Global Video Games Fundraising, Investment, M&A and JV Review

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Contents

Video games market trends: fundraising, investment, M&A and JV opportunities Video games market analysis – Console – Massively Multiplayer Online (MMO) – Casual/Social Online – Mobile – Online gambling and skill based – In-game advertising About IBIS Capital

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Market trends: fundraising, investment M&A and JV opportunities

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000 90.000 50.000 30.000 50.000 10. getting bigger and changing Pure console* remains the largest low growth sector.000 0 2005 2006 2007 2008 2009 North America EMEA 2010 Asia Pacific 2011 Latin America 2012 2013 2014 Source: PWC (excludes hardware revenue) * Note: Pure console excludes MMO † 4 Note: Online includes MMO.The video games industry is big.000 40.000 20. online† and mobile drive market growth Global Video Game Sector Revenue ($M) 100.000 70.000 90.000 0 2005 2006 2007 2008 Console games 2009 Online games Mobile games 2010 PC games 2011 In-game Advertising 2012 2013 2014 Asia Pacific and Europe to pass North America driven by higher online and mobile growth rates Regional Video Game Market Revenue ($M) 100.000 60.000 30.000 40.000 80.000 60.000 70.000 10.000 80. casual and social games .000 20.

IGN. PS2. VideoGaming247. Digital Battle. LA Times. News Limited.biz. Gamesindustry. Newsday. NTV. PS3: $15-30m Next console cycle: ? Strong development project management is crucial Marketing costs are substantial Equivalent to development cost or higher Retail. The Ledger. revenue and risks are accelerating Investment per game is accelerating Average game development costs are growing Xbox. GameSpot. Gamecube: $3-5M Wii: $5-7M XBox360. Gamasutra. Wired Note: Development Cost excludes marketing and distribution 5 G ra nd Ca l Th ef t Video games rivalled Hollywood in 2009 Re d n' s . VGChartz. distribution and hardware royalties are significant 30-40% of retail turnover 500K to 1M units just to break even (ex-overheads) Console games are hit driven. Mainichi Shinbun. IndustryGamers. MontrealTechWatch.Console game costs. IDC. GameSpy. Gamezone. Forbes. Companies. mobile and next console cycle As sa ss i Development Cost ($M) Sales (M Units) Franchises selling tens of millions of units are lower risk 250 But failed games can be deadly 2001 Daikatana – ION Storm Dallas closed 2004 Malice – Argonaut into receivership 2008 Hellgate – Flagship into receivership 2008 Haze – Free Radical into receivership 2009 Tabula Rasa – NCSoft closes $69M MMO after 15 months sales following 7 year development 2009 Duke Nukem Forever – Take2 closes 3D Realms without any game release following 12 year development Global Unit Sales (M) 200 150 100 50 0 Mario Pokemon Tetris The Sims Need for Speed Final Fantasy Grand Theft Auto FIFA Madden NFL Legend of Zelda Sources: Companies. with investment no guarantee of success 120 100 80 $M 60 40 20 0 n ho ld IX lo fD ut y: M W 2 St ee l Cr ac kd ow Cr ee d la ne o ue St ra ng le Sh en m Au to Ha l as y IV 3 t 18 16 14 12 10 8 6 4 2 0 M Units Lo st P Fi na lF an t Hardware: $22B Revenue Software: $55B Revenue Total $77B video games vs $85B film global revenue Up to $60 per game sold vs $10-20 per cinema ticket/DVD Video games growth to be driven by online. Time Magazine.

micro-transactions. micro-transactions Bigpoint: free. Bigpoint. PS3 quality) Console/PC Supported by profitable business models Best companies growing revenue 100%+ annually while also generating 20-30%EBITDA margins App Store: free to $10 per game WoW: $12.Online/mobile games are growing and fragmenting the market Online*/mobile growing scale and share 2009 $19B revenue = 32% share of total video games 2014 $44B revenue = 50% share of total video games As consumer markets fragment Wii grew Casual Console market (60M+ Wii’s sold) Apple grew Casual/Social Mobile market (3B Apps sold) WoW grew Hardcore Online market (11.com grew Casual Skill Web market (20M players) Bigpoint bridged Casual to Hardcore online market (web delivery. parallel game development business platforms (not “one game” hit driven companies) Multiple distributors (not just Facebook) Rapid. Companies. Spil. casual and social games 6 . low cost game development and continuous daily redevelopment cycles for rapid market response Fast failure (cut commercial losers.99 monthly fee Spil: free. advertising supported Zynga: free.99-$14. subscription and in-game item sales (microtransactions). back commercial winners) Sources: PWC. no advertising Casual Gamers Hardcore Gamers Web/Mobile And requiring different skills and approaches Multiple.5M+ subs) Zynga. Playfish. no console. Casual Gaming Association. no downloads) Onlive hopes to expand Casual to Hardcore markets across TV and web (digital delivery. lead generation King. PS2 quality. TechCrunch *Note: Online includes MMO. Yahoo! grew Casual/Social Web market (200M players) King.com: rake of user bets.

GfK. better games” Ubisoft: new franchise refresh “every 12-18 months” 120 100 80 60 40 20 Global Video Games Private Fundraising $1.200m $1. NPD Group. motion capture etc) 80 70 60 50 40 30 20 10 0 1998 1999 2000 Global Video Games M&A 3. Activision Blizzard. Charttrack. high risk market has lead to many independents struggling to adapt and survive 0 Funds raised Number of investments Fundraising remains robust for the right pitch Casual/Social MMO Mobile/iPhone Educational Digital distribution Niche (geography/culture) console games Video games technology (3D game engines. drive digital (Playfish acquisition).With investment dynamics entering a new phase Majors focus on franchises. but risking declining long term growth: Activision Blizzard: 75% revenue from franchises.000m $800m $600m $400m $200m $0m 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 With negative impact on independents Independents rely on advances and third party work from majors Narrower major focus = fewer advances and less third party work “Fewer. with “select few new properties” EA: “fewer & bigger” hits in core. competition and risk for independent releases Hit driven. similar to filmed entertainment Majors adopting similar strategies to maximise short to medium term earnings.500 1.000 2. digital and cost Highest game sales come from existing franchises Retail market increasingly hit driven with downward retail volume and margin pressure. Companies Note: Funds raised/transaction value only includes disclosed amounts Transaction Value ($M) Number of Transactions 7 .500 2.000 1.000 500 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Quality consolidating M&A set to rebound Consolidation of major publishers and online (EA/Playfish) Consolidation of major media and online (Disney/Playdom) Consolidation within crowded casual/social market Consolidation of offline and online gambling Sources: CapitalIQ (excludes Vivendi Activision and Vivendi Universal Publishing deals). bigger” hits for majors increases investment per game. manage costs THQ: “fewer.

Deal activity is being driven by subsector consolidation Consolidation Curve for Video Games Sector Consolidation High Sector Launch Sector Growth for Scale Sector Consolidation Sector Equilibrium Console MMO Online gambling Medium Skill based In-game Advertising Casual/Social Mobile Low . high return) . medium return) .Alliances or spinoffs Expected Deal Activity* * Note: some outlier deals may occur (e.g.Leveraged buyouts (medium risk.Limited M&A/ investment (low risk. low returns) . large scale strategic M&A (high risk. low returns) .Low volume. medium return) . midmarket strategic M&A .VC Investment (high risk.Growth equity investment (medium risk.High volume. Massive/Microsoft In-game advertising deal) 8 .Some small M&A .Cost focus .

With clear investment. value destroying M&A Limited organic investment due to small market size 9 . value destroying M&A Focused new IP investment in extending skill based model to core franchises In-game Advertising Small strategic M&A Avoid large. value destroying M&A Focused new IP investment in non-fantasy MMO market growth Focused new IP investment in casual/ social subscription/ microtransaction MMO market JV with major media for licensed MMO marketing/ investment Casual/ Social Invest in growth capital game fund Mid-market strategic M&A in subscription /microtransaction market Avoid large. M&A and JV Opportunities Console Core franchise organic investment Limited new IP investment until 8th generation consoles Avoid large. low cost mobile game development JV with major media for licensed mobile games marketing/ investment Online Gambling Avoid due to distance from core video games competencies Skill Based Invest in growth capital game fund Mid-market strategic M&A Avoid large. value destroying M&A Focused new IP investment in parallel. M&A and JV opportunities For Major Video Games Companies Sector Investment. value destroying M&A Focused new IP investment in parallel low cost subscription/ microtransaction game development JV with major media for licensed casual/social marketing/ investment Mobile Invest in growth capital game fund Small strategic M&A Avoid large. value destroying M&A Acquire economically challenged AAA independents to control internal costs JV with major media for licensed games/ marketing investment MMO Invest in growth capital game fund Mid-market strategic M&A Avoid large.

downloadable content. M&A and JV opportunities (cont) For Independent Video Games Companies Sector Investment.With clear investment. M&A and JV Opportunities Console Organic investment (if possible) Exit to major video games company JV with major media for licensed games/ marketing/ investment Restructure to focus on self publishing. casual/ social or mobile markets. with parallel development and low cost/ offshoring MMO Organic investment for new IP in nonfantasy MMO market growth (if possible) VC fundraising for casual/social subscription/ microtransaction non-fantasy MMO market Growth equity buyout for casual/social subscription/ microtransaction MMO market JV with major media for licensed MMO marketing/ investment Casual/ Social VC fundraising for subscription/ microtransaction market Growth equity buyout for subscription/ microtransaction market Exit to major video games/ media company JV with major media for licensed casual/social games marketing/ investment Mobile VC fundraising Exit to major video games company JV with major media for licensed mobile games marketing/ investment Online Gambling VC fundraising for online gambling technology and niche/ geographic online gambling Growth equity buyout for gambling technology and niche/ geographic online gambling LBO for large generic gambling franchises JV with major media for licensed marketing/ investment Skill Based Growth equity buyout Exit to major video games/ media company JV with major media for licensed marketing/ investment In-game Advertising VC fundraising Exit to major video games/ media company 10 .

