Knowledge

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Digi-Capital Ideas

Global Video Games Investment Review

February 2011

Knowledge
www.digi-capital.com
Relationships © Digi-Capital Limited 2011
Digi-Capital Ideas
 Contents

Executive summary

Market trends: fundraising, investment, M&A and JV opportunities

Market analysis
– Massively Multiplayer Online (MMO)
– Casual/Social Online
– Mobile
– Console
– Online gambling and skill based
– In-game advertising

About Digi-Capital

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Knowledge
Relationships
2 Note: Thank you to Graham Smith for his kind assistance

Digi-Capital Ideas
 Executive summary

Knowledge
Relationships
3
Digi-Capital Ideas
 The rise of online/mobile, China and the time to invest for growth

Games investment has fundamentally shifted to online/mobile

 Video games investment has changed fundamentally, shifting to online/mobile games
 Many major console publishers are struggling to adapt to online/mobile, and are not driving online/mobile games investment
 Quality investment demand still exceeds supply for high growth, high profitability online/mobile games companies
 Despite major publisher/media consolidation, with multiple high profile acquisitions

China, not America, could dominate the global games market

 Online*/mobile games should grow total video games market size to $87B and take 50% revenue share at $44B, with the historically strong pure console+ sector
flat to down
 Asia Pacific and Europe should take 90% revenue share for online/mobile games (China 49%, Europe 17%, Japan 14%, South Korea 11% in 2014F), although
North America remains important
 China’s domestic strength has produced high volume (up to 20M peak concurrent users), low ARPU**, cost efficient online/mobile games businesses with up to
50% operating margins, enabling significant investment in foreign markets

Online/mobile games independents: invest for growth or exit now

 Online/mobile games are high growth (18% CAGR 09-14F), but the market remains unconsolidated
 Games investment and M&A are accelerating, with the value of fundraising growing by 52% and M&A by 60% in 2010
 But the opportunity will not last forever, particularly if the results from some of the high profile acquisitions do not deliver in 2011
 The time to act is now, whether raising funds to accelerate growth prior to consolidation, create joint ventures and strategic partnerships to enter major foreign
markets (particularly from and to China, Japan and South Korea), or exit to take advantage of the strong M&A market and valuations

Conglomerates subsidising change, harder for console pureplays

 Console game investment is accelerating, with investment no guarantee of success, with major console publisher strategies appearing to have converged on fewer
franchises, refreshed more often with higher marketing budgets
 Large console franchises still remain highly cash generative, despite current market challenges to overall corporate profitability
 Although adapting to meet fundamental changes in the market with online/mobile organic investment and acquisitions, pureplay console publishers must prove
that their repositioning can deliver sustainable profits
 Conglomerates with diversified revenue streams may find it easier to invest in the change to online/mobile games

There is significant opportunity to invest in 2011

 The video games market is changing across sectors (casual/social online, middleware, smartphone/tablet, browser based MMO++, online skill based gaming, pure
console, retail MMO, gambling)
 As online/mobile games grow and fragment the games market, supported by high growth, high profit business models
 With opportunity for online/mobile games growth capital funds to invest in the strongest independent companies
 And clear investment, M&A, JV and strategic partnership opportunities for corporate and financial investors

Knowledge *Note: Online includes MMO, casual and social games

Relationships
4 +Note: Pure console excludes MMO

Digi-Capital
**Average Revenue per User
Ideas ++Massively Multiplayer Online
 Games investment has fundamentally shifted to online/mobile

Video games investment has changed fundamentally Global video games private placements
 VC games investment approached 2007 levels in 2010 in terms of funds raised, but $1,200M 140
number of investments declined
 Top 10 investments accounted for ~60% of total games investment in 2010, with a $1,000M 120
fundamental shift to online/mobile games company investments
100
 General VC market weakness and limited knowledge and relationships across $800M
complex, fast moving online/mobile games sectors still make generalist VC games 80
investment challenging $600M
60
$400M
Major console publishers struggle to adapt to online/mobile 40
 Major console publishers are focused on existing large console games franchises, as
$200M 20
the console games market is flat to down, with declining profitability
 Major publishers’ core competencies focus on management of $20m+ serial, high $0M 0
risk, complex developments, launches and commercialisation 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
 Online/mobile games require rapid, multiple, small scale parallel development
platform investments, completely different to major publishers’ business cultures Funds raised Number of investments
 Major publishers are not driving online/mobile games investment
 Major publishers are wary of large scale online/mobile video games M&A in early
stage, fragmented markets where market dominance is not yet clear Global video games mergers and acquisitions
$3,000M 80
Quality investment demand still exceeds supply 70
 High quality, high growth (100% annual revenue growth, 20-50% operating $2,500M
margin) online/mobile games companies are seeking investment to accelerate 60
growth $2,000M
50
 Outside the major investment deals, online/mobile games companies still find it
$1,500M 40
challenging to find high quality investors
30
$1,000M
Despite major publisher/media consolidation 20
 Console publisher/online: Electronic Arts/Playfish $400M $500M
10
 Media/online: Disney/Playdom $763M
 Online/mobile: DeNa/Ngmoco $400M $0M 0
 Major online/online: Tencent/Riot Est. $350M-$400M 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

