91
7.41
257.23
41.75
20.22
6.35
36.90
69.39
26.31
90.6%
78.1%
78.4%
93.1%
75.9%
58.8%
82.5%
68.1%
63.4%
88.7%
13,882
1,903
1,685
5,084
5,421
1,014
1,812
2,125
2,655
48,317
(3,508)
(351)
(885)
(548)
(1,358)
(233)
(493)
(953)
(575)
(2,084)
10,374
1,552
800
4,537
4,063
781
1,319
1,172
2,080
46,233
Median
Mean
Source: CapitalIQ
Note: Calendarized to December year end
21
CY2009
Revenue
CY2010
CY2011
CY2009
EBITDA
CY2010
CY2011
2.42 x
5.80 x
3.98 x
7.74 x
7.01 x
2.36 x
1.78 x
1.45 x
4.04 x
24.09 x
2.33 x
4.75 x
4.06 x
7.56 x
5.07 x
2.11 x
1.97 x
1.42 x
3.39 x
15.39 x
2.60 x
3.79 x
3.31 x
7.62 x
4.17 x
1.83 x
1.81 x
1.21 x
2.72 x
11.51 x
13.8 x
9.3 x
5.7 x
19.2 x
12.2 x
4.3 x
4.4 x
3.2 x
9.3 x
47.1 x
10.4 x
7.6 x
6.5 x
18.5 x
10.0 x
4.9 x
5.6 x
5.8 x
8.2 x
28.2 x
6.8 x
6.4 x
5.4 x
14.8 x
8.2 x
4.3 x
5.1 x
4.6 x
6.7 x
20.9 x
4.01 x
6.07 x
3.73 x
4.81 x
3.02 x
4.06 x
9.3 x
12.9 x
7.9 x
10.6 x
6.5 x
8.3 x
MMO M&A activity is increasing
Selected M&A
Deal
value
Revenue
multiple
EBITDA
multiple
Target
description
30 May 11
$50m
n.a.
n.a.
US MMO developer
Strategic acquisition for US and global online
growth outside China, as well as R&D capability
26 April 11
$350m
n.a.
n.a.
Web based MMO developer and
publisher
Summit Partners and TA Associates bought
out prior private equity owners to leverage
Bigpoint’s leading market position
25 April 11
$68.3
n.a.
n.a.
Chinese online game developer
Accelerates Changyou's position in China's
online games industry and adds a new category
of web based games to its portfolio
16 March 11
$17.7m
12.8x
n.a.
South Korean MMO developer
Following its merger with Wemade, Joymax
continues to expand its portfolio in South Korea
and beyond
24 Feb 11
n.a.
n.a.
n.a.
Lego Universe MMO development
team
Lego acquired Lego Universe development
team to bring the game internally
02 Feb 11
n.a.
n.a.
n.a
Two South Korean MMO developers
and publishers
Merger of Joymax and Wemade enables the
companies to leverage each others’
complementary development, portfolio,
distribution and platform capabilities globally
04 Feb 11
Est. $350M$400M
n.a.
n.a.
League of Legends MMO
developer and publisher
Tencent acquired a majority stake in Riot
Games, having previously been an investor
and Chinese distributor
06 Dec 10
n.a.
n.a.
n.a.
South Korean developer of
MMO EverPlanet
Nexon was the EverPlanet publisher in
Japan and South Korea, and should now
leverage the acquisition by publishing
internationally
04 Nov 10
n.a.
n.a.
n.a.
Designs, develops, and markets
multiplayer middleware solutions
to the games industry
Date
Target
Acquirer
22
Comments
Ubisoft will continue further development
on Quazal’s technology to strengthen
Ubisoft’s new online services
Sources: CapitalIQ, Mergermarket, Bloomberg, VentureBeat
MMO M&A activity is increasing (continued)
Selected M&A
Deal
value
Revenue
multiple
EBITDA
multiple
Target
description
Comments
$10.2m
7.0x
n.a.
MMO developer
The acquisition diversifies Gravity’s products
and services
28 Sep10
n.a.
n.a.
n.a.
Operates a 3D virtual community
Website
The acquisition extends Microsoft's reach into
online advertising markets
03 Aug 10
$71m
4.9x
30.5x
German based publisher of online
virtual worlds and MMOGs
Frogster is to be continued as an independent
company with the existing management and the
team at the existing sites
20 Apr 10
n.a.
n.a.
n.a.
Developer of Lord of the Rings
Online
Warner Bros. acquisition moves it further into
the free to play micros-transactions MMO sector
19 Apr 10
$21m
n.a.
n.a.
Development and provision of
online games, in particular
MMOGs
Expands product portfolio
$80m
n.a.
n.a.
China-based developer of 3d
MMORPGs
The acquisition is in line with KongZhong’s
strategy to expand into the two fastest growing
video games segments in China (MMORPGs and
Mobile games)
$75m
4.4x
US based developer of massivelymultiplayer online role playing
games
The acquisition will reduce risks in internal
development of future online games and
improve margins through the low-cost
structure of Cryptic’s engine
Date
28 Sep10
Target
(50.8%
stake)
Acquirer
(77%)
(29%)
15 Dec 09
09 Dec 08
Shanghai Dacheng
Network Technology
23
Sources: CapitalIQ, Mergermarket, Bloomberg, VentureBeat
The MMO sector is ripe for investment
Selected private placements
Date
Target
Investor
14 June 11
Deal
value
Target
description
$4m
Kids virtual world developer
22 Dec 09
Date
Target
Investor
4 investors
Deal
value
Target
description
$18m
Develops, publishes, and licenses
multiplayer online games
including EVE
02 May 11
n.a.
$4m
Sports themed virtual world
developer
15 Dec 09
$3m
Develops and licenses MMO tech
platform and develops third party
racing games
24 Mar 11
n.a.
$8.1m
MMO middleware provider
30 Nov 09
n.a.
Develops and operates
online games in China
08 Mar 11
Dr. Patrick SoonShiong
$15m
MMO developer
29 Oct 09
$4m
Develops multiplayer games
and platforms for iPhone
13 Dec 10
Stelt Holding NV
$10m
MMO developer and publisher
$12m
Develops MMOs for console and
PC
27 Sep 10
QuantAM
$12m
Operates an MMO games portal
31 Jul 09
$1m
Develops, produces and
distributes MMOs for kids
$4m
$4m
Asynchronous massive
multiplayer online games for
iPhone
16 Feb 09
08 Jul 10
A worlds and MMO games
production company
$20m
Develops multiplayer online
games and entertainment
07 Oct 08
$1m
22 Mar 10
Offers MMO games for casual
gamers
$1m
$21m
MMO games developer
Publishes online computer games
with a focus on virtual worlds
$20m
Develops and operates online
games in China
$50m
MMO games developer
$3m
Develops and publishes browserbased casual MMOs and social
games
Jan 10
n.a.
20 Jan 10
06 Jan 10
4 investors
01 Aug 09
25 Jul 08
24
14 Apr 08
47 investors
Undisclosed
Angel investor
Private investors
including CEO
Sources: CapitalIQ, Mergermarket, GLG
With clear investment, M&A and JV opportunities
Firm Type
Investment, M&A
and JV
Opportunities
Major
Video Games
Independent
Video Games
Venture Capital
Private Equity
Major Technology,
Media & Telecoms
 Invest in growth capital
game fund
M&A
destroying M&A
 Focused new IP
investment in nonfantasy MMO market
growth
 Focused new IP
investment in casual/
social subscription/
micro-transaction nonfantasy MMO market
licensed MMO
marketing/investment
for new IP in nonfantasy MMO market
growth (if possible)
casual/social
subscription/microtransaction nonfantasy MMO market
for casual/ social
market
for licensed MMO
marketing/
investment
 Invest in casual/
micro-transaction in
non-fantasy MMO
market
 Avoid hardcore MMO
market due to risk
profile
 LBO in hardcore
MMO market
in casual/ social
market
capital game fund
 JV with major/
independent video
games companies for
licensed MMO
marketing/
investment
capability for
significant IP
portfolios and
platforms
destroying M&A
25
Casual/Social Online Sector
26
Casual/social online games are growing extremely rapidly
Casual/social online games have two primary forms


Casual/social online games require little experience or time commitment, with
simple rules and gameplay accessed through a web browser
Most casual/social games offer a free element, coupled with subsequent game
purchase, in-game virtual item purchase, subscriptions or advertising
The primary forms of casual/social online games are:
 Casual: single player, played on a casual games platform such as Big Fish
Games or Spil
 Social: multiplayer, played either on a casual/social games platform (e.g.
Bigpoint) or via a social network such as Facebook (e.g. Zynga)
The global market is high growth






