Right now, the field is dominated by the large players: Activision Blizzard Inc. -- with console and online franchises including "Call of Duty" and "World of Warcraft" -- and Electronic Arts Inc. -- building on the success of its original game, "The Sims," by branching out into multiplayer sports and war games efforts.
EA broke out its biggest product to date on Tuesday, Dec. 20, with the debut of "Star Wars: The Old Republic," meant to do battle with Activision Blizzard's "World of Warcraft." "Star Wars" reportedly cost between $100 million and $300 million to develop.
Then, there is the latest entrant in public game companies, Zynga, which collected nearly $830 million in revenue (as of Sept. 30), through the unlikely method of having people grow online flowers and vegetables with its "Farmville" series as well as other games that appeal to a hitherto unreached game demographic: women.
Zynga's initial public offering on Dec. 16 was less exciting than expected. Shares priced at $10, half of what analysts were predicting earlier this year, and ended their first trading day down 5%, signaling concerns about the company's growth prospects.
But that's still a good return for early investors such as Clarium Capital Management LLC's Peter Thiel and LinkedIn Corp. co-founder Reid Hoffman, who were in on Zynga's $10 million Series A fundraising.
So which game companies are now the most attractive acquisition targets for the big players?
Early on in the life cycle of a game startup, venture capitalists are looking for economy of scale, said Itzik Ben-Bassat. The Israeli native, who started his gaming life at Blizzard before its merger with Activision and is now an executive in residence for New York-based Insight Venture Partners, has been on both sides of gaming deals.
To bring a relatively low-cost console game to market can cost up to $7 million, Ben-Bassat said, while a mobile application or game for a social network site such as Facebook Inc. might range between $500,000 and $1 million.
For example, Berlin-based Wooga GmbH, which, like Zynga, started off with social games for Facebook, was established in early 2009 with only $700,000 in seed capital, according to Anthony Moretti, an investment banker with Brooks, Houghton & Co. whose practice focuses on the sector.
By the end of its first year, Wooga raised $7.5 million in an effort led by Balderton Capital. And, in May, Wooga, now the largest European social gaming company, raised $24 million in a Series B investment led by Highland Capital Partners, with Balderton and other early investors coming back for more.
Still, the reliance on a Facebook platform by Zynga and Wooga can be a double-edged sword, mostly because of the problem of converting players to payers. Of Zynga's 227 million average monthly active users listed in its IPO prospectus, only 6.7 million were paying customers.
"The challenge for Zynga is how do you drive customer acquisition costs as low as possible," said Darren Wallis, a partner with tech-focused venture capital and hedge fund firm Alara Capital.
The next move for gaming, as it is for so much of the tech world, is into the cloud and onto mobile devices, Moretti said, which may leave some early console game developers such as THQ Inc. in the dust.
"It's clear from THQ's market cap [down 87% from the year's start to about $56.3 million] that it's under pressure," Moretti said. But that doesn't necessarily translate into a sale for the company because, he noted, THQ's business model was license driven, rather than owning the pièce de résistance of high tech: patents.
Which is one reason why Alara Capital's hedge fund is looking beyond role playing and social networks to companies that hold core patents that enable a user's experience.
The model for that kind of company might be Interdigital Inc., owner of some 18,000 patents in the field, which got a huge boost to its stock price when Google Inc. was said to be looking it over.
But game developers themselves will still need a good storyline and characters to engage users, Ben-Bassat said, and then an ability to connect.
"They have to be able to reach consumers on every online and social distribution platform," he said.
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