M&A and JV opportunities (cont) For Venture Capital and Private Equity Firms Sector Venture Capital Investment Opportunities Console Avoid pure console investments due to risk profile and sector consolidation MMO Invest in casual/social subscription/ microtransaction non-fantasy MMO market Avoid hardcore MMO market due to risk profile Casual/ Social Invest in casual/social subscription/ microtransaction market Avoid pure advertising supported market because of business model Mobile Invest in parallel. low cost mobile game development Online Gambling Invest in online gambling technology providers Invest in niche/ geographic online gambling franchises Avoid generic gambling franchises due to sector consolidation Growth equity buyout of online gambling technology providers Growth equity buyout of niche/ geographic online gambling franchises LBO of large generic gambling franchises Skill Based Selective investment in new niches Avoid investment in already consolidated parts of the sector In-game Advertising Invest in ingame advertising technology Avoid in-game advertising agencies due to business model Private Equity Buyout Opportunities Avoid pure console buyouts due to risk profile and sector consolidation LBO in hardcore MMO market Growth equity buyout in casual/social subscription/ microtransaction MMO market Growth equity buyout in casual/social subscription/ microtransaction market Avoid pure advertising supported market because of business model Develop sector relationships in anticipation of sector maturity Growth equity buyout Develop sector relationships in anticipation of sector maturity 11 .With clear investment.

M&A and JV Opportunities Console JV with major/ independent video games companies for licensed games/ marketing/ investment Strategic M&A of independent studios to build internal capability for significant IP portfolios and leveraging marketing platforms MMO Invest in growth capital game fund JV with major/ independent video games companies for licensed MMO marketing/ investment Mid-market strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid large. value destroying M&A Casual/ Social Invest in growth capital game fund JV with major/ independent video games companies for licensed casual/social games marketing/ investment Mid-market strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid standalone organic investment due to different core competencies Mobile Invest in growth capital game fund JV with major/ independent video games companies for licensed mobile games marketing/ investment Small strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid standalone organic investment due to different core competencies Online Gambling JV with independent online gambling companies for licensed online gambling marketing/ investment Avoid organic investment and M&A due to different core competencies Skill Based Invest in growth capital game fund JV with independent video games companies for licensed marketing/ investment Mid-market strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid standalone organic investment due to different core competencies In-game Advertising Small strategic M&A to build internal capability for significant IP portfolios and leveraging client relationships Avoid large.With clear investment. M&A and JV opportunities (cont) For Major Media Companies Sector Investment. value destroying M&A Avoid standalone organic investment due to different core competencies 12 .

Console Sector 13 .

Companies * Note: Pure console excludes MMO games 14 . as consoles sold at a loss. casual/social online and mobile games marketshare The launch of Apple’s iPad and imitators may change the console market in ways that are likely to be greater. followed by the Xbox360 at 35% and PS3 at 18% Market forecast of $37B revenue by 2014. fuelled by North American and European growth from anticipated 8th generation platforms (2014-2016). AsiaPacific growth limited by piracy and high share of MMO/casual/social online games Console games profits for Sony/Microsoft come from software.Console games have driven the video games market A consolidated sector driven by hardware cycles Wii dominates current 7th generation consoles with 47% of global platform revenue. but take much longer to occur. than anticipated Digital downloadable content and game delivery reduce likelihood of a 9th generation console cycle. creating potentially significant long term issues for Sony. The lower cost Wii has generated hardware profits for Nintendo Software pureplays can be highly profitable. but decline in packaged goods retail sales led to losses for many firms in 2009 8th generation console cycle forecast to drive growth. Nintendo and GameStop $40B $35B $30B $25B $20B $15B $10B $5B $0B 2005 Worldwide pure console* software market 2006 2007 2008 2009 EMEA 2010 North America 2011 2012 2013 2014 Asia Pacfic Latin America The console market has gone through 7 overlapping platform/technology cycles 1st generation 1970 1975 1980 3rd generation 1985 1990 4th generation 7800 5th generation 1995 2000 6th generation 7th generation 2005 2nd generation 2600 Colour TV game 5200 Sources: PWC. but such growth is likely to be constrained by growing MMO. Microsoft.

BioShock 2 was developed for Take-Two by inhouse and outsourced developers Inhouse: 2K Marin. although Take-Two sold its distributor Jack of All Games to Synnex in 2009 Shift to digital distribution likely to reduce the role of physical distributors in the medium term Digital distribution growing through Xbox Live Arcade. motion capture. with almost half of all sales in Q4 Sources: Companies. Playstation Network. 2K Australia. major publishers are reducing the number of games published Project management is provided to manage quality control and risks Distribution Physical distribution Digital distribution Retail negotiation Major publishers often distribute their own games. advertising and technology assistance provided Game bonders increasingly carry completion risk Console manufacturers charge publishers a royalty for each game manufactured at time of manufacture Publishers carry inventory risk Due to increasing marketing budgets and consumer focus on hits. Wii Ware and major independent distributors such as Valve’s Steam Independent publishers rely on third party distributors such as Synnex and Ingram Micro Retail Physical retail Web retail Downloadable content Physical retail continues to be challenged by web retailers such as Amazon Retailers such as market leader GameStop make more profit from used than new software sales Used sales cannibalise new sales Majors using downloadable content to combat used market Downloadable content share growing with fast broadband Downloadable add-on game modules generate post-launch sales Retail remains highly seasonal. with royalties after agreed sales target reached Technology providers license game engines. 2K China Outsourced: Digital Extremes (multiplayer) Arkane Studios (level design assistance) Publishing Financing Manufacturing Marketing Major publishers and banks finance game development Ancillary services such as market research.But its mature value chain is changing Changes in industry dynamics impact all stages of the value chain Development Inhouse development Outsourced development IP & technology licensing Majors have multiple inhouse game development studios globally Independents receive advances from Majors for game development to cover costs. Credit Suisse 15 . facial animation etc Third-party independent studios often used for licensed IP games and assistance on in-house development For example.

Fast Company. Mergermarket. PatentGenius.com 16 .7% stake Activist Carl Icahn has already forced Board changes and may push for further corporate activity Independents open to exit Many independents would welcome an exit due to market conditions Independent Developer Sources: Sony.The console software market is still driven by major publishers Integrated Publisher Nintendo 3DS launch New 3D device without special glasses PS4 in 2014-16? Sony has announced development of an 8th generation console for potential launch in 2014-16 THQ cost cuts THQ asset sales (Big Huge Games) and staff cuts Niche Game Portfolio Diversified Game Portfolio Icahn Take2 13.

