Video Game Venture Capital - VGVC

According to research published by Games Investor Consulting in April 2009, 2009 Year to date game funding has dropped by 60% compared to the same period in 2008 and 70% compared to 2007.The report summarizes several key drivers for this sudden funding drought:·         Investors have less capital to invest as their sources of finance have contracted with the drop in stock markets·         Investors will be spending an increasing proportion of their capital on ensuring the perennity of their investments·         With the significant drop in stock markets and M&A activity, exit options have dried up·         Risk aversion has increased and the lack of understanding of the gaming industry will likely push investors away from investments in the space.

On Tuesday 14th April 2009, Ascaron Entertainment GmbH, Germany, went into administration at the regional court in Bielefeld, Germany. The company mentioned that the “extended development delay” of Sacred 2: Fallen Angel was at least partially responsible for the filing despite having sold over 400,000 copies worldwide since its release.

 While in administration server and services of Sacred 2 multiplayer and the Securom game activation will continue as usual while Ascaron continues working on a Sacred 2 PC expansion and on the development of Sacred 3. The company also aims to use the protection offered by its administration status in order to access financing: “Ascaron has already begun negotiations with several well-known interested parties to discuss a positive takeover”.

Ascaron has offices in Germany and the UK, was started in 1989 and been a distributor, publisher and developer of games such as DarkStar One, SACRED, Call of Juarez, American Civil War and City Life 2008.

It will be interesting to identify the new investors that gain access to Ascaron’s IPs and distribution capabilities over the next few months.

Square Enix open to international acquisitions

Despite the recent successful acquisition of Eidos for $123.3m, Square Enix group president, M. Yoichi Yada has announced he would consider future acquisitions and likely outside Japan.

M. Yada commented: “In the last five to 10 years, the Japanese games industry has become a closed environment, with no new people coming in, no new ideas, almost xenophobic. It is now slightly behind western counterparts. The lag with the US is very clear. The US games industry was not good in the past but it has now attracted people from the computer [industry] and from Hollywood, which has led to strong growth .”

In an acquisition strategy mirroring the recent PMI approaches of EA and Activision, M.Yada intends to implement a restructuring program to bring Eidos back to profitability but without interfering too much into the developer creative process: “It is always difficult to manage creatives anywhere in the world. We want to cherish the Eidos studio culture but change it where it is necessary.”

This surprise announcement and opening to the foreign market after over 2.5 decades of successful sales (Square Enix has sold more than 80m copies of Final Fantasy and 45m copies of Dragon Quest titles to date) could be the consequence of several drivers:

• A means to reassure investors in the wake of a drop in 2008 sales
• an attempt in diversifying a product portfolio concentrated around 2 major franchises and to gain access to a wider international audience
• An opportunistic strategy aimed at deploying part of Square Enix’s $1.1 billion of Cash and Short term Investments while industry valuations are at a record low

Another key question is which firm(s) is Square Enix considering? With his experience and track record in turning around studios, M. Yada may consider one of the numerous distressed companies up for sale, including Apogee, Midway or Ascaron. Other companies may consider partnerships with Square Enix or equity investments in order to fill the gap left open by the drop in VC and public market funding.

Finally, with the recent EA and Activision acquisitions, and next gen consoles expected by 2012, could this be another sign of industry consolidation and should we be expecting the heating up of M&A activity while valuations are attractive?

The duke Nukem developer, founded in 1987 and working on the latest installment of the popular Duke Nukem franchise since 1997 is believed to be closing the studio.

The closure was originally confirmed by TakeTwo with the following statement: “We can confirm that our relationship with 3D Realms for Duke Nukem Forever was a publishing arrangement, which did not include ongoing funds for development of the title,” according to Take-Two VP of communications Alan Lewis. “In addition, Take-Two continues to retain the publishing rights to Duke Nukem Forever,”

This was later confirmed by 3D Realms webmaster Joe Siegler and followed by leaked pictures and gameplay footage.

According to Bloomberg, Take-Two filed a lawsuit against Duke Nukem developers Apogee on May 14th, , claiming that “Apogee continually delayed the completion date for the Duke Nukem Forever. Apogee repeatedly assured Take-Two and the video-gaming community that it was diligently working toward competing development of the PC Version of the Duke Nukem Forever.” Take-Two said in 2000 it had an agreement with Apogee and paid $12 million for publishing rights to the forthcoming game. In 2007, the two companies entered into a second agreement.

Finally, on May 18th, 3D Realms / Apogee released a statement indicating that it had let go its Duke Nukem Forever development team on May 6th but would continue to operate as a company. In terms of the actual transactions that have occured in the past between 3DR, GT Interactive and Take-Two, 3DR released the following explanation:

“As some of you may know, Take-Two filed a lawsuit last week containing various accusations and claims against 3DR and the uncompleted DNF game. Take-Two never paid 3DR advances or any signing bonus or any other funds related to DNF, up until July 2008, at which time they paid $2.5m in connection with another agreement for an unannounced game. This is the sum total Take-Two has paid 3DR in connection with DNF. Take-Two claims that they paid $12m to GT Interactive/Infogrames to acquire the publishing rights for the DNF game. To be clear, 3DR was not a party to that transaction and did not receive any money from it. When the DNF game was originally signed with GT Interactive in 1998, GT paid 3DR a $400,000 signing bonus. Up until July 2008, this was the only publisher money we received for the DNF game. Meanwhile, 3DR put over $20m into the production of DNF.