$2.25B revenue 2007, $3B revenue 2009*
>200M casual monthly unique users
>700M social Monthly Active Users+ (“MAU”)
Casual/social games have a high proportion of paying female customer (74%)
Popular casual games include:
 Bejeweled (PopCap Games)
 QQ Games Collection (Tencent China)
 Diner Dash (Playfirst)
 Mystery Case Files (Big Fish Games)
Popular social games include:
 Cityville, Farmville, Frontierville, Mafia Wars (Zynga)
 Dark Orbit , Deepolis, Farmerama (Bigpoint)
 Millionaire City (Digital Chocolate)
 Pet Society (Electronic Arts)




100M
80M
60M
40M
20M
11 Nov
10 Jan
Casual players: 52% women
Casual payers: 74% women
Men
26%
Men
48%
Women
52%
Women
74%
Social players: older (so wealthier) than expected
With multiple business models



Explosive growth – Cityville after 41 days
Monthly Active Users

Subscription and in-game item sales (micro-transactions) models most profitable
Advertising supported models are cyclical, with generally lower margins
Bigpoint (browser “core” – between hardcore and pure casual gameplay): free,
subscription and in-game item sale, limited advertising
Zynga (social): free, in-game item sales (micro-transactions)
Spil (casual): free, advertising supported, micro-transactions
Big Fish Games (casual): try before you buy, downloads, retail, multi-platform
Casual/social game development costs of less than $500k are much lower than
console game development costs
27
25%
20%
15%
10%
5%
0%
<18
18-21
22-29
30-39
40-49
Sources: Casual Games Association, DFC Intelligence, Inside Network, ISG (US/UK age
statistics 2010)
*Note: Casual Gaming Association includes casual/social games played on mobile, iPhone,
social networks, PC, Mac and Xbox LIVE Arcade platforms, using different definitions to
the earlier PWC definitions
+Note: MAU is total monthly active users, not unique users
50-59
60+
Social games market dynamics are changing
Top 40 Facebook app publishers MAU* (M)
Social games are the leading social applications


~70% of the Monthly Active Users for top 40 Facebook application publishers come
from games
Half of the top 40 Facebook applications are games
Driven by the nature of social networks



Cross-promotion using social networks and social games platforms is critical to the
growth of social games
Investment in “on platform” cross-promotion and marketing generally produces
much higher return on investment than “off platform”
The strongest social games are built around game design focused on acquiring
users, generating revenue from virtual items and increasing user engagement and
lifetime
Daily
Horoscope 8
Telaxo 7 Social Zoosk 7
Cie Games 8
Myspace 6
Graph 7
GSN 8
Photobucket 7
Frases Boyaa 9
Diarias 9 Kabam 9
MindJolt 9
Digitware
Conduit 9
9
Yelp 10
LOLapps 10
TubeYou 10
MiniMax 11
Yahoo!
11



So a portfolio of distribution and games is needed


HTC 6
Zynga
278
RockYou! 14
Popcap 15
Wooga 16
Microsoft 16
Social Point 16
RootMusic 17
CrowdStar
42
Digital Chocolate 19
AppBank 19
Badoo 40
Electronic Arts 36
@Apps 21
Takeoff Monkey 23
The major social networks dominant positions make them excellent marketing and
distribution partners
Social games companies which are primarily dependent on one social network have
more limited leverage in commercial negotiations
70:30 revenue split between games developers and social networks is not
uncommon, but there are market rumours of more extreme splits in favour of some
social networks
Social networks’ commercial policies can have significant impact across both social
games developer and middleware sectors
50 Cubes 6
SNAP 15
But the social networks also pose a significant challenge

Funzio 6
6 Waves 25
Causes 26
Playdom 25
Broader distribution
Fewer
games
More
games
As in any industry, reliance on one product or one distribution channel poses
potential risks
Diversified social games companies with a portfolio of games and distribution
channels generally have the greatest control over the destiny of their businesses,
and hence lower long term risks
Narrower distribution
28
Source: InsideNetwork
*Monthly Active Users Feb 2011
Online/mobile games middleware offers another way to play
Today’s online/mobile games middleware market: disparate, unintegrated solutions
Technology
Development
Monetization
Analytics
Optimization
Delivery
Marketing/
Distribution
Payment
Services
delivered
Games
development
engine/SDK
Virtual item
(microtransactions),
virtual
currency,
subscription,
in-game
advertising,
and sales tools
Measure and
analyse key
online/mobile
game metrics
for continuous
feedback loop
Optimize game
performance
across
multiple
platforms
Deliver games
across
platforms
Distribution on
social/casual/
browser based
and mobile
platforms
Payment
across
platforms and
geographies
Security
Anti-fraud,
anti-piracy,
revenue
assurance
Example
company
There is the potential for an integrated games middleware solution
Development
Monetization
Analytics
Optimization
Delivery
Marketing/
Distribution
Payment
Integrated online games middleware solution
Across casual, social, browser based, smartphone, set-top box, connected console, PC, including all major platforms and devices
29
Security
There are opportunities across the casual/social value chain
Developer
Creation, design and
development of a game
Publishers
Funding, distribution and
project management
More Zynga acquisitions?
Disney and GameStop buys
Zynga ‘s series of acquisitions in
2010 to leverage its position may
continue in 2011
Disney buys Playdom for $763M
and GameStop buys Kongregate
Portals
Aggregators
Casual/social game
destination websites
Next after Playfish/Playdom?
Zynga, Bigpoint and GameForge
are subject to constant
speculation about IPO or exit
30
Intermediary between
developers, publishers
and portals
Chinese major investments?
Chinese games companies set to
accelerate foreign investment in
2011 in line with 12th 5 year plan
Middleware
Enable the creation and
distribution of casual/
social games
Middleware consolidation
Visa’s acquisition of Playspan and
Google’s acquisition of Jambool may
lead to more early stage consolidation
Sources: Mergermarket, Companies, PaidContent, TechFlash, Financial Times
Particularly for integrated online companies like
Tencent is the greatest games company may not know well
 China has 29% internet penetration, but 382M users
 China forecast to reach 56% internet penetration (754M users) by 2015
 Tencent holds dominant or leading stakes in many Chinese online/mobile markets (IM,
games, eCommerce, search, mobile services)
 Tencent’s Chinese games market share was 20% in 2009 with forecast 27% by 2012
 Total peak concurrent users across all games categories of ~20M
 Tencent’s market cap is substantially more than Activision Blizzard, Electronic Arts,
GamesStop, Take2, THQ, Atari, Game Group and Ubisoft combined
Tencent Games quarterly revenue (RMB M)
2,500
2,000
Casual/social online
1,500
Board & chess
1,000
Tencent’s integrated model is where the market is headed
 Tencent generates ~50% operating margin
 Online/mobile games (MMO, board & chess, casual/social) generate >40% revenue
 Business model appears to be migrating from virtual items (higher Average Revenue per
User) to subscriptions (short term revenue reduction, but lower volatility)
 Integrated model with upgrades/privileges across online, mobile and offline (not just
games) is a significant advantage for customer acquisition, development and retention
 Enhanced capabilities to cross-promote, upsell and cross-sell
500
MMO
3Q09
4Q09
1Q10
2Q10E
Tencent Chinese revenue leadership ($M)
Tencent will be in your market soon, if it isn’t already
 Tencent is growing through domestic partnerships:

China Unicom (fixed line, 3G, operations, “QQ Wallet”)

Hunan TV (talent, animation, online/mobile games)

China Merchants Bank (financial services)
 Tencent is expanding with international partnerships/investments:

Riot Games (League of Legends MMO)

Digital Sky Technologies (Facebook, Zynga, Mail.ru investor)

Vina Games (Vietnamese online games/internet)

MIH India Global Internet (licensed software, content & trademarks)

