I blogged several times about how Zynga’s IPO would affect the social game industry and now we have the first data point, Zynga’s $180 million (and potentially more) acquisition of DrawSomething’s developer, Omgpop.
Zynga has some cash
Although I am restating the obvious, Zynga is sitting on a ton of cash (they added with the offering $1 billion to ample cash reservoir). As most people have learned anecdotally, when you have a lot of cash in your wallet (or purse), you are more likely to spend it. Although Zynga was not exactly averse to acquisitions prior to its IPO, they are now willing and able to spend big bucks when they see a great opportunity. Given how much cash they still hold, Omgpop is likely not Zynga’s last major acquisition, providing a clear exit path to companies with something valuable.
Users are more valuable than talent
My second takeaway from the acquisition is that what is now valuable to Zynga, and thus also to the other major players, is users, not talent or competencies. What Zynga is spending almost $200 million on is Draw Something’s 10.8 million DAU (and the company’s reported 20 million DAU). Zynga can quite easily create a similar game for much less money so it is not the technology; while the size of the deal and the related size of the Omgpop team shows it is not a talent acquisition.
In previous posts I had mentioned how Zynga’s multiples would set a benchmark for how other social games are valued, unfortunately, you cannot draw a straight line valuation of your company based on this sale. The analogy I like to use is the Super Bowl. Ads during the Super Bowl selling at a much higher CPM than other TV ads because advertisers do not have any other opportunities to reach as many people at once. In this situation, Omgpop sold for more per DAU than a smaller company would because there are not many other opportunities to pick up as many DAU at one time.
UA is indeed the biggest issue facing social game companies
The biggest issue social game companies face, both on Facebook and mobile platforms, is user acquisition, which is why Zynga was willing to pay so much for Omgpop. If it was the good old days, Zynga could just use performance marketing (ads on a CPI or CPA basis) to acquire 10-20 million users and it would probably cost them a lot less than $200 million. For a large social game company, this deal shows how hard it is to get incremental users. Unless you have $200 million to spend, social game companies will need to approach marketing smartly and adopt robust marketing strategies to survive and thrive.
Perseverance often works
What seems overlooked in the Omgpop story is that the company is about six years old and has launched about 35 games (NY Times article about Omgpop’s struggles). In fact, the NY Times reported the company would of run out of money by this May if Draw Something was not a huge success. Omgpop is clearly not a one hit wonder, but a company that has persevered and not given up. It actually reminds me of another hugely successful mobile game developer, Rovia. Like Omgpop, Rovio launched over 30 games in a three year period before breaking through with Angry Birds. And I have to mention my previous company Merscom, which we founded in 1993, dealt with some tough times but eventually sold to Playdom in 2010. These examples show that you should not expect a home run on your first swing and not give up when things are harder than you expected.
The industry does not start and end in the Valley
When you are in the San Francisco area, there is an unspoken (well it is sometimes spoken) attitude that social gaming begins and ends there. They do not take companies from outside the region very seriously. Omgpop, however, was a New York company whose core team was not SF boys. If my math is right, three (Omgpop, Doubledown and Playfish) of the four largest acquisitions in the social space came from outside the Bay Area (with Playdom being the exception, not the rule).
Parting thoughts
My key takeaways from the acquisition of Omgpop by Zynga are
- M&A is not dead in the social game space
- Large acquirers are not interested in talent acquisitions but are looking at ways to continue growing
- User acquisition is becoming the central issue in the social space and will drive M&A. The companies with strong marketing will thrive
- The best companies are not necessarily great in the first 90 days
- The best companies are not necessarily in northern California
The Business of Social Games and Casino 