The PocketGamer.biz Mobile Mavens is our panel of experts drawn from all sectors of the mobile gaming industry.
Last week, with Zynga having acquired Draw Something studio OMGPOP, our attention was drawn not only to future buys by the social giant, but also the moves its rivals might make in retaliation, leading us to ask:
Is the strategy behind Zynga's $210 million purchase of OMGPOP sound, and do you think this will kick start another round of acquisitions within the industry?
John is co-founder of PR and marketing company Big Ideas Machine. Also an all-round nice guy...
I don't know about kick start more acquisitions - it's been a busy time already in terms of M&A activity.
Absolutely there will be a continued focus on the acquisition of proven hit games, especially by the big players like EA and Zynga who have a share price to support and which don't have the luxury of throwing lots of new IP out there to see what sticks.
On the one hand I think this is good news, as it'll mean some small studios are going to get rewarded for their work. But the recent data from AppGeyser suggests that the games category is getting overheated; on Android at least, less than 0.5 percent of games sold over 50,000 in six months.
I worry that'll mean even more derivative games based on the handful of IP that goes on to sell millions. How many Temple Run clones do we really need?
The biggest upside will be that it might mean my Glu shares will be worth something again.
Mills co-founded ustwo, a digital products and services studio back in 2004.
In 2013, after successfully launching Whale Trail, he set up ustwo games to focus on creating beautiful gaming experiences. Recent titles include Blip Blupand the forthcoming Monument Valley.
I think the key is for the big guys to go hunting for IP that never made it.
Since its release we have had two Whale Trail IP acquisition offers from two very big studios. They wanted it was because, firstly, nobody in the world has really seen it 200,000 sales to date - and with their power and tweaks they could get it out, and secondly, another saw potential for the IP in the freemium world .
I don't particularly think this will "kick start" acquisitions as John already said, M&A activity is pretty high.
From the analyst point of view: active audience is the key thing for companies like Zynga. That's what creates revenue for the firm. So I did a simple analysis of a few recent acquisitions, balancing the reported audience versus reported (initial) acquisition costs, to give a Customer Acquisition Cost (CAC) metric.
The acquisition cost of developer per customer is $11 for another Zynga acquisition NewToy, $15 for OMGPOP and $47 for PopCap.
On that basis looks like Zyngas doing better deals than EA, but PopCap's a little different beast since it has a big stable of IP. As EA's Pogo isnt exactly setting the casual gaming world alight, the publisher probably needed to open the wallet again. None of it compares particularly favourably with the reported $2 CAC of advertising, but IP (and talented staff) has value of course.
The "mega developers" such as EA, Zynga, Gameloft and others will continue to build scale and audience. Most smaller developers will only have one (or possibly a handful) of titles but lack the scale to promote additional titles to an audience.
Scale will become a more important factor and smaller developers seeking to cash out should do so at the earliest opportunity when their audience is at its peak, before it inevitably declines as they lack new, interesting product to move that audience onto. You might have a hit game. You might even be able to follow it up with another hit, but cash out then before you roll the dice again.
As a big shot said some weeks ago: The time to act in mobile games is now! Why?
First, it's about own IPs. Mobile is beyond mobile phones and tablets. Its now also smart TV, PC, in-flight and car entertainment systems, set-top boxes, social - every day a new platform shows up. We can cover these topics, but you really need a strong portfolio of own IPs.
Second, its about user acquisition, user retention and reach how many consumers can you attract and move around your portfolio successfully. Having million sellers in your portfolio helps a lot to cross-promote other titles.
Third, its about the team with a scalable and agile structure. Fourth, its about your technology and experience. Handling fragmentation like OSs, platforms, languages, social features, ad-networks, user analytics etc, is important.
Fifth, its about understanding the monetisation models and acting very flexibly on new trends, like freemium. Finally, its about producing a successful portfolio of titles not only a one time hit.