Naspers (36% Tencent investor) with global reach in high growth markets

$760M investment fund, including games focus
Western video games and media are learning from Tencent
31
3Q10E
Source: CapitalIQ, Credit Suisse, Company, Shanghai Securities
News, Reuters, People’s Daily
4Q10E
Casual/social games are driving larger company valuations
Company
US and Europe
Electronic Arts Inc.
G5 Entertainment AB
GigaMedia Ltd.
RealNetworks Inc.
Price
(10-Jun-11)
% of 52
Week High
Market
Cap
Net
Debt
Enterprise
Value
22.81
3.40
1.17
3.47
92.0%
79.6%
47.0%
80.5%
7,624
25
65
471
(1,971)
(0)
(37)
(334)
5,653
25
28
136
Median
Mean
CY2009
Revenue
CY2010
CY2011
CY2009
EBITDA
CY2010
CY2011
1.49 x
16.61 x
0.17 x
0.24 x
1.51 x
n.a.
0.44 x
0.34 x
1.45 x
n.a.
0.75 x
0.38 x
n.m.
n.m.
6.9 x
n.m.
21.7 x
n.a.
n.a.
n.m.
10.2 x
n.a.
n.a.
4.4 x
0.87 x
4.63 x
0.44 x
0.76 x
0.75 x
0.86 x
6.9 x
6.9 x
21.7 x
21.7 x
7.3 x
7.3 x
1.70 x
8.43 x
1.43 x
4.71 x
0.99 x
2.59 x
7.01 x
2.36 x
1.78 x
1.45 x
24.09 x
1.77 x
14.81 x
1.42 x
n.a.
n.a.
2.46 x
5.07 x
2.11 x
1.97 x
1.42 x
15.39 x
1.70 x
13.66 x
1.30 x
n.a.
n.a.
2.14 x
4.17 x
1.83 x
1.81 x
1.21 x
11.51 x
8.1 x
n.m.
8.3 x
18.5 x
13.6 x
6.1 x
12.2 x
4.3 x
4.4 x
3.2 x
47.1 x
5.7 x
n.a.
n.a.
n.a.
n.a.
6.0 x
10.0 x
4.9 x
5.6 x
5.8 x
28.2 x
5.4 x
n.a.
n.a.
n.a.
n.a.
5.0 x
8.2 x
4.3 x
5.1 x
4.6 x
20.9 x
2.36 x
5.14 x
1.78 x
5.00 x
2.11 x
5.16 x
1.87 x
4.06 x
1.83 x
4.37 x
1.75 x
3.49 x
8.2 x
12.6 x
8.1 x
12.1 x
5.8 x
9.5 x
5.9 x
11.0 x
5.1 x
7.7 x
5.1 x
7.6 x
Asia
Asiasoft Corporation
Astro Corporation
Gamania Digital Entertainment Co., Ltd.
InterServ International Inc.
IPVG Corp.
Kingsoft Corporation
NetEase.com, Inc.
Perfect World Co., Ltd.
Shanda Games Limited
Shanda Interactive Entertainment Ltd.
Tencent Holdings Ltd.
0.36
2.45
1.73
2.44
0.03
0.54
41.75
20.22
6.35
36.90
26.31
93.2%
91.0%
88.6%
55.3%
62.9%
77.6%
75.9%
58.8%
82.5%
68.1%
88.7%
111
161
287
68
20
609
5,421
1,014
1,812
2,125
48,317
(27)
(3)
(31)
(23)
9
(201)
(1,358)
(233)
(493)
(953)
(2,084)
Median
Mean
Median
Mean
Source: CapitalIQ
Note: Calendarized to December year end
32
84
159
256
45
29
408
4,063
781
1,319
1,172
46,233
Generating substantial M&A
Selected M&A
Date
Target
Acquirer
Deal
value
Revenue
multiple
EBITDA
multiple
Target
description
Comments
01 Jun 11
n.a.
n.a.
n.a.
Australian social games
developer
20 May 11
$45m
n.a.
n.a.
Israeli social games
developer
18 May 11
n.a.
n.a.
n.a.
Social games developer
29 Apr 11
n.a.
n.a.
n.a.
San Francisco based
social games developer
PopCap expands social games
capabilities
19 Apr 11
n.a.
n.a.
n.a.
Social games network
Mindjolt continues its social
games rollup strategy
05 Apr 11
n.a.
n.a.
n.a.
Online poker statistics portal
Zynga acquires gambling focused
statistics portal
n.a.
n.a.
n.a.
NewsCorp makes small entry
into social games market
09 Feb 11
$190m
n.a.
n.a.
Virtual goods payment platform
Visa’s acquisition moves its traditional business
more actively into the virtual goods payment sector
21 Jan 11
n.a.
n.a.
n.a.
US-based developer of social and
branded games
Zynga New York will form part of Zynga’s
continuing growth across social and mobile games
22 Oct 10
n.a.
n.a.
n.a.
US-based developer of
social games
WonderHill becomes Kabam’s San Francisco studio
08 Sep10
$95m
n.a.
n.a.
Online game development studio
in Korea
The acquisition will combine Shanda Games' online
game platform with Eyedentity's game
development capabilities
26 Feb 11
MAKING FUN
33
RockYou expands social combat
and strategy games
Major gambling company enters
social games market
Zynga acquires gambling focused
social games developer
Sources: CapitalIQ, MergerMarket, TechCrunch, Companies
Generating substantial M&A (continued)
Selected M&A
Date
Target
Acquirer
Deal
value
Revenue
multiple
EBITDA
multiple
Target
description
Comments
13 Aug 10
Est. $70m
n.a.
n.a.
Social Gold virtual currency
platform
Google extends its presence in the games sector
with Jambool’s monetization platform
06 Aug 10
Est. $228m
n.a.
n.a.
Widget maker for social networks
Google extends its presence in the social games
sector with Slides widgets
27 Jul 10
$763m
n.a.
n.a.
Strengthen digital gaming portfolio, acquire
management and extend reach on social networks
Facebook and MySpace
27 Jul 10
n.a.
n.a.
n.a.
Social gaming platform
Strengthens GameStop's digital platform and its
strategy to be the gaming aggregator of choice
03 Jun 10
n.a.
n.a.
n.a.
US-based developer of
multiplayer Web-based
fantasy games
Challenge Games' Co-Founder will become Zynga' s
General Manager and Vice President. The Challenge
Games' 35 employees will join Zynga’s workforce
26 May 10
n.a.
n.a.
n.a.
26 Apr 10
n.a.
n.a.
n.a.
08 Apr 10
n.a.
n.a.
03 Mar 10
n.a.
26 Feb 10
Enables online friends to converse
privately over the Web; and share
Web pages, pictures, and audio
and video files
Publishes games from casual
game developers on PC, console,
and iPhone platforms
Lloyd Melnick, Founder of Merscom and team
of 20 producers, designers, artists and
engineers will join Playdom
n.a.
Australian-based casual games
developer
Consolidation of the Australian casual games
market
n.a.
n.a.
Offers massively multiplayer
online and casual games on
Facebook
The founders of Offbeat are joining Playdom in
leadership roles, and the 12 developers and
designers of Offbeat will join Playdom's
existing 15-person Seattle studio
n.a.
n.a.
n.a.
Develops FunCards, a card game
for playing cards with friend
Acquired an unknown minority stake to enter a
high growth market
n.a.
n.a.
n.a.
US-based social games developer
Hi5 added several of Big Six's executives to its
management team and strengthened its online
games presence
The engineering team of Sharegrove will join
Facebook
(Undisclosed stake)
24 Feb 10
Big Six Games, Inc
34
Sources: CapitalIQ, MergerMarket, TechCrunch, Companies
Generating substantial M&A (continued)
Selected M&A
Date
Target
Acquirer
12 Jan 10
Deal
value
Revenue
multiple
EBITDA
multiple
Target
description
Comments
US-based operator of online
The combination of Shanda’s games and Mochi’s
games advertising network for
distribution platform will create a better online
game developers, advertisers and
game media platform
publishers
$80m
n.a.
n.a.
$180m
n.a.
n.a.
US-based online social games
The acquisition raised capital to fund growth
and expansion whilst also putting off an IPO of
the company
09 Nov 09
$400m
n.a.
n.a.
Developer of free-to-play casual
social games that can be played on
social networking platforms
Electronic Arts continues to expand away from
its core console games sports offerings into
high growth casual games, but at a price
04 Nov 09
n.a.
n.a.
n.a.
Ireland-based publisher and
developer of online games
The deal improved Gamestop’s digital media
business and helped it extend outside the US
05 Aug 09
$132m
8.1x
n.a.
US-based provider of video game
compression software, games and
social networking
The acquisition was in line with Google’s
strategy of pursuing innovation and video
quality on the web
27 Jul 09
$30m
n.a.
n.a.
Canadian based owner of online
games and social networking sites
The acquisition will allow the combined entity
to provide a full suite of social advertising
solutions for developers and advertisers
08 Dec 09
(Undisclosed stake)
Tiger Global
Management LLC
(Majority stake)
35
And attracting significant investment
Date
Target
Investor
Deal
value
Target
description
Date
Target
Investor
Deal
value
Target
description
01 Jun 11
n.a.
Developer and publisher of social
games middleware and games
20 Apr 11
n.a.
31 May 11
$5m
Russian social games developer
and publisher
18 Apr 11
$3m
30 May 11
$24m
German social games developer
and publisher
12 Apr 11
$10.7m
Social MMO games developer
$85m
Social MMO developer and
publisher
31 Mar 11
n.a.
German social games developer
and publisher
26 May 11
7 investors
$5m
Turkish and Middle Eastern social
games developer and publisher
29 Mar 11
$6m
Indian social games developer
25 May 11
$12m
Finnish hardcore social MMO
23 Mar 11
$5m
13 May 11
$23m
Social games developer and
publisher
14 Mar 11
n.a.
Spanish online game developer
$5m
UK social sports game developer
and publisher
22 Feb 11
$12m
Casual game developer and
publisher
$1.5m
US based cloud-based social
analytics company
22 Feb 11
$1.4m
German social-mobile games
developer
10 Feb 11
$15m
Gamer social network
$760m
Tencent investment fund,
including games focus
$30m
Social games developer and
publisher
25 May 11
Early Bird
13 May 11
n.a.
12 May 11
Cervin Ventures and
TiE Angels
n.a.
11 May 11
10 May 11
27 Apr 11
Various educational
games projects
US based interactive gaming for
movie theatres and stadiums
$20m
US social-mobile games developer
24 Jan 11
$20m
Various educational games
projects
20 Jan 11
36
To be invested
in next 2-3
years
Sources: CapitalIQ, Mergermarket, Wall Street
Journal, New York Times, Shanghai Securities News,
Reuters, People’s Daily
And attracting significant investment
Date
Target
Investor
Deal
value
Target
description
Date
10 Nov 10
$16m
Multi-platform casual-games
platform, with expertise in PC,
online and mobile
03 Feb 10
20 Oct10
$20m
Publishes, and distributes online
games for social networks and
web communities
31 Jan 10
29 Sep 10
$6m
Develops, publishes, and provides
casual games, including
Diner Dash
25 Jan 10
15 Jun 10
$150m+
Largest Facebook social games
company
20 Jan 10
14 May 10
$20m
Develops location based social
games
09 Apr 10
n.a.
$1m
01 Apr 10
9 investors
Target
Investor
Deal
value
Target
description
$10m
Allows employees to connect and
share by posting messages
$1m
Publishes and delivers casual
video games
n.a.
Develops and publishes social
games in Russia
$20m
Develops and operates online
games in China
20 Jan 10
$18m
Develops social games
applications
Operates as a social network in
Latin America, Europe, Asia, and
Africa
14 Dec 09
$2m
Develops social games for
networking sites
Produces social games for
platforms
07 Dec 09
$4m
Provides an online social and
games community for children
aged 6 to 14
01 Dec 09
$11m
Operates a virtual currency
platform for social media
developers
Undisclosed
investors
Shenzhen Fortune
Venture Capital
Management
25 Mar 10
n.a.
Develops social web games
19 Mar 10
$2m
Offers Hangout.net, a casual 3D
social networking site
01 Dec 09
11 investors
$2m
Develops multi-platform social
games
09 Feb 10
$3m
Offers a social networking website
24 Nov 09
Undisclosed
investor
$5m
Develops, publishes, and operates
free to play online games
37
Sources: CapitalIQ, Mergermarket, Wall Street
Journal, New York Times, Shanghai Securities News,
Reuters, People’s Daily
Firm Type
Investment, M&A
and JV
Opportunities
Major
Video Games
Independent
Video Games
Venture Capital
game fund
M&A in subscription/
micro-transaction and
middleware markets
destroying M&A
 Focused new IP
investment in parallel
low cost subscription/
micro-transaction game
development
licensed casual/social
subscription/microtransaction and
middleware markets
for
subscription/microtransaction market
games/media
company
for licensed casual/
social games
marketing/
investment
38
 Invest in casual/
micro-transaction
and middleware
markets
 Avoid pure
advertising
supported market
because of business
model
Private Equity
Major Technology,
Media & Telecoms
in casual/ social
middleware markets
 Avoid pure
advertising
supported market
because of business
model
capital game fund
 JV with major/
independent video
games companies for
licensed casual/
social games
marketing/
investment
capability for
significant IP
portfolios and
platforms
destroying M&A
organic investment
competencies
Mobile Sector
39
Mobile games have been reinvigorated by smartphone growth
Smartphone marketshare is accelerating




