Online and Mobile Gaming Growth Explodes

April 26, 2011

Three significant online gaming transactions announced already this week are evidence of the explosive growth the online, mobile and social gaming sector is witnessing.  TA Associates and Summit Partners today announced a $350 million recapitalization of Bigpoint GmbH, a Hamburg-based online gaming company. On Monday, Japanese mobile social network Gree purchased mobile social game platform operator OpenFeint for $104 million, and publicly-traded online game developer announced plans to acquire a majority stake for $101 million in Shenzhen 7Road Technology Co., a web-based game company in China. Even Google is jumping into the gaming arena:  after investing $100 million into social gaming giant Zynga last year, the company is now looking for a Product Manager to “grow its brand-new business – Games at Google,” according to a recently posted job offer.

Investments in mobile and online games have been igniting over the past year or so, as mobile technology continues to blossom and a multitude of app stores make distribution easier than ever. Worldwide spending on mobile games is expected to more than double over the next few years, reaching  $11.4 billion by 2014, according to Gartner. Currently, online and mobile games generate about a third of all games software revenues globally. By 2015, these games are expected to generate 50% of all games software revenue, or around a fifth more revenue than pure console games.

Low barriers to entry make this market high-growth and profitable, an alluring combination for investors. In 2010, investments in online, mobile or social gaming reached more than $770 million — representing about 75% of the entire gaming sector’s record year of investments, according to research by VentureBeat.

There’s no doubt leaders are beginning to emerge in this area. Zynga, for one, has raised more than $327 million over the past two years and recently resigned-Electronic Arts COO John Schappert is rumored to be heading to the company. This new avenue of gaming combines the hottest areas of technology at the moment – cloud, advertising and mobile technology. As innovations continue to drive the market, we expect to see serious cash flowing into the space, as well as increasingly healthy M&A valuations.

Select Online & Mobile Gaming M&A Transactions, 2011

(Click image to enlarge)

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.

It’s an M&A Game for Vivendi-Activision

December 3, 2007

Don More

Don More

Pending Deal Provides Lessons to Other Technology Vendors

What do you do as an undersized player in a fast-changing, brutally competitive market led by a much larger adversary, in this case Electronic Arts in the gaming space? One answer is to do what Vivendi just announced it intends to do after reportedly failing to auction their isolated electronic games business: buy a competitor.

In a complicated deal structure, Vivendi Games will merge into Activision, and Vivendi the parent will end up owning a majority stake in the combined company. The deal makes a new number-one revenues-wise, and better positions the combined entity to compete in the massively-multiplayer games market. (Disclosure: Updata has transacted with Activision in a prior M&A transaction.)

The pending Vivendi-Activision deal illustrates several themes for M&A in 2008:

Incremental Value in Scale: In some circumstances if a public company has an “orphan” division they can’t divest, they can sometimes unlock value by buying. In this case, the buyer’s stock went up (so far) as a result of the implied increased value of the Vivendi Game business.

Cross-Border European M&A: This is an example of inbound European M&A (although, Activision’s management, and not Vivendi’s, proposed this transaction). The weak dollar is expected to drive more inbound activity and may help offset other potential declines in M&A volume next year (e.g., drop off in private equity deals).

Financial Engineering: This is at least the second major financial engineering tech deal in a few weeks, following announcement of CA’s strategic partnership with HCL Technologies, which essentially calls for HCL to run the research and product development divisions of CA’s threat management security business. According to CA’s announcement, the combined assets are expected to enable more profitable growth and gains in market share.

Vivendi said more acquisitions are likely to follow in the fragmented games market. It would not be surprising for Electronic Arts to respond with its own acquisition (e.g., Ubisoft’s name has come up). Given the Hollywood-like budgets of big game productions and the similar hit-miss nature of both industries it may not be long before Disney, Bertelsmann and Viacom jump in and take out electronic gaming.


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