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Casual Games; A Strategic Review of the Sector

from 17 July 2007 at Casual Connect in Seattle

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Casual Games; A Strategic Review of the Sector

  1. 1. Avista Partners
  2. 2.  Key growth factors  Fundraising  Mergers & Acquisitions Vl Valuation i  The Holy Grail in Online Games  Trends & opportunities Avista Partners 2
  3. 3. Avista Partners 3
  4. 4.  Venture Capital  & Private Equity firms are actively investing in  the casual game sector ▪ Intel Capital ▪ Softbank funds/ companies ▪ Benchmark Capital ▪ IDG funds ▪ Plus many others  Why? ▪ Explosive growth for Game Portals & Online Media Consumption ▪ Casual games are games for the mass market ▪L   d i   Low production costs for casual games  f   l  ▪ Low advertising & distribution costs ▪ Recurring revenue base and scalability are the critical factors ▪ more appealing to financial investors   li  t  fi i l i t Avista Partners 4
  5. 5. Investors focus on companies that have the   potential to meet the following:  Great games Content Diversified  Multiple games in back catalog and pipeline Portfolio  Fast growing profitability driven by game/subscription/ g gp y yg p Monetization M ti ti virtual items revenues, advertising revenues (in-game or in-site) and search revenues  Strong platform required to sustain high quantities of Technology Platform customers  Management teams require strong experience in internet, Management g game or entertainment sectors Avista Partners 5
  6. 6. Avista Partners 6
  7. 7. 34 deals in 2007 with over $135m raised  Largest deals   Trion World Network $30m  IGA Worldwide $25m  K2 Network $16m et o $ 6  Infocomm Asia Holdings $14.2m  Net ork Game Interaction $ 0m Network Game Interaction $10m Avista Partners Note: up to 15 July 2007; deals for 2007 7 7
  8. 8. Total Deal Value (USD$ millions) Total # of Deals 280.0 280 0 40 266.1 260.0 36 35 240.0 34 220.0 30 200.0 180.0 167.7 6 25 160.0 135.9 140.0 20 120.0 120 0 16 102.0 15 15 100.0 97.5 80.0 10 60.0 60 0 50.0 8 39.7 40.0 5 3 11.2 3 20.0 2 0.0 0 2000 2001 2002 2003 2004 2005 2006 2007 Avista Year Partners Note: up to 15 July 2007.; deals where value is undisclosed are not included in total value but are included in # of deals 8
  9. 9. VC firm fi # of d l f deals Intel Capital 8 Softbank funds/ companies 8 Benchmark Capital 7 IDG Ventures 6 Accel Partners 5 JVP 5 Draper related funds 4 Granite Global Ventures 4 New Enterprise Associates 4 Trinity Ventures 4 CDC Games 3 Greylock Ventures 3 Madrona Venture Group 3 Millenium Technology Ventures 3 WPP related companies 3 108 VC s/ Strategic Investors invested to date 108 VC’s/ Strategic Investors invested to date Avista Partners Note: up to 15 July 2007.; deals include all individual deals and includes deals where the same VC may have invested in the same company but different deal 9
  10. 10. Company type # of deals % of deals Game Portal 8 23.5% In Game Advertising 8 23.5% Casual MMO 4 11.8% Multiplayer Network 3 8.8% Online Game Social Network 2 5.9% Online Fantasy League 2 5.9% Casual G C l Game P bli h Publisher 2 5.9% 5 9% Casual Game Developer 2 5.9% Multiplayer Online Game Developer 1 2.9% Episodic Game Developer 1 2.9% Game Search Engine 1 2.9% Avista Partners Note: up to 15 July 2007; deals include all individual deals and includes deals where the same VC may have invested in the same company but different deal 10
  11. 11.  More fundraising deals in 2006 in the sector than  any other full year  Interest in the sector by financial investors is at an  all time high ll  i  hi h  Majority of money raised to date has been by  Game Portals, In‐Game Advertising and Casual  MMO companies Best time ever to raise money Avista Partners 11
  12. 12. Avista Partners 12
  13. 13. Transaction EV/ EV/ Date Acquirer Target Value Revenue EBITDA Jul-07 Popcap Retro64 na Jul-07 CMP Technology How Machines Work na Jun-07 Liberty Media Fun Technologies (47%) $99.3m 4.8x Apr-07 Eidos Bluefish Media na Mar-07 Electronic Arts Neowiz $105m (19%) 4.0x 15.0x Feb-07 Vivendi Games Wanako Games na Feb-07 Google Adscape Media na Jan 07 Jan-07 MumboJumbo Ritual Entertainment na Jan-07 Gigamedia TC2N $22.9m (40%) Nov-06 Realnetworks Atrativa $3.8m Nov-06 Demand Media Intermix assets na Oct-06 Boonty Gamehub na Sep-06 Sony Gamepot (27%) $22m Sep-06 Spill Group Zlong Games (majority) na Aug-06 Fun Technologies CDM Fantasy Sports $10m 1.3x Aug-06 Fun Technologies Teagames na Aug-06 Aug 06 Viacom Atom Entertainment $200m Jul-06 GaiaX APE Inc. $1m 18 deals to date in past 12 months worth over $460m Avista Partners Note: up to 15 July 2007 13
