• TrendForce predicts that Virtual Reality (VR) hardware and software will be a $70 billion market in 2020
  • VR hardware will account for $20 billion in 2020
  • VR software will account for $50 billion in 2020
  • TrendForce predicts the VR market in 2016 will be $6.7 billion

IEShepra Opinion: With the recent announcement of the Oculus Rift at $599, it seems like Facebook may be giving Sony an unintended lead in VR (See Microsoft giving the lead to PS4 because of their always-on technology) by not realizing this type of hardware would greatly benefit from a razor blade model. The software is where the real money is and the distribution platform for that software could results in Billions of dollars of annual revenue.

Look at Steam and their $3.5 Billion in retail sales for 2015 and remember their 30% revenue share – that’s $1.05 Billion to Steam for having 15% of the PC game distribution market.

My own assumptions are that at $299, Oculus would dominate the market and increase the adoption speed by an order of magnitude. The revenue potential is in the Billions if they have aspirations of becoming the Steam of VR.

Now, considering that 15% (equivalent to Steam’s percentage of the PC game market) is a reasonable target for Oculus within 5 years, Facebook has a potential distribution platform worth $7.5 Billion in revenue in 2020..

My assessment is that Facebook has bought into something pretty huge. Disclaimer: I do not own FB stock.

A lower price point accelerates the model, but FB should be fine either way, as long as they own the distribution channel.

The Finnish Game Industry is growing at a 39.5 percent growth rate because of some amazing game developers (SuperCell, Rovio, Remedy, (Among others)).

Below is an updated presentation on the market in Finland as well as an outline of opportunities in Finland for anyone looking to start an office there. Of particular note (although not in this presentation) is how Ilkka Paananen and the SuperCell team have deliberately chosen to ensure Finland receives the taxes it is due by not setting up operations in Ireland, the Netherlands Antilles and other tax havens, in order to pay what they owe their country. I applaud this approach to industry development and hope it serves as an example to other companies and countries on how a stand-up company deals with success and helps to build both an ecosystem and industry within a country.

My opinion is that with massive profits and mainstream appeal for many of its games, the Finnish game industry is setup in a way to pay for the development of games that can reach the global audience, but also ensure the industry’s ongoing success. It’s morally righteous and reverent to the local university system (as well as previous commercial entities such as Nokia) which have helped build it, and it appreciates the fact that the universities will continue to be a major part of its growth in the future.

In a world that is often short-sighted, Finland is a leader and their approach is a brilliant example in the post-Montreal economic development era.

I just got some new data points on the video game industry in Turkey:

  • Turkey has a population of 78 million people, with 50 percent under 25 years old
  • 33 percent of the population of Turkey has Facebook accounts
  • 92 percent of the total population has a mobile phone, 30 percent of which are smartphone users
  • Turkey has seen a 25 percent increase in video games sales 2009-2011
  • 28 percent of the population plays video games
  • Turkey has 22,500 cyber cafés
  • 40 percent of the population has internet access at home, 72 percent of which are playing games
  • 52 percent of the gaming population pays for games

The weekly Niko Partners newsletter has some info on the growing Chinese Social Network Game Market.

According to Gamelook.com.cn –

As of 2011:

  • There are 235 million registered social network game players in China
  • There are 150 million active social network game players in China
  • 64.8 percent of registered social network game players in China are active players
  • The number of registered players grew 33.7 percent over the past year

Our friends at Cerca Trova Advisors put out a new newsletter and I recommend it highly. Thanks to Martin Wierzbicki and Gerard Wiener who know their stuff on Game Investment and M&A.

Monthly Digest of M&A and Investment Activity, May/June 2011

The games M&A and fundraising juggernaut continues its breathtaking pace as we enter the month of June. Rarely has a day passed, let alone a week, without a head turning (or sometimes, head scratching) deal being announced. Even if one does not include the prospective transactions that almost made it to the finish line and those currently in the pipeline, this year’s deal making remains unprecedented for its combination of depth, breadth, geographical scope and sheer size.