Global mobile phone penetration 67% in 2009, 5B subs in in 2010E
Mobile phone penetration >100% in many developed markets
Total global mobile phone market volume growth Q1 2010 = 21.7%
Global smartphone market volume growth Q1 2010 = 56.7% (18.8% of
total market volume in Q1 2010 vs 14.4% in Q1 2009)
Global mobile games revenue ($B)
14
12
10
Driving mobile games revenue growth
8


6
Global mobile games market forecast to grow to >$13B by 2014
The mobile games market landscape is adapting to consumer trends and
market demand:
 Mobile game publishers are bypassing network operators to sell
directly to consumers via iTunes and Android Market
 High connectivity and multiplayer games becoming mass market
due to unlimited data packages
 In-game advertising being used to supplement mobile game
revenues
 Integrated applications increasing to allow converged gameplay
with console/MMO/casual/social games
New players have entered from multiple markets





Network operators (e.g. Vodafone Live!)
Manufacturers (e.g. Apple App Store)
Web advertising platforms (e.g. Google)
Console games majors (e.g EA Mobile)
Independent games companies (e.g. Rovio)
4
2
0
2005
2006
2007
2008
2009
2010E
2011F
2012F
2013F
2014F
Global mobile broadband penetration
60%
50%
40%
30%
20%
10%
With low barriers to entry



0%
Development costs tens to hundreds of thousands, not millions
>10B iPhone Apps downloaded, many of which are independently
developed games
App stores enable direct sales, bypassing network operators
2003
2004
2005
Developed
40
2006
2007
World
2008
Developing
Source: ITU, PWC, IDC
* Note: Online includes MMO, casual and social games
2009
2010E
Attracting major corporates and multiple independents
Japan's DeNa $400m
Ngmoco acquisition
DeNA acquisition to leverage
Mobage globally
EA claims market leadership
But 40% of mobile games revenue still
from “feature” phones, not smartphones
Public
Mobile
pureplay
MultiPlatform
Lupis Labs
THQ smartphone
focus
THQ sells THQ
Wireless
Operations and
Global Carrier
division to focus on
smartphones
CLAPFOOT
GAMES
iPhone/Android App stores
revolutionise independents
Independents now sell direct via
App stores, bypassing operators
Microsoft
and Nokia
To address
“burning platform”
questions, the
giants are joining
forces against
Apple and Google
Private
41
Source: Companies
Apple is aiming to be the mobile/tablet entertainment company
 Apple is far down the path of migrating from electronics and software to mobile communications and entertainment
 Apple’s strength is providing all components of the mobile entertainment value chain in elegantly integrated consumer products and services,
including hardware, software, eCommerce, applications and content
 iPad is the next stage of Apple’s mobile entertainment strategy, already spawning many imitators. This may change the video games market in
ways that are likely to have greater impact, but take much longer to occur, than anticipated. The tablet/smartphone browser market remains early
stage, with significant room for commercial development as 46M tablets are forecast to be sold in 2011E
Aiming for a complete mobile offering
The App Store



iPod
Touch
iPhone4
iMac functionality,
iPhone mobility
350,000
Mobility
Number of Available Apps
300,000
iPad2
Macbook-Air
Macbook
250,000
200,000
150,000
100,000
50,000
Entertainment functionality
42
Source: IDC
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
May-09
Mar-09
Jan-09
Nov-08
Jul-08
-
iMac
Sep-08
iPod
The App Store services iPhone, iPod Touch and iPad with >10B
apps downloaded to date
App Store should generate an increasing proportion of Apple’s
non-hardware revenues, with unrealised profit potential
70/30 App Seller/Apple revenue split for payment/promotion is
attractive, compared to Facebook Credits 70/30 (ex promotion)
and some other distributors’ 40/60 split
But Google and Apple are fighting for market dominance
Apple remains the dominant mobile games platform in the US