Take-Two retains publishing rights for the DNF game, although 3DR retains certain rights to sell the game directly to the public. Late last year, 3DR began negotiations with Take-Two to provide funding to complete the DNF game. In the meantime, 3DR was hitting mutually-agreed milestones, despite not having a new agreement finalized. Take-Two was well aware that 3DR needed the funding to continue the DNF game development. Suddenly, after months of negotiations, Take-Two materially changed the parameters of the proposed funding agreement. 3DR informed Take-Two that it could not financially afford the changes Take-Two was suggesting and would be forced to release the team if an agreement was not reached. Take-Two made a last minute proposal to acquire the Duke Nukem franchise and the 3DR development team. Take-Two’s proposal was unacceptable to 3DR for many reasons, including no upfront money, no guarantee minimum payment, and no guarantee to complete the DNF game. From 3DR’s perspective, we viewed Take-Two as trying to acquire the Duke Nukem franchise in a “fire sale.” Those negotiations fell through on May 4th, a deal never materialized, and the DNF team was sadly released a few days later.”

Though the question remains as to why it took 12 years for the publisher to pull the plug, perhaps more important is the issue surrounding future ownership of Apogee’s franchises (Duke but also Wolfenstein 3D and Commander Keen). The Take-Two lawsuit is probably not completely independent to the latter…

According to sources at Techcrunch.com, VoxPop.TV, a San Francisco-based start-up has raised $1.5 million in Series B funding led by Hearst Interactive Media, with original investor True Ventures participating. VoxPop raised $2 million in Series A funding from True Ventures in 2007 and is also backed by Amicus Capital.VoxPop.TV creates embeddable pop culture contextual games for publishers. With a game library over 1,000, VoxPop is the largest “pop culture gaming company” in the market. Voxpop.tv’s client list includes MTV, CBS, CNN, NCAA, Wired, and Rhapsody. The firm also provides services to many small publishers and blogs. Founded in 2006, VoxPop is headquartered in San Francisco.

This is an excellent example of how major media publishers are increasingly leveraging casual gaming to attract and retain viewers on their websites and the market potential that resides in this segment.

Areae, creators of Metaplace, have announced that they are dropping the company name in favor of the service/product name, and will now be known only as Metaplace. Also, they announced that they’ve secured Series B funding to the tune of 6.7M. Funding comes from the original backers, Charles River Ventures and Crescendo Ventures) with Marc Andreesen and Ben Horowitz as new investors.It’s particularly interesting that Marc Andreesen is among the investors, as Metaplace is very much an example of what Andreesen described as a “Level 3 Internet Platform” in this lengthy but well thought out post. Sources:

1. Raph Koster: October 22, 2008
2. Techcrunch: October 22, 2008
3. BoingBoing: October22, 2008
4. VGVC : September 19, 2007 

Funtactix, an Israel-based game studio founded in 2006 and funded by Benchmark Capital and JVP, today announced the launch of Moondo, a gaming site touted as “the Web’s first cross-gaming universe”.

Funtactix was founded in 2006, and raised $6M in series A funding from Benchmark Capital and Jerusalem Venture Partners (JVP) in 2007.

The Moondo offering seems promising, offering a free-to-play (ads + item-sales) experience, but with a level of cross-game integration normally reserved for walled-garden platforms like the Wii or Xbox360’s Live.

Wanting to learn a little more about the service, we got the opportunity to do some Q&A with both Funtactix CEO Sam Glassenberg, as well as Benchmark Capital general partner Michael Eisner.

Be sure to see those Q&A below:

Moondo launch Part 2: Q&A with Funtactix CEO Sam Glassenberg

Moondo launch Part 3: Q&A with Benchmark Capital’s Michael Eisenberg

[Disclosure: Sam Glassenberg formerly worked at Microsoft, as did VGVC’s Kim Pallister, who penned this post.]

Funtactix, an Israel-based game studio founded in 2006 and funded by Benchmark Capital and JVP, today announced the launch of Moondo, a gaming site touted as “the Web’s first cross-gaming universe”.

Funtactix CEO Sam Glassenberg was kind enough to answer a few questions about the company and service for VGVC:

VGVC: How many games will the service offer at launch, and how do you see that number growing over time?

Glassenberg: Moondo currently features 3 deeply-connected games available in two genres: Shooter and Racing. The universe will be gaining a third genre (Sports) in August with a fast-paced Jetpack volleyball game followed by football in September. We’ll continue to add new games and genres rapidly over time. Funtactix can deliver new genres on an 8-12 week production cycle, complemented in-between with new game modes, new arenas, and fresh content. Moondo has an aggressive cross-gaming roadmap of new games planned through the holidays and 2009. This entire universe will move into the browser in October.