With May’s monthly scorecard of six acquisitions and eight fundings spanning eight countries (Turkey, Germany, Finland and Australia among others), there is no sign of a slowdown. Significantly, the latest batch of financing deals are also demonstrating that investors are still putting money into social gaming after several months of focusing on mobile, distribution and middleware plays. While the conventional wisdom during the last year has been that social gaming is played out, the money flow says not yet, at least when it comes to newer segments and geographies. And when we say money flow, we mean a lot of money. Kabam reeled in $85 million on May 26, which brings its 2011 haul to a staggering $115 million. Crowdstar brought home a not too shabby $23 million round (its first), German social games company woogo landed $24 million and Accel Partners, fresh on the heels of its $42 million round with Rovio, locked down a $12 million investment in another up-and-coming Finnish gaming company, Supercell.

On the M&A front, Zynga continued its steady march on the deal making path with the acquisition of DNA Games and the team behind the popular Cocos2D games engine, and Rovio completed its first major acquisition, adding the Finnish animation studio Kombo to its stable of artists, engineers and developers. Chinese games company Perfect World acquired Star Trek Online maker Cryptic Studios from Atari for €35 million. Electronic Arts hit a double this month with two acquisitions (no doubt trying to keep up with Zynga’s pace), announcing the purchase of Firemint on May 3, which will be folded into EA Interactive, as well as the acquisition of Mobile Post Production, a specialist cross-platform development house. Rounding out the month, News Corp’s IGN Entertainment consolidated its dominant position in games media with the purchase of Hearst’s UGO Entertainment in anticipation of a spin off from News Corp later this year. June is already shaping up to be another exciting month, so let’s see how the rest of the month plays out.

Games M&A Activity
On June 2nd, RockYou announced the acquisition of Australian social games developer 3 Blokes. Founded in 2006, 3 Blokes has developed four social games for the Facebook platform, including their most recent title, Galactic Trader, a space trading and combat game with 200K monthly active users. The team is led by George Fidler, who has previously worked for EA and The Creative Assembly. 3 Blokes will continue to operate independently as a RockYou studio and develop strategy and combat-driven Facebook games. It appears that RockYou, which just brought on a new CEO, is adopting Zynga’s strategy of acquiring small game studios to build talent and games. Earlier this year, the company bought social game studio Playdemic.

On June 1st, Angry Birds developer Rovio announced the acquisition of leading Finnish animation studio Kombo, for an undisclosed sum of cash and stock. The acquisition of the Helsinki-based studio strengthens Rovio’s animation production capabilities, which could be used both to support games development and to improve Rovio’s presence in other media including TV and film. Earlier this month, the company announced that Angry Birds has been downloaded more than 200 million times, cementing its title as the most popular game of the smartphone era, and the most popular game of all time, eclipsing Tetris by almost 2-to-1.

On May 31st, Chinese games company Perfect World announced the acquisition of Star Trek Online maker Cryptic Studios from Atari for €35 million ($50 million). Cryptic Studios developed the innovative and successful City of Heroes, as well as its subsequent expansion, City of Villains. Both titles garnered numerous awards from leading publications including GameSpy’s Game of the Year award in 2004. After developing both City of Heroes and City of Villains, Cryptic Studios was purchased by Atari in 2008 and created Champions Online and Star Trek Online. The deal highlights the expanding ambitions of Chinese games companies outside of China. Perfect World’s Chairman and CEO, Michael Chi, said that the acquisition will help it further penetrate into the U.S. and global online game markets.

On May 18th, ngmoco (DeNA) acquired Rough Cookie, the Dutch mobile games developer behind hits such as Star Defense, We Farm and We City. Rough Cookie will help DeNA to establish a presence in Europe as the company readies the global launch of its social network for mobile games, Mobage. Rough Cookie was founded 2008 by Wouter ten Brink, Danny Hoffman and Erik t’ Sas, to focus on smartphone games development. Star Defense was an early success; after ngmoco presented the game on the WWDC keynote stage, the title became a top-selling App Store game in the summer of 2009. The game earned Rough Cookie a Dutch Game Award as well as a mention in the Top 50 iPhone Developers of the Year, by Pocket Gamer. Terms of the deal were not announced.

