Lessons and insights from social casino and gaming M&A activity in Q1

Last quarter saw some interesting deals in the gaming space. Several of the deals, and non-deals, suggest trends that are likely to continue in 2019.

Playtika acquires Wooga rather than another social casino

The most interesting deal was Playtika acquiring Wooga for ~$100MM. The thought-provoking element to me was that Playtika decided to invest outside the social casino space. In the past, acquisitions such as House of Fun, Buffalo Studios, etc., were focused on explanding Playtika’s social casino portfolio. Wooga, however, has no presence in the social casino space, instead is a casual, primarily puzzle, game developer. Playtika’s move suggests one of the following:

Given the stagnant user numbers in social casino, there are better growth opportunities in other genres.
Valuations in casino are too high compared with growth potential in the space.
Most likely, social casino companies will continue to expand (and acquire) in casino but also are maturing to want a more robust and diversified portfolio (consistent with Aristocrat’s acquisition in 2017 of Plarium at the same time it purchased Big Fish).

Zynga spent $560+ million for one title, Empires & Puzzles

Zynga’s $560MM acquisition of 80 percent of Small Giant Games (thus valuing the company at $700MM) shows CEO Frank Gibeau’s strategy of focusing on controlling large, long-term franchises. Small Giant’s core product, Empires & Puzzles, is the 13th highest grossing title on mobile. Empires & Puzzles is Small Giant’s only game live, they are not known to have any other big projects in the pipeline (unlike Natural Motion, which had Dawn of Titans in the works when Zynga acquired it), so the acquisition is to add Empires & Puzzles to Zynga’s list of franchises.

This strategy is consistent with what Gibeau learned at EA, that franchises transform a game company from a hit driven business, with wide revenue fluctuations, to a company with sustainable and predictable growth (and thus higher valuation). He is collecting evergreen franchises to try to turn Zynga into the EA of mobile. These franchises include his purchase of Gram Games, which provided the hypercasual franchise Merge Dragons, and Harpin, which gave him Patience – Solitaire. In addition, acquiring rights to Star Wars, Harry Potter and Game of Thrones for gaming creates additional franchise opportunities. Coupled with existing Zynga franchises Zynga Poker, Words with Friends, CSR Racing and to a lesser extent Hit It Rich!, Wizard of Oz Casino Slots and Farmville, Zynga now has a stable revenue base to build on.

Epic raises $1.25BN at a valuation of $5BN-$6BN, showing the breadth and value of its business

Last October, Epic raised $1.25 billion from KKR, Kleiner Perkins, Vulcan Capital and other blue chip investors at a valuation probably well over $5 billion. What is most impressive about Epic is how it has consistently succeeded in different parts of the game industry. While companies frequently are unable to repeat successes in the gaming space or expand beyond their expertise, Epic seems to do it at ease. Fortnite is only the latest in a string of successes that I find incredibly surprising, given the challenges other companies in the game industry experience. I remember Epic when they were still a small North Carolina company, largely an indie developer. Their odds-defying achievements include (and I am probably forgetting some):

I first learned about Epic from a CNN story (I think 1998) about someone who created a first person shooter (FPS) in their basement that was soon to be released but getting much buzz. At the time, the FPS market was dominated by id Software (Doom) and all the other FPS were fringe products. They might have a loyal following, like Bungee’s Marathon, but nobody challenged id. I did not expect Epic to launch the top FPS but they did. Unreal turned into the biggest FPS for years, making id an afterthought.
With the success of Unreal, Epic decided to license its game engine (creatively branded the Unreal Engine). At the time, the game engine industry was awful. Companies like NDL (Emergent) scraped by to make payroll as no major developers were using third party engines. There was very much a not invented here mentality in the video game industry. Fast forward ten years later and Epic built a game engine company that powers many hit products and is worth hundreds of millions of dollars.
Most successful games are followed with…not another successful game. The video game industry is known as being hit driven and even the strongest companies have had difficulty replicating their big successes. While Epic surprised me by successfully creating a huge franchise with Unreal, it did not seem likely that they could ever replicate their success. Then they launched Gears of War in 2006 and ended up with a bigger franchise than Unreal.
I have written several times about the challenge of traditional gaming companies competing successfully in the free to play space, most recently Nintendo. Not only is much of what a game company learned in the traditional videogame space worthless in free to play gaming, it actually hinders the ability to create a successful F2P product. Outside of acquisition, I did not foresee a traditional company succeeding in F2P. Then Epic, which had built its business around traditional console game (Unreal, Gears, etc), launched a title you may have heard of, Fortnite, which has now generated billions of dollars. Not only did it succeed in F2P, it helped build a new F2P monetization mechanic. Yet again Epic proved me wrong.