VGVC: You speak of your engine and production pipeline being capable of putting out titles in 8-12 weeks. What’s the secret to doing that, and will game quality suffer with such a quick turn-around time? 

Glassenberg: Game studios have always developed engines specifically designed for specific, disconnected genres (FPS, Racing, Sports, etc.)

For the last two years, Funtactix has focused entirely on building an engine, content tools, and pipelines specifically dedicated to cross-gaming: designed to rapidly-deliver a variety of deeply-connected experiences in different genres. A few example investments include:

·         Lag-resilient networked multiplayer implementation that supports an unlimited variety of genres

·         Reusable character system – providing customizeable, animated characters that come to life across games

·         Scalable backend that supports large numbers of users

·         An item management system designed around balancing versatile power items across multiple games

Our carefully-architected abstraction means enhancements to cross-game systems over time provide improvements to all games.

Our one-of-a-kind engine and pipeline also enable us to assemble a working, playable prototype early in our development cycle. We use this for user playtesting and rapid iteration, allowing us to converge on a thrilling and addictive experience quickly so we can share it with the wider community.

Our games are centered around taking the thrills of hardcore gameplay and turning into a more approachable experience – so it takes seconds, not hours, to get the hang of things. For example: “Crystal Run” offers the traditional hardcore-FPS thrills of team-based ‘capture the flag’ in lighthearted, multilevel arenas with point-and-click controls and a much cleaner top-down view.

These games are enhanced frequently with new arenas and content.

We’ve seen amazing results on early experiments in our limited beta. Users move with their friends rapidly from game-to-game, empowered by cross-game items.

Our thousands of users are hungry for this content: A small content pack (new arenas) doubled the # of sessions played. The introduction of two small cross-gaming investments (leveling and two cross-game power items), increased sessions per user by over 250 percent!

VGVC: Will you expose the avatar/friend/item between-game portability to 3rd party developers, or is Funtactix aiming to do all the games for Moondo in-house?

Glassenberg: Moondo is the only experience that empowers users to bring their character and item investments across games. This requires an unprecedented level of cross-game integration. Focusing on 1st-party development enables us to deliver this deep level of integration into every activity. This is why the company has focused so deeply on building a proprietary engine, tools, and pipeline specifically designed to rapidly deliver these experiences.

VGVC: What platforms do you eventually hope to support, if any, other than PC?

Glassenberg: We are eager to bring cross-gaming to the widest possible audience on the hardware they already have.  Moondo already supports hundreds of millions of mainstream PCs, and we continue to expand our support for mainstream hardware. We look forward to enabling Moondo users to share the experience with their friends on other popular platforms in the future –Intel-based Macs, for example.

VGVC:. What revenue models do you have today, and will that evolve over the coming months?

Glassenberg: We will support Virtual Item Sales and Advertising in 2009.

Moondo is a free-to-play universe: offering a cross-gaming experience to the widest possible audience. Moondo will make money via virtual items sales – a truly scalable revenue model that has proven itself as a flexible tool for monetizing large mainstream audiences in both Eastern and Western markets. The barrier to entry is the lowest (free), and users can pay for vanity and power items to enhance their character and gaming experience.

When it comes to virtual items, cross-gaming has several exclusive advantages. In Moondo:

•Vanity items are more visible: Showing off in every game and throughout the universe (not just in one corner of a website).

•Power items are more useful: Giving gamers utility in every game (instead of just one)

•All items are more durable: They work not only in games currently available, but in the universe of games that have yet to be revealed.

An item purchase is _worth_ more to a user in Moondo.

Instead of buying an item that you are forced to abandon when you move onto another game, Moondo items will continue to deliver utility as new games and genres arise in the universe. These new games arrive frequently: the Funtactix cross-gaming engine and pipeline enables the company to deliver those new games and genres on a rapid production cycle (8-12 weeks), enabling not only more valuable items, but a longer user lifecycle.

Moondo will generate revenue from its non-paying users through advertising over this longer lifecycle.

We will introduce virtual item sales by mid-2009.

VGVC: Thank you.

Funtactix, an Israel-based game studio founded in 2006 and funded by Benchmark Capital and JVP, today announced the launch of Moondo, a gaming site touted as “the Web’s first cross-gaming universe”.

Benchmark Capital General Partner Michael Eisenberg was kind enough to answer a few questions about their decision to fund Funtactix for VGVC:

VGVC: What made Moondo a better investment bet for you, given how crowded the space is today?

Eisenberg: Moondo is build on quite a technology platform, representing 24 months of heads-down development. It is the only cross-gaming option on the market and the technology barriers are large. I beleive that customers want a return on their time investment in gaming and do not want to throw away “game stuff” they have accumulated through skill and over time.

VGVC: When looking at what seem to be the main properties of Moondo’s offering: cross-game platform, Social network, game destination/portal; was there any one of those that stood out as the key element?

