Behind the scenes of GREE’s latest acquisition: what made Funzio right for the Japanese mobile giant

GREE’s surprise $210 million acquisition of Funzio wasn’t a surprise for everyone — according to Funzio’s former COO Anil Dharni, the two companies had been meeting together for the past six months. As it turns out, GREE’s purchase of the San Francisco-based company wasn’t based on competition from a potential funding round, but both company’s long-term goals for the lucrative mid-core gaming market.

“We had been exploring the idea for some time. We were interested in it at a high level, and as we dug into it deeper and deeper, the more both sides became more and more excited,” explains Shanti Bergel, GREE’s senior vice president of business and corporate development. “It was almost eerie how aligned we were about where we wanted to be and how we wanted to get there.”

For GREE, the benefits of the deal are clear — all of Funzio’s mobile games have been hits and the company knows how to succeed consistently in the North American market. Funzio’s games will also populate GREE’s new mobile social network with players used to paying for items in free-to-play games.

However, there are many other developers with hit mobile games, and with GREE estimating it will earn over $500 million in net income this fiscal year, it can afford to buy them. Funzio also wasn’t short on suitors. Dharni tells us the company was evaluating its funding options very seriously before ultimately deciding to go with GREE. What turned out to be the key difference for both companies was the type of games Funzio was putting on the top of the app store charts.

“We had been defining this mid-core space on mobile, and we picked a partner that we were most aligned with,” says Dharni. “They get it. They understand the challenges in mobile and they’ve executed amazingly in Japan.”

Dhari tells us that what really struck his team was how mid-core games dominate the top grossing app charts in Japan and Asia, and that Japanese developers had created and designed mechanics specifically for mid-core games to boost retention, engagement and monetization.

“That was a great insight,” he says. “If we were part of GREE, we were going to be able to share this knowledge, further accelerating our revenue and user goals.”

Overall the acquisition hits similar notes to DeNA’s 2010 pickups of Ngmoco and Gameview, and seems to be a shift in tactics for GREE.  Unlike DeNA, which has built up its North American presence by letting its acquisitions handle the heavy lifting, until now GREE has been using OpenFeint as a way to quickly establish its own gaming platform. The company has been busy building up its own 200-member plus U.S. team to handle first-party games and supplementing content with a variety of deals and strategic investments. With the Funzio buy, GREE seems to be in the same place DeNA was a year-and-a-half ago — paying top dollar in order to get high performing North American titles on its networks.

As part of GREE, the Funzio team will be tightly integrated and will focus on what Dharni calls the Tier One regions — North America and Europe, bringing its knowledge to help GREE make games that will click with Western audiences. Bergel tells us GREE is looking for the Funzio team “to be a key, active ingredient in the North American revenue line going forward.”

One thing GREE is staying tight-lipped on is what will happen to Funzio’s non-mobile games. While the company’s games are arguably more successful on mobile than they are on the web now, Crime City still has 1.5 million monthly active users and 140,000 daily active users on Facebook. The newly released Kingdom Age has a further 410,000 MAU and 40,000 DAU and both games are also available on Google+. Although GREE’s primary focus is on mobile, Funzio’s social network expertise may have also been a deciding factor in the GREE acquisition.

“We believe Facebook and Google will play a pretty important role in mobile,” says Dharni when asked if GREE sees an opportunity in social games on the web. “Whether you focus purely on mobile or purely on web, we need to have expertise in-house on Facebook and Google. That’s our point of view, and every time we had a discussion with the GREE team, we agreed on that. As we look into the future, Facebook literally one day will have more mobile users than users on the web — at some point those lines will be blurred and mobile will be an integral piece of Facebook’s growth strategy. We look at it holistically, not platform specifically.”