We will see several acquisitions valued between 50-250 million this year. Jon Jordan summed up the research from GP Bullhound here some time ago. I am sure we will see a lot of new faces in the industry with deep pockets and instead of building up an own mobile unit they will just buy one or more of the Mavens' companies. Check out the PocketGamer.biz Top 50 developer list - half of the list was already bought or are in discussion!
Draw Something is a good fit for Zynga, so its not just a knee-jerk reaction, but I do think it's interesting how fast it was acquired. Its almost like Zynga decided to throw some money at the studio before it figured out it is actually earning quite a bit of money on its own.
Although, taking a look at other OMGPOP games, I think Zynga was really interested in its hit flash game, Aim for the Nuts, and the potential it has going over to iOS.
There are also a lot of other factors, like OMGPOP has a lot of Flash games under its belt, probably has a decent sized development team, so Zynga is picking up a game that sits side by side with Words With Friends and at the same time it increases its development resources for future Facebook games.
Like Mills said, everyone in the top 50 has already had their fair share of acquisition offers. While I would be happy with $210 million, most of the offers are not really worth giving up your IP if you have longevity in the top ranks.
But how long can you stay on top? Id like to add in a quote from one of my favourite movies:
"If you're hanging onto a rising balloon, you're presented with a difficult decision - let go before it's too late or hang on and keep getting higher, posing the question: how long can you keep a grip on the rope?" - Withnail & I
It seems grass and gaming have at least one thing in common knowing when to stop is important. Is $10 per customer enough? $20? How high can you go, man?
I like the balloon analogy.
It also comes down to your partners. If you have VC money rolled into your startup the offer to acquire at some number greater than 1x for that VC partner is put pressure on your partnership. Seldom does the creative vision meet the financial vision in VC funded companies.
I think the other question is what did OMGPop see in the acquisition beyond the $$$? If they didn't think that through they will be unhappy long term.
I am betting any VC financed company in the industry is a pretty interesting place to be right now.
I think Zynga's strategy was reactionary. The company saw a game taking off, and how it appeared to be affecting their own titles like Words with Friends as detailed by Business Insider.
As a result, the firm jumped in to try to buy a game that was seeing extraordinary growth. Personally I think it's going to be short-lived as Draw Something won't have the long-term staying power that other games do.
From the OMGPOP perspective this seems like a great deal. I can't imagine many companies in a similar position not taking this kind of an offer.
As to whether or not this will trigger a larger buying frenzy, I don't think so. We are going to see more of the M&A deals focused around buying successful properties and teams, as opposed to smaller purchases that are essentially hiring a bunch of people en-masse.
For me, Zynga's games - and I speak as someone who got addicted to Scramble with Friends for a period - seem to hit the heights for 2 or 3 months and then drop out of my consciousness. In that respect, Draw Something seems like the perfect match - I can't imagine that in four months people will be playing it.
But if we accept that as Zynga's business model, then is that sustainable? How long can it go on either buying or aping whats popular? It seems like it's paddling desperately to stay afloat; surely it only needs 2 or 3 games to miss the spot, and it's in trouble, no?
The OMGPOP purchase for me seems like a lot of money for a game that will do very well for the firm for a relatively short period of time. Needless to say, I don't get it.
If anything, the acquisition shows just how completely unpredictable and explosive the mobile games market is today. No-one saw the success of Draw Something coming, and that includes OMGPOP itself. Its well done and the timing is right, but honestly it could have happened to any of the talented mobile developers out there.
What I think OMGPOP did well which probably compares to what Rovio also did well was act immediately, and aggressively, on an explosive opportunity. It got everything it could out of the success.
To me, its interesting that the number one social game publisher can be overthrown by a small relatively inexperienced developer in three weeks. I'm pretty happy I'm not in Zyngas shoes. Having to flush out USD 200m to keep my position every time someone has a hit game that steals my customers overnight? That could become an expensive hobby....
