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


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