  14. 14. Total Deal Value (USD$ millions) Total # of Deals 360.0 360 0 18 340.2 2007 is trending to over $400m in  340.0 17 320.0 16 deals for full year 300.0 280.0 14 260.0 240.0 12 227.2 220.0 220 0 208.3 208 3 207.0 207 0 184.1 200.0 10 168.6 180.0 9 8 9 160.0 8 140.0 120.0 6 94.8 100.0 80.0 80 0 4 4 3 3 60.0 2 40.0 2 1 20.0 0.0 00 0.0 0.0 0 Avista 1999 2000 2001 2002 2003 2004 2005 2006 2007 Partners Year Note: up to 15 July, 2007; deals where value is undisclosed are not included in total value but are included in # of deals 14
  15. 15. Acquiror # of deals Fun Technologies 6 Electronic Arts 4 Realnetworks 3 Shanda 2 Big Fish Games 2 Media General 2 Viacom (Atom Entertainment) ( ) 2 Popcap 2 Gigamedia 2 Vivendi Games 2 Avista Partners Note: up to 15 July, 2007; deals include all individual deals and includes deals where the same VC may have invested in the same company but different deal 15
  16. 16.  Pure casual game M&A l  Oberon, Bigfish, Popcap have been the most acquisitive Vi Various potential giants may acquire   i l  i     i  Video game publishers  EA has a dedicated casual business now & has EA has a dedicated casual business now & has Pogo com  Eidos has acquired 1 company   Online content/service companies  Realnetworks has acquired 3 companies & has Realarcade  Microsoft acquired Massive and has MSN Games  Media/ Entertainment Conglomerates M di / E i  C l  MTV Networks/Viacom acquired Atom Entertainment  Time Warner/ AOL acquired / q Avista Partners 16
  17. 17.  17 acquisitions closed in 2006; most ever   i i i   l d i   6     Interest in acquisitions in the sector is at an all  time high  Value of average deal size can only go higher Consolidation will continue to grow in momentum t Avista Partners 17
  18. 18. Avista Partners 18
  19. 19. Transaction EV/ EV/ Date Acquirer Target Value Revenue EBITDA Jun-07 Liberty Media Fun Technologies (47%) $99.3m 4.8x na Mar-07 Electronic Arts Neowiz $105m (19%) 4.0x 15.0x Aug-06 A 06 Fun T h l i F Technologies CDM F t Fantasy S t Sports $10m $10 1.3x 13 Mar-06 Fun Technologies WorldWinner $23m 2.2x Feb-06 Realnetworks Zylom $21m 2.6x Nov-05 Liberty Media Fun Technologies (51%) $144m 5.6x Jun-05 Fun Technologies Fanball Interactive $22m $ 4.8x Jul-04 Fun Technologies Skilljam $8m 2.2x Jan-04 Realnetworks Gamehouse $35.6m 3.6x Multiples are driven by: ‐ acquiror demand ‐ growth rate of target ‐ strategic value of target Avista Partners 19 19
  20. 20. Avista Partners 20
  21. 21. Online game companies want to know:   What is the best strategy for my online game  business?  What are VCs looking for in an online game compan ? What are VCs looking for in an online game company? For VCs, the question is this:    What type of online game business should I look to  h fl b h ld l k invest in?  And the large media companies ask:   A d th  l   di   i k   Which online game companies should we look at  acquiring?  Avista Partners 21 21
  22. 22. y What is the Holy Grail in  the future of online  g games?  Avista Partners 22 22
  23. 23. Avista Partners 23 23
  24. 24. Currently, many people believe it is World of Warcraft from   Vivendi.   single game generating $1 billion per year in revenues not the Holy Grail of online games    only attract hard core gamers and not the mass market l hd d h k  WOW’s eight or nine million subscribers pales in comparison to  the over 50 million users worldwide who play Maplestory from  py p y Nexon in Korea or the over 66 million registered users of Habbo Hotel from Sulake in Finland.   Plus MMORPGs do not have much of a life cycle beyond five  y y years.  Avista Partners 24 24
  25. 25. Not 100% clear that subscription‐based business  Not 100% clear that subscription based business   models are best  especially given the huge success of item‐selling‐based  p yg g g business models in Asia and the growing success of  companies like Three Rings (Puzzle Pirates) and K2  Network (publisher of Korean developed online games) Network (publisher of Korean‐developed online games) One company to watch is Bigpoint   a German company which now offers seven casual  ff browser‐based games.   In lieu of no subscription fees, Bigpoint generates  revenues by selling items in‐game.   On average, they are generating more revenues per  user than WOW is  is.  Avista Partners 25 25
  26. 26. There are many portals like this but very few of these portals are   generating any serious revenues.  Some of the successful companies may not be around in 18 to 24  months.   Aggregation as a standalone strategy does not work unless you are the  number one or two player b      l  What is going to happen when casual game publishers have the  p power control revenue shares & pricing?  p g  Will not happen overnight but it will happen once there has been  more consolidation in the sector and the publishers are larger or  owned by larger companies. owned by larger companies  Content owners will always win in the end—and this business is  clearly more about great games and than about great distribution.  Avista Partners 26 26