 Online publisher/online: Shanda/Mochi Media $80M

Transaction value Number of transactions

Sources: CapitalIQ (excludes Vivendi Activision and Vivendi Universal

Knowledge Publishing deals), NPD Group, Charttrack, GfK, Activision Blizzard, GamesBeat

Relationships
5 Companies, Bloomberg, VentureBeat

Digi-Capital Ideas Note: Funds raised/transaction value only includes disclosed or estimated
amounts
 China, not America, could dominate the global games market

Global Video Games Sector Revenue ($B)

Online† and mobile games
should grow total video games 100
market size to $87B and take 90
50% revenue share at $44B 80
70
(18% CAGR 09-14F). The 60
historically strong pure 50
console* sector is flat to down 40
30
20
Asia Pacific and Europe should 10
0
take 90% revenue share for
2004 2005 2006 2007 2008 2009 2010E 2011F 2012F 2013F 2014F
online and mobile games
(China 49%, Europe 17%, Console games Online games Mobile games PC games In-game Advertising
Japan 14%, South Korea 11%
in 2014F). North America Regional Online/Mobile Games Revenue ($B)
remains important
50
45
40 10%
China’s domestic strength has
35 17%
produced high volume (up to 30
20M peak concurrent users), 25
low ARPU**, cost efficient 20
15 73%
games businesses with up to
10
50% operating margins, 5
enabling significant 0
investment in foreign markets 2005 2006 2007 2008 2009 2010E 2011F 2012F 2013F 2014F

Asia Europe North America

Sources: PWC (excludes hardware revenue), Companies

Knowledge
Relationships
6 * Note: Pure console excludes MMO
Digi-Capital Ideas
† Note: Online includes MMO, casual and social games

** Average Revenue per User

 Online/mobile independents: invest for growth or exit now

Online/mobile games are high growth but unconsolidated

 2009 $19B revenue = 32% of global video games revenue Consolidation Curve for Video Games
 2014F $44B revenue = 50% of global video games revenue
 >200M casual online unique users, >700M social online monthly active users,
Sector Sector Sector Growth Sector Sector
>20M MMO subscribers, >10B iPhone apps (55% games) downloaded Consolidation Launch for Scale Consolidation Equilibrium
 Barriers to entry remain low (outside of Facebook social games), with strong
competition but limited market dominance by major competitors
 Independents are competing successfully with more established competitors High Pure
Console
 High revenue growth (100%+) and operating margins (50%+) are being
delivered by strongest independents
Retail MMO

Investment and M&A are accelerating

 Video games fundraising was 52% higher in 2010 than 2009
Online gambling
 Video games M&A was 60% higher in 2010 than 2009
 Online/mobile games valuations for both investment and M&A have been rising,
with major deals attracting significant interest Skill based
 Major corporate acquirers are increasingly looking to external investments, Medium
acquisitions, joint ventures and strategic partnerships for online/mobile games Casual/Social Online
growth and diversification
 Strong Asian players (China, Japan and South Korea) are actively seeking foreign
opportunities to leverage their capabilities internationally, as well as to source Browser based MMO

international IP and knowledge for large domestic markets

Middleware
Mobile
But the opportunity will not last forever
 Public companies are subject to intense analyst scrutiny of high valuation In-game
investments and acquisitions Advertising
Low
 Not all current online/mobile games investments and M&A are likely to deliver
as expected during 2011, with a potentially negative impact on valuations - VC Investment - Growth equity - Leveraged - Limited Expected
- Some small investment buyouts M&A/ Deal
The time to act is now M&A - High volume,
mid-market
- Low volume,
large scale
investment
- Cost focus
Activity*