On May 18th, Zynga announced the acquisition of DNA Games, a social games developer based in San Francisco. DNA saw success with its first Facebook game, Casino City, which reached 2.4 million monthly active users at its peak in February 2011. While DNA’s recent titles have been less successful, Zynga seems to be particularly interested in its technology platform and approach to A/B split testing and feature iteration, which includes detailed tracking of test results and player behavoir across gender and age demographics as well as region and time of day. The deal is Zynga’s 14th acquisition in the last 12 months.

On May 11th, WebMediaBrands acquired Inside Network, a popular research provider and blog network for social and mobile app developers, in a cash and stock transaction valued at $14 million. Inside Network’s properties include the widely-read blogs Inside Facebook, Inside Social Games and Inside Mobile Apps; the Inside Social Apps conference; and the research products AppData, Inside Virtual Goods, and the Facebook Marketing Bible. The company’s six full-time employees in Palo Alto will join WebMediaBrands. During the last several years, WebMediaBrands has built up a strong portfolio of social media-focused news sites and conferences. With this acquisition, it will now arguably be the leader in the social media news market, especially when it comes to Facebook-specific news.

On May 9th, Zynga acq-hired Ricardo Quesada and Rolando Abarca, key contributors to the popular Cocos2D open source games engine for iOS. Cocos2D is widely used by small developers as well as larger players, such as Atari, ngmoco and Gamevil, in the development of mobile games for iPhone, iPod Touch, iPad and Mac. Terms of the deal were not announced. Zynga is continuing to build out its presence in the mobile games space through a combination of recent hires and acquisitions including last month’s purchase of UK mobile developer Wonderland Software and the acquisition of mobile developer Floodgate Entertainment in March.

On May 6th, News Corp’s IGN Entertainment announced the acquisition of Hearst’s UGO Entertainment, expanding its reach over online videogame news. IGN will now operate its existing properties along with UGO.com, 1UP.com and UGO’s entire network of owned and affiliated properties. Together, the properties reach a global audience of more than 70 million monthly visitors. The acquisition comes as rumors continue to heat up that News Corp is preparing to spin off IGN as a separate company during the next few months. The business is growing rapidly and is expected to bring in $10 million in profit this year on revenue of $100 million.

On May 3rd, Electronic Arts announced the acquisition of Firemint, a leading mobile game developer based in Melbourne, Australia. Firemint is the developer behind popular games such as Flight Control and Real Racing for the iPhone and iPad. The 60 person company was founded in 1999 by CEO Robert Murray, and will now become part of EA Interactive, the division of Electronic Arts focused on digital business that includes EA Mobile, Pogo and social gaming outfits like Playfish. EA also simultaneously announced the acquisition of Mobile Post Production, a specialist in cross-platform development and porting of games for smartphones. Terms of the deals were not disclosed.

Games Investment Activity
Wooga, a leading German social games company, landed a $24 million round of funding led by Highland Capital Partners, Tenaya Capital and existing investors Balderton Capital and HV Holtzbrinck Ventures. Founded in 2009, wooga launched its first free-to-play brain training game, Brain Buddies, when the team was just five people strong. Today, the company employs a team of 85 people in Berlin and is the third largest social games developer on Facebook with 30 million monthly active users. The team has created a number of popular social games, including Monster World, Diamond Dash and Bubble Island. The investment was announced on June 1st.

Austin-based games developer Portalarium raised a second round of financing from m8 Capital in the UK and Peter Thiel’s Founders Fund, bringing the total raised by the company to $3.6 million. Portalarium was launched by Richard Garriott, the well-known game developer who sold his two previous companies: Origin, sold to Electronic Arts in 1992 and Destination Games, sold to NCsoft in 2001. In the past year, the company released two games, Port Casino Poker and Port Casino Blackjack, which were created to quickly build out its backend technology and start interconnecting a player network across platforms and social networks. The funding comes just as the company is gearing up for the launch of a brand new and unique social media game. The investment was announced on June 1st.