  27. 27. Some people believe that publishing a huge number   of downloadable games and selling them everywhere  g g y is the answer.  But is that really a long‐term sustainable business, given  the large (and rapidly growing) number of downloadable  hl (d idl i) b fd l d bl game publishers and developers  For instance  I’m amazed by how many puzzle games  For instance, I m amazed by how many puzzle games  there are in the market currently.  ▪ How many puzzle games can the market support?  ▪ And how does a consumer differentiate among them?  Doubtful that anyone will succeed long‐term with   undifferentiated content in a saturated market.  undifferentiated content in a saturated market   Avista Partners 27 27
  28. 28. A website that features a casual, mass market‐focused MMO with great  A website that features a casual  mass market‐focused MMO with great   game‐play, interactivity, customization, VOIP capability, and user  generated content (games, videos of game‐play and avatars).   Pl s simple  a  to make friends  find friends  in ite friends  and pla   ith  Plus simple way to make friends, find friends, invite friends, and play with  friends.   Mix of different types of advertising, including both onsite banners and  in‐game promos or product placement.  d l Holy  maple habbo myspace skype youtube hotel Grail story 1st game website that offers all the key features of this mash‐up will  g y p  indeed be the Holy Grail of online games.   Forget about 10 million or even 50 million users.   L k f   Look for 100 million registered users for one game website   illi   i d   f       bi Avista Partners 28 28
  29. 29. Avista Partners 29
  30. 30.  More developers switching from high end console to casual games  ▪ Lower development costs, less risk & higher ROI ▪ PC, XBLA, PSP, DS, Wii , , ,,  Game Portals/ Aggregators growing in popularity with consumers;  watching less TV; Advertising is a major source of revenue  Mix of Ad‐supported, casual games and paid premium games  In‐game advertising is a new source of revenue for developers/ publishers  Casual MMO’s will grow ie. Runescape  Business models selling items in game growing quickly ie Bigpoint  Social 3d chat games will grow ie Second Life, Habbo Hotel  Micropayments Avista Partners 30
  31. 31.  Acquire or Be Acquired  Raise money to grow and/or acquire  B ild D C b i Build D2C business on own websites with a focus on community      b it   ith   f    it  Monetise across other platforms by licensing or in‐house for mobile,  console,  in addition to PC in store console,  in addition to PC in‐store  Sell items in‐game  Publish games by episode  Build advertising revenues L Localize sites for key Non‐English countries li   it  f  k  N E li h  ti  Outsource selected development pieces overseas  Develop game widgets for social networks ie. Bunchball Avista Partners 31
  32. 32. Paul Heydon Managing Director gg Avista Partners Tel: +44-203-178-6866 Email: Web: Avista Partners 32
  33. 33. This presentation was prepared by Avista Partners exclusively for the benefit and internal use of the Recipient in order to indicate, on a preliminary basis, the feasibility of a possible  transaction or transactions. This presentation is incomplete without reference to, and should be viewed solely in conjunction with oral briefing provided by Avista Partners. The presentation is proprietary to Avista Partners and may not be disclosed to any third party or used for any other purpose without the prior written consent of Avista Partners. The information in this presentation reflects prevailing conditions and our views as of this date, which are accordingly subject to change. In preparing this presentation, we have relied  upon and assumed, without independent verification, the accuracy and completeness of all the information available from public sources or which was provided to us by or on behalf of the Recipient or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock or the business of the Recipient. Even when this presentation contains a kind of appraisal, it should be considered preliminary, suitable only for the purpose described herein and not be disclosed or otherwise used without the prior written consent of Avista Partners. The information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects. Avista Partners LLP is authorised and regulated by the Financial Services Authority. Avista Partners 33
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from 17 July 2007 at Casual Connect in Seattle


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