 Raising funds to accelerate growth prior to consolidation strategic M&A strategic M&A - Alliances or
 Joint ventures and strategic partnerships to enter major foreign markets spinoffs
(particularly from and to China, Japan and South Korea)
 Exit to take advantage of strong M&A market and valuations

Knowledge Sources: Digi-Capital, PWC, CapitalIQ

Relationships
7
Digi-Capital
*Note: some outlier deals may occur, e.g. Microsoft/Massive acquisition
Ideas
 Conglomerates subsidising change, harder for console pureplays

Console game investment is accelerating Console games are hit driven, with investment no guarantee of success
 Average game development costs have grown:
 XBox360, PS3: $15-30m
120 18
 Wii: $5-7M
16
 Strong development project management is crucial 100
14
 Marketing costs can equal development costs or more 80 12
 Retail, distribution and hardware royalties are significant

M Units
10

$M
 30-40% of retail turnover 60
8
 500K to 1M units just to break even (ex-overheads) 40 6
4
20
Although video games now rival Hollywood 2
0 0
 Hardware: $22B Revenue*
 Software: $55B Revenue*
 Total $77B video games vs $85B film global revenue*
 Up to $60 per game sold vs $10-20 per cinema ticket/DVD
 Console games are flat to down, with console growth hoped Development Cost ($M) Sales (M Units)
for from next console hardware cycle in 2014-2016

Conglomerates have the best chance to adapt

Franchises selling tens of millions of units are lower risk
 Major console publisher strategies appear to have converged
on fewer franchises, refreshed more often with higher
marketing budgets 250

 Although adapting to meet fundamental changes in the

200
market with online/mobile organic investment and
Global Unit Sales (M)

acquisitions, pureplay console publishers must prove that 150

their repositioning can deliver sustainable profits
 Conglomerates with diversified revenue streams may find it 100
easier to invest in the change to online/mobile games
 Disney has invested significantly with the Playdom social 50
games and Tapulous smartphone games acquisitions, as well
as an apparent intention to invest less in console games 0
Mario Pokemon Tetris The Sims Need for Final Grand Theft FIFA Madden NFL Legend of
 Microsoft invested significantly in developing and launching Speed Fantasy Auto Zelda
Kinect, revitalising the sales and market share of XBox360
and related games software

Sources: Companies, IDC, Gamasutra, VGChartz, Gamezone, IndustryGamers,

Knowledge Mainichi Shinbun, The Ledger, News Limited, GameSpy, GameSpot, VideoGaming247,

Relationships
8 LA Times, NTV, Digital Battle, IGN, Time Magazine, Forbes, MontrealTechWatch,

Digi-Capital Ideas
Newsday, Gamesindustry.biz, Wired
Note: Development Cost excludes marketing and distribution
* Global revenue figures from 2009
 Market trends: fundraising, investment
M&A and JV opportunities

Knowledge
Relationships
9
Digi-Capital Ideas
 The video games market is changing across sectors

Casual online Browser based Massively Multiplayer Online (“MMO”)

 Simple single player online games  Thousands of simultaneous online player games
 Played on online casual games platforms  Played on browser based online MMO platforms
 Example company: PopCap Games  Example company: Bigpoint

Social online iPhone/iPad and other smartphone/tablet

 Multiplayer online games  Mobile casual, social and MMO games
 Played on social platforms (e.g. Facebook)  Played on smartphones/tablets
 Example company: Zynga  Example company: Rovio

Online/smartphone/tablet middleware Online skill based gaming

 Technology for online/smartphone/tablet games  Online gambling based on skill, not chance (US legal)
 Software as a Service B2B business model  Thousands of simultaneous online players
 Example company: Jambool  Example company: King.com

Pure console Retail MMO

 Retail/digital download console games  Thousands of simultaneous online player games
 Played on PS3, XBox360 or Wii  Played on PC/Console via retail or digital download
 Example company: Electronic Arts  Example company: Activision Blizzard

Online gambling
 Online versions of offline gambling (illegal in US)
 Played on PCs or smartphones
 Example company: Betfair

Knowledge
Relationships
10
Digi-Capital Ideas
 As online/mobile games grow and fragment the market

Online*/mobile growing scale and share

 2009 $19B revenue = 32% of global video games revenue
 2014F $44B revenue = 50% of global video games revenue