But sector economics are increasingly risky Publishers’ gross profit is approximately 1/3 of retail price VA T/Sales Tax 1 5% P ublisher Gro ss P ro fit 35% Retail M argin 25% Distributio n M argin 5% Hardware M anufacturer Ro yalty 20% For major AAA $60 retail console game.5 Units Sold (M) 2.5 3.0 2.0 1. 1-2M unit sales are needed to break even* 200 150 100 $M 50 0.5 -50 Retail Revenue Publisher Retail Profit Publisher Gross Profit Publisher Net Profit 1.0 * Assuming $25M development and $15M marketing spend 17 .

g. IFG) Second priority Reporting Cost reporting Due diligence. development progress monitoring and milestone approvals Specialist Auditor (e.And development financing is becoming like film financing Complex financing structures to effectively manage risks. Games Audit) Security interests in developer’s rights Sources: International Film Guarantors. Games Audit 18 .g. with significant transaction costs Royalties Co-pub/distribution agreement Parent Company/ Developer IP Milestone Approvals Publisher/ Distributor Game development and delivery of Gold Master Candidate Bank Borrower/Developer (via Special Purpose Vehicle) Loan of budgeted costs including transactional costs (payable per milestone) Development Completion Agreement First priority Completion Guarantee Agreement IP Completion Bond Guarantor (e.

a..a. 1. 1.So valuations reflect a mature industry in transition USD millions.33 37. THQ Inc.a.138 1.53 8.a.a.a.m.2% 85.a.0% 65. n. 1.a.5 x 11. n. The9 Limited Median Mean 15.9 x n. Median Mean 11.a.8% 73.8 x 6.9 x 4. 0.18 x n. 5.7% 54.1 x n.a.167 37.17 x n.8% 68. 6.a.20 x 1.0 x n.a.a. n. 11.4% 62.a. 1. except per share data Company US players Activision Blizzard. Square Enix Holdings Co.6 x n.m.4 x European players Atari Digital Bros SpA Future PLC Game Group plc GameLoft SA Ubisoft Entertainment SA Median Mean Median Mean 5.3 x n.a.60 x n. n. n.98 x 2.a.a.a.98 x n.a. n.2% 79.1 x n.81 x n. Inc.972 779 166 3.609 2. GameStop Corp.2% 113 24 85 352 351 881 12 65 18 (68) (25) (93) 125 89 103 284 326 788 n. n.a. n.25 1.01 x 1. n. 2. n.996) 15 (80) (158) 10. 5. n.m. 4. 2. n.4% 68.a.417 (138) n.a.6 x n.a.733 2.8 x n.2 x 4. n.2% 80.a. n. Nintendo Co.42 x n.a.49 x n. 7. 4.a.3% 939 1. Electronic Arts Inc.a. n.031 1.247) (799) (247) 811 894 2.a.5 x n. Sega Sammy Holdings Inc. n. n.1 x n. 2.m.20 x 1. 2.16 x n.a.a.42 x n.89 7. 3.8 x Price (13-Jul-10) % of 52 Week High Market Cap Net Debt Enterprise Value CY2008 Enterprise Value Multiples Revenue EBITDA CY2009 CY2010 CY2008 CY2009 CY2010 APAC players Capcom Co.1 x 5.a.a.21 x n.80 x n.a. Ltd.m. 3. n. n.62 x n.a.26 4. 0.a.a. Giant Interactive Group. 0.a.60 x 1.72 0. 3.a.03 4. n. n. n. n.a.4% 93.1% 50.26 x 1. Shanda Interactive Entertainment Ltd.78 87.a.a.206 23. n.37 1.44 x n.42 x 1. 4.1% 35. 0.6 x n.636 2. Ltd.33 40.a.14 4.a.08 x 2. n.935 3.9% 48.a.a.6 x n.70 9. 7.1 x 7.54 x n.a. 1.9 x 4. 0. n. n.a.a. n.97 296. 12.201) (930) (1.a.a. Inc. n.a.7 x n.16 19. n.995 2.4% 61.321 4. n.1 x n. n. n.7 x n.07 x n.a.5 x 13.20 15.073 2.979 2. n. Ltd.20 x 1.3% 42.a.a.0 x n. n. 4. 17.14 19.a. 6.m.a. 6. n. Namco Bandai Holdings Inc.08 x 2. 8. 2.68 x 2.a.342) (1. Konami Corp.9 x 4.a. n.a.m.a.44 x n. Take-Two Interactive Software Inc.4 x 4.78 x n.a. 5.a.42 x 0.a. 6.26 x 1.68 x n.5 x 11. 1.05 x n. n.216 109 (128) (742) (41) (960) (14.m. 4.45 x n.991 2.51 10.m.9 x 9. n. 6.9 x 8.a.4 x n. 5.64 14.62 x 1.a.a.94 x n.41 15.a.05 x 3. 0.m.26 x 1.a.3 x 5. 5.a.1 x 6. 1.7 x 7.27 71.3 x n.3% 65. 2.680 1.385 2. 0.a.a.a.9 x 8.01 x 1.7 x 6.a.a. n.2% 14.a. 2.53 x n.1% 87.957 859 324 (3.62 x 2.20 x n.46 x n.9 x Source: CapitalIQ Note: Calendarised to December year end 19 .a.63 x n. n.

a. Windows. UK based video games Increase development capabilities for games for developer of PlayStation Games Sony’s PlayStation platform Publishes software for the Mac. n. n. Ltd $7m 0.a. 21 May 09 $115m 0. and console games in Korea. and console platforms 22 Feb 10 n. Spy Hunter and Wheelman franchises The acquisition will allow Wigo Global to improve its competitiveness in game development 21 Dec 09 $43m 0. Develops online.a.a.a n. n.5x n.a. n.a. Mergermarket 20 . and Japan UK based developer and publisher of video games Revenue multiple 5.9x EBITDA multiple 12.a. n.a.a.a.5x n.a.a. North America. n. n.a. US-based marketer and distributer of video games US-based developer of video games such as “Doom” and “Quake” US-based developer of video games 24 Jun 09 n. n. 22 Apr 09 Wigo Global Co.a.2x n.4x Target description Video games publisher in South Korea Comments Wemade increased in presence in its core South Korean market by expanding beyond online games 05 Jun 10 Expansion in the South Korean market 04 Apr 10 (50%) 31 Mar 10 n. Switzerland based developer of video games 02 Mar 10 n. South-Korean based developer of games software Sources: CapitalIQ.a. n.a n. iPhone.a.In the advanced stages of consolidation Selected M&A Date Target Acquirer Deal value $58m (26%) 03 May 10 (65%) n. video. Mortal Kombat.a.a. The consideration for the acquisition will be used in part to pay down Codemasters’ £52 million ($79 million) debt Expand SouthPeak Interactive geographically into Europe IRP GmbH $4m n. The acquisition expands NgMoco beyond the mobile markets Synnex gains an established footprint in the video game hardware and software market as well as retaining distribution rights with the major publishers such as EA and Nintendo Id Software’s expertise in first person shooter games will compliment ZeniMax’s Bethesda Softworks’ division’s roll playing games such as ‘Fallout 3’ Warner Bros purchased the Midway assets out of bankruptcy and included the Joust.

Koei to hold 76% of game software for home use and the shares arcade games Sources: CapitalIQ. n.a.In the advanced stages of consolidation (continued) Selected M&A Date Target Acquirer Deal value $63m D3 Inc Revenue multiple 0.a.1x n. Mergermarket 21 .a. US-based developer of video games $85m 0.a.a.5x Target description Comments 09 Mar 09 Japan-based video game content Game portfolio expansion in its core Japanese developer market Developer of Video games including the Tombraider franchise Canadian-based video games developer South-Korean based developer of PC-based games The acquisition allows Square Enix to expand its games franchises to more focus on western markets Geographical expansion and the acquisition of 110 skilled game developers Geographic expansion into the development of games for the Asian market The sale of the majority of the company comes as Midway had a $800m debt due by the end of the year 12 Feb 09 $83m 0.3x Develops and sells computer In the new merged entity.4x neg 03 Feb 09 n.a.4x EBITDA multiple 5.a.8x 4.2% stake) 18 Nov 08 Mark Thomas (Private investor) $19m 0. 02 Dec 08 n. n. n. 02 Dec 08 (87. n.

With limited pure console focused investment
Selected recent private placements
Date Target Investor Deal value
$4m
Chart Venture Partners

Target description
Publishes augmented reality and entertainment games across platforms

Date
02 Oct 09

Target

Investor

Deal value
$23m

Target description
Designs, develops and publishes casual/PC video games Develops entertainment software and games for consoles, handhelds and PCs Develops and publishes video games for consoles and PCs Develops and publishes games that join consoles, PCs, mobile and the Internet Low cost, emerging market game consoles

26 May 10

17 May 10

One investor

$14m

Low cost, emerging market game consoles Driving game developer in the United Kingdom Low cost, emerging market game consoles

01 Aug 09

47 investors

$12m

13 May 10

$9m

06 Jul 09

$8m

30 Nov 09

$8m

21 May 09

n.a.

20 Nov 09

Socius Capital Group, LLC

$5m

US-based console software developer

19 Mar 09

n.a.

