Online Gaming Witnesses Growth, IPOs

November 9, 2011

The online and mobile gaming market, not including online gambling, is rapidly growing, with companies reporting large increases in sales and receiving significantly higher valuations for initial public offerings. We have noted before how the online gaming market has been ripe for growth, and activity certainly has not slowed. For example, the largest expected IPO in Japan this year is a $1.3 billion offering for Nexon, an online gaming company. Nexon was the first developer of a graphic massively multiplayer online role playing game (MMORPG) in 1995 with The Kingdom of Winds, and now operates successful games such as MapleStory and Kart Rider.

The success of Nexon as an online gaming company comes as no surprise though, given other impressive announcements within the industry this year. Also headquartered in Japan, public mobile gaming companies GREE and DeNa, with market capitalizations of $6.4 billion and $7.3 billion, continue to report impressive earnings numbers for the year. In the United States, casual online gaming company Zynga is preparing its initial public offering, with an expected valuation of $10 billion. Overall, the U.S. online gaming industry is projected to grow from $4.5 billion in 2010 to $9.5 billion in 2014, according to NPD Group.

Of course, no discussion of the popularity of online and mobile gaming can leave out Rovio, the company that brought us Angry Birds. On November 2, Peter Vesterbacka, Rovio’s CEO, announced that Angry Birds had surpassed 500 million downloads in the past two years, with each incremental download creating revenue for the company. Rovio has come into the spotlight in recent months not only because of its reported 130 million monthly users, 30 million daily active users, and 300 million minutes of gameplay each day, but because it has also achieved all of this with little to no marketing spend.

With such explosive growth in popularity, monetization of non-gambling online game play has created successful enterprises out of these small start-up companies helmed by true game lovers. The online and mobile gaming industry has seen over 30 acquisitions this year, suggesting that larger gaming companies recognize the technology and innovation from these gaming upstarts can represent a threat. By far the largest acquisition since this year has been Electronic Arts’ acquisition of PopCap Games for $1.3 billion. Other transactions included Perfect World’s purchase of Cryptic Studios for $50.4 million, Quepasa Corporation’s purchase of XtFt Games for $4.0 million, and Zynga’s acquisition of two smaller companies, DNA Games and Area/Code Entertainment, for undisclosed amounts

Although many transaction values in this industry are undisclosed, there is the potential for huge rewards. Electronic Arts paid 12.9x revenue and an astounding 81.3x EBIT for its acquisition of PopCap.  By redefining the way games are played and how gaming companies create earnings, the leaders of online and mobile gaming have made innovation a necessity to both flourish and survive. The owners and investors of these businesses are finding handsome returns on the very creativity that lead them into the business.

– Bruce Crabtree, Financial Analyst

Not Just Fun And Games Anymore

July 30, 2008
Online Gaming Will Be A Powerful Driver Of M&A

by Don More

with Matthew Cohen and Francesca Bartolomey

“Flank left! Flank left!”
“Enemy on your right!”

These are the outbursts typical of a gamer in Counter-Strike; however, gaming has gone far beyond the ‘traditional’ youngish, mostly male audience to include an amazing 72% of the entire U.S. population, up from 64% in 2006. Make no mistake about it – it’s not your parents’ Atari. Leaps in technology, bandwidth, and processing power have extended gaming to new uses, audiences, and age groups. Applications experiencing great growth include education, training, and rehabilitation. Gamers are a critical market that advertisers cannot afford to ignore. NPD Group reports that in 2007, the gaming sector alone generated about $19 billion in revenues in the U.S. representing a 40% increase from sales in 2006.

Participation in online gaming has grown to 42% of the population.  Of all online gamers in 2007, 90% used a PC (or laptop) to enter the virtual gaming network, while 19% reported using their console  (such as Xbox 360 and PlayStation 3).* And not only are more users than ever before playing games online, but they are also becoming more avid gamers. NPD Group reports that 13% of online gamers spend 20 hours or more per week playing games online. Expect web-enabled handhelds of the Nintendo DS or PSP variety to further increase market penetration and engagement in the medium.

In addition to entertainment, games are increasingly a component of education. For example, LeapFrog’s products (as well as similar lines by Hasbro and Mattel) are designed to encourage development and basic learning in children as young as just a few months old. The benefits of games that are introduced into a learning environment are seen in older students as well. Research conducted on the effect of using games to aid students in learning math showed that students using the games earned an average of 4.3 more points on a math test than students in a control group.

Another growth area in gaming leverages technological advances that enable physical involvement of the user in video games, a phenomenon colloquially dubbed “wiihabilitation.” War veterans, the elderly, and other patients recovering from injury are using the Nintendo Wii in order to enhance (and reduce the burden of) rehabilitation therapy.

Employers are seeing the benefit of games in workplace training as well. While many productive hours have probably been lost to the likes of Tetris and Solitaire over the years, more companies utilize online games to train employees better.

M&A activity reflects the market opportunity. Hot on the heels of last year’s $18.9 billion deal combining Vivendi and Activision, video gaming titan Electronic Arts made a $2 billion bid for rival Take-Two Interactive (the creator of the hugely successful Grand Theft Auto series) earlier this year. Additional gaming deals announced this year are shown below. Expect more activity to follow.

*The overlapping 9% consists of respondents who access online games via both their computer and console.


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