Apple has >2x more mobile apps than Android
Android apps growth rate 5x Apple apps growth rate
Apple mobile apps are paid for at twice the rate of Android apps
55% of the top 100 iPhone paid and free apps are games
But Google is threatening its global position
Mobile Applications 2010 (US)
350,000
600%
300,000
500%
250,000
 Global smartphone sales grew substantially in 2010 to 297M units (+72% on 2009)
 Global smartphone marketshare changed dramatically in 2010 compared to 2009:
 Nokia 38% (-20%), Google 23% (+482%), RIM 16% (-20%), Apple 16% (+9%),
Microsoft 4% (-52%)
• Apple’s tablet marketshare dropped from 95% to 75% between Q3 and Q4 2010 due to
Android tablets (particularly Samsung), with Android tablets forecast to increase share
300%
150,000
100%
50,000
0%
 “Freemium” models with in-game micro-transactions and/or advertising support are
increasingly common
 17% of iPad games have in-App purchases vs 4% of iPhone games
 Rovio’s blockbuster Angry Birds is sold for 99c on iPhone, but now also generating
substantial revenue via free app with advertising on Android
 Apple’s model has appeared more commercially attractive to game developers, but
increased competitive action from Google may change perceptions
Apple
Google
Total Apps
Game genre share (revenue/volume) and average price (US)
20%
200%
100,000
-
Casual/social games business models have migrated
25%
400%
200,000
Nokia
Paid Apps
RIM
Annual growth
Games share of top 100 apps by platform (US)
$9
60%
$8
50%
$7
15%
$6
40%
$5
30%
$4
10%
5%
$3
20%
$2
10%
$1
$0
Revenue Share
Volume Share
0%
iPad
Ac
t io
n
Ar
ca
Ad de
ve
nt
ur
Si
e
m
ul
at
io
n
Sp
or
t
s
St
ra
te
gy
Fa
m
ily
Pu
zz
le
R
Ro a c
in
le
Pl g
ay
in
g
Bo
ar
d
M
us
ic
Tr
iv
ia
Ed Ca
rd
uc
at
io
na
l
Ki
ds
W
or
d
Ca
sin
o
Di
ce
0%
iPhone
RIM
Paid
Nokia
Free
Average Price
43
Source: Gartner, Distimo (US data), IDC
Palm
Microsoft
Mobile games are driving strong public company valuations
Price
% of 52
Market
Net
Enterprise
(10-Jun-11)
Week High
Cap
Debt
Value
CY2009
CY2010
CY2011
CY2009
CY2010
CY2011
Com2uS Corporation
10.44
62.8%
99
(35)
64
2.20 x
2.49 x
1.35 x
11.0 x
16.5 x
4.1 x
Dena Co. Ltd.
39.27
93.8%
5,791
(746)
5,045
8.90 x
4.19 x
3.07 x
18.9 x
8.3 x
6.4 x
GameLoft SA
7.18
91.2%
544
(36)
508
2.78 x
2.54 x
2.24 x
18.1 x
13.0 x
10.2 x
GAMEVIL Inc.
28.86
87.9%
160
(41)
119
5.26 x
4.50 x
3.54 x
9.3 x
8.2 x
6.4 x
Glu Mobile, Inc.
4.70
81.7%
272
(24)
248
3.12 x
3.85 x
3.87 x
n.m.
n.m.
n.m.
Gree, Inc.
23.67
95.8%
5,428
(288)
5,140
16.77 x
8.30 x
5.91 x
29.4 x
16.5 x
12.2 x
Mixi, Inc.
3,746.18
60.4%
581
(164)
417
2.53 x
2.06 x
1.75 x
9.6 x
9.1 x
7.9 x
Median
3.12 x
3.85 x
3.07 x
14.5 x
11.0 x
7.1 x
Mean
5.94 x
3.99 x
3.10 x
16.0 x
11.9 x
7.9 x
Company
Revenue
EBITDA
Source: CapitalIQ
Note: Calendarised to December year end
44
Sources: CapitalIQ, Mergermarket, Companies
With significant M&A activity
Selected M&A
Deal
value
Revenue
multiple
EBITDA
multiple
07 Jun 11
n.a.
n.a.
n.a.
German mobile games middleware
provider
Blackberry maker RIM hopes to enhance
platform leveraging Scoreloop’s iOS and
Android middleware platform
01 Jun 11
n.a.
n.a.
n.a.
Finnish animation studio
Rovio intends to use Kombo’s animations to
leverage its brands
19 May 11
n.a.
n.a.
n.a.
Dutch mobile games developer
Ngmoco brings strong mobile games
developer inhouse for Mobage
12 May 11
$24m
n.a.
n.a.
Mobile games service provider
24MAS extends its mobile network games reach
with Selatra’s distribution in 55 countries
03 May 11
n.a.
n.a.
n.a.
Mobile post-production solution
provider
EA expands its mobile technical capabilities
03 May 11
n.a.
n.a.
n.a.
Australian mobile games developer
EA expands its mobile games portfolio and
capabilities
n.a.
n.a.
n.a.
Smart phone game and application
developers
Title Consulting Services expands into
mobile games
25 Apr 11
n.a.
n.a.
n.a.
Mobile games developer
Zynga expands capabilities in the socialmobile sector
22 Apr 11
$104m
n.a.
n.a.
Social-mobile games network
Gree expands global social-mobile footprint
and capabilities
19 Apr 11
n.a.
n.a.
n.m.
Social-mobile games developer
MindJolt continues its social-mobile games rollup
28 Mar 11
n.a.
n.a.
n.m.
Multi-platform games developer
DNA Dynamics expands its games capabilities
Date
02 May 11
Target
T3 Apps
& Best
LLC
Acquirer
45
Target
description
Comments
With significant M&A activity (continued)
Selected M&A
Date
Target
Acquirer
Deal
value
Revenue
multiple
EBITDA
multiple
Target
description
Comments
Zynga expands its mobile games
development capabilities
18 Mar 11
n.a.
n.a.
n.a.
Casual and mobile games developer
03 Mar 11
n.a.
n.a.
n.a.
Finnish HTML 5 games developer
Disney expands its cross-platform
capabilities
23 Feb 11
n.a.
n.a.
n.a.
Gaijin expands its mobile games capabilities
12 Feb 11
$10.1m
n.a.
n.a.
Chinese mobile games developer
(part of Oberon Media)
Cash expands Chinese mobile games
presence
02 Dec 10
n.a.
n.a.
n.a.
Develops games for mobile Words
With Friends and Chess With Friends
The new Zynga With Friends studio should
form part of Zynga’s push into mobile games
19 Oct10
n.a.
n.a.
n.a.
iPhone games publisher (publisher,
but not owner, of Rovio’s
original Angry Birds)
EA is using Chillingo to increase market share
on the iPhone platform
12 Oct10
$400m
n.a.
n.a.
Develops games and entertainment
experiences for the iPhone
DeNA plans to integrate its Mobage software
with Ngmoco's own social networking
platform Plus+
01 Jul 10
n.a.
n.a.
n.a.
Developer of music games for the
iPad, iPhone, and iPod Touch
Strengthens Disney’s portfolio of games and
entertainment offerings in mobile
23 Jan 08
$36m
1.5x
n.m.
Development and publishing of
2D and 3D mobile games
Expands upon Glu’s development capabilities and
pipeline for new game releases
46
And high volumes of early-stage investments
Deal
value
Target
description
20 May 11
$2m
Canadian mobile games publisher
05 Feb 11
11 May 11
$10m
Mobile application and games
developer
11 Jan 11
$6m
$18m
Chinese Android social-mobile
games network
08 Nov 10
$9m
Date
Target
Investor
Keystone
Ventures
27 Apr 11
Date
Target
Investor
Tiger Global
Management
Deal
value
$20m
Target
description
Mobile App store (including
games)
Publishes lifestyle and children's
content, including applications for
iPad and iPhone
Operates as a mobile social
network
19 Apr 11
n.a.
$3.5m
Augmented reality mobile game
20 Oct10
$12m
31 Mar 11
5 investors
$6.1m
Mobile game creation platform
provider
30 Sep10
n.a.
$2.5m
11 Aug 10
n.a.
Develops games and
entertainment experiences for the
iPhone
$13.5m
Design, marketing, and sale of
mobile games worldwide
29 Jun 10
$20m
Provides a mobile service that
mixes social, locative, and games
elements
23 Jun 10
$11m
Mobile application distribution
and developer community in the
United Kingdom
21 Mar 11
15 Mar 11
n.a.
n.a.
Social-mobile games network
focused on South America, India,
Asia and Africa
30 Jun 10
10 Mar 11
10 Mar 11
$42m
$1.2m
Noise Toys
25 Feb 11
8 investors
Angry Birds developer
$18m
24 Feb 11
Promotora de
Proyectos
$1.3m
Colombian media and animation
studio (including mobile games)
23 Feb 11
4 investors
$2.5m
Finnish location based mobile
games developer
47
Owns and operates a gaming
portal that offers mobile phone
video games
Develops 3D MMO games for
Apple's suite of mobile products
21 Jun 10
Trinad
Management,
LLC
$3m
Publishes and distributes
entertainment content for third
generation mobile networks
worldwide
09 Jun 10
Angel
investors
n.a.
Develops applications and games
on mobile devices
28 May 10
7 investors
Sources: CapitalIQ, Mergermarket
Nominal
amount
Develops games for personal
computers and mobile phones
And high volumes of early-stage investments (continued)
Date
Target
Investor
26 May 10
Target
description
Date
$4m
Augmented reality mobile game
15 Sep 09
$20m
Develops location based social
games
Deal
value
Target
Investor
Private
investors
Deal
value
Target
description
$1m
Develops games for personal
computers and mobile phones
04 Sep 09
$1m
elements
Chart Venture Partners
14 May 10
06 May 10
Accredited
investors
$5m
Offers videogames, Internet platform
and Internet/mobile gaming for flash
and smartphone
18 Aug 09
$3m
Operates as a social games
platform for mobile devices
08 Apr 10
19 investors
$3m
Online platform, engages in
aggregating, promoting, and
delivering mobile entertainment
content directly to members
13 Aug 09
$3m
Develops multiplayer and social
games platforms for mobile
devices and wireless networks
$2m
Develops massively multiplayer
online (MMO) mobile games
04 May 09
$2m
Conceives, develops and deploys
mobile games and mobile
applications for publishers
06 Apr 10
27 Mar 10
Angel
$10m
elements
16 Feb 10
Debt
Nominal
amount
Develops mobile games for social
networks
14 Dec 09
$4m
Operates a community of game
enthusiasts to build and play
location based mobile games
25 Nov 09
$4m
Develops mobile, casino and
online games
05 Nov 09
$3m
Develops and publishes mobile
games in China
17 Sep 09
n.a.
Provides mobile content services
for direct to consumer and B2B
business segments in Italy, Spain,
Turkey and Brazil
48
Firm Type
Investment, M&A
and JV
Opportunities
Major
Video Games
game fund
destroying M&A
 Focused new IP
investment in parallel,
low cost mobile game
development
licensed mobile games
Independent
Video Games
 VC fundraising
games company
for licensed mobile
games marketing/
investment
49
Venture Capital
Private Equity
Major Technology,
Media & Telecoms
 Invest in parallel, low
cost mobile game
development
 Develop sector
relationships in
maturity
capital game fund
 JV with major/
independent video
games companies for
licensed mobile
games marketing/
investment
to build internal
capability for
significant IP
portfolios and
platforms
destroying M&A
organic investment
competencies
Console Sector
50
Console games are no longer driving market growth
A consolidated sector driven by hardware cycles







