ISA 2011: Live-Blogging the Mergers and Acquisitions Landscape for Small and Mid-Size Developers

In the last panel of Inside Social Apps InFocus 2011, we’re examining the merger and acquisition landscape for small and mid-size developers.

The panelists:

Terence Fung, Head of Corporate Development, Zynga
Sean Ryan, Director Games Partnerships, Facebook (former EVP and GM Games, News Corp)
Atul Bagga, VP Equity Research – Games, ThinkEquity
Raph Koster, VP Creative Design, Playdom (former President, Metaplace)

EE: What do you do if you’e a game developer and you’re considering merger and acqusition options?

RK: I hope you get into the business because you have a passion for entertaining people. Hopefully you’re not here just to merge and acquire and sell. What makes you valuable is being good at being an entertainer. It’s a creative business that’s driven by passion.

EE: Why did you sell?

RK: It’s so dependent on the circumstances. Are you reaching your goals? Are you bored with what you were doing? Were you running out of money? There are plenty of reasons someone would want to sell. It’s far too personal a question to give a blanket answer.

EE: Why did you sell to Playdom?

We had pivoted from doing a UGC virtual world we’d been working on for three years, then we pivoted to doing social games and got to touch more users in one day than in three years as a virtual good. Playdom said, “you can touch even more, we can help you.”  It was the opportunity to touch a lot of people and it was an exciting time in entertainment.

SR: The standard console cycle is 7 years long. We believe as a company that this is only the beginning of what the social ecosystem is.

We cut back on virality, but we’re going to be expanding the ecoystytem this year.  The question is ‘are you making something in an area that’s growing?’ We’re gonna grow the game business, Apple and Google are going to build their games businesses. What the best way to maximaize creativity? Value to investors?  To your self?  [The market] slowed down a bit, had some very big outcomes. Now people are looking to see if it is slowing down. There’s growth amongst the mid-size developers.

Is the ecosystem you’re in growing? Can I raise money? Can I get profitable quickly? Can I grow, if not you should sell, if you can, you should invest in your business.

[Facebook] has more plans and features coming.

AB: What we’re seeing in the social gaming industry – there are RPGs, there’s a lot of space to explore. Mobile is just getting going, monetization has only been 1 or 2% – a huge opportunity. The space is going to evolve – we estimate to be a 12 billion dollar market over the next 5 years.

EE: Zynga’s been buying a lot of comapnies since launch – from the guys who did FarmVille to people making RPGs. What’s next?

TF: We manage a large pipeline of opportunities. We look at lots of games studios. We encourage anyone witha an app, technology, or product that’s intersting to come to us. We believe there are synergies. You might not seem like they fit with Zynga, but we have a tactical view of where we’re going in the next 6 months.

EE: What do you tell people like RK?

That’s exactly how you should look at it. We tell people thinking about joining Zynga that we have network operations, analytics, recruiting. As a manger of a company you would be thinking about payroll, but if you’re about making a big game, that’s an ability we can integrate. Come work with really smart talented people, come join Zynga.

EE: We’ve seen toolbars do well, where games can share traffic with each other. Are there other platform service providers or non-gaming companies that have a lot of potential right now?

TF – There’s a lot of dislocation in the market. People are trying to get a steady feel for the market. Applifier is a good example of the disruption in the market. Overtime, developers gravitate towards a network with signifcant power behind it. We’re trying to create a Dog-powered network – when you see the dog (Zynga’s mascot) on Facebook or mobile, you equaite it with fun. We’re working with independent developers to bring innovative things into our business.

SR: [Upon acquisition}, there’s a tendency to pull features. When google bought social gold, people held their breath to see what that meant. When Apple released Game Center – what did it meant to OpenFeint? You need to move either faster or get bought or just be differenet enough. Lots of ways value creation opportunites. The things that a are closer to a platform tend to have the platform (replicate) them. But OpenFeint have continued to thrive, despite Game center.

EE: Were all those [acquisitions] worth it?

TF: Yes, I’m dead serious.