19 Oct 09

$6m

Provides a 3D game development tool

09 Mar 09

One investor

$6m

Low cost emerging market game consoles

Sources: CapitalIQ, Mergermarket

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And clear investment, M&A and JV opportunities

Firm Type Investment, M&A and JV Opportunities

Major Video Games
Core franchise organic investment Limited new IP investment until 8th generation consoles Avoid large, value destroying M&A Acquire economically challenged AAA independents to control internal costs JV with major media for licensed games/ marketing investment

Independent Video Games
Organic investment (if possible) Exit to major video games company JV with major media for licensed games/ marketing/ investment Restructure to focus on self publishing, downloadable content, casual/ social or mobile markets, with parallel development and low cost/ offshoring

Venture Capital
Avoid pure console investments due to risk profile and sector consolidation

Private Equity
Avoid pure console investments due to risk profile and sector consolidation

Major Media
JV with major/ independent video games companies for licensed games/ marketing/ investment Strategic M&A of independent studios to build internal capability for significant IP portfolios and leveraging marketing platforms

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Massive Multiplayer Online (“MMO”) Sector

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and is a significant profit driver for Vivendi The strength of the “fantasy” MMO market (>90% subscriptions market share) has prompted many copycat offerings. followed by up to 3 years of stability before an often sharp decline MMOs that rely purely on digital distribution tend to grow slowly MMO expansion packs help to manage churn and ongoing retail presence Poor launches are generally fatal: NCSoft shut $69M Tabula Rasa after only 15 months of sales and a 7 year development 0 Jan.Apr.000.000 Total Subscribers 20. subscription.Nov.2% EVE Online 1.000 Current Subscribers But MMOs are also hit driven and high risk Many retail MMOs have grown during their launch year. micro transactions (in-game currency commission and items) and advertising WoW customers pay $12. with 35+ males the largest player demographic There appears to be significant untapped potential for MMOs in other game genres.4% World of Warcraft currently skews the market World of Warcraft accounts for ~2/3 of subscriptions.Jul.M Dec.2% RuneScape 7.Feb.1999 2000 2001 2001 2002 2002 2003 2004 2004 2005 2005 ay.Mar.Aug. Companies *April 2008 25 .5% Lord of the Rings Online 0.Mar.The MMO sector is both high growth and consolidated The MMO sector is highly cash generative MMOs are video games with thousand of simultaneous players Business models are retail.Oct.000 10.2006 2007 2008 MMO subscriptions market share* EverQues t 1.99 monthly fees MMOs operate across all major platforms 30.Jul.8% Final Fantas y XI 3. MMOGChart (2008).3% Lineage 6.6% All Others 0.8% 5.6% World of Warcraft 62.Jun.99-14.Aug.000.Oct. suggesting a “Blue Ocean Strategy” approach to opening new genres (as with Nintendo Wii in the console market) APB from independent RealTimeWorlds attempted to expand a different MMO genre in 2010 following $50m investment Dofus 2.000 Market growth rates are forecast to accelerate There are currently over 15M paying MMO subscribers globally.M Dec.000 MMO subscriber growth forecast Regression Forecast 25.000.Sep.000 5.Jan.Feb1997 1997 1998 1998 ay.1% Lineage II 6.5% Sources: IBIS Capital.000.9% City of Heroes / Tibia Villains 0.000. with a strong presence in China and South Korea The MMO subscription market is forecast to reach 30 million by 2012 based on regression analysis of recent data 15.000.1% EverQues t II 1.

Companies 26 . IMDB.Yet remains an early stage market with evolving dynamics Warcraft 2011 film? Rumoured preproduction with “Saving Private Ryan” screenwriter Subscription/Micro-Transactions Ankama approaches? Rumoured approaches from financial and trade buyers Casual Hardcore Advertising Supported Jagex Game / Intergi Entertainment North American Alliance Intergi to handle North American sales Sources: MergerMarket.

but generally generate dollars less revenue • Hybrid “freemium” models such as Bigpoint are establishing a significant presence and delivering solid results. blurring the line between MMO and Free-2-Play / casual/social games Hundreds of millions of dollars Micro-transactions Pure Subscription / Time-based Hundreds of millions of dollars Hybrid retail sales and subscriptions Billions of dollars 27 . but require substantial development and marketing investment Tens of Advertising / • Free games are cheaper to develop millions of Marketing and market.And a clear hierarchy of successful business models Business models are solidifying Revenue Potential • Subscription-based models generate highest revenue.

a.a. and licenses multiplayer online games including EVE Develops and licenses MMO tech platform and develops third party racing games Undisclosed Angel investor $1m 16 Feb 09 $4m 22 Dec 09 4 investors $18m 07 Oct 08 Private investors including CEO $1m 15 Dec 09 $3m 25 Jul 08 $1m Sources: CapitalIQ. publishes. Target description Develops and operates online games in China Develops multiplayer games and platforms for iPhone Develops MMOs for console and PC Develops. in particular MMOGs Comments Expands product portfolio beyond Tencent Instant Messenger The acquisition is in line with KongZhong’s strategy to expand into the two fastest growing video games segments in China (MMORPGs and Mobile games) The acquisition will reduce risks in internal development of future online games and improve margins through the low-cost structure of Cryptic’s engine 19 Apr 10 15 Dec 09 $80m n.a. EBITDA multiple n.4x n. China-based developer of 3d MMORPGs 09 Dec 08 $75m 4. Target description Development and provision of online games. US based developer of massively-multiplayer online role playing games Selected private placements Date 08 Jul 10 Target Investor Deal value $4m Target description Asynchronous massive multiplayer online games for iPhone Develops multiplayer online games and entertainment Develops and operates online games in China Date 30 Nov 09 Target Investor Deal value n.a. Mergermarket 28 .The MMO sector is ripe for investment and M&A Selected M&A Date Target Acquirer Deal value $21m 29% Shanghai Dacheng Network Technology Revenue multiple n.a. produces and distributes MMOs for kids A worlds and MMO games production company Offers MMO games for casual gamers Publishes online computer games with a focus on virtual worlds 29 Oct 09 $4m 22 Mar 10 $20m 01 Aug 09 20 Jan 10 $20m 47 investors $12m 31 Jul 09 06 Jan 10 4 investors $3m Develops and publishes browserbased casual MMOs and social games Develops. n.a.

M&A and JV opportunities Firm Type Investment. M&A and JV Opportunities Major Video Games Invest in growth capital game fund Mid-market strategic M&A Avoid large.With clear investment. value destroying M&A 29 . value destroying M&A Focused new IP investment in nonfantasy MMO market growth Focused new IP investment in casual/ social subscription/ micro-transaction nonfantasy MMO market JV with major media for licensed MMO marketing/investment Independent Video Games Organic investment for new IP in nonfantasy MMO market growth (if possible) VC fundraising for casual/social subscription/microtransaction nonfantasy MMO market Growth equity buyout for casual/ social subscription/ micro-transaction MMO market JV with major media for licensed MMO marketing/ investment Venture Capital Invest in casual/ social subscription/ micro-transaction in non-fantasy MMO market Avoid hardcore MMO market due to risk profile Private Equity LBO in hardcore MMO market Growth equity buyout in casual/ social subscription/ micro-transaction MMO market Major Media Invest in growth capital game fund JV with major/ independent video games companies for licensed MMO marketing/ investment Mid-market strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid large.

Casual/Social Online Sector 30 .

Casual/social online games are growing extremely rapidly Casual/social online games have two primary forms Casual/social online games require little experience or time commitment. limited advertising Zynga (social): free. subscription and in-game item sale. Bigpoint) or via a social network such as Facebook (e. social networks. micro-transactions Casual/social game development costs of less than $500k are much lower than console game development costs Payers Women account for 74% of paying players Men 26% Women 74% Source: Casual Games Association. with simple rules and gameplay accessed through a web browser The primary forms of casual/social online games are: Casual: single player. in-game item sales (micro-transactions). $3B revenue 2009* >200m monthly unique players globally China and Korea generated $1B revenue in 2007 Casual/social games have a high proportion of paying female customer (74%) Popular casual games include: Bejeweled (PopCap Games) QQ Games Collection (Tencent China) Diner Dash (Playfirst) Popular social games include: Farmville (Zynga) Dark Orbit and Deepolis (Bigpoint) Pet Society (Playfish) Heaviest play times are 79pm and 11-2pm around lunch and dinner Casual/social gamers who pay for a subscription and/or are community users average 7-15 hours of online play per week Casual/social players vs payers Players Women account for 52% of casual/social game players Men 48% Women 52% With multiple business models Subscription and in-game item sales (micro-transactions) models most profitable Advertising supported models are cyclical. played either on a casual/social games platform (e. DFC Intelligence *Note: Casual Gaming Association includes casual/social games played on mobile. Zynga) Peak casual/social games hours The global market is high growth $2. iPhone. PC. advertising supported.g. Mac and Xbox LIVE Arcade platforms. lead generation Spil (casual): free.g.25B revenue 2007. played on a casual games platform such as Spil Social: multiplayer. with generally lower margins Bigpoint (browser “core” – between hardcore and pure casual gameplay): free. using different definitions to the earlier PWC definitions 31 .

design and development of a game Publishers Funding. Financial Times 32 . Companies. publishers and portals Tools & Technology Enable the creation and distribution of casual/ social games More SPIL acquisitions? SPIL acquired Onrpg.com to enter the MMO sector. distribution and project management Portals Casual/social game destination websites Aggregators Intermediary between developers. PaidContent. integrating around 100 casual games directly Sources: Mergermarket. TechFlash. Bigpoint and GameForge are subject to constant speculation about IPO or exit Google investment in Zynga Unconfirmed rumours of Google investing between $100 million and $200 million in Zynga Microsoft’s casual expansion Microsoft has boosted the video game-related capabilities of Bing. opening the door to acquiring other developers to extend its offering Disney and GameStop buys Disney buys Playdom for $763M and GameStop buys Kongregate Next after Playfish/Playdom? Zynga.Providing opportunities across the casual/social value chain Developer Creation.