Eisenberg: Cross Gaming is a huge deal. It lengthens engagement with players, and amortizes the gamer’s investment in Moondo games. The social network is important as well since it is the first social netowrk to be deeply tied to a multiple-game experience. Think of it as the personal expression leg in the cross gaming since it is 100% integrated with the cross gaming environment.

VGVC:  We hear of far more VC investment in game companies as “tech companies” rather than “entertainment companies”. Does Benchmark differentiate along these lines, and did the IP of Moondo’s individual game properties play a role?

Eisenberg: we invest in great entrepreneurs building great experiences for customers. Moondo’s cross-gaming is a superior experience for customers who deserve something better than what they have been served up by disconnected games and flash game aggregators.

VGVC: What is Benchmark Capital’s strategy with regards to the Video Games sector?

Eisenberg: To invest in great entrepreneurs who are building great services. Generally, we are bullish on games as a form of entertainment going forward and Benchmark has been the early leader in investments in gaming companies such as Habbo, Second Life, Red5, (Funtactix/)Moondo and most recently, Riot Games.

VGVC: Thank you!

John Welch, CEO of Playfirst, has posted a nice essay on the company blog, discussing the first four years of the company’s history.

Some interesting highlights:

• 5M initial VC funding
• $26.5M in total funding
• 2007 revenues of $10M. Not yet profitable.
• 85 employees. (…in downtown San Francisco to boot, so operating costs are going to easily be ~12-14m as a rough estimate, thus the not yet profitable point above)
• While the numbers aren’t spelled out, it’s pretty obvious that the Diner Dash franchise was a huge part of their success. Could they have done it without Diner Dash?
• Their investment in developing their Playground SDK is an interesting platform play, though it’s more nuts-n-bolts level than the web 2.0 style platforms we are seeing from others.

We really like Playfirst. Of the companies applying traditional publishing models to the casual games space, they are the one that seems to beleive in the value of the game content above all else, and their investment in IP (through development, trademark & branding, marketing, etc) shows it.

We hope that John will continue to post these peeks behind the curtain of what is a company with a bright looking future. 

Earlier this month, Forrester released a report entitled, “Attracting Venture Capital Investment in an Uncertain Economy” [1].

It’s mostly a VC 101 primer updated for the current economic climate. Here’s a very brief summary:

• The economy is troubled, recession is possible
• Venture investment in technology in 2007 ($10.5B, 337 deals) was nowhere near the bubbly heights of 2000
• Venture capitalists are wiser and more sophisticated now; they’re less likely to withdraw en masse in a repeat of their behavior after the 1999-2001 bubble burst (VC investments plummeted from $63B in 2000 to just $11B in 2002) 
• VCs remain confident because “the fundamentals of technology investment” remain strong
• What will change? (1) it’ll take longer to do deals; (2) due diligence will be more thorough — models and the assumptions they rode in on will be double- and triple-checked; (3) cash flow is king; (4) China and India might draw more investment; (5) traditional IT will attract less investment interest

To create the report, Forrester interviewed VCs including .406 Ventures, Adams Capital Management, Battery Ventures, Mooreland Partners, Newion Investments Management, The National Venture Capital Association and Valhalla Partners.

Sources:

1. Attracting Venture Capital Investment in an Uncertain Economy, Forrester, March 10, 2008

Big Bear Entertainment has secured 550k in Series A funding from El Dorado Ventures and Optix Pty Ltd.

We first covered Big Bear Entertainment in November of last year, when it was announced that they had secured 400k of their 500k Series A round. This appears to be the remainder of it, along with a 10% increase in size.

Sources:

1. VentureBeat, March 12, 2008
2. VGVC, November 3, 2008

Fluid Entertainment, a California developer now working on a children’s MMO, has secured 3.2M in a Series A round of funding. The round was led by Trinity Ventures.

Fluid has developed numerous children’s titles around licenses like Pokemon, Harry Potter and Powerpuff Girls. This is their first forray into the MMO space.

The children’s MMO/VW space will be an interesting one to watch over the next year. Just about every toy company has learned from Webkinz phenomena that an online experience can enhance the experience and a physical toy can move the transactional cost from a credit-card subscription barrier to a retail transaction that parents understand. However, the segment is getting crowded, children are fickle when it comes to toy fads, and the community attachment is not as great for these games as it is for something like WoW.

Sources

1. GamesIndustry.biz, March 12, 2008

Alamofire, a casual gaming startup, is reported to have secured $2M in funding from the Founders Fund.

VentureBeat, source of the news, says there’s still some question as to the details. See the link below for news.

Alamofire is a developer of casual games and cites itself as dedicated to “addictive, lightweight casual social games”. Social in this case meaning for social network services, as it’s first game, Packrat for Facebook, indicates.

Update 1: PEHub has a post revealing the other backer, Alsop Louie Partners.

Sources:

1. VentureBeat, February 2, 2008. 
2. PEHub, February 27, 2008.

Sparkplay Media Inc announced that it has raised 4.5M in Series A funding. The round was lead by Redpoint Ventures and Prism Ventureworks.