Kabam, one of the leading developers of hardcore social games, raised $85 million in Series D financing led by Google Ventures and Pinnacle Ventures. The company has grown from 25 to over 400 employees in the past 16 months on the strong performance of its Facebook game lineup, Kingdoms of Camelot, Dragons of Atlantis, Glory of Rome and Global Warfare. Kabam’s user base of 7.2 million monthly active users is a fraction of Zynga’s 250 million, but Kabam’s users spend significantly more time and money playing its games than typical social games users. With the Series D investment, Kabam is expected to continue to expand its games portfolio, further international growth (particularly in Asia) and make additional acquisitions. The investment was announced on May 26th and comes just four months after the company raised $30 million in a Series C round in January 2011.

Peak Games, the largest and fastest-growing social gaming company in Turkey, Middle East and North Africa, raised $5 million in Series A financing led by German venture firm Earlybird Venture Capital. The company has 10 million monthly active users through a mixture of original IP, including Okey, the most popular game in Turkey, Okey Plus and Ikon Kiz (FabGirl), and licensed games such as Komsu Ciftlik. Part of Peak Games’ success has been driven by how the company reaches underserved markets with localized and culturally-specific games that employ strong engagement and monetization strategies. The investment was announced on May 25th.

Finnish social games developer Supercell raised $12 million in a funding round led by Accel Partners. Klaas Kersting, founder of German browser-game giant Gameforge also invested in the round, as did London Venture Partners, one of Supercell’s previous investors. Supercell is developing titles for gamers who want online browser-based games that are bigger in scope than the most social games, but less involved than massively-multiplayer games. The company’s first game, Gunshine.net, came out of closed beta in May and grew rapidly from 30K to 350K monthly active users during the month. The company is led by Ilkka Paananen, who previously founded Finnish mobile games developer Sumea and sold the company to Digital Chocolate in 2004. The investment was announced on May 25th and represents Accel’s second financing this year of a Finnish games company. In March, Accel co-led a $42 million round in Finnish mobile developer Rovio.

CrowdStar, a leading social games developer, closed a $23 million round led by Intel Capital and Time Warner with participation from China’s The9 and NVInvestments. CrowdStar is the fifth largest social games developer on Facebook with 29 million monthly active users. Its most popular games include It Girl, Happy Aquarium and Happy Pets. The company currently has over 100 employees and will use the funding to double headcount this year as well as grow through acq-hires in the mobile and social gaming spaces. CrowdStar has never before taken in institutional funding and previously funded all of its growth through operating profits. The investment was announced on May 23rd.
Canadian mobile games publisher Fuse Powered raised $2 million from BlackBerry Partners Fund and NFQ Ventures. Fuse is a mobile game publishing company formed in 2009, with a focus on maximizing customer value and game discovery through the use of propriety tools and real-time analytics software. Fuse offers analytics tools to support its mobile development partners, such as a real-time game performance dashboard and data-driven business plans. The company will use the investment to expand staffing, technology infrastructure, partnership support and business development. The investment was announced on May 19th.

London-based online games publisher We R Interactive raised $5 million in funding from private investors including Paul Fitzsimons, ex-media sector partner at Apax Partners and Elio Leoni-Sceti, former CEO of EMI Music. The company’s debut game, I AM PLAYR, is a point-of-view soccer game that allows users to experience life through the eyes of a professional soccer player. It fuses live action video, interactive story-telling and first-person perspective game play to create an original narrative, where the storyline is dictated by the user’s decisions and actions both on and off the field. The investment was announced on May 13th.

Social games developer Funzio closed a $20 million Series A round led by IDG Ventures and China-focused investment firm IDG Capital Partners. The company launched its first game, Crime City, in September 2010, which quickly became one of the top Facebook games of the year with 7 million monthly active users. Building on the success of Crime City, Funzio plans to use the funding to triple its team this year and scale its business so that it can launch games faster and develop them in parallel. The investment was announced on May 10th.