That's spot on. That's exactly what I was trying to say. Badly.
$210M is a happy figure for OMGPOP.
The question is why so much from Zynga? How much is Tapjoy worth? How much would cross promoting a game on Draw Something for a full month cost? How many games will Zynga promote on users from OMGPOP?
Adam has been in the mobile game industry since 2007, creating games independently. He's since grown into a full 50+ person studio manager.
Recently he's taken a position at Wooga in Berlin to sharpen his design skills and work with the world's best to create amazing, well-crafted products onto the mobile marketplace.
I think OMGPOP probably could've gotten more money.
Zynga bought it on a reaction. The company felt the burn losing PopCap, and it knew that if it wasn't first to the table with OMGPOP, that EA or similar would grab it up.
It can't do this with every company that jumps to the top (as said, 200 million is an expensive habit) but this was a special case. Draw Something passed the 1 million users mark in days, passing Facebook for how quickly it spread. Zynga had the capabilities to scale. It knew they could take the firm over and control the users.
I think Draw Something is on to something. It's based on visual intelligence, and while it's a bit loose in terms of game mechanics, it makes up for it with a well polished, fun package. Will it have staying power? Just as much as Words With Friends or Hanging With Friends. There was a game just like it on the Top charts of Shockwave for five or more years back in the flash days.
I've got a slightly different point to add to this mix: the OMGPOP acquisition has definitely captured the games M&A headlines, but big publishers buying small developers isn't the only kind of acquisition activity for this year.
I think we're going to see or already are seeing, actually - the beginnings of mobile developers collaborating/merging with/buying up each other in an effort to acquire scale, users, IP etc. I think that trend will continue regardless of developments like Zynga's purchase of OMGPOP because, especially in the UK at the moment, mobile is becoming an increasingly congested place to develop games.
In other words, in response to Dan's original question: big acquisitions like that of OMGPOP might kick start another round of high-profile acquisitions within the industry, but there's a slow-burn and lower-profile process of consolidation already beginning which will also fuel acquisitions.
The things I find important are being creative, having complete control over my apps, having a lifestyle of being able to work at home, and knowing that if I get burnt out, I can just walk away and take six months off - that would never happen though.
The money is nice - it allows me to maintain this lifestyle. We are always in slow decline, but so far we've been able to do things to reignite interest every few months that puts us, not really on the top, but close enough to have a very comfortable living and have fun.
If we were to be acquired, I would be giving a lot of this up. It would be a risk to give up something that completely fulfils my needs in exchange for a short term monetary gain.
Don't get me wrong, everyone has a price. My price is that, after taxes, I have enough guaranteed money in the bank to retire at my current lifestyle in San Francisco - which includes an expensive electronics and game fetish. Only then, would I be able to take the risk and throw myself into the corporate environment.
The biggest thing you hear in any acquisition is how things won't change. Firemint, OpenFeint, ngmoco - all those companies were going to continue doing business the way they were operating beforehand. Now you see Jason Citron leaving OpenFeint after a couple months, ngmoco only focusing on Mobage along with some major personnel shake ups and Flight Control Rocket with tons of IAP despite being a paid app.
Things are guaranteed to change unless you can play the corporate game and somehow infect and usurp the larger entity. I'm not really interested in those kinds of shenanigans.
Another thing that sours me about acquisitions is that often an acquisition is a short term strategy for the parent company. Everyone talks about how they really want the acquired company to be a part of the future of the parent company but, in fact, they want to inflate their DAU so that they can sell their company at a higher price or artificially pump up their stock price with news that Zynga now owns the #1 game on the App Store.
After that short term goal is accomplished, the other company is basically forgotten - unless it can play the political game or its growth is completely off the charts. Worse case is, the business is folded into the larger development pool, which is typical of almost every EA acquisition.
But I also agree with Graeme, that if your passion is to play the VC game and are looking for an acquisition, it's a pretty awesome time for YOU.