high risk. not lower return project funding General Partners Source. VC A. high growth online/mobile video games companies are struggling to secure VC investment to maximise growth during the critical stage before industry consolidation Quality demand exceeds quality supply of investment and board representation Game Fund $75M funds committed 6 year fund lifetime 3 year investment period So a growth capital game fund offers substantial opportunity Growth capital game fund investing in online/mobile game companies. launches and commercialisation Online/mobile games require rapid. completely different to major publishers’ business cultures Major publishers are not investing significantly organically Major publishers are wary of large scale online/mobile video games M&A in early stage. parallel game development business platforms (not “one game” hit driven companies) Growth capital returns (>30% IRR.But there is a gap in online/mobile games investment Major publishers aren’t structured for online/mobile investment Major publishers’ core competencies focus on management of $20m+ serial. complex developments. C rounds and growth equity Both US and European focus General Partners with strong industry. fast moving online/mobile games sectors High quality. B. oversee and exit portfolio companies To profit from opportunities and manage risks in a complex market Say $75M online and mobile game fund. small scale parallel development platform investments. invest in. VC investment across video games in 2009 had dropped by 60% from its high point in 2007 due to general VC market weakness and limited knowledge and relationships across complex. fragmented markets where market dominance is not yet clear Game Fund Structure Limited Partners Financial investors and/or major strategic corporates Generalist VC video games investment is in decline Despite rapid market growth. not individual games Working capital and equity investments in multiple. financial and entrepreneurial track records Both strategic (major video game and media corporates) and financial Limited Partners Co-investment with Tier 1 VC/PE firms and/or Limited Partners for larger deals Market leading video games investment market analysis Follow-on fund sizes could be increased if outstanding returns delivered Portfolio Companies 33 . investing $25M+ per year Online/mobile video games working capital. 3-6X money multiple). multiple.

72 x 3.138 1.3% 50. 4.m.7% 48.995 5 90 19 126 0.73 x 0.45 x 8.838 2.a. 8.35 x 0.69 x n.8 x 5. IPVG Corp.49 x 2.a.9 x 7.a.05 x 2.3 x 7.991 5 127 14 461 (1.0 x 4.59 x 2.4 x 4.50 x 5. Median Mean Median Mean Price (13-Jul-10) % of 52 Week High Market Cap Net Debt Enterprise Value CY2009 Enterprise Value Multiples Revenue EBITDA CY2010 CY2011 CY2009 CY2010 CY2011 15.a.00 x 1..m.9% 70.00 x 1.41 x 1.6 x 5. 1.317 939 1.30 x 1.98 x n.64 2.3 x 5.29 x 6.5 x 5. 7. 7.1 x 3.3% 85 112 260 104 20 570 4.385 (29) (10) (28) (33) 9 (192) (1.996) (0) (37) 5 (335) 2.0 x 6.59 x n.07 x 2. 5.7 x Source: CapitalIQ Note: Calendarized to December year end 34 . 2.a.com Inc.34 x 1. n.3% 63. n.61 x 1.0% 42. 1.1 x 10.53 x 0.1% 62.56 x 1.22 x n.a.a. Playlogic Entertainment Inc.a.32 x 0.134) (274) (388) (1. 3. G5 Entertainment AB GigaMedia Ltd. RealNetworks Inc.16 97.a. n.2% 40.0% 4.3 x 5. 1. Shanda Games Limited Shanda Interactive Entertainment Ltd.3% 63.96 x 4.3 x 5.a.60 x 2.99 x 2.0% 49. InterServ International Inc.9 x 10.a.a.9 x n.1% 76..20 x n.04 x 2.03 0. Perfect World Co.a.73 x 0.9 x 8. 1.41 68.m.24 6.4 x n.78 x n.52 34.450 1. Ltd.0 x 2.4 x 7.a.72 x 1.a.20 3.64 3.1 x 5. 1.70 1. 0.29 0.a.3 x 0.a.a.38 40.54 x 1.4 x 5.m.3 x 7.14 0.47 x 2. n.4 x 5.a.28 1.451 1.With casual/social games helping larger company valuations USD millions. Kingsoft Corporation Limited Netease.8 x n.a. 16.2% 23.247) 56 103 233 72 29 378 3. 0. Ltd.1 x 4.213 1.98 x 1. n.a.0 x n.0 x 3.9 x n.38 x 1.0 x 5.0 x 4.07 x 2.22 x 0.30 x 0.5 x 5. n.2 x 10. 14.69 x 14.78 x 0.76 x n. except per share data Company US and European players Electronic Arts Inc.a.m. 0.1 x n. n.4 x 4.30 24.1 x n. n.98 x 2.97 x 2.7 x 4. 14.04 x 1. n.0 x 14. Median Mean Asian players Asiasoft Corporation Public Company Limited Astro Corporation Gamania Digital Entertainment Co. n.0 x 4.3 x 5.8 x n. n.04 x 1.1 x n.a.76 x 0.1 x 5.18 x 1.7% 61.10 x n.15 x n.61 x 1.71 0.04 x 3.1 x 3.4% 95.59 x 5.a.

a.a.a.a. designers. artists and engineers will join Playdom 26 Apr 10 n.a. a card game for playing cards with friend US-based social games developer Consolidation of the Australian casual games market The founders of Offbeat are joining Playdom in leadership roles.a.a.a.2M Revenue multiple n. MergerMarket. and iPhone platforms Lloyd Melnick. n. Inc n.a. Facebook and audio and video files Publishes games from casual game developers on PC. n. n. n. n.a. n. n.a. n.a. Target description Social games developer Comments Strengthen digital gaming portfolio. multiplayer Web-based fantasy The Challenge Games' 35 employees will join games Zynga’s workforce Enables online friends to converse privately over the Web.a. Challenge Games' Co-Founder will become US-based developer of Zynga' s General Manager and Vice President.a. 26 Feb 10 (Undisclosed stake) 24 Feb 10 Big Six Games. n. Companies 35 . US-based operator of a social networking site AOL disposed of Bebo after it acquired the company for $850m in March 2008 03 Jun 10 n. n. n.a.a. EBITDA multiple n. 08 Apr 10 n. n.a. n. n. n. The engineering team of Sharegrove will join and share Web pages. 26 May 10 n. n. Sources: CapitalIQ. Founder of Merscom and team of 20 producers.a. n.Generating substantial M&A Date Target Acquirer Deal value $763. acquire management and extend reach on social networks Facebook and MySpace Strengthens GameStop's digital platform and its strategy to be the gaming aggregator of choice 27 Jul 10 27 Jul 10 n.a. Australian-based casual games developer Offers massively multiplayer online and casual games on Facebook Develops FunCards.a.a. Social gaming platform 17 Jun 10 n. n.a.a. pictures.a.a.a. n.a. and the 12 developers and designers of Offbeat will join Playdom's existing 15-person Seattle studio Acquired an unknown minority stake to enter a high growth market Hi5 added several of Big Six's executives to its management team and strengthened its online games presence 03 Mar 10 n. console.a.a.

Generating substantial M&A (continued) Date Target Acquirer Deal value $80m Revenue multiple n.a.a.a. EBITDA multiple n. n. n. 05 Jun 09 Dreamwork net Co.a. US-based online social network 12 Jan 09 n. Boonty’s seller The acquisition will reduce risks in internal development of future online games and improve margins through the low-cost structure of Cryptic’s engine 09 Dec 08 $75m 4. $132m 8.a.a. Developer of free-to-play casual social games that can be played on social networking platforms Ireland-based publisher and developer of online games US-based provider of video game compression software.a.com. Mergermarket 36 . 09 Nov 09 $400m n.a. but at a price The deal improved Gamestop’s digital media business and helped it extend outside the US The acquisition was in line with Google’s strategy of pursuing innovation and video quality on the web The acquisition will allow the combined entity to provide a full suite of social advertising solutions for developers and advertisers The acquisition will allow Chengdu to expand its position in the fast growing online Chinese games market The acquisition will increase advertising revenue with a higher number of users 04 Nov 09 (Majority stake) 05 Aug 09 n. US-based developer and distributor of online casual games US based developer of massively-multiplayer online role playing games The proceeds of the sale will be reinvested into Café.a. n.a.a.1x n.a.6x 7.a.4x n. Target description Comments 12 Jan 10 US-based operator of online The combination of Shanda’s games and Mochi’s games advertising network for distribution platform will create a better online game developers.6x Chinese online game developer $10m n. advertisers game media platform and publishers US-based online social games The acquisition raised capital to fund growth and expansion whilst also putting off an IPO of the company 08 Dec 09 (Undisclosed stake) Tiger Global Management LLC $180m n.a.a. n.a. n. Ltd $65m 4.a. n. 27 Jul 09 $30m n. games and social networking Canadian based owner of online games and social networking sites Electronic Arts continues to expand away from its core console games sports offerings into high growth casual games. n. n. Ltd 09 Mar 09 Chengdu B-ray Media Co.a. Sources: CapitalIQ.