Sparkplay Media is developing a platform for browser-based MMO’s, and eating their own dog food by developing their own MMO, Earth Eternal, in parallel with it. 

Sources:

1. PEHub, February 15, 2008

Last week during GDC, Autodesk announced that it was acquiring Kynogon, a French company whose product Kynapse is middleware for doing AI (mostly pathfinding and visibility/perception for AI/NPC characters, which grows more complex as games move to more complex 3D environments). Terms of the deal were not disclosed.

 Sources:

1. PEHub, February 20, 2008.

Received the following press release this morning. No time to make detailed comments other than we wish them luck with their fundraising and hope to see a bevvy of deals around game IP from the new fund.

Incubation Venture Partners in Process of Raising $20 Million Fund
 
Azcatl Seed Capital Fund Would Provide Early Capital to Diverse Creators of New Original Games, Toys, Web, TV and Graphic Novels
SAN FRANCISCO, California (February 25, 2008) — Incubation Venture Partners LLC, the venture capital arm of Incubate Group Corp., announces that it is in the process of forming its first fund with qualified accredited investors, the Azcatl Seed Capital Fund I, a potential $20 million dollar venture capital fund to finance development of original creative properties, including video games, toys, television and graphic novels. The management of the fund has currently signed ten Letters of Interest and is actively exploring funding a variety of opportunities in the entertainment industry. The Azcatl Seed Capital Fund will support early stage development of new cross-media or transmedia entertainment properties by making equity investments directly into production companies or into intellectual property holding companies owned by creators. Incubate Group actively works with each creator before, during and after funding, assisting them to maximize each property’s potential.
 
The Azcatl Seed Capital Fund derives its name from an Aztec myth about a little red ant who played his part to save the world. According to the story, Quetzalcoatl created humanity but forgot to create a way to feed them. He searched fruitlessly for a way to feed his creation, and eventually discovered something amazing: a little red ant effortlessly carrying a kernel of corn ten times bigger than his tiny body. After much negotiation, Quetzalcoatl convinced the ant to show him the ant’s secret stockpile and found an endless supply of food, thereby saving humanity.
“Access to capital for creators seems to be the largest issue facing the media industry today,” said Peter Leahy, CEO of Incubate Group Corp, “and this is especially an issue for African-American, women, Latino and other diverse creators. By providing both venture capital funding and access to cutting-edge business development tools, we plan to reduce risk and better support creators in making the best creative and business decisions in the earliest stages of production.”
The backers of the Azcatl Seed Capital Fund will be looking to support products and brands in underserved markets and thereby capture the opportunity to develop original marketleading franchises. To that end, Incubate has identified market opportunities for new children and family-oriented properties as well as those developed for adults. Investment opportunities the fund managers are currently reviewing include electronic games, television, webisodes, movies, collectible card games, hobby games, graphic novels, books, licensed products, toys, music and online websites and communities.
“Azcatl Seed Capital Fund will actively support innovation in design, business models and content,” said Peter Leahy. “How people get their media is changing. With innovations like video on the internet, digital distribution via Xbox Live and convenient web browsing on the iPhone, people can increasingly access their favorite media anywhere and on demand. We believe our model of venture capital funding-linked with strong professional services provided in part by veteran fellow creators and artists-is a powerful approach. We also anticipate raising a second fund for expansion capital to support those companies that graduate out of Azcatl Seed Capital Fund I.”
Incubate Group provides creators with the resources they need to be successful-including business development, marketing, production, PR, licensing, art direction, product design and development, and technology-to support and sustain each creative property it funds. Incubate is working with both top and emerging talent in the entertainment industry, including several women and minority-owned production companies.
About Azcatl Seed Capital Fund
Azcatl Seed Capital Fund I is a limited liability company that is in the process of raising a $20 million seed and early stage fund with qualified accredited investors to support new and original cross-media entertainment properties. Incubation Venture Partners LLC will be the fund manager for Azcatl Seed Capital Fund I, and is the venture capital arm of Incubate Group Corp. More information about Incubation Venture Partners and the Azcatl can be found at www.incubationpartners.com

About Incubate Group Corp.
A new media company, Incubate Group Corp. acquires and invests in companies and products generated by both top creators and emerging talent. Incubate helps the creators grow these ideas, maintain their creative control and build unique paths to bring their ideas to market. Once an Incubate-backed property has launched and proven its commercial viability, Incubate assists in expanding the property’s reach and revenues with strategic partnerships, licensing and securing additional capital or financing.
You can find more out about Incubate Group Corp. at:
www.incubategroup.com
# # #
 

Electronic Arts has offered Take-Two shareholders $26 per share (nearly $2B) in exchange for the well known (but struggling) developer-publisher best known for its Grand Theft Auto games franchise [1].