This fundraising deal shows Epic is arguably the strongest company in the gaming sector and one that can expand its footprint into other gaming areas. Although I consider the Google/Apple duopoly over mobile gaming unshakeable, same for Steam on PC, it is hard to bet against Epic. Its ability to expand from Unreal to one of the largest core gaming companies also suggest that Fortnite will not be a one-hit wonder but we should anticipate more Epic titles dominating free to play gaming.

What Q4 means for 2019

The big deals in Q4 suggest several M&A trends I expect to see in 2019:

There will be a pick-up in consolidation among social casino companies, but these companies will also look at growing in other game genres.
The major game companies (all genres and all platforms) will focus acquisition efforts on acquiring franchises, not talent.
Epic will continue to defy the odds

Key takeaways

The three most important deals in the gaming space in Q4 2018 were Zynga’s acquisition of Small Giant Games, Playtika’s acquisition of Wooga and a $1.25BN investment in Epic at a valuation of $5BN-$6BN
Playtika’s deal shows that social casino companies are looking outside the space to grow
Zynga’s deal demonstrates the value of franchises is increasing in mobile gaming

Is Hypercasual worth the $450 million that Zynga and Goldman Sachs just spent

In February, I wrote that the next big casual gaming phenomenon would be hypercasual, but even I did not expect the genre to take off as quickly as it did. Last week, Goldman Sachs invested about $200 million in French hypercasual game company Voodoo. The next day, Zynga announced it acquired hypercasual game company Gram Games for $250+ million. These deals follow Zynga’s acquisitions of Harpin and Peak Games’ card business for $142 million. With about $600 million in deal, money talks, and money is saying hypercasual is for real.

What are hypercasual games?

Hypercasual games have a single mechanic and a single goal, so they are very easy to learn. Mastering them, however, is almost impossible, as the games get more challenging as you try to reach a high score. Effectively the core game loop is very straightforward, do one thing, get rewarded (so you can try again) and keep repeating to get a higher score.

Are hypercasual games here to stay?

As I said in February, unlike fads, hypercasual taps into the key to product success, simplicity. Most successful products are not crammed with features that generate a lot of checkmarks on a competitive analysis. Instead, products with very few options generate tremendous value. Uber is valued at tens of billions and when you open the app you are asked where you want to go, and then you are given 3 or 4 options to get there. You are not picking the color of the car that collects you, the height of the driver, what route they will take, etc., which is all handled by Uber. Apple is another great example. The iPhone and iPad have virtually no extraneous features or options.

The science behind simplicity is neuroscience, particularly related to cognitive load. Cognitive load is how much info people are processing at any one time. A simple user experience minimizes cognitive load, thus not creating too much strain and making enjoyment more likely.

Many people often do not realize it is much harder to make a simple product, just as it is harder to create a five slide presentation than a 50 slide one. Keeping a product simple means you must decide what features to exclude, so you need to understand your customer and what you are trying to achieve. Given the market’s feedback to Gram and Voodoo last week, the effort is worthwhile.

Do opportunities remain in hypercasual?