As consumer markets fragment

 Wii grew Casual Console market (85M+ Wii’s sold)
 Apple grew Casual/Social Mobile market (10B+ Apps sold) Console/PC
 WoW grew Hardcore Online market (12M+ subscribers)
 Zynga, Spil, Playfish, Yahoo!, Big Fish Games grew Casual/Social
Web market (700M+ Monthly Active Users+ [“MAU”])
 King.com grew Casual Skill Web market (25M players)
 Bigpoint bridged Casual to Hardcore browser market
 Onlive hopes to expand delivery across TV and web (no console)

Supported by profitable business models

 Best companies growing revenue 100%+ annually while also
generating 20-50%EBITDA margins Casual Hardcore
 App Store: free (with in-game virtual items) to $10 per game Gamers Gamers
 WoW: $12.99-$14.99 monthly fee
 Spil: free, advertising supported
 Zynga: free, micro-transactions
 King.com: rake of user bets, micro-transactions, advertising
 Bigpoint: free, subscription, micro-transactions, no advertising
 Big Fish: try before you buy, downloads, retail, multi-platform

And requiring specific skills and approaches

 Multiple, parallel game development business platforms (not “one
game” hit driven companies) Web/Mobile
 Multiple distributors (not just Facebook) across platforms and
geographies
 Rapid, low cost game development and continuous daily
redevelopment cycles for rapid market response
 Fast failure (cut commercial losers, back commercial winners)
 Strong analytics (to maximise commercial returns)
 Aimed at delivering true scalability and category leadership, with
profit margins increasing as revenue grows

Knowledge Sources: PWC, Bigpoint, Companies, Casual Gaming Association,

Relationships
11 TechCrunch, Inside Network

Digi-Capital Ideas *Note: Online includes MMO, casual and social games
+Note: MAU is total monthly active users, not unique users
 With opportunity for online/mobile games growth capital funds

Investing in quality online/mobile video games companies* Example Fund Structure

 50-100% annual revenue growth
 20-30%+ operating margins or potential
 $10M+ revenue
 Domestic strength with East/West ambitions (China to Europe/US or Europe/US to China) Limited Partners
 Strong management teams, intellectual property and commercial track records with clear exit Investors
strategies
 Specific sector focus+
 Casual/social online Tencent, Shanda and
 iPhone/iPad, other smartphone/tablet Giant Interactive have
 Browser based MMO invested in games
funds
 Online/smartphone/tablet middleware

With a clear investment strategy to manage risk and optimise returns Game Fund
 $10M average investment ($5-15M range) $100M+ funds committed
 Focus on growth capital investment returns (30%+ IRR, 3-5x money multiple) 4 year investment period
 Working capital (debt convertible into equity via convertible loan notes) 7 year fund lifetime
 Pure equity capital
 Equity capital plus bank debt
 Direct European and Chinese investments
 US investment with Tier 1 co-investment partners
 Clear exit paths via trade sale to strategic video game and media corporates as market consolidates
 IPO potential for later stage investments depending on market conditions General Partners
Source, invest in, oversee
Growth capital fund structure and exit portfolio companies
 $100M+ committed funds
 2011-2014 investment period (aim to invest 75%+, remainder for follow on rounds)
 2011-2017 fund lifetime
 Committed funds fee basis
 2% annual management fee 2011-2104, reducing to 1.5% in 2015-2017 Portfolio Companies
 20% General Partners carry
 Return of funds invested before carry
 Return of fees before carry
 8% hurdle return before carry, with catch-up

Knowledge * Corporate investments, not project funding/publishing of individual games

Relationships
12 + Not pure console, retail MMO or online gambling due to investment risk

Digi-Capital Ideas
 There are clear investment, M&A and JV opportunities
For Major Video Games Companies
Sector Console MMO Casual/ Mobile Online Skill Based In-game
Social Gambling Advertising
Investment,  Core franchise  Invest in  Invest in  Invest in  Avoid due to  Mid-market  Small strategic
M&A and JV organic growth capital growth capital growth capital distance from strategic M&A M&A
Opportunities investment game fund game fund game fund core video  Avoid large,  Avoid large,
 Limited new IP  Mid-market  Mid-market  Small strategic games value value
investment until strategic M&A strategic M&A M&A competencies destroying destroying
8th generation  Avoid large, in subscription  Avoid large, M&A M&A
consoles value /micro- value  Focused new  Limited
 Avoid large, value destroying transaction destroying IP investment organic
destroying M&A M&A and M&A in extending investment
 Acquire  Focused new middleware  Focused new skill based due to small
economically IP investment markets IP investment model to core market size
challenged AAA in non-fantasy  Avoid large, in parallel, low franchises
independents to MMO market value cost mobile
control internal growth destroying game
costs  Focused new M&A development
 JV with major IP investment  Focused new  JV with major
media for in casual/ IP investment media for
licensed games/ social in parallel low licensed
marketing subscription/ cost mobile games
investment micro- subscription/ marketing/
 Explore strategic transaction micro- investment
options for MMO market transaction
underperforming  JV with major game
assets media for development
licensed MMO  JV with major
marketing/ media for
investment licensed
casual/social
marketing/
investment