This isn’t exactly a friendly offer at this point. Electronic Arts made the offer on February 19 in a letter from EA CEO John Riccitiello to Take-Two board chair Strauss Zelnick. EA went public with the offer after Take-Two rejected it [1]. Chances are, though, that this is only standard haggling over price rather than deep-seated opposition to the deal. It’s likley that Take-Two has a good handle on Grand Theft Auto IV pre-orders (we’re guessing they’re very strong) and might therefore feel emboldened to ask for more.

This comes after earlier rumors that Viacom had made an offer to buy TTWO at $23 per share.

EA has apparently found new religion regarding management of studios they’ve acquired, but Take-Two (and its infamous Rockstar studios) are going to put that hands-off philosophy to the test.

Update 1: EA has put an FAQ about the deal online. It includes the following facts:

• No plans to shutter NYC offices
• Veiled hints that some of the Rockstar controversy might be tamped down
• EA has been talking to Take-Two about this for about a year
• EA will host a conference call on Monday, February 25, 2008 at 5:00 am PT to discuss its proposal to acquire Take-Two Interactive and may disclose other material developments affecting its business and/or financial performance. Listeners may access the conference call live through the following dial-in number:
  (877) 795-3647, access code 220497, or via webcast at http://www.eatake2.com.

Sources:

1. Electronic Arts proposes to acquire Take-Two Interactive, EA Press Release, February 24, 2008 

Sean Ryan (CEO of Meez) writes, “a hedge fund manager this week … insisted that RNWK might even consider spinning out RealGames since it would be worth far more as an independent entity than it is stuck inside Real, but I don’t take that concept too seriously, even if it’s a logical step” [1].

Real’s overall growth is stuck in the high single digits while its gaming business grows at a blistering 25%. Maybe there’s something to the idea.

Then again, Valleywag’s Nicholas Carlson doesn’t think it’ll do Real a lot of good. He writes, “RealNetworks purchased Macrovision’s games business for $4 million. Last year, it bought a casual games site called Gametrust for about $20 million. It’s all part of RealNetworks CEO Rob Glaser’s plan to be a player in casual games. Just like he planned to be a player in online music. You know, before Apple crushed him. Or like how he planned to be a player in online video. Before Adobe’s Flash laid him low. We give Glaser this much credit: He keeps spotting opportunities. The best business plan going seems to be to watch what markets Glaser enters, follow him, and do a better job” [2].

Funny snark aside, we need to set the record straight: Valleywag is wrong to suggest that Real’s doing this to “be a player.” Real’s already pulling in annual revenues north of $100M from its games business. That makes it more of a player than all but a handful of casual-games focused companies.

Sources:

1. Macrovision Sellling TryMedia Games Group to RealNetworks, Sharkjumping, February 21, 2008
2. Why Rob Glaser desperately wants to be a player, Valleywag, February 22, 2008

Santa Clara, California-based Macrovision is selling (formerly San Francisco-based) games DRM middleware provider TryMedia for $4M to RealNetworks, a Seattle-based company that’s increasingly focused on its fast-growing games business revenues.

Although the TryMedia division “was in pretty rough shape, having lost $14 million in 2007, with losses anticipated to be in a similar range in 2008″ (on annual revenues of just $10.6M) [2, 3], Real appears to be excited about the acquisition, noting that it “doubles the scale of [Real’s] syndication business” and is part of “Real’s strategy to build reach through syndicated distribution partnerships” [1]. Macrovision was rumored to be ready to simply shut down TryMedia before Real picked up the company.

Macrovision paid $34M for TryMedia in 2005 [4] and The company was funded by the Intel Digital Home Fund, a $200M fund under Intel Capital [5].

Summary: Real picked up a the troubled subsidiary of a troubled company in order to expand its games distribution reach. That makes sense. If those relationships had been allowed to fizzle out, Real’s competitors might have been able snag a few at bargain prices. Real snapped up the whole lot as a bundle (over 300 in number, according to TryMedia’s website).

Sources:

1. RealNetworks to Acquire TryMedia from Macrovision, PRNewswire, February 22, 2008
2. Macrovision Q4 Earnings, PaidContent.org, February 21, 2008
3. Macrovision selling games business, Silicon Alley Insider, February 21, 2008
4. Macrovision to acquire TryMedia, Findarticles.com, July 26, 2005
5. Intel Digital Home Fund profile, IntelPortfolio.com

At GDC last week, entrepreneurs we met with were asking these questions. We don’t have satisfactory answers (yet) so consider this a list of things we need to learn: 

• Just who are the venture capitalists that really understand the gaming business? (For example, we hear that RedPoint Ventures’ Fouad ElNaggar is a member of a virtual Rock Band that ranks number two in the worldwide Xbox 360 leaderboards. There’s a man that not only knows games but also has some serious skills, if true.)
• Which VCs lack any experience in games whatsoever, and should they be avoided (or perhaps sought out for their “fresh” perspective)?
• What was the true volume (number and size) of investments made in interactive entertainment in 2007? (As far as we know, none of the commercial databases tracks interactive entertainment as a separate category. Please correct us if we’re wrong on this point.)

