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Social Gaming Companies See Their Stock Rise

FarmVille
Source: Facebook
FarmVille

For the better part of the last year, game industry pundits have shouted from the rooftops that social network gaming was the next big thing – but it’s starting to look like even they underestimated just how big it would be.

Major media companies, traditional game developers and more are gobbling up the developers of Facebook and MySpace games – and the price tags are escalating at a startling pace.

Disney holds the current crown, last week paying $563 million for Playdom, the third largest maker of social games. (That price could escalate to $763 million if the unit hits performance targets over time.)

To put that in perspective, last November, Electronic Arts paid $325 million in cash and stock for Playfish, a larger company in the space (with another $100 million set aside for performance bonuses). That’s a more than 90 percent premium in just nine months - for a smaller company. And that puts social gaming squarely in bubble territory.

“I think you’ve got scarce supply of social gaming sites with scale,” says Michael Pachter, Managing Director of Equity Research at Wedbush Securities. “Obviously there are 50 that do $2 million in revenues, but not that many do $100 million. Scarcity is what drives the price up. Maybe Disney overpaid, but they did so because they really wanted it.”

Industry leader Zynga, meanwhile, has caught the attention of Google. The search giant invested between $100 million and $200 million in the company in mid-July and will reportedly make it the cornerstone of its expected Google Games launch.

Even retailers are jumping on board, albeit a bit less directly. GameStop bought flash game and social hub Kongregateat the end of July for an undisclosed amount. While the company does not make games directly for social networks, the brick and mortar chain hopes to use it to help bridge the free-to-play social gamer over to the console world, eventually building their customer base.

Earlier this year, Will Wright, creator of “The Sims,” predicted social gaming could eventually make up one-quarter of the video game industry - though he did stop short of saying whether that would be in time spent or in revenue. Either way, several notable developers, perhaps sensing the shift, have left the traditional games business to focus on the social networking space.

"My belief is this is a harbinger of things to come...Any developer who pooh-poohs it is underestimating what is about to happen." -Ultima Creator, Richard Garriott


Richard Garriott, creator of the “Ultima” franchise (which kicked off the role playing game genre), launched Portalarium earlier this year, with a focus on social games. And last June Brian Reynolds, whose credits include “Alpha Centauri” and “Civilization II” left behind the studio he co-founded to join Zynga.

“My belief is this is a harbinger of things to come,” says Garriott. “Any developer who pooh-poohs it is underestimating what is about to happen.”

What’s interesting about the buying spree of these companies is the needs of the various purchasers are not the same. Electronic Arts is looking to corner all bases in the growing gaming industry. Google is gearing up for a fight with Facebook. And Disney sees Playdom as a way to promote not just its games, but all of its entertainment properties, including films, television holdings and theme parks.

Because the field is still so new, though, whether these companies will see returns on such heavy investments is still uncertain. Pachter, at present, only sees one deal as a relatively sure bet: EA’s purchase of Playfish..

“Playfish was already at break even when EA bought them,” he says. “Layer on top of that stuff like ‘Tiger Woods’ and ‘Fifa’ and I’m confident EA will [get its money back]. With Disney, I’m not so sure.”

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