Knowledge
Relationships
13
Digi-Capital Ideas
 There are clear investment, M&A and JV opportunities (cont)
For Independent Video Games Companies
Sector Console MMO Casual/ Mobile Online Skill Based In-game
Social Gambling Advertising
Investment,  Organic  Organic  VC fundraising  VC fundraising  VC fundraising  Growth equity  VC fundraising
M&A and JV investment (if investment for  Exit to major for online buyout  Exit to major
Opportunities possible) for new IP in subscription/ video games gambling  Exit to major video games/
 Exit to major non-fantasy micro- company technology video games/ media
video games MMO market transaction  JV with major and niche/ media company
company growth (if and media for geographic company
 JV with major possible) middleware licensed online  JV with major
media for  VC markets mobile games gambling media for
licensed games/ fundraising  Growth equity marketing/  Growth equity licensed
marketing/ for buyout for investment buyout for marketing/
investment casual/social subscription/ gambling investment
 Restructure to subscription/ micro- technology
focus on self micro- transaction and niche/
publishing, transaction market geographic
downloadable non-fantasy  Exit to major online
content, casual/ MMO market video games/ gambling
social or mobile  Growth media  LBO for large
markets, with equity buyout company generic
parallel for  JV with major gambling
development and casual/social media for franchises
low cost/ subscription/ licensed  JV with major
offshoring micro- casual/social media for
transaction games licensed
MMO market marketing/ marketing/
 JV with major investment investment
media for
licensed
MMO
marketing/
investment

Knowledge
Relationships
14
Digi-Capital Ideas
 There are clear investment, M&A and JV opportunities (cont)
For Venture Capital and Private Equity Firms
Sector Console MMO Casual/ Mobile Online Skill Based In-game
Social Gambling Advertising
Venture  Avoid pure  Invest in  Invest in  Invest in  Invest in  Selective  Invest in in-
Capital console casual/social casual/social parallel, low online investment in game
investments due subscription/ subscription/ cost mobile gambling new niches advertising
Investment technology
to risk profile and micro- micro- game  Avoid technology
Opportunities providers
sector transaction transaction development investment in  Avoid in-game
 Invest in
consolidation non-fantasy and already advertising
niche/
MMO market middleware consolidated agencies due
geographic
 Avoid markets online parts of the to business
hardcore  Avoid pure gambling sector model
MMO market advertising franchises
due to risk supported  Avoid generic
profile market gambling
because of franchises due
business to sector
model consolidation

Private Equity  Avoid pure  LBO in  Growth equity  Develop sector  Growth equity  Growth equity  Develop sector
Buyout console buyouts hardcore buyout in relationships buyout of buyout relationships
due to risk profile MMO market casual/social in anticipation online in anticipation
Opportunities gambling
and sector  Growth subscription/ of sector of sector
consolidation equity buyout micro- maturity technology maturity
providers
in transaction
 Growth equity
casual/social and
buyout of
subscription/ middleware niche/
micro- markets geographic
transaction  Avoid pure online
MMO market advertising gambling
supported franchises
market  LBO of large
because of generic
business gambling
model franchises