At GDC, I ran into an employee of an early-stage VC firm that’s starting to make a name for itself with investments in the online games space. In our brief chat, I asked, “Which of your competitors would you commend for doing a good job in the games space?” The VC absolutely refused to mention any other names. I got the sense that this was out of a desire to keep those names off of this blog (and out of entrepreneurs’ minds). Is it really that competitive out there?

And what’s wrong with saying, “I really respect the investments soandso’s making in this space”?

The only comment I did get was something close to: ”We’re not doing the largest volume, but we are making the smartest deals.”

Manifesto Games founder Greg Costikyan points us to a couple of interesting posts from Meez CEO and angel investor Sean Ryan, on his conclusions drawn from Casual Connect Amsterdam, discussing the pain and opportunity in the casual games space.

Both posts are worth reading for anyone playing in the space. Costikyan summarizes the ‘Pain’ post well in saying the ‘landrush is over’. Rising development costs, a glut of content - much of it free - resulting in falling average selling price, increased power and exercise of that power by what Ryan labels distributors*, and increasing competition from cheap content suppliers, are making the business of developing casual games far more challenging and less lucrative than it was just a couple years ago.

[*Ryan uses the term ’distributor’ to refer to both distributors like Oberon, Real, etc, and casual game portals like MSN Games, Yahoo, and BigFish that they often supply. There are important differences between the two, and the power each strata in the business yields depends on how consolidated traffic is between the main sites. Distributors like Oberon have become increasingly powerful in recent years as traffic has diversified across a larger number of niche-specific portals. This is analogous to the shift in power that took place in computer retail in the 90’s as sales shifted from thousands of mom and pop shops to a few big-box retailers, with distributors like Ingram Micro and Merisel losing influence, and with it margin, in the process; of course in the casual games case, the shift is in the opposite direction. To Ryan’s point though, both are higher levels of the ecosystem holding power over the lowly developer]

While all of this is interesting and true, its not exclusive to casual games.  While Casual Connect was going on, I sat half-way around the world at the DICE summit in Las Vegas, where Mitch Laskey and Keith Boesky were on stage debating whether consolidation would kill innovation. One of the more interesting points in the debate occurred when Laskey (a VC himself, with Benchmark Capital) claimed he had invested in a developer and his co-speaker interrupted “Bullshit!”, asserting that the company “is a platform play” more than a developer.

Similarly, while we don’t know the full details of what some casual game devs that have received recent funding are up to, our bets are that they’ll ALL turn out to be platform plays, game aggregation communities, or casual game aggregators or publishers. About the only example we can think of is GameLayers, and even that is arguably a platform play due to its meta-game type of experience.

A more-than-once discussed topic in DICE cocktail conversations was the contrast between VC’s investing in publishers, platform providers, and technology companies, but not Game IP, while publishers were very much grokking the value of IP and leaving a trail of acquisitions to prove it (Bioware/Pandemic being the poster child in most of these discussions). One theory frequently floated was that the majority of VCs putting money into the games segment were traditionally technology investors, rather than having a more ‘Hollywood’ background. Of course, in the casual games segment, where IP can be immitated as quickly as technology and game mechanics, is this any safer a bet? Uncertain.

In many ways, the landrush may be over in any segment that’s proven profitable. With retail games, the stakes of high development costs mean publishers exercise power. With console downloadable games, its only a matter of time before the platform owners dial up their margins and control over their own channel. With casual games, publishers with fight for virtual shelf space and squeeze out indie developers while distributors and portals will each leverage their strengths.

So with all that considered, should VCs dare put money into casual game devs? 

The answer of course, is Yes.

However, investing in a commoditized space with decreasing ASPs and increasing competition would be a bad idea. The key is whether the investment opportunity is in a company that is building a *differentiated* product or experience.

Ryan points to a couple tactics in his opportunity post, recommending that developers maximize distribution through use of Flash and by seeking additional distribution parterships, as well as developing their own direct-to-consumer web sites. Not that these are bad ideas, but they strike us as fairly limited thinking.

More sound tactics for early stage casual game developers might include limiting distribution in exchange for better terms or favored marketing status (e.g. Everyday Shooter signed exclusively with Sony on PS3 and got put on a marketing pedestal in exchange, vs being just one of many games on Xbox Live Arcade or Nintendo’s service). Another tactic would be to explore alternative business models. Item-based sales is an oft-cited model, but examples like Webkinz and UBFunkeys are even more novel. Finally, rather than looking at Facebook or MySpace as distribution vehicles, treating them as development platforms requiring unique content.

Regardless of the tactic, a developer striking out in a new and bold direction (e.g. the GameLayers reference above) strikes us as a better investment than one setting out to hit its head against the same brick wall as a thousand other players. 

At last week’s D.I.C.E. summit, EA CEO John Riccitello admitted that EA “blew it” when attempting to impose a command-and-control structure and homogeneous culture when integrating its Bullfrog, Origin Systems, and Westwood Studios acquisitions. We’re having trouble finding a full transcript, but in the meantime, Kotaku’s posted a good summary.