Worldwide pure console* software market
Wii dominates current 7th generation console unit sales globally with 46% of
consoles sold to date, followed by Xbox360 at 28% and PS3 at 26%. 2010 sales of
Xbox 360 were 42% higher than 2009, driven by 8M Kinects sold in its first 60 days
Market forecast of $37B revenue by 2014E, fuelled by North American and European
growth from anticipated 8th generation platforms (2014-2016). Asia-Pacific growth
limited by piracy and high share of MMO/casual/social online games
Console games profits for Sony/Microsoft come from software, as consoles generally
sold at a loss. The lower cost Wii has generated hardware profits for Nintendo
Software pureplays can be highly cash generative, but decline in packaged goods
retail sales has led to challenges (e.g. EA’s last profitable year in 2007, Activision
Blizzard profitable driven by console and MMO franchises, but revenue guidance
down for 2011F)
8th generation console cycle forecast to drive growth, but such growth is likely to be
constrained by growing MMO, casual/social online and mobile games marketshare
The launch of Apple’s iPad and imitators may change the console market in ways that
are likely to have greater impact, but take much longer to occur, than anticipated
Digital downloadable content and game delivery (such as OnLive) reduce likelihood
of a 9th generation console cycle, creating potentially significant long term issues for
Sony, Microsoft, Nintendo and GameStop
$40B
$35B
$30B
$25B
$20B
$15B
$10B
$5B
$0B
2005
2006
2007
2008
Asia Pacfic
2009
EMEA
2010E
North America
2011F
The console market has gone through 7 overlapping platform/technology cycles
1st generation
1970
3rd generation
1975
1980
1985
2nd generation
2600
5200
5th generation
1990
4th generation
1995
7th generation
2000
2005
6th generation
7800
Colour TV game
51
Sources: PWC, VGChartz, Companies
* Note: Pure console excludes MMO games
2012F
Latin America
2013F
2014F
As the mature value chain is changing
Changes in industry dynamics impact all stages of the value chain
Development
Publishing
Distribution
Retail



Inhouse development
Outsourced development
IP & technology licensing



Financing
Manufacturing
Marketing



Physical distribution
Digital distribution
Retail negotiation



Physical retail
Web retail
Downloadable content

Majors have multiple in-house
game development studios
globally
Independents receive
advances from Majors for
game development to cover
costs, with royalties after
agreed sales target reached
Technology providers license
game engines, motion capture,
facial animation etc
Third-party independent
studios often used for licensed
IP games and assistance on inhouse development
For example, BioShock 2 was
developed for Take-Two by
inhouse and outsourced
developers
 Inhouse: 2K Marin, 2K
Australia, 2K China
 Outsourced: Digital
Extremes (multiplayer)
Arkane Studios (level
design assistance)

Major publishers and banks
finance game development
Ancillary services such as
market research, advertising
and technology assistance
provided
 Game bonders
increasingly carry
completion risk
 Console
manufacturers charge
publishers a royalty
for each game
manufactured at time
of manufacture
 Publishers carry
inventory risk
Due to increasing marketing
budgets and consumer focus
on hits, major publishers are
reducing the number of
games published
Project management is
provided to manage quality
control and risks

Major publishers often
distribute their own games,
although Take-Two sold its
distributor Jack of All
Games to Synnex

Physical retail continues to
be challenged by web
retailers such as Amazon
Retailers such as market
leader GameStop make
more profit from used than
new software sales







52



Shift to digital
distribution likely to
reduce the role of
physical
distributors in the
medium term
Digital distribution
growing through
Xbox Live Arcade,
Playstation
Network, Wii Ware,
OnLive and major
independent
distributors such as
Valve’s Steam
Independent publishers
rely on third party
distributors such as Synnex
and Ingram Micro