Knowledge
Relationships
15
Digi-Capital Ideas
 There are clear investment, M&A and JV opportunities (cont)
For Major Technology, Media and Telecoms Companies
Sector Console MMO Casual/ Mobile Online Skill Based In-game
Social Gambling Advertising
Investment,  JV with major/  Invest in  Invest in  Invest in  JV with  JV with  Small strategic
M&A and JV independent growth capital growth capital growth capital independent independent M&A to build
Opportunities video games game fund game fund game fund online video games internal
companies for  JV with  JV with major/  JV with major/ gambling companies for capability for
licensed games/ major/ independent independent companies for licensed significant IP
marketing/ independent video games video games licensed online marketing/ portfolios and
investment video games companies for companies for gambling investment leveraging
 Strategic M&A of companies for licensed licensed marketing/  Mid-market client
independent licensed MMO casual/social mobile games investment strategic M&A relationships
studios to build marketing/ games marketing/  Avoid organic to build  Avoid large,
internal investment marketing/ investment investment internal value
capability for  Mid-market investment  Small strategic and M&A due capability for destroying
significant IP strategic M&A  Mid-market M&A to build to different significant IP M&A
portfolios and to build strategic M&A internal core portfolios and  Avoid
leveraging internal to build capability for competencies leveraging standalone
marketing capability for internal significant IP marketing organic
platforms significant IP capability for portfolios and platforms investment
 Explore strategic portfolios and significant IP leveraging  Avoid due to
options for leveraging portfolios and marketing standalone different core
underperforming marketing leveraging platforms organic competencies
assets platforms marketing  Avoid investment
 Avoid large, platforms standalone due to
value  Avoid organic different core
destroying standalone investment competencies
M&A organic due to
investment different core
due to competencies
different core
competencies

Knowledge
Relationships
16
Digi-Capital Ideas
 Massive Multiplayer Online (“MMO”) Sector

Knowledge
Relationships
17
Digi-Capital Ideas
 The MMO sector is both high growth and consolidated

The MMO sector is highly cash generative

 MMOs are video games with thousand of simultaneous players
MMO subscribers (M)
 Business models are retail, subscription, micro transactions (in-game
currency commission and items) and advertising
 WoW customers pay $12.99-14.99 monthly fees
 MMOs operate across all major platforms

Market growth rates are forecast to accelerate

 There are currently over 20M paying MMO subscribers globally, with a
strong presence in China and South Korea
 The MMO subscription market is forecast to reach 30 million by 2012
based on regression analysis
 The substantial Chinese MMO market is dominated by domestic Chinese
companies

But MMOs are also hit driven and high risk

 Many retail MMOs have grown during their launch year, followed by up to
3 years of stability before an often sharp decline
 MMOs that rely purely on digital distribution tend to grow slowly
 MMO expansion packs help to manage churn and ongoing retail presence Global MMO subscriptions Global MMO genres
 Poor launches are generally fatal: NCSoft shut $69M Tabula Rasa after 15
months of sales and a 7 year development City Heroes - Villains, Second Life, 1% Others, 5%
1% Age of Conan, D&D, 1% Science Other, 3%
Everquest II, 1% 1% Fiction, 2%
LOTR, 1%
World of Warcraft currently skews the market EVE Online, 2%
Final Fantasy XI, 2%

 World of Warcraft accounts for ~60% of subscriptions, and is a significant Dofus, 3%

Lineage, 4%
profit driver for Activision Blizzard
 The strength of the “fantasy” MMO market (>90% subscriptions market Lineage II, 4%

share) has prompted many copycat offerings, with 35+ males the largest World of
RuneScape, 6%
player demographic Warcraft, 60%
 There appears to be significant untapped potential for MMOs in other game Aion, 12% Fantasy, 95%
genres, suggesting a “Blue Ocean Strategy” approach to opening new
genres (as with Nintendo Wii in the console market)
 Yet opening a new segment is not without risk: RealTimeWorlds raised
>$100M in total, then went into administration after launch of APB

Knowledge Sources: MMOData Feb 2010, Companies, CapitalIQ, GLG

Relationships
18
Digi-Capital
Note: data not publically available for all MMOs
Ideas
 Yet remains an early stage market with evolving dynamics

Subscription

NCSoft takes MMO mobile

NCsoft released Aion Exchange in
October 2010, a new
iPhone/iPad application enabling
subscribers to MMO Aion to
track their accounts, virtual Warner Bros/LOTR
equipment, and trends Post-acquisition, Lord
of the Rings Online
triples revenue with
change to freemium

Casual Hardcore

Tencent/Riot
Tencent continues its
international expansion
with purchase of League
Virtual items/micro-transactions of Legends developer

Knowledge Sources: MergerMarket, IMDB, Companies

Relationships
19
Digi-Capital Ideas
 And a clear hierarchy of successful business models

Business models are solidifying

• Subscription-based models generate
Revenue Potential
highest revenue, but require
substantial development and
marketing investment
• Browser based “freemium” models Advertising / Tens of
have established a significant Marketing millions of
dollars
presence, delivering solid results and
blurring the line between MMO and
casual/social games. The business
model allows the majority of users to
play for free, with a minority paying
Freemium /
for additional virtual items (“micro-
Micro-transactions Hundreds of millions of dollars
transactions”) and subscriptions
• Browser based games are cheaper to
develop and market, but generally
generate less revenue with lower
Average Revenue per User (“ARPU”).
This is changing.
Pure Subscription / Hundreds of millions of dollars
Time-based