EE: Even with people leaving quickly?

TF: All of the acquisitions were very positive. What we encourage is for any acquisition target who considers us to speak with other people who’ve joined about the good, bad, and hopefully not too much ugly, and come in with eyes wide open.

EE: Do you feel burned by some acquisitions in the past?

TF: Is buying struggling games makers a good or bad strategy? We see that there’s a large pipepline of struggling developers. It is a challenging market, not that there aren’t talented teams and founders. We look for people who’ve looked at their mistakes, say “this is how I messed up. We wanted to focus on a feature and it didn’t really produce DAUs.” But we don’t throw the baby out with the bathwater.

EE: If you’re starting a new gaming company, do you start on Facebook, Mobile, iOS, Android?

SR: If you’re building something social, why not build on the biggest social network that’s still growing like crazy. But not all games are social. Angry birds on Facebook wouldn’t make a lot of sense. What’s the type of game you’re building? Fit it into a platform that makes sense.

AB: If you believe games are moving to persistent games that you can only play 2 or 3 at a time, then you want to allow users to stay in contact with the people they play with across devices. It is going to be more about a multi-channel aporach and less about one channel.

EE: TenCent and other Chinese developers have done experiments in the US, but when are they going to come to the U.S. and buy someone big?

SR: 2010 was first time growth has slowed, so people are looking for how to grow. The Chinese have some of the best expertise on running games. On Facebook we’ve created this huge army of users for free to play games.  There might be 10% with the gamer instinct, and they’ve greaduated and want to play something more hadcore than a simulation. The Chinese will be looking for designer talents. What works in the U.S. may or may not work in China. The only non-Chinese games that is successful is World of Warcraft. In the U.S. we’re not familiar with their stories, so they’ll be looking for content, for expertise.

EE: Do you see the Chinese focusing internally or buying small or mid-size developers.

AB: They are sitting on a big cash balance so I wouldn’t be surprised to see people making a big acquisition in the next 12 months. Take 2, Electronic Arts could be places they could look for designer talent.

EE: You see big gaming companies making moves>

RK: There are some making moves. The story that’s most interesting is Ubisoft. They tried a half-dozen games and a lot didn’t hit and they just kept trying. It’s symptomatic of any large indutry shift that old companies will have trouble adjusting to a new landscape, and this is a very new landscape. We’re talking about companies who’ve hardly gotten into digital distribution. They have a lot to learn about how to weave their DNA into a company. That’s the ultimate goal of M&A, to reshape the DnA of your company to bring new expertise into every level.

EE:Any psecific advice for new developers?

RK: Ubisoft did the right thing buy trying, learning, trying again, and being willing to be patient. You either build or you buy. If you buy it, you need to leave it alone and learn as much as you can from it. There’s a history of acquiring and not using the acquisition very well. It takes patience , you can’t turn an organization of that size on a dime.

SR: When I was at NewsCorp we started a games unit, acquired Making Fun to get up to speed. Packaged game companies [could] buy a 20-peson company.

As DeNA did with NGMOCO, or Disney – they wanted to make a big play, take a big swing. I think the Chinese will tend to buy smll. We’ll see if they play something big and say  “now you’re in charge” like DeNA dd with NGMOCO.

EE: You track a lot of markets. What would you do different?

AB: Success is open to definition. In a short-term view, acquisitions may not be successful. Disney acquiring Playfish wasn’t about driving the net year revenue, but a longer term view.

Just to step back, the console gaming market was up 35% during the dot come bust, up 30% when the whole economy was down 5%. Now it is down 10% a year. Businesses need to leapfrog the conslole and get into the next level. Social flows beyond games into monetizing media across your brand.

EE: Physical promotions opportunities are all over the place. Are you looking to long established intellectual property lines for how you’re going to build Zynga in the future?

TF: Zynga is firing on all cylinders, identifying brand sponsorships like Farmers Insurance, State Farm, and helping promote some movie releases, but I don’t see the need to make the next Tron game considering our ability to knock out successful new intellectual property.