Often when there is a spate of deals it means the end of bubble, or at least the end for small developers, but that is not the case with hypercasual. First, hypercasual is not really a genre, but more of a game making philosophy. It is about creating games with a straightforward and simple mechanic. There is no reason to believe this philosophy cannot be extended to every genre, from simple car racing games to hypercasual social casino titles. The opportunities for hypercasual are as bright now as the opportunities for free to play were after Farmville and Who Has the Biggest Brain.

What should you do

<pThe key is to learn from hypercasual rather than try to imitate what is already in the market. If you have a successful game, see how you can simplify it. What can you do to reduce players’ cognitive load. If you are looking for new product opportunities, identify what player segments currently do not have good hypercasual options and build products for these players. This can be an extension of your current customers or can create games for customers where the competition is irrelevant. By focusing on simple yet repeatable fun, there is a great opportunity in the game industry.

Key takeaways

Hypercasual it the hottest sector in the gaming space, with two deals valued at $450+ million announced last week.
Hypercasual games have a single mechanic and a single goal, making them easy to learn and play but hard to master
The key is simplicity, and the opportunity is to make your own games simpler or create products for an existing or new market that leverages simple mechanics.

Maybe your competitors are not that smart after all

Key takeaways

While it is important not to underestimate your competitors, you also should not consider them perfect.
Industry leaders often maintain their position due to certain core factors and their other initiatives can be flawed, do not assume everything they do is right.
Simply because a competitor decided to pass on an apparent opportunity does not mean they made the correct decision, they may have misjudged the opportunity and left an opening for you.

Maybe your competitors are not that smart after all

I have repeatedly said and written to not underestimate your competition (most recently here), but experience has shown me that you also should not overestimate them.

Success does not equal omniscience

One mistake we often make is to think industry leaders are perfect. Several years ago I worked for a top-5 social game company (okay it was Playdom as most of you have access to LinkedIn). We were very envious of the leading game company at that time, Zynga. Everything they seemed to do, from new products to new features to marketing, worked. Almost always when we identified an initiative at Zynga it inspired a similar initiative. In fact, when I wanted to pursue something, I found it was best to wait for Zynga to try it and I could then easily get internal support (conversely, if Zynga was not doing it, it was usually a non-starter).

Fast forward a few years and Zynga acquired Spooky Cool Labs, where I was Chief Growth Officer. Although the bloom was off the rose at that point, I did have a chance to speak with some Zynga veterans who were there when I was at Playdom. What I learned was that many of the initiatives that “inspired” us were considered disappointments at Zynga. There were several key drivers for their success but not everything worked well, or even worked at all. Sometimes the success factors overshadowed the failures and other times they did not even initially realize the initiatives were net-negatives.

While I have had the fortune to work at both the hunter and the hunted, I have also seen many companies over-estimate the market leaders in various industries. Most automakers copied GM until they saw that GM was on the verge of bankruptcy. Foreign airlines copied US ones’ yield management pricing until the US airlines needed government aid. The list is almost endless of industry leaders leading the competition off a cliff.

Don’t assume they know more

A recent experience highlighted another mistake of over-estimating the competition. A few weeks ago we launched a new feature in one of our products. The offering was not unique; it was largely common sense for any social casino. We actually knew that our two largest competitors had considered the feature and it would have been quite easy for them to implement.

Although our feature was not a huge effort, we delayed it and spent a great deal of time looking at possible downside because our competitors had not tried it earlier. We believed they clearly knew the market and obviously wanted to optimize revenue. Finally, we decided that we might as well try it, it seemed like to good an opportunity to pass on.

When we launched the feature, we saw a 21 percent increase in revenue (through an AB test). The uplift has settled in the 10-15 percent category but given the limited effort we consider it one of our greatest successes of the year.

We still do not understand why our competitors have never launched a comparable feature (even after talking to a person who worked on a comparable feature at one that was never launched). More importantly, we now know we should not place too much credence in a competitor’s decision not to try something (feature, new product, etc). We are still conscious if a competitor scales back something they have launched as that decision is probably based on the traction that they have witnessed but we are also conscious that they are no more omniscient than we are.