Asia.net. Mergermarket 37 . and operates free to play online games 09 Apr 10 n. a casual 3D social networking site Offers a social networking website Allows employees to connect and share by posting messages Publishes and delivers casual video games Develops and publishes social games in Russia Develops and operates online games in China 24 Nov 09 Undisclosed investor $5m 09 Feb 10 $3m 24 Nov 09 Undisclosed investor $2m Development of social games Operates an online social games company in Chile Designs. and Africa Produces social games for platforms 14 Dec 09 $2m Develops social games for networking sites Provides an online social and games community for children aged 6 to 14 Operates a virtual currency platform for social media developers Develops multi-platform social games Develops. Europe.And attracting significant investment Selected recent private placements Date 15 Jun 10 Target Investor Deal value n. 03 Jun 09 $4m Online social network for gamers 20 Jan 10 Shenzhen Fortune Venture Capital Management $20m 02 Jun 09 5 investors $1m Operates Elf Island Website of online games for children Sources: CapitalIQ. develops and publishes casual/PC video games 03 Feb 10 $10m 17 Nov 09 $4m 31 Jan 10 Undisclosed investors $1m 02 Oct 09 $23m 25 Jan 10 n. Develops social web games 01 Dec 09 11 investors $2m 19 Mar 10 $2m Offers Hangout. publishes.a. Target description US-based online social games Date 20 Jan 10 Target Investor Deal value $18m Target description Develops social games applications 14 May 10 $20m Develops social games for networking sites Operates as a social network in Latin America. 07 Dec 09 $4m 01 Apr 10 9 investors $1m 01 Dec 09 $11m 25 Mar 10 n.a.a.a.

value destroying M&A Focused new IP investment in parallel low cost subscription/ micro-transaction game development JV with major media for licensed casual/social marketing/investment Independent Video Games VC fundraising for subscription/microtransaction market Growth equity buyout for subscription/microtransaction market Exit to major video games/media company JV with major media for licensed casual/ social games marketing/ investment Venture Capital Invest in casual/ social subscription/ micro-transaction market Avoid pure advertising supported market because of business model Private Equity Growth equity buyout in casual/ social subscription/ micro-transaction market Avoid pure advertising supported market because of business model Major Media Invest in growth capital game fund JV with major/ independent video games companies for licensed casual/ social games marketing/ investment Mid-market strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid large. value destroying M&A Avoid standalone organic investment due to different core competencies 38 .With clear investment. M&A and JV opportunities Firm Type Investment. M&A and JV Opportunities Major Video Games Invest in growth capital game fund Mid-market strategic M&A in subscription/ micro-transaction market Avoid large.

Mobile Sector 39 .

many of which are independently developed games Source: ITU.7% Global smartphone market volume growth Q1 2010 = 56.g. casual and social games 40 . THQ Wireless) Independent games companies (e.8% of total market volume in Q1 2010 vs 14.g.g.g.g EA Mobile. 5B subs in in 2010F Mobile phone penetration >100% in many developed markets Total global mobile phone market volume growth Q1 2010 = 21. Apple is blocking the use of Adobe’s Flash platform on its own mobile devices New players are entering from multiple markets Network operators (e. not millions >3B iPhone Apps downloaded. Apple App Store) Web advertising platforms (e. Glu Mobile) With low barriers to entry Development costs tens to hundreds of thousands.7% (18. Vodafone Live!) Manufacturers (e. PWC.4% in Q1 2009) Global mobile games revenue growth is strong Mobile Games Revenue ($B) 14 12 Driving mobile games revenue growth Global mobile games market forecast to grow to >$13B by 2014 The mobile games market landscape is adapting to consumer trends and market demand: Mobile game publishers are bypassing network operators to sell directly to consumers High connectivity and multiplayer games becoming mass market due to unlimited data packages In-game advertising being used to supplement mobile game revenues Integrated applications increasing to allow converged gameplay with console/MMO/casual/social games 10 8 6 4 2 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Mobile games platforms Java is the most common platform for mobile games. Google) Console games majors (e.Mobile games are being reinvigorated by smartphone growth Smartphone marketshare is accelerating Global mobile phone penetration 67% in 2009. IDC * Note: Online includes MMO. but limitations require native binary formats for sophisticated games. Nokia Ovi.

EA has launched 20 Hasbro brands on multiple platforms with iPhone apps driving growth Public Pure-play Independent Developers Opportunity for independent mobile developers to help majors and media companies extend brands into mobile Corporate Strong mobile services competition Microsoft. Apple and Google focused on mobile services growth including games ngmoco raises $25m to buy Freeverse in 2010 Backed by Institutional Venture Partners. Nokia. Kleiner Perkins.Attracting both corporates and independents EA is market leader EA has 34% mobile games publishing market share in the US. Norwest Venture Partners and Maples Investments Private Source: Companies. TechCrunch 41 .

000 80. with substantial unrealised profit potential 70/30 App Seller/Apple revenue split iPod iPod Touch iPhone iMac functionality. likely to spawn many imitators.000 120. eCommerce. iPod Touch and iPad with >3B apps downloaded to date App Store should generate an increasing proportion of Apple’s non-hardware revenues.000 100. than anticipated Aiming for a complete mobile offering The App Store The App Store services iPhone. software. iPhone mobility Number of Available Apps 160.000 40. but take much longer to occur.000 20.Apple is aiming to be the mobile entertainment company Apple is far down the path of migrating from electronics and software to mobile communications and entertainment Apple’s strength is providing all components of the mobile entertainment value chain in elegantly integrated consumer products and services.000 140. applications and content iPad is the next stage of Apple’s mobile entertainment strategy.000 09/07/2008 09/09/2008 09/11/2008 09/01/2009 09/03/2009 09/05/2009 09/07/2009 09/09/2009 09/11/2009 09/01/2010 Mobility iPad Macbook-Air Macbook iMac Entertainment functionality Source: IDC 42 . This may change the video games market in ways that are likely to be greater. including hardware.000 60.

99) generated more revenue than FIFA10 (one-off app sale at $6. TapTap Revenge 3 (free app with in-app purchases of $0.99 Casual/social games business models migrating to mobile “Freemium” models with in-game micro-transactions emerging For example.99) in Jan 2010 20 0 Paid vs Free Apps (K) Growth Rate (%) Game genre share (revenue/volume) and average price (US) 25% 20% 15% 10% 5% 0% Ac ti o n Ar ca Ad de ve nt ur Si e m ul at io n Sp or ts S tr a te gy Fa m ily Pu zz le R ac R ol in e Pl g ay in g Bo ar d M us ic Tr iv ia Ca E du r ca d tio na l K id s W or d Ca si no Di ce Most popular app categories by platform (US) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Music Utlilities Entertainment Other Other Other $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 Games Personalisation Games Apple Nokia Blackberry Revenue Share Volume Share Average Price Source: Distimo (US data) 43 .99 The highest grossing mobile apps sell for $9.And is already the mobile games app platform of choice Apple is the dominant mobile games app platform in the US Apple has >7x more mobile apps than Android Apple has >4x new mobile apps developed per month than Android Apple mobile apps are paid for at twice the rate of Android apps 58% of Apple mobile apps are games 160 140 120 100 (K) 80 60 40 Mobile Applications (US) 16% 14% 12% 10% 8% 6% 4% 2% 0% Apple Android Apps in Store (K) Nokia Blackberry Palm Windows Consumers are prepared to pay for quality The highest volume mobile apps sell for $0.

