Casual Games; A Strategic Review Of The Sector

Avista Partners

 Key growth factors  Fundraising  Mergers & Acquisitions  Valuation V l i  The Holy Grail in Online Games  Trends & opportunities 2

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 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 ▪ Low production costs for casual games L   d i    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 4

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Investors focus on companies that have the  potential to meet the following: Content

 Great games

Diversified Portfolio

 Multiple games in back catalog and pipeline

M Monetization ti ti

 Fast g growing gp profitability y driven byy g game/subscription/ p virtual items revenues, advertising revenues (in-game or in-site) and search revenues

Technology Platform

 Strong platform required to sustain high quantities of customers

Management g

 Management teams require strong experience in internet, game or entertainment sectors 5

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 

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  Network Game Interaction $10m Net ork Game Interaction $ 0m

Note: up to 15 July 2007; deals for 2007

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Total Deal Value (USD$ millions) 280 0 280.0

Total # of Deals 40

266.1

260.0

36

240.0

34

220.0

35 30

200.0 180.0

167.7 6

25

160.0 135.9

140.0 120 0 120.0

16

102.0

15

15

100.0 97.5

80.0 60 0 60.0

20

10

50.0

8

39.7

40.0

3

20.0

3

5

11.2 2

0.0 2000

2001

2002

0 2003

2004

2005

Year Note: up to 15 July 2007.; deals where value is undisclosed are not included in total value but are included in # of deals

8

2006

2007

Avista Partners

VC firm fi

# off d deals l

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 Millenium Technology Ventures

3 3

WPP related companies

3

108 VC’s/ Strategic Investors invested to date 108 VC s/ Strategic Investors invested to date 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

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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%

C Casual lG Game P Publisher bli h

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%

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

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 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 11

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Date Jul-07 Jul-07 Jun-07 Apr-07 Mar-07 Feb-07 Feb-07 Jan-07 Jan 07 Jan-07 Nov-06 Nov-06 Oct-06 Sep-06 Sep-06 Aug-06 Aug-06 Aug 06 Aug-06 Jul-06

Acquirer Popcap CMP Technology Liberty Media Eidos Electronic Arts Vivendi Games Google MumboJumbo Gigamedia Realnetworks Demand Media Boonty Sony Spill Group Fun Technologies Fun Technologies Viacom GaiaX

Target Retro64 How Machines Work Fun Technologies (47%) Bluefish Media Neowiz Wanako Games Adscape Media Ritual Entertainment TC2N Atrativa Intermix assets Gamehub Gamepot (27%) Zlong Games (majority) CDM Fantasy Sports Teagames Atom Entertainment APE Inc.

Transaction Value na na $99.3m na $105m (19%) na na na $22.9m (40%) $3.8m na na $22m na $10m na $200m $1m

EV/ Revenue

EV/ EBITDA

4.8x 4.0x

15.0x

1.3x

18 deals to date in past 12 months worth over $460m

Note: up to 15 July 2007

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Total Deal Value (USD$ millions) 360 0 360.0

340.2 17

2007 is trending to over $400m in  deals for full year

340.0 320.0 300.0

Total # of Deals 18 16

280.0

14

260.0 240.0 220 0 220.0

12

227.2 207 0 207.0

208 3 208.3

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

3

60.0

2

40.0 0.0 2000

2

1

20.0 1999

4

3

2001

0.0

00 0.0

2002

2003

0 2004

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

2005

2006

2007

Avista Partners

Acquiror Fun Technologies Electronic Arts Realnetworks Shanda Big Fish Games Media General Viacom ((Atom Entertainment)) Popcap Gigamedia Vivendi Games

# of deals 6 4 3 2 2 2 2 2 2 2

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

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 Pure casual game M&A l 

Oberon, Bigfish, Popcap have been the most acquisitive

 Various potential giants may acquire V i   i l  i     i 





Video game publishers 

EA has a dedicated casual business now & has Pogo com 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

M di / E Media/ Entertainment Conglomerates i  C l 

MTV Networks/Viacom acquired Atom Entertainment



Time Warner/ AOL acquired Games.com / q

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Avista Partners

 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

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Date

Acquirer

Target

Transaction Value

EV/ Revenue

EV/ EBITDA

Jun-07

Liberty Media

Fun Technologies (47%)

$99.3m

4.8x

na

Mar-07

Electronic Arts

Neowiz

$105m (19%)

4.0x

15.0x

A 06 Aug-06

F Technologies Fun T h l i

CDM F Fantasy t S Sports t

$10 $10m

13 1.3x

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

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

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 company? What are VCs looking for in an online game compan ? 

For VCs, the question is this:   What type of online game business should I look to  h f l b h ld l k

invest in?  

A d th  l And the large media companies ask:    di   i   k   Which online game companies should we look at 

acquiring?  21

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What is the Holy Grail in  y

the future of online  g games? 

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

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 h d d h k  WOW’s eight or nine million subscribers pales in comparison to 

the over 50 million users worldwide who play Maplestory p y p y from  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. 

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Avista Partners

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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   25

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Avista Partners

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.  

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Avista Partners



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  h l ( d idl i ) b fd l d bl game publishers and developers  For instance, I For instance  I’m amazed by how many puzzle games  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

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).   Plus simple way to make friends, find friends, invite friends, and play with  Pl s simple  a  to make friends  find friends  in ite friends  and pla   ith  friends.   Mix of different types of advertising, including both onsite banners and  in‐game promos or product placement.  d l 

myspace



skype

maple

youtube

story

habbo hotel

Holy  Grail

y p 1st g game website that offers all the key features of this mash‐up will  indeed be the Holy Grail of online games.   Forget about 10 million or even 50 million users.   Look for 100 million registered users for one game website L k f     illi   i d   f       b i 28

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 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

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Avista Partners

 Acquire or Be Acquired  Raise money to grow and/or acquire  Build D2C business on own websites with a focus on community B ild D C b i       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  Localize sites for key Non‐English countries L li   it  f  k  N E li h  ti  Outsource selected development pieces overseas  Develop game widgets for social networks ie. Bunchball 31

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Paul Heydon Managing g g Director Avista Partners Tel: +44-203-178-6866 Email: [email protected] Web: www.avistapartners.com

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Avista Partners





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.

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