Hybrid retail sales

Billions of dollars
and subscriptions

Knowledge
Relationships
20
Digi-Capital Ideas
 MMO is helping to deliver strong public company valuations

USD millions, except per share data Enterprise Value Multiples

Price % of 52 Market Net Enterprise Revenue EBITDA
Company (18-Feb-11) Week High Cap Debt Value CY2009 CY2010 CY2011 CY2009 CY2010 CY2011

Activision Blizzard, Inc. 11.07 87.5% 13,351 (3,508) 9,843 2.30 x 2.21 x 2.46 x 13.1 x 9.9 x 6.4 x
Changyou.com Limited 36.83 92.7% 1,899 (351) 1,548 5.79 x 4.73 x 3.78 x 9.2 x 7.6 x 6.4 x
Giant Interactive Group, Inc. 7.83 94.9% 1,781 (873) 908 4.58 x 4.61 x 3.75 x 6.6 x 7.4 x 6.1 x
NCSoft 204.28 82.5% 4,038 (534) 3,504 6.13 x 5.99 x 6.04 x 15.3 x 14.7 x 11.8 x
NetEase.com, Inc. 44.48 94.9% 5,776 (1,339) 4,437 7.77 x 5.54 x 4.55 x 13.5 x 10.9 x 8.9 x
Perfect World Co., Ltd. 21.42 50.8% 1,074 (229) 844 2.59 x 2.28 x 1.98 x 4.8 x 5.3 x 4.7 x
Shanda Games Limited 6.07 68.7% 1,732 (486) 1,246 1.71 x 1.87 x 1.71 x 4.2 x 5.3 x 4.8 x
Shanda Interactive Entertainment Ltd. 43.46 87.4% 2,502 (939) 1,563 1.96 x 1.90 x 1.62 x 4.4 x 7.7 x 6.2 x
Sohu.com Inc. 83.84 92.7% 3,181 (575) 2,605 5.06 x 4.25 x 3.41 x 11.7 x 10.2 x 8.3 x
Tencent Holdings Ltd. 26.75 98.2% 49,116 (2,055) 47,061 24.88 x 15.89 x 11.88 x 48.6 x 29.1 x 21.6 x

Median 4.82 x 4.43 x 3.58 x 10.5 x 8.8 x 6.4 x

Mean 6.28 x 4.93 x 4.12 x 13.1 x 10.8 x 8.5 x
Source: CapitalIQ
Note: Calendarized to December year end

Knowledge
Relationships
21
Digi-Capital Ideas
 MMO M&A activity is increasing
Selected M&A
Deal Revenue EBITDA Target
Date Target Acquirer Comments
value multiple multiple description

Tencent acquired a majority stake in Riot

04 Feb 11 Est. $350M- League of Legends MMO
n.a. n.a. Games, having previously been an investor and
$400M developer and publisher
Chinese distributor
Nexon was the EverPlanet publisher in Japan
06 Dec 10 South Korean developer of
n.a. n.a. n.a. and South Korea, and should now leverage the
MMO EverPlanet
acquisition by publishing internationally

Designs, develops, and markets Ubisoft will continue further development on

04 Nov 10 n.a. n.a. n.a. multiplayer middleware solutions Quazal’s technology to strengthen Ubisoft’s
to the games industry new online services

(50.8% The acquisition diversifies Gravity’s products

28 Sep10 $10.2m 7.0x n.a. MMO developer
stake) and services

Operates a 3D virtual community The acquisition extends Microsoft's reach into

28 Sep10 n.a. n.a. n.a.
Website online advertising markets

German based publisher of online Frogster is to be continued as an independent

03 Aug 10 $71m 4.9x 30.5x company with the existing management and the
virtual worlds and MMOGs
(77%) team at the existing sites

Developer of Lord of the Rings Warner Bros. acquisition moves it further into
20 Apr 10 n.a. n.a. n.a.
Online the free to play micros-transactions MMO sector

Development and provision of

19 Apr 10 $21m n.a. n.a. online games, in particular Expands product portfolio
(29%) MMOGs

The acquisition is in line with KongZhong’s

Shanghai Dacheng China-based developer of 3d strategy to expand into the two fastest growing
15 Dec 09 Network Technology $80m n.a. n.a.
MMORPGs video games segments in China (MMORPGs and
Mobile games)
The acquisition will reduce risks in internal
US based developer of massively-
development of future online games and
09 Dec 08 $75m 4.4x n.a. multiplayer online role playing
improve margins through the low-cost
games
structure of Cryptic’s engine