Used sales
cannibalise new
sales
Majors using
downloadable
content to combat
used market
Downloadable
content share
growing with fast
broadband
Downloadable add-on game
modules generate postlaunch sales
Retail remains highly
seasonal, with almost
half of all sales in Q4
Sources: Companies, Credit Suisse
Although the console market is still driven by major publishers
PS4 in 2014-16?
Sony has announced development of an 8th generation
console for potential launch in 2014-16
Integrated Publisher
Microsoft Kinect
Controller without a
controller generates
8M sales in first 60
days
Niche
Game
Portfolio
Independent market challenging
Many independents have sold to large
consolidators, some have ceased
trading, others are repurposing to
online/mobile, some quality AAA
independent studios still performing
Diversified
Game
Portfolio
OnLive goes live
The console without a console
launches, with the impact of
console game delivery over
broadband to be tested in the
market in 2011
Independent Developer
53
Sources: Companies, Mergermarket
Console to digital
Major console publishers
trying to adapt to online/
mobile. Diversified
conglomerates such as
Disney and Microsoft more
able to support reinvestment
But sector economics are increasingly risky
Publishers’ gross profit is approximately 1/3 of retail price
VAT/Sales Tax
15%
Publisher
Gross Profit
35%
Distribution
Margin
5%
Retail
Margin
25%
Hardware
Manufacturer
Royalty
20%
For major AAA $60 retail console game, 1-2M unit sales are needed to break even*
200
150
$M
100
50
0.5
1.0
1.5
Units Sold (M)
2.0
2.5
-50
Retail Revenue
Publisher Retail Profit
Publisher Gross Profit
54
Publisher Net Profit
* Assuming $25M development and $15M marketing spend
3.0
And development financing is becoming like film financing
Complex financing structures to effectively manage risks, with significant transaction costs
Royalties
Co-pub/distribution
agreement
Parent Company/
Developer
Publisher/
Distributor
IP
Milestone
Approvals
Game development and delivery
of Gold Master Candidate
Bank
IP
Borrower/Developer
(via Special
Purpose Vehicle)
Loan of budgeted
costs including
transactional costs
(payable per
milestone)
Development
Completion
Agreement
First
priority
Completion
Guarantee
Agreement
Completion Bond
Guarantor (e.g. IFG)
Reporting
Cost reporting
Due diligence, development progress
monitoring and milestone approvals
Specialist Auditor
(e.g. Games Audit)
Security interests in developer’s rights
55
Sources: International Film Guarantors, Games Audit
Second
priority
So valuations reflect a mature industry in transition
CY2009
Revenue
CY2010
CY2011
CY2009
EBITDA
CY2010
CY2011
2.42 x
1.49 x
0.45 x
1.09 x
0.26 x
2.33 x
1.51 x
0.43 x
1.03 x
0.28 x
2.60 x
1.45 x
0.41 x
0.91 x
0.26 x
13.8 x
n.m.
5.0 x
n.m.
0.9 x
10.4 x
n.m.
4.8 x
12.6 x
3.5 x
6.8 x
10.2 x
4.7 x
7.9 x
7.3 x
1.09 x
1.14 x
1.03 x
1.11 x
0.91 x
1.12 x
5.0 x
6.6 x
7.6 x
7.8 x
7.3 x
7.4 x
1.21 x
0.88 x
0.40 x
0.66 x
0.71 x
0.43 x
1.03 x
0.90 x
0.41 x
0.84 x
0.70 x
0.51 x
0.98 x
0.87 x
0.40 x
0.84 x
0.67 x
0.51 x
7.5 x
6.2 x
5.7 x
2.4 x
5.6 x
2.3 x
5.9 x
6.7 x
5.4 x
4.2 x
3.8 x
3.2 x
5.5 x
6.2 x
4.7 x
4.8 x
3.4 x
3.2 x
0.69 x
0.72 x
0.77 x
0.73 x
0.76 x
0.71 x
5.6 x
5.0 x
4.8 x
4.9 x
4.7 x
4.6 x
0.69 x
0.12 x
2.74 x
0.80 x
n.a.
0.13 x
2.50 x
0.74 x
n.a.
0.13 x
2.23 x
0.68 x
8.6 x
1.7 x
n.m.
18.3 x
n.a.
2.7 x
12.8 x
3.9 x
n.a.
2.7 x
10.3 x
2.6 x
Median
Mean
0.75 x
1.09 x
0.74 x
1.12 x
0.68 x
1.02 x
8.6 x
9.5 x
3.9 x
6.5 x
2.7 x
5.2 x
Median
Mean
Source: CapitalIQ
Note: Calendarised to December year end
0.95 x
1.34 x
0.93 x
1.28 x
0.85 x
1.15 x
9.5 x
12.2 x
5.2 x
6.7 x
4.0 x
5.2 x
Company
US
Activision Blizzard, Inc.
Electronic Arts Inc.
GameStop Corp.
Take-Two Interactive Software Inc.
THQ Inc.
Price
(10-Jun-11)
% of 52
Week High
Market
Cap
Net
Debt
Enterprise
Value
11.46
22.81
26.26
15.59
3.51
90.6%
92.0%
91.6%
88.7%
53.8%
13,882
7,624
3,976
1,334
239
(3,508)
(1,971)
66
(192)
(9)
10,374
5,653
4,042
1,142
229
Median
Mean
Asia
Capcom Co. Ltd.
Konami Corp.
Namco Bandai Holdings Inc.
Nintendo Co. Ltd.
Sega Sammy Holdings Inc.
Square Enix Holdings
21.92
22.84
11.92
203.33
19.85
15.81
98.1%
97.7%
96.7%
55.6%
82.5%
65.5%
1,295
3,048
2,819
26,002
5,250
1,819
(190)
(53)
(839)
(13,397)
(1,728)
(863)
1,105
2,995
1,979
12,605
3,522
956
Median
Mean
Europe
Atari
Game Group plc
GameLoft SA
Ubisoft Entertainment SA
3.89
0.72
7.18
10.35
62.3%
49.6%
91.2%
71.3%
83
250
537
980
37
103
(36)
79
56
120
353
501
1,059
In the advanced stages of consolidation
Selected M&A
Deal
value
Revenue
multiple
n.a.
n.a.
n.a.
Console games developer
Loyalize expands in the gamification market
$89.6m
1.0x
5.3x
Japanese console games developer
and publisher
Three-way merger
n.a.
n.a.
n.a.
PC games developer
Plans to refocus development on browser
based games
06 Apr 11
n.a.
n.a.
n.a.
Games hardware controller
makers (merger)
Merger of two force-feedback hardware
controller developers
31 Mar 11
n.a.
n.a.
n.a.
Japanese games developer
Ultizen will refocus Red Entertainment on
online and mobile games
31 Mar 11
n.a.
n.a
n.a
Romance based games developer
Agency buys female focused games developer to
deliver broader services for female focused clients
n.a.
n.a
n.a.
Downloadable content technology
provider
GameStop continues its efforts to capture more
of the digital download market
01 Mar 11
$36m
n.a.
n.a.
PC/console/handheld user
interface middleware provider
Expansion of Autodesk’s existing games
middleware offering
19 Jan 11
n.a.
n.a.
n.a.
Console games developer
Purchase of music games developer
13 Jan 11
n.a.
n.a.
Polish console games developer
Consolidation within the Polish
developer market
Date
Target
Acquirer
17 May 11
10 May 11
and
Liveware
Legendary
Investments
06 May 11
31 Mar 11
EBITDA
multiple
(part of Stardock)
n.a.
57
Target
description
Comments
Sources: CapitalIQ, Mergermarket, Companies
In the advanced stages of consolidation (continued)
Selected M&A
Deal
value
Revenue
multiple
EBITDA
multiple
Target
description
Comments
23 Dec 10
n.a.
n.a.
n.a.
Developer of Rock Band and
Guitar Hero
Viacom/MTV disposal following challenging
trading conditions
11 Nov 10
n.a.
n.a.
n.a.
Developer of Chronicles of
Riddick and The Darkness
Zenimax adds another quality console
developer to its studios
28 Oct 10
n.a.
n.a.
n.a.
Resident Evil creator’s game
development studio
Zenimax adds another quality console
developer to its studios
15 Sep10
n.a.
n.a.
n.a.
A third party developer of video
games for Capcom and 2K games
(Take-Two Interactive)
A strategic purchase as Blue Castle developed
Capcom’s hit Dead Rising 2
05 Jun 10
$58m
5.9x
12.4x
n.a.
n.a
n.a.
n.a.
n.a.
n.a.
$4m
n.a.
n.a.
Switzerland based developer of
video games
Expand SouthPeak Interactive geographically
into Europe
02 Mar 10
n.a.
n.a.
n.a.
UK based video games developer
of PlayStation Games
Increase development capabilities for games for
Sony’s PlayStation platform
22 Feb 10
n.a.
n.a.
n.a.
Publishes software for the Mac
and iPhone platforms
The acquisition expanded NgMoco’s portfolio
to the Mac (as well as more iPhone games)
21 Dec 09
$43m
0.2x
US-based marketer and
distributer of video games
Synnex gains an established footprint in the
video game hardware and software market as
well as retaining distribution rights with the
major publishers such as EA and Nintendo
Date
Target
Acquirer
Video games publisher in South Wemade increased in presence in its core South
Korea
Korean market by expanding beyond online games
(26%)
03 May 10
(65%)
04 Apr 10
(50%)
31 Mar 10
IRP GmbH
n.a.
58
Develops online, video, and
console games in Korea, North
America, and Japan
Expansion in the South Korean market
The consideration for the acquisition will be used
UK based developer and publisher
in part to pay down Codemasters’ £52 million ($79
of video games
million) debt
In the advanced stages of consolidation (continued)
Selected M&A
Date
Target
Acquirer
Deal
value
Revenue
multiple
EBITDA
multiple
Target
description
Comments
Id Software’s expertise in first person shooter
games will compliment ZeniMax’s Bethesda
Softworks’ division’s roll playing games such as
‘Fallout 3’
24 Jun 09
n.a.
n.a
n.a.
US-based developer of video
games such as “Doom” and
“Quake”
21 May 09
$115m
0.5x
n.a.
games
Warner Bros purchased the Midway assets out of
bankruptcy and included the Joust, Mortal Kombat,
Spy Hunter and Wheelman franchises
$7m
0.5x
n.a.
South-Korean based developer of
games software
The acquisition will allow Wigo Global to
improve its competitiveness in game
development
$63m
0.4x
5.5x
Japan-based video game content
developer
Game portfolio expansion in its core Japanese
market
12 Feb 09
$83m
0.4x
neg
Developer of Video games
including the Tombraider
franchise
The acquisition allows Square Enix to expand
its games franchises to more focus on western
markets
03 Feb 09
n.a.
n.a.
n.a.
Canadian-based video games
developer
Geographical expansion and the acquisition of
110 skilled game developers
02 Dec 08
n.a.
n.a.
n.a.
South-Korean based developer of
PC-based games
Geographic expansion into the development of
games for the Asian market
$19m
0.1x
n.a.
games
The sale of the majority of the company comes
as Midway had a $800m debt due by the end of
the year
Wigo Global
Co. Ltd
22 Apr 09
09 Mar 09
D3 Inc
Mark Thomas
(Private investor)
02 Dec 08
(87.2% stake)
59
With limited pure console investment
Date
Target
Investor
05 June 11
Deal
value
Target
description
Date
$7m
PC game developer
26 May 10
$3m
China based console and PC
games developer
17 May 10
n.a.
Finnish games developer
Target
Investor
Deal
value
Target
description
$4m
Publishes augmented reality
and entertainment games
across platforms
Chart Venture Partners
Vickers Venture Partners
13 May 11
06 May 11
Grand Cru Oy
17 April 11
n.a.
$12.2
Console and PC game controller
hardware developer
31 Mar 11
n.a.
$1.25m
Game controller hardware
developer
$14m
Low cost, emerging market game
consoles
13 May 10
$9m
Driving game developer in the
United Kingdom
30 Nov 09
$8m
Low cost, emerging market game
consoles
20 Nov 09
$5m
US-based console software
developer
19 Oct 09
$6m
Provides a 3D game development
tool
$23m
Designs, develops and publishes
casual/PC
video games
$12m
Develops entertainment software
and games for consoles,
handhelds and PCs
08 Feb11
$40m
A pioneering service providing
console games without a console
over the internet
30 Sep10
$150m
Major publisher consolidating the
games industry across platforms
02 Oct 09
30 Sep10
n.a.
Third party game developer with
clients such as Konami and EA
01 Aug 09
One investor
Socius Capital
Group, LLC
47 investors
24 Sep10
n.a.
$10m
Develops console games
06 Jul 09
$8m
Develops and publishes video
games for consoles and PCs
13 Aug 10
One investor
$15m
Low cost, emerging market
game consoles
21 May 09
n.a.
Develops and publishes games
that join consoles, PCs, mobile and
the Internet
$7m
Develops and publishes
interactive entertainment
software for consoles
09 Mar 09
$6m
Low cost emerging market
game consoles
16 Jul 10
60
One investor
And clear investment, M&A and JV opportunities
Firm Type
Investment, M&A
and JV
Opportunities
Major
Video Games
Independent
Video Games
Venture Capital
Private Equity
Major Technology,
Media & Telecoms
 Core franchise organic
investment
 Limited new IP
investment until 8th
generation consoles
destroying M&A
 Acquire economically
challenged AAA
independents to control
internal costs
licensed games/
 Explore strategic
options for
underperforming assets
(if possible)
games company
for licensed games/
marketing/
investment
 Restructure to focus
on self publishing,
downloadable
content, casual/
social or mobile
markets, with parallel
development and low
cost/ offshoring
investments due to
risk profile and sector
consolidation
investments due to
risk profile and sector
consolidation
 JV with major/
independent video
games companies for
licensed games/
marketing/
investment
 Strategic M&A of
independent studios
to build internal
capability for
significant IP
portfolios and
platforms
 Explore strategic
options for
underperforming
assets
61
In-game Advertising Sector
62
In-game advertising is early stage
In-game advertising is small but growing