Moving forward

While it is never good to underestimate your competitors – they have many smart people trying hard to succeed – you also should not assume they are perfect. Even the most successful are probably doing some things wrong, and their success may cover up the mistakes. And while they have also looked at the market and talked to customer, they do not always come to the right conclusions on the best way to move forward. It’s why competition always leads to better products and companies. Look at the competition, but also make decisions on all the information you have available.

Why Blue Ocean is actually the safe route

Last year, I spoke at Casual Connect in Tel Aviv about Blue Ocean Strategy in the game space (see presentation below) and multiple people commented to me how this approach was great but too risky. The belief is that while overall Blue Ocean strategy would be the best approach, it was too risky from a career perspective to pursue. What they missed, and what I obviously failed to convey during the presentation, is that it is actually less risky to pursue a Blue Ocean strategy than a traditional strategy.

The core of Blue Ocean Strategy is that rather than trying to win against entrenched competitors you find and target uncontested market space where the competition is irrelevant. Red oceans are a known market space with many competitors where you fight for market share. In red oceans, it is all about beat the competition and exploiting existing demand. Blue oceans is an unknown market with few competitors where you are creating market share.

Why people think Blue Ocean is riskier

The reason many people feel that red oceans are less risky is the fact that you are competing in a known rather than unknown market space. The unknown is always scary, be it going into space or a haunted house. In many ways, it is scarier in business where people must make their own decisions rather than basing decisions on what somebody else has done successfully. People thus transfer this fear of the unknown to Blue Ocean being a riskier strategy.

The reality

The reality, however, is that it is riskier to follow a Red Ocean strategy of trying to “win” against your competitors. The Blue Ocean Institute at Insead can point you to multiple academic studies that show Blue Ocean strategy has a higher ROI than traditional Red Ocean competition. While you can be successful following a Red Ocean strategy (there are myriad examples of companies that have dominated their space by competing better than their peers, such as Disney, Exxon and GE), overall the results from pursuing a Blue Ocean strategy are likely to surpass the results of competing in a Red Ocean. Bringing it back to the risk assessment, your personal professional position is more secure the better your results. At the end of the day, the leaders who deliver the most appealing P&L are the ones who survive and advance (had to drop in that phrase given the upcoming NCAA Tournament).

Some might argue these statistics are a long term play and in the short term it is still riskier to try something new than just tried to beat your competitors on the battlefield. The long term results play out over time but a Blue Ocean strategy creates the opportunity for a quick debacle, if you launch a completely new approach and it shows no traction.

Again, the reality does not justify the fears. It is not that a Blue Ocean strategy has no risks, since it is a new approach there may not be a market for it, but Red Ocean strategies are also incredibly risky. Competitors are smart and always improving. Copying their strategies will always leave you behind them and the gap between you and your competitors is likely to widen.

The Zynga example

Zynga provides a great example of both Blue Ocean success and Red Ocean failure. When Zynga first launched in 2007, it was a Blue Ocean company. Rather than competing the game space by creating more beautiful games or spending more on advertising, they brought a new business model to the United States, free-to-play gaming (they may not have been the first but they were among the first, so let’s not get hung up on this). Moreover, rather than compete in traditional channels with other game companies, i.e. Circuit City, Egghead, Best Buy, etc., they focused on Facebook as their primary channel. The result was a company that at one point had a valuation over $10 billion and saw many leaders enjoy very appealing compensation.

In the last few years, Zynga’s strategy has apparently evolved into winning against other social game companies. They would see successful games and fast follow. Without going into too much detail, in the time I was there I saw the leadership of almost every game team (outside of our slots products) turn over at an incredible pace, with some game teams going through 2-4 General Managers in less than two years. If you compare the job security (and thus amount of risk faced) between Zynga in the Blue Ocean days and the Red Ocean days, the Blue Ocean was clearly a less risky period.