20 x 0. 31 May 07 est.48 x n.7 x n. Median Mean 0.62 6.2% 87.9x 21 Jun 05 $60m n. 08 Dec 05 $699m 10.a. Target description Comments Developer of music games for the Strengthens Disney’s portfolio of games and iPad. n.a.m. and iPod Touch entertainment offerings in mobile Development and publishing of 2D and 3D mobile games Developing. publishing and distributing games for mobile phones Publishes wireless entertainment applications.2 x n. ring tones and images Produces and distributes mobile entertainment content and applications Expands upon Glu’s development capabilities and pipeline for new game releases The acquisition strengthens Oberon Media’s multi-platform strategy and will position Oberon to provide services to mass market casual games The acquisition of JAMDAT was in line with EA’s strategy to expand into high growth games segments CYBIRD Holdings offers mobile content and mobile marketing solutions. Airborne Media will provide scale in the games and entertainment sectors 23 Jan 08 $36m 1.m.9% 67. $114m n.5% 49.14 3.a. Companies 44 .a.69 x 0.6 x n.94 x 0.5 x 16.5x n.a.61 x 0.a.a.8% 85.70 1.30 x 0.a.86 % of 52 Week High 95.7 x 13.46 x 1.41 x 0.27 x 0. 17.a.5 x 26.7 x Selected M&A activity Date 1 Jul 10 Target Acquirer Deal value n. Revenue multiple n.a.53 x EBITDA CY2008 CY2009 21. n.46 x 3.a. Mergermarket. Hudson Soft Company Tose Co.4 x 13. Ltd. Sources: CapitalIQ.Mobile games have both strong valuations and M&A Industry comparable metrics USD millions. (13-Jul-10) 0. n. 1.6 x 9. including games. 1.87 x 21. EBITDA multiple n.17 x 0.30 x 0.47 x 2. except per share data Price Company G5 Entertainment AB GameLoft SA Glu Mobile. n.2x 49.49 x 1.a.69 x 2.44 x 0.07 x 0.64 4.2% Market Cap 5 351 35 104 51 Net Debt (0) (25) 5 (47) (20) Enterprise Value 5 326 39 57 32 Enterprise Value Multiples Revenue CY2008 CY2009 CY2010 2. iPhone.49 x 0. Inc.

and games elements Mobile application distribution and developer community in the United Kingdom Publishes and distributes entertainment content for third generation mobile networks worldwide Develops applications and games on mobile devices Develops games for personal computers and mobile phones Publishes augmented reality and entertainment games across platforms Date 14 Dec 09 Target Investor Deal value $4m Target description Operates a community of game enthusiasts to build and play location based mobile games Develops mobile.And are attracting multiple small early-stage investments Selected recent private placements Date 30 Jun 10 Target Investor Deal value $14m Target description Design. Spain. locative. and sale of mobile games worldwide Provides a mobile service that mixes social. engages in aggregating. engages in aggregating. Internet platform and Internet/mobile gaming for flash 13 Aug 09 and smartphone Online platform. and games elements Develops mobile games for social networks 27 Mar 09 $3m $2m Nominal amount $6m 27 Mar 10 Angel Debt $10m Nominal amount 16 Feb 10 11 Mar 09 $8m Sources: CapitalIQ. Turkey and Brazil Develops games for personal computers and mobile phones Provides a mobile service that mixes social. and games elements Operates as a social games platform for mobile devices Develops multiplayer and social games platforms for mobile devices and wireless networks Conceives. 09 Jun 10 n. and 04 May 09 delivering mobile entertainment content directly to members Develops massively multiplayer 22 Apr 09 online (MMO) mobile games Provides a mobile service that mixes social. Mergermarket 45 . locative. locative.a. and delivering mobile entertainment content Operates an ad-supported mobile games and applications distribution platform 29 Jun 10 $20m 25 Nov 09 $4m 23 Jun 10 Trinad Management. promoting. develops and deploys mobile games and mobile applications for publishers Develops mobile games An online platform. promoting. Nominal amount $4m 15 Sep 09 $1m 28 May 10 04 Sep 09 $1m 26 May 10 Chart Venture Partners 18 Aug 09 $3m 06 May 10 Accredited investors 19 investors $5m 08 Apr 10 $3m 06 Apr 10 $2m Offers videogames. casino and online games Develops and publishes mobile games in China Provides mobile content services for direct to consumer and B2B business segments in Italy.a. marketing. LLC Angel investors 7 investors $11m 05 Nov 09 $3m 21 Jun 10 $3m 17 Sep 09 Private investors n.

value destroying M&A Avoid standalone organic investment due to different core competencies 46 . low cost mobile game development Private Equity Develop sector relationships in anticipation of sector maturity Major Media Invest in growth capital game fund JV with major/ independent video games companies for licensed mobile games marketing/ investment Small strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid large. value destroying M&A Focused new IP investment in parallel.With clear investment. M&A and JV opportunities Firm Type Investment. M&A and JV Opportunities Major Video Games Invest in growth capital game fund Small strategic M&A Avoid large. low cost mobile game development JV with major media for licensed mobile games marketing/investment Independent Video Games VC fundraising Exit to major video games company JV with major media for licensed mobile games marketing/ investment Venture Capital Invest in parallel.

Online Gambling Sector 47 .

bingo and skill games B2C business models are based on odds stacked in the house’s favour or scaled commission fee (“rake”) Global Online Gambling Revenue ($B) 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 % 15. casino games.com. such as 888.3% in 2012) Online gambling uses the web and mobile to enable wagering. PartyGaming (6.5%) the largest firms Africa and South America are forecast to grow quickly from a low base Market share by game type and region Bingo 8% Lottery 13% Skill Based 4% Wagering 35% Asia and M iddle East 1 5% Euro pe 49% Oceania 7% So uth A merica 2% A frica 1 % Skill based games avoid many US restrictions Although a small subsector within online gambling. with Bwin (8% market share). supplanting the US after the Unlawful Internet Gambling Enforcement Act 2006 The fragmented market in Europe is ripe for consolidation. as well as providing payment integration and statistical analysis Casino operators serve customers directly Combined B2B/B2C businesses are emerging.8 R CAG The line between B2C and B2B firms is blurring Content developers create and design games Platform developers develop software platforms to host games.com and its B2B unit Dragonfish Consolidation is set to accelerate Europe is the largest market. Viaden Media. Christiansen Capital Advisers 48 . poker.3%) and William Hill Plc (4. games of skill avoid many of the legal/regulatory restrictions of most US states and international markets Poker 20% Casino 20% No rth A merica 26% Sources: Barclays Capital. lotteries.8% in 2008 grew to 6. Online-Casinos.Online gambling continues to cannibalise offline Online Gambling is high growth Ongoing revenue CAGR has been over 15% for the last decade Growing market share compared to offline (4.

The Times 49 .5B IPO B2B Platform Developers 888/Dragonfish 888 entered B2B platform market with Dragonfish to leverage inhouse technology B2C US/European Consolidation? European firms like PartyGaming and 888 could become targets if the US Unlawful Internet Gambling Enforcement Act is amended Combined Offline/Online Sources: Companies. MergerMarket. creating €682M revenue €196M EBITDA largest listed online gambling business globally Betfair IPO? Potential £1.Sector dynamics and growth are leading to consolidation Online Content Pureplay Online Pureplay PartyGaming / bwin merger Merger announced.

Skill based games avoid many regulatory challenges Skill based games are similar to gambling Online betting games. trivia and other skill games Business models are based on: Scaled commission fee (“rake”) Entry fees for tournaments Interest on players’ funds invested Micro-transactions Players can also play non-gambling versions of most games for free Independence from advertising revenue reduces cyclical risk But avoid many regulatory challenges Skill games are by definition not games of chance. The website is available in nine languages. and includes skill game versions mainstream TV properties such as “American Idol” and “Deal or No Deal” Established. similar to the bingo market 50 . but where the outcome is determined by players’ skill rather than chance Games include arcade. European and Asia-Pacific markets Legislation has been introduced in the US to attempt to legalise online poker (20% of the gambling market globally). puzzle. but the situation remains unresolved The market continues to grow King. word. which enables them to operate in many US States. profitable business models Games are developed both internally and by third party developers The skills based market tends to target women over the age of 35.com launched in 2003. with more than 350M games played in January 2009.

4 x 8.53 x 2.7 x 11.95 % of 52 Week High 66.22 0.03 x n.27 x n. 12.28 x 0.a. except per share data Company 32Red Plc 888 Holdings Public Limited Company bwin Interactive Entertainment AG CryptoLogic Limited GVC Holdings PLC Net Entertainment NE AB PartyGaming Plc Playtech Limited Median Mean Price (13-Jul-10) 0.3 x 10.9% Market Cap 15 218 1.6 x 8.2 x 3.1% 56.1 x n.14 x 2.33 x n.488 1.9 x n.49 x 1.68 x 2. 1.8 x 10.5 x 8.7% 82.64 6.63 41.4 x 28.3 x 13.1 x 10.6 x 6.8 x 30.8 x 11.7 x n. 9.a.51 x 1. 0.330 1.67 x 2.4 x 6.9 x 12.80 x 0. 6.5 x 12.7 x 12. 11.m.0 x 10. n.a.m.7% 34.98 x 3.4% 66.0 x 8.a.m. 4.a.1 x 3. 4.33 x 0.80 x 2.4 x 11.a.2 x 7.68 x 0.9 x 6.3 x 13.2 x Equity Value Multiples P/E Multiples CY2009 CY2010 CY2011 26.609 Enterprise Value Multiples Revenue EBITDA CY2009 CY2010 CY2011 CY2009 CY2010 CY2011 0.2 x 18.2 x n.3 x 36.84 x 1.92 x 10.0% 78.4% 27.m.0 x Source: CapitalIQ Note: Calendarised to December year end 51 .2 x 7.5 x 17.a.8 x n.53 x 0.684 Net Debt (2) (88) (240) (17) (24) (16) (157) (75) Enterprise Value 13 131 1.5 x 11.25 x 2.6 x 11.1 x 12.14 1.5 x 10.5 x 12. 5.98 x 0.4 x n.9 x n.8 x 36.50 x 2.a.55 2.a.64 9.8 x 25.Strong economics and growth support valuations USD millions.6 x 8.5 x 8.62 x 8.1 x 8. 0. 16.5 x n.290 13 27 343 1. 2.66 x 0.48 x 7.530 30 51 360 1.39 x 8.2% 70.98 x n.7 x 28.10 3.3 x 11.7 x 12.