Audience Question: Like everyone, we’re  looking for funding and support. Where in the game development cycle does an idea need to be to attract someone like Zynga or angel funding?

SR: Publishing is coming back into vogue. You need someone to fund it, someone with expertise. The developer itself needs the help of a larger partner, even if they’re a great studio. They should focus on making a great game, let someone else focus on things that detract from mking a great game. Numerous folks like Zynga and NewsCorp look at the game, see if a game fits into their portfolio. There’s options to own it , fund it, or publish it.

RK: Here’s the dev-centric answer, practical advice. If this is your first game , then don’t build your dream game. Take the first game as a learning opportunity. Start building something that will be fun. Launch as quickly as you can. Learning from that will help you go chase the deals. It iss easy starting out to try to build something ambitious when you don’t know what you don’t know yet. Might not be what you want to do, but launch something relatively simple.  Doesn’t meean it can’t be awesome.  Launch it, start building a following, learn the lessons, that gives you the leg up to start swinging for the fences, what you believe in. Companies will want to know,  “do they know their stuff? Can they execute – that’s always what matters – and do you have something fun and playable for your second idea. Can you show it to someone who doesn’t know the difference beteween PHP and Perl, between bitmap and vector graphics.

I would grab a free edition of UNITY or flash – I did it perosnally – I built the first the first iteration of my game with Blitz Basic (audience applause). While looking for funding, I was able to show blue spots log into an MMO space. Then said, “I think I might just launch this”, and then I got funding.

Audience question: Should people go work at Zygna, or get some experience first before they go try build their own game?

TF: Were not going to take a leap of faith on someone with no experience building games. There are some strong game designers who haven’t stepped into the social game world. I think they have great potential at Zynga

EE: What do you think about buying a smaller traditional game studio?

TF: It’s hard because of how fast we iterate. We have real time strategy game people. There are obviously traditonal game developers dabbling in social and mobile.

Audience question: If you’re thinking about about getting into social, would you build your own thing or look to get hired?

RK: I’ve been bitten buy the entrepreneur bug now.  If you think you can get the learning on your own – and you can if you have the will and the discipline -there’s no reason not to try it your self unless you want to work with a specific great designer in the space. Coming at it as a traditional game designer, at GDC, social game designers were booed. They were called a soulless exercise based on metrics. There is a lot to learn from metrics, but metrics are just a fast way to do play testing.

It may be harder to dive into an organization that knows it already because there may be a lot of culture clash. If they understand what you bring as a traditional designer, it can be a great marriage.

Audience question: The game that are successful right now are more of the same. What about games that are really agaisnt the grain, out of left field . What do you look for?  –

SR: Wer’re looking for as diverse a platform [as possible]. PVP, arcade, etc so that all types of gamers will find something that really interests them. Sports games are doing well on Facebook, they’re montetizing really well. Focus on the top 5 DAUs is a soulles excerise. The better games that we’ve seen come from small developers who are really passionate about the core, or things we don’t normally associate with the platform.

Audience question: As a young developer studio, what are the gotchas that we should look out for?

TF: Teams that hav been slamming their heads against the wall for two years on a new product, who haven’t shown abiliy to learn from their mistakes is the #1.

SR: It is very specific to what the company is looking for in an acquisition. Building another city game right now is not going to work well. If you’re a PVP game and saying “this is why it works, here’s the data”. It might not get you to 100 million users, but will help you get acquired or funding.

TF: Zynga isn’t looking for specific game types, we’re looking for intelligence we can integrate into the company. New IP out of the box is great if it can be transferred to other IPs. We have a network of users and we want to get the fun to them.

What are stock option pitfalls companies being acquired should look out for?

RK: Get a good lawyer

SR: There’s this movie called The Social Network…

RK: There’s a lot of blogs. I tried to read as much as I could. My best advice, find people who’ve been through it before who you trust who can guide you. Trying to learn it on your own can be incredibly difficult. You can’t overestimate the value of advisors.

SR: Having a good lawyer who has been through this many times who can tell you what’s typical.