Net net

The bottom line is that business is risky. Yes, Blue Ocean strategy may fail and you can lose your job. Red Ocean strategy, however, also can fail and leave you in an equally precarious situation. Given the evidence that Blue Ocean strategy yields superior results to Red Ocean and results drive your personal professional success, Blue Ocean is actually the less risky strategy to pursue.

Key takeaways

While most agree that a Blue Ocean strategy has the highest long-term returns, many fear it is too risky to pursue from a personal career perspective.
The reality is that it is actually the less risky approach, as the underlying odds favor success via a Blue Ocean approach.
Given the challenges of trying to win in a competitive industry, finding an uncontested market and growing it is a less risky approach.

Dawn of a new era of in-game advertising

Last week I wrote about the rising cost of paid user acquisition. this week I want to dive deeper into how advertising can help mitigate this issue. Ironically, my former employer, Zynga, made a creative move recently in this direction. Zynga announced SponsoredPLAY, an in-game advertising product where sponsors offer special content or levels that enhance rather than detract from gameplay. I do not know enough about the offering to comment on it directly but it shows how game companies need to think to thrive in the coming age of higher cost per installs.

Why advertising is the natural hedge

Last week I discussed the fundamentals of the paid user acquisition space and why it pointed to dramatically higher CPIs (cost per installs) in the near future. There are several options to cope with this situation but one of the strongest is to increase advertising revenue in your game. Once advertising becomes a significant component of your revenue mix, any increase your CPIs due to higher advertising rates should also generate additional ad revenue on the other side of the equation. The more CPIs increase, the more your ad revenue increases.

Advertising 2.0

Unfortunately, increasing advertising is not as easy as putting banner ads in your games. Last January I wrote how consumers are much savvier now and expect their communications with companies to be as smart and sophisticated as they are. The same holds true for advertising.

For advertising to work in 2015 and beyond, it must achieve certain functions that most ads do not

Targeted: The advertising should be relevant to the customer. A 50-year-old man should not see an ad for a Miley Cyrus concert.
Contextual: The advertising should fit naturally with the overall game experience. You should not be playing Game of War and all of a sudden see an advertisement with pink fluffy unicorns dancing on rainbows.
Beneficial: Rather than having the advertising annoy the player, enhance their experience. Use it to deliver benefits that they would not normally receive.
Segment: You do not have to show ads to everyone. You may only want to show ads to non-spenders. If the ads are truly beneficial, you may actually want to show them more frequently to spenders. The important thing is to create as small clusters as possible and then create an advertising strategy that optimizes the value for that cluster (IAP [in-app purchases], subscription, advertisements).
Multiple formats: You should not limit your advertising strategy to one type of advertising, just as you would not limit your in-app purchases to only allowing players to buy chickens. Different types of ads will work in different parts of your game and some types will be more relevant to certain users. Use the full arsenal of advertising to optimize your player’s experience and the revenue they generate.
Flexibility: The digital marketing world is still in its infancy. Rather than have a laser focus on one ad unit or strategy, keep abreast of developments in the industry and continually evolve your strategy as best practices evolve.

Continue reading “Dawn of a new era of in-game advertising”

We just launched Hit It Rich!

We just launched our social casino game, Hit It Rich, on Facebook. Please take a look and let me know what you think.

Proud to be part of third exit in three years

For those who have not seen the news, Zynga acquired Spooky Cool Labs today.

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Playtika acquires Wooga rather than another social casino

Zynga spent $560+ million for one title, Empires & Puzzles

Epic raises $1.25BN at a valuation of $5BN-$6BN, showing the breadth and value of its business

What Q4 means for 2019

Key takeaways

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What are hypercasual games?

Are hypercasual games here to stay?

Do opportunities remain in hypercasual?

What should you do

Key takeaways

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Key takeaways

Maybe your competitors are not that smart after all

Success does not equal omniscience

Don’t assume they know more

Moving forward

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Why people think Blue Ocean is riskier

The reality

The Zynga example

Net net

Key takeaways

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Why advertising is the natural hedge

Advertising 2.0

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The Impact on Zynga

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