Allow for expansion of the WPT brand online 23 Jul 09 $159m 2.a.a. a series of international poker tournaments Operates FoxyBingo. card and casino games on PCs and Windows mobile phones Comments The acquisition expands 888 into the mobile and social networking games market 07 May 10 $23m 1.a.6x n. greyhound racing and jai-alai The acquisition allows Playtech to increase it’s market share in Bingo to compliment its current Poker and Casino offerings The acquisition is within Sportech’s strategy to become a leading global provider of sports related gambling systems To match the rapid expansion of 888’s B2B segment (Dragonfish).com. Taiwan based online gambling software developer Develops and supplies gaming software solutions for online gaming operations Online gambling company based in Italy Operates The World Poker Tour.a.a.1x 24 Aug 09 $12m n. Mergermarket 52 . 07 Sep 09 $161m 8. n.And consolidating M&A is accelerating Date 14 Jun 10 Target Acquirer Deal value $48m Revenue multiple n. Think Bingo and Bingo Scotland $48m 10. $95m 3.7x n.1x 7.9x Provides integrated software and Following the deal Orbis will be rebranded hardware to the bookmaking OpenBet and Alphameric will be rebranded as marketplace Timeweave Developer of Bingo and networked games US-based provider of wagering systems for horseracing. a range of games which complement in-house products and an enhanced product pipeline Geographical expansion into the Italian online gambling market which it expects to be deregulated 15 Feb 10 $57m 2.2x 75. Target description Enables users to play puzzle.2x 27 Jan 10 (Scientific Games Racing LLC division) 22 Dec 09 $75m 0.a.com. n.2x 11. Getminted. board.a.a. Wink expands 888’s presence in the UK Bingo market The acquisition includes Gigamedia’s Everest Poker Site and allows Gigamedia to realise the potential of its online gambling business The acquisition adds an open platform.6x n.a.8x 9. EBITDA multiple n.9x Aim to build a meaningful share of the $1.5 billion global online bingo market and increase its female client base Sources: CapitalIQ. Online Bingo business 16 Dec 09 (60% online gambling business) 08 Dec 09 Mangas Capital Entertainment $100m n.

France-based operator of online casinos 03 Dec 07 $111m n. Online gambling operator with a focus on the female market Sources: CapitalIQ.a. Mergermarket 53 . n. n. gambling and gaming sector in Europe Strengthens Unibet’s position in the Bingo and Nordic markets and especially within the female gamer market 15 Jun 08 $62m n. EBITDA multiple n. Target description Online sports betting companies.a.a. Online JV between Playtech (29%) and William Hill (71%) Creation of a new online betting company that will be more competitive in the marketplace by using Playtech’s platform technology Expand Mangas’ presence into the casino. n.a.a.And consolidating M&A is accelerating (continued) Date 27 Feb 09 Target Acquirer Mangas Capital Entertainment Deal value $139m Revenue multiple n.a. n. both Malta registered Comments Expansion of Mangas’ sports betting capabilities across Europe 20 Oct 08 (Online assets) Mangas Capital Entertainment n.a.a.a.

value destroying M&A Focused new IP investment in extending skill based model to core franchises Independent Video Games VC fundraising for online gambling technology and niche/geographic online gambling Growth buyout for gambling technology and niche/ geographic online gambling LBO for large generic gambling franchises JV with major media for licensed marketing/ investment Venture Capital Invest in online gambling technology providers Invest in niche/ geographic online gambling franchises Avoid generic gambling franchises due to sector consolidation Private Equity Growth equity buyout of online gambling technology providers Growth equity buyout of niche/geographic online gambling franchises LBO of large generic gambling franchises Major Media For pure online gambling JV with independent online gambling companies for licensed online gambling marketing/ investment Avoid organic investment and M&A due to different core competencies For skill based games Invest in growth capital game fund 54 . M&A and JV Opportunities Major Video Games For pure online gambling Avoid due to distance from core video games competencies For skill based games Invest in growth capital game fund Establish growth stage game investment fund Mid-market strategic M&A Avoid large. M&A and JV opportunities Firm Type Investment.With clear investment.

In-game Advertising Sector 55 .

5bn $2.5bn $0.0bn $0. median age 36 Mobile: 64% female. 12.In-game advertising is early stage In-game advertising is small but growing In-game advertising is seen by publishers as an additional revenue stream to traditional game sales In-game advertising delivers targeted advertising Console: 68% male. median age 26 Casual/social: 50% male.9bn $0.5bn $1.4bn $0.5bn $0.0bn 2005 2006 2007 In-game 2008 2009 2010 Advergame 2011 2012 Around game Relatively few firms Corporate Independent Online in-game advertising: static or dynamic media advertising that appears inside the game or during the game while its being loaded or played Online around game advertising: static or rich media advertising that appears outside of the videogame but shown in conjunction with it Online advergames: custom made games specifically created to communicate a marketing message designed around a product or service Sources: PWC 2009.3bn $2. median age 31 Global market > $1B revenue.5bn $1. with a view to expanding to console games US Online PC games advertising revenue by category $2. Sony PS3 in-game advertising is open. web or mobile.0bn $1.7bn $0. whether via console (Xbox Live Arcade. because of the ability to dynamically target and update in-game advertising All Microsoft Xbox 360 game advertising must use Microsoft’s Massive Inc.0bn $2. Playstation Network).9% CAGR forecast 2009-2014 Multiple formats (static and dynamic): In-game Around-game Advergames Online formats hold the greatest potential.2bn $1. with players such as IGA and Double Fusion partnering with Sony and major game publishers Google Ad-Sense for Games focuses on casual/social web games. IDC 2008 56 .

a. TechCrunch 57 .a. EBITDA multiple n. Flash game advertising network and payments platform 17 Mar 07 n.a. n.a.a.a. an area in which Microsoft sees future growth as well as competition with Google 04 May 06 est.a. Delivers advertising content to on-line enabled game platforms Google was looking for ways to extend its advertising program and in-game advertising offered a logical extension Microsoft’s acquisition further expanded its presence into the area of online advertising. Revenue multiple n. $200m $400m n.With limited. high profile M&A Selected M&A activity Date Target Acquirer Deal value n.a. n. n.a. n.a. Offers advertisers platforms to reach games audience in real time Sources: CapitalIQ. Target description US based provider of online video game services and ingame advertising services Comments Playdom had raised $43m as part of a Series A funding round and said that the proceeds from the raising would be used for acquisitions and to expand the company’s portfolio of titles Shanda extended its online video games strength in China into mobile 18 May 10 11 Jan 10 $80m n.

value destroying M&A Avoid standalone organic investment due to different core competencies 58 . value destroying M&A Limited organic investment due to small market size Independent Video Games VC fundraising Exit to major video games/media company Venture Capital Invest in in-game advertising technology Avoid in-game advertising agencies due to business model Private Equity Develop sector relationships in anticipation of sector maturity Major Media Small strategic M&A to build internal capability for significant IP portfolios and leveraging client relationships Avoid large. M&A and JV opportunities Firm Type Investment. M&A and JV Opportunities Major Video Games Small strategic M&A Avoid large.And clear investment.

About IBIS Capital 59 .

delivering both financial advisory and investment services Corporate Finance Fundraising M&A Joint Ventures Growth Focus Industry Contacts Industry Expertise Long/short Low volatility Global Media Hedge Fund Track Record Small Cap Private Equity Direct investment Digital focus 60 .IBIS Capital is a specialist investment bank IBIS Capital is a specialist media. digital and communications focused investment bank.

Digital Media. growth company development and turnaround.co. worked for Rupert Murdoch. financial services. Tim has the triumvirate of evil professions. His previous experience was at Dawnay. across Europe.uk Phone: +44 788 0505 651 61 . Day Corporate Finance. and now being an investment banker. Graham’s sporting history includes an official world ranking of 82nd in acrobatic rock and roll dancing Contact: Tim Merel Email: tim. Graham’s background is in Bioscience Enterprise and Natural Sciences from Cambridge. FinnCap and Arma Partners. having been a lawyer. When he’s not doing sensible things.merel@ibiscapital. Technology and Telecoms experience in industry. USA and Asia Pacific. law and business from Yale and Sydney University.About the authors Tim Merel is a Corporate Finance Director with Video Games. where he focused on technology acquisitions. direct investment. Tim writes adventure stories and plays a mean guitar Graham Smith is focused on marketing and execution within the IBIS Capital investment banking team. with background in software engineering.

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