Heavy Competition Could Drive Big M&A Multiples In Social Gaming This Year

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We’ve heard from a number of industry executives that serious M&A discussions in the social gaming space have heated up since Electronic Arts’ (EA) acquisition of Playfish for about $400 million in late 2009 (including earnouts).  The companies seriously looking at social gaming acquisitions are not just big console gaming companies like EA or Activision, they include big media companies like Viacom and Asian companies as well.

We see a few drivers of the increased activity:

  • Virtual goods continue to generate exponential revenue growth rates in the US and are on fire in 2010.
  • Low barriers to entry and inexpensive marketing opportunities have given less-capitalised private companies such a large head start it makes sense for larger competitors to just buy them (and their experienced teams) versus funding competing products internally.

With increased competition for a limited number of good deals, valuation multiples will likely be rich in 2010.  As a result, gaming companies like Activision and Take-Two Interactive, whose hardware businesses are suffering as gamers move online, risk being left behind if they don’t pay up.  In fact, looking at the Electronic Arts/Playfish and Shanda Games/Mochi Media acquisitions, it can be argued that multiples are already increasing:

gaming acq multiples

In the near-term we expect most of these acquisitions to be of smaller gaming companies where large companies effectively buy tech teams with valuable expertise in addition to a few popular games released by independent companies. 


Virtual goods finally exploded in the west during 2009 (they had been generating billions in revenue for Asian companies for years) – at least doubling to between $700 million and $1 billion.

According to executives in the industry, growth has only accelerated thus far in 2010 and has been growing upwards of 200% in the first quarter.  Anecdotally, we’ve heard Facebook credits is helping to drive this acceleration as gamers have been buying more goods as a result of the ease of use and trust in the brand.

Most of the purchases are coming from a small segment of rabid users (less than 10% of total gamers, we estimate), and these users appear to be buying virtual goods in larger amounts per purchase.


Large development costs and significant marketing and distribution resources are needed to launch a successful console game.  However, these costs are much lower for social game developers.

For example, development costs for the average social game can exceed a couple hundred thousand for the more sophisticated games, but can be as low as $20,000 for some of the less graphic-intensive games.  This compares to $5 million to $10 million for some of the more sophisticated console games.

In addition, social games incorporate a number of free viral elements (like announcing to all your Friends you just upgraded your farm on “Farmville,” for example) and advertising on social networks can be incredibly inexpensive.  We estimate Facebook self-serve CPMs are a tiny $0.23 (though CTR are admittedly low too), which is significantly lower than most web publishers.  Some of the more targeted web publishers achieve double-digit CPMs.

The low barriers to entry and inexpensive marketing opportunities have enabled some independent companies to amass very large audiences and a huge lead over those companies (like console gaming companies) that are just now putting games out on social networks :

Facebook Games

As a point of comparison, Electronic Arts released a free beta version of Tiger Woods Golf in January 2010 and has grown a fairly insignificant audience of about 5,000 active monthly users.

See Also:

Facebook’s New Payments System Is Increasing Virtual Goods Sales By An Impressive 25%

Virtual Goods Sales Up 100% This Year At PlaySpan

EA Smart To Buy Playfish, Valuation Fine

Virtual Good Sales Could Grow 100% To 150% This Year In The US And Western Europe

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