US Online PC games advertising revenue by category
In-game advertising is seen by publishers as an additional revenue
stream to traditional game sales
In-game advertising delivers targeted advertising
 Console: 68% male, median age 26
 Casual/social: 50% male, median age 36
 Mobile: 64% female, median age 31
Global market > $1B revenue, 12.9% CAGR forecast 2009-2014
Multiple formats (static and dynamic):
 In-game
 Around-game
 Advergames
Dynamic formats hold the greatest potential, whether via console (Xbox
Live Arcade, Playstation Network), web or mobile, because of the
ability to dynamically target and update in-game advertising
Microsoft “redeployed” its Massive advertising business in October
2010, 4 years after its estimated $200-400M acquisition
Sony PS3 in-game advertising is open, with players such as IGA and
Double Fusion partnering with Sony and major game publishers
Google Ad-Sense for Games focuses on casual/social web games, with a
view to expanding to console games
$2.5bn
$2.0bn
$2.0bn
$1.5bn
$1.5bn
$1.2bn
$1.0bn
$0.9bn
$0.7bn
$0.5bn
$0.5bn
$0.4bn
$0.0bn
2005
2006
2007
In-game
Relatively few firms
Corporate
$2.3bn
2008
2009
Around game
2010E
2011F
2012F
Advergame
Online in-game advertising: static or dynamic media advertising
that appears inside the game or during the game while its being
loaded or played
Online around game advertising: static or rich media advertising
that appears outside of the videogame but shown in conjunction
with it
Online advergames: custom made games specifically created to
communicate a marketing message designed around a product or
service
Independent
63
Sources: PWC, IDC
With limited, high profile M&A
Selected M&A
Deal
value
Revenue
multiple
EBITDA
multiple
Target
description
Comments
18 May 10
n.a.
n.a.
n.a.
US based provider of online video
game services and in-game
advertising services
Playdom had raised $43m as part of a Series A
funding round and said that the proceeds from
the raising would be used for acquisitions and
to expand the company’s portfolio of titles
11 Jan 10
$80m
n.a.
n.a.
Flash game advertising network
and payments platform
Shanda extended its online video games
strength in China into mobile
17 Mar 07
n.a.
n.a.
n.a.
Delivers advertising content to
on-line enabled game platforms
Google was looking for ways to extend its
advertising program and in-game advertising
offered a logical extension
04 May 06
est. $200m $400m
n.a.
n.a.
Date
Target
Acquirer
Microsoft’s acquisition further expanded its
Offers advertisers platforms to presence into the area of online advertising, an area
reach games audience in real time in which Microsoft sees future growth as well as
competition with Google
Selected Private Placements
Date
Target
Investor
12 May 11
Deal
value
Target
description
Date
$1.4m
Mobile in-game advertising
platform
5 Jul 10
$20m
US social advertising network
with significant games presence
Target
Investor
Deal
value
n.a.
$1.5m
Chicagoland Entrepreneurial
Center – Investment Arm
23 Mar 11
64
Sources: CapitalIQ, TechCrunch
Target
description
Mobile in-game advertising
platform
And clear investment, M&A and JV opportunities
Firm Type
Investment, M&A
and JV
Opportunities
Major
Video Games
destroying M&A
 Limited organic
investment due to small
market size
Independent
Video Games
Venture Capital
 VC fundraising
games/media
company
 Invest in in-game
advertising
technology
 Avoid in-game
advertising agencies
due to business
model
65
Private Equity
 Develop sector
relationships in
maturity
Major Technology,
Media & Telecoms
to build internal
capability for
significant IP
portfolios and
leveraging client
relationships
destroying M&A
organic investment
competencies
About Digi-Capital
66
About Digi-Capital
Digi-Capital is a digital investment bank
• Focused on high growth digital companies across America, Europe and Asia (China, Japan, South Korea)
• Video games, digital media, digital services, mobile, software and media industry specialist
• Regulated by the Financial Services Authority with US SEC Regulation 15a-6 coverage
• UK and China, US operating relationship
Managing high growth digital companies’ investment banking needs
• Fundraising
• Exit/sale
• Acquisition/investment
• Venture partner
• Restructuring
Leveraging broad experience
• Investment banking, software engineering and corporate
Working with leading clients
Global video games
Global media
Global media
Global online casual games
Global business media
Global online games
Media, communications, tech
focused private equity
Global growth private equity
iPhone/Android games
iPhone/iPad games and apps
Working in partnership with global network banks
67
Private social networking
Global Video Games Investment Review
2011
June transaction update
Contact: tim.merel@ digi-capital.com
www.digi-capital.com
© Digi-Capital Limited 2011

IBIS Capital Global Video Games Investment Review

Transcription

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