We’re looking for a little help covering the very, very active world of venture funding for game businesses. This is an ideal gig for a current (or rising) MBA student looking to educate him or herself on the business or for a j-school student looking to build a resume in tech reporting. We’re not in this for a profit (and have no revenues), but pay can be arranged for the right writer. Please contact us if you’re interested.

Michael Robertson (the founder of MP3.com), has launched Dealipedia, a simple, wiki-style database built to track deals (M&A activity, VC investments, IPOs, etc). The company has launched with over 18,000 deals pre-entered into the database, and appears to be an attempt to replace costly commercial databases.

Michael hopes that “Dealipedia will become a fantastic business resource to research historic deals and or stay abreast of new transactions” and so do we.

Before Dealipedia really works for us, though, here are our enhancement requests:

1. per dealtype RSS feeds
2. per-industry RSS feeds (I’ve got no interest in life sciences, for instance, and don’t have the time to sort through hundreds of non-games deals)
3. “save as Excel/CSV” feature after running a query (deal data exportable to spreadsheet format)

For an “alternate” view on Dealipedia, check out Valleywag, who are in high form on this one: “The real service Dealipedia provides is giving people an anonymous way to let the world know just how wealthy they are.” [#]

[Via VentureBeat]

Veteran video games industry reporter Dean Takahashi (author of Inside the Xbox and The Xbox 360 Uncloaked) has joined VentureBeat, which is great news because it should mean an increase in volume and quality of video game venture capital coverage on one of our favorite news sources. Congrats to both parties! Looking forward to the great new coverage!

MCVUK is reporting that Viacom is offering to buy majority control of Take-Two Interactive at $23 per share (the company’s shares are at $15.83 at 12:10PM ET). [Ed: actually, MCVUK is reporting that Viacom is offering £23 per share, but we figure that’s a typo, because it’s not consistent with other figures reported in the same story.] [1]

The deal would value value Take Two at $1.71B (based on outstanding shares of 74.33M) [2]. No official announcement has yet been made. Take-Two’s shares have so far today risen $.23 to $15.83 (1.54%), but trading volume is below average, which we take to mean that investors don’t believe this rumor just yet.

Sources:

1. “Viacom to buy Take Two for $1.5 billion?” MCVUK, February 7, 2008
2. TTWO, Yahoo Finance

At Casual Connect Amsterdam, FlowPlay CEO and founder Derrick Morton took the stage to briefly discuss FlowPlay’s just-closed $3.7M round of funding during Adeo’s Ressi’s VC 101 presentation (more on that later). Here’s what Derrick had to say:

• Elevator pitch: We are Miniclip meets Second Life. We aggregate casual games into a virtual world.
• Why FlowPlay sought funding: We started with $130k of our own money. We went out and got $.5M of angel money… our first investors were the founders of Skype.
• How FlowPlay found its investors: We did a pitch at a show called “Under the Radar.” The audience voted and one of the judges was from Intel Capital [FlowPlay’s lead investor]. That was June of last year, and in December we closed the financing.
• Lessons  learned: Be really noisy. Some people are really worried about confidentiality. Don’t try to be in real stealth mode. The reason the Skype guys found us is because they read about us in a newspaper article. Being in complete stealth is not always good for you. Also: don’t go out too early. We made the mistake of thinking “hey we got this great deck.” That wasn’t enough. You’ve got to have a good plan and a good business model and show that you know how to make it work.

At Casual Connect Amsterdam, Rebel Monkey CEO Margaret Wallace took the stage to briefly discuss Rebel Monkey’s just-closed $1M venture investment during Adeo’s Ressi’s VC 101 presentation (more on that later). Here’s what Margaret had to say:

• Elevator pitch: Rebel Monkey is a premiere casual game house founded by two veterans of the industry. Our goal is to enact the evolution of casual games beyond what we’ve seen to this point. Our focus is on providing connected casual games experiences. We’ll build a leading community-based platform for casual games to connect players around the world.
• Why Rebel Monkey sought funding: We’ve been around for about a year. We’d raised money for projects, no problem. We found when we wanted to build our big vision product (the connected community platform) nobody was really ready to establish a partnership for that, even though they all encouraged us to continue. We ended up going the private investment route because it was the way to see our vision for casual gaming and it allowed us to pursue our vision in an unmitigated fashion while retaining ownership of the platform and intellectual property.
• How Rebel Monkey found its investors: Redpoint Ventures funded us (to the tune of $1M). Redpoint also invests in Gaia Online. They found us. They were the first investors we spoke to. When Redpoint came around we really hit it off immediately… in terms of our vision for online gaming, social networking, and how it relates to the rest of the world.
• Lessons learned:  Raising venture capital is so different from doing a typical publishing deal or distribution relationship. The biggest lesson: how it works with the attorneys. Not only are you paying for your own attorney’s fees, but you’re also paying for your investor’s attorney’s fees. Ultimately of course it’s your investor paying those fees. When you’re a small fish … only raising a million dollars… you’re paying an attorney to negotiate against you! It’s full of conflict of interest and was the most frustrating part of the whole process.