Row Sham Bow, an Orlando-based game development studio creating games for social networks, raised $3 million in funding from early-stage venture capital firm Intersouth Partners. The company was established by Philip Holt, who was previously VP, President and GM of EA’s Tiburon studio and SVP of Product Development for THQ, and Nick Gonzalez, who also spent time at EA’s Tiburon studio. The investment was announced on May 9th.

Cerca Trova Advisors
Cerca Trova is an investment banking and strategic advisory firm focused on opportunities in technology, mobile and digital media including gaming and interactive entertainment. We provide M&A advisory, capital raising and strategy consulting services to companies at all stages of development. Our principals are experienced M&A practitioners and industry insiders with deep domain expertise and decades of experience working with both established and growing companies and a clear understanding of the issues and challenges that they face. Cerca Trova has offices in San Francisco, Helsinki and Beijing. www.cercatrovaadvisors.com

The global market for social networks will surpass $5 billion by 2015 according to Parks Associates. The firm also stated that more than 250 million people currently play social network games every month.

On March 18th, we posted some data from Business Insights that predicted the market at $4 Billion by 2015.

According to a new Business Insights report called The Future of Social Gaming:

  • As of 2010, there were almost 600 million social gamers
  • China made the greatest contribution to total player numbers in 2010, with 109  million players
  • The US was second in total players in 2010, with 95 million
  • By 2015, they expect the number of players in China to reach 273 million
  • By 2015, they expect the number of players in the U.S. to reach 150 million
  • The global social gaming market was worth just under $1.5 billion in 2010, and is forecast to reach almost $4 billion in 2015
  • The most important market is the US, with revenues of $670 milion expected to grow to $1.2 billion in 2015
  • Japan is in second place, with a $180 million market that is forecast to reach $570 million in 2015
  • The Big Four leading games developers – Zynga, EA, CrowdStar and Playdom
  • Zynga is far larger than its competitors, with 195 million active users across its titles, compared to second-placed EA’s 39 million active users

There is a lot of interest in what the average ARPU and ARPPU is in social games and I thought it would be good to link to some articles and blogs that define the numbers and give insight into what we use:

Lightspeed Research put out new data on social games. Here are some of the findings:

  • 58% of the social network users surveyed had played a social game, with 68% starting to play in the last year and 12% in the last month.
  • Of social gamers, 17% considered themselves ‘addicted’ to social games
  • 59% of social networkers have up to 10 friends playing the same social games as them
  • 11% have also invited strangers to play games with them
  • 36% of the total respondents cited being invited by a friend as the reason they started playing social games
  • 16% started playing social games by reading a friend’s newsfeed
  • 18% started playing social games by reading a friend’s recommendation
  • 29% play social games daily
  • 67% play one to two different social games at least once per week
  • 10% play five or more different social games at least once per week
  • 24% play several times per day
  • 67% play for up to an hour per day
  • 24% play up to two hours
  • 10% play for two hours or more
  • People aged 55-64 play more frequently than 18-34 year olds
  • 68% play social games for fun
  • 26% play to compete with friends
  • 20% play to relieve stress
  • Men are more likely to play to compete with friends (28% vs. 23% of women)
  • Women are more likely to play for fun (71% vs. 66% of men)
  • Men are also more likely to say they play to connect with others (17% vs. 9% of women)
  • 17% of social game players have played on their mobile
  • 23% for 18-34 year olds have played on their mobile

Monetising social games

  • Many social gamers are motivated to interact with brands to get rewards for their games
  • 34% have responded to some kind of marketing activity to get game rewards
  • 18% have clicked on an advertisement or offer to get rewards
  • 14% have signed up to a newsletter or a new game
  • 10% have signed up for a free offer
  • 3% have signed up for a new credit card for game rewards

According to an article in Adweek, the value of a Facebook fan is $3.60. Vitrue, a social media specialist agency determined that a fan base of 1 million is equal to $3.6 million in equivalent media over a year.

Vitrue analyzed Facebook data from its clients – and found that marketers posting twice daily can expect ~60 million impressions per month through their news feed (not uniques).

With a $5 CPM, 1 million fans generate about $300,000 in media value each month.