For the past 5+ years I have been working with Spil Games and I have seen the online game company grow from a small start-up to a profitable international 300-person company. At the same time the online game market has also grown tremendously. When I first looked at online gaming back in 2005 it was still considered a niche market: people played games on consoles or downloaded them to their PCs, playing games in a browser was still in its infancy. At that time most people hardly ever played online games, it was considered something for kids or geeks.
Times have changed though, nowadays online games are everywhere. Especially social games like Farmville managed to get a lot of new people to start playing games. In the early days social networks helped the growth as well: if your friends invite you to play a game the chance that you will try out the game is a lot higher.
Traditionally most game companies either earned money through advertising, through a one-time payment (“download this game for USD 19,99”) or by charging a monthly subscription fee. But social games changed that completely, suddenly free-to-play games became massively profitable because players were willing to make small payments for virtual goods. Leading social game developer Zynga makes tons of money on virtual items and is currently valued between USD 7 and 10 billion.
Zynga valuation is an obviously an outlier. Despite not ‘owning’ any of its players (almost all their players play their games on Facebook, so they are heavily dependent on them) they still manage to get a huge valuation because they are able to make the exact games that people want to play and that people are willing to spend money in. Competitors like Playdom that also specialize in developing social games, and who don’t own their players either, also get high valuations: Playdom was sold to Disney last year for USD 760 million.
But for non-social game companies valuations so far where a bit lower. It seems that may be changing though and that investors are starting to realise the potential of these companies. This week it was announced that Bigpoint raised a USD 350 million round at a USD 600 million valuation. The company is not a social game company but focuses on browser based MMO (=massive multiplayer online) games, that are free to play. Bigpoint earns its money with virtual items as well, just like Zynga and Playdom. The big difference is that Bigpoint owns most of its users and is not dependent on a site like Facebook.
I expect that valuations for many other online game properties will go up in the near future, especially for those companies that get a large part of their revenues from virtual goods and that are not dependent on Facebook for their traffic. It will be interesting to see at which valuation these companies are able to raise rounds – or are snapped up by players like Zynga looking to have their own traffic! Based on what I am hearing in the market the revenues of many of these players are doubling every year because of virtual items (just like Bigpoint) and I won’t be surprised to see a billion dollar IPO for one of them within the next 18 months.