Knowledge Sources: CapitalIQ, Mergermarket, Bloomberg, VentureBeat

Relationships
22
Digi-Capital Ideas
 The MMO sector is ripe for investment
Selected private placements
Deal Target Deal Target
Date Target Investor Date Target Investor
value description value description
Develops and licenses MMO tech
13 Dec 10 Stelt Holding NV $10m MMO developer and publisher $3m
15 Dec 09 platform and develops third party
racing games

QuantAM Operates an MMO games portal n.a. Develops and operates

27 Sep 10 $12m 30 Nov 09 online games in China

Asynchronous massive Develops multiplayer games

29 Oct 09 $4m
08 Jul 10 $4m multiplayer online games for and platforms for iPhone
iPhone
Develops MMOs for console and
01 Aug 09 47 investors $12m PC
Develops multiplayer online
22 Mar 10 $20m games and entertainment

Develops, produces and

31 Jul 09 $1m distributes MMOs for kids
Jan 10 n.a. $21m MMO games developer

Undisclosed $4m A worlds and MMO games

16 Feb 09 production company
Develops and operates online Angel investor
20 Jan 10 $20m games in China
$1m Offers MMO games for casual
07 Oct 08 gamers
Develops and publishes browser-
06 Jan 10 4 investors $3m based casual MMOs and social
games Private investors Publishes online computer games
25 Jul 08 including CEO $1m
with a focus on virtual worlds
4 investors Develops, publishes, and licenses
22 Dec 09 $18m multiplayer online games $50m
14 Apr 08 MMO games developer
including EVE

Knowledge Sources: CapitalIQ, Mergermarket, GLG

Relationships
23
Digi-Capital Ideas
 With clear investment, M&A and JV opportunities

Firm Type Major Independent Venture Capital Private Equity Major Technology,
Video Games Video Games Media & Telecoms
Investment, M&A  Invest in growth capital  Organic investment  Invest in casual/  LBO in hardcore  Invest in growth
and JV game fund for new IP in non- social subscription/ MMO market capital game fund
Opportunities  Mid-market strategic fantasy MMO market micro-transaction in  Growth equity buyout  JV with major/
M&A growth (if possible) non-fantasy MMO in casual/ social independent video
 Avoid large, value  VC fundraising for market subscription/ micro- games companies for
destroying M&A casual/social  Avoid hardcore MMO transaction MMO licensed MMO
 Focused new IP subscription/micro- market due to risk market marketing/
investment in non- transaction non- profile investment
fantasy MMO market fantasy MMO market  Mid-market strategic
growth  Growth equity buyout M&A to build internal
 Focused new IP for casual/ social capability for
investment in casual/ subscription/ micro- significant IP
social subscription/ transaction MMO portfolios and
micro-transaction non- market leveraging marketing
fantasy MMO market  JV with major media platforms
 JV with major media for for licensed MMO  Avoid large, value
licensed MMO marketing/ destroying M&A
marketing/investment investment

Knowledge
Relationships
24
Digi-Capital Ideas
 Casual/Social Online Sector

Knowledge
Relationships
25
Digi-Capital Ideas
 Casual/social online games are growing extremely rapidly
Casual/social online games have two primary forms
 Casual/social online games require little experience or time commitment, with
Explosive growth – Cityville after 41 days
simple rules and gameplay accessed through a web browser 100M
 Most casual/social games offer a free element, coupled with subsequent game
purchase, in-game virtual item purchase, subscriptions or advertising
 80M

Monthly Active Users

The primary forms of casual/social online games are:
 Casual: single player, played on a casual games platform such as Big Fish
Games or Spil
60M
 Social: multiplayer, played either on a casual/social games platform (e.g.
Bigpoint) or via a social network such as Facebook (e.g. Zynga)
40M
The global market is high growth
 $2.25B revenue 2007, $3B revenue 2009*
 >200M casual monthly unique users 20M
 >700M social Monthly Active Users+ (“MAU”)
 Casual/social games have a high proportion of paying female customer (74%)
 Popular casual games include:
11 Nov 10 Jan
 Bejeweled (PopCap Games)
 QQ Games Collection (Tencent China) Casual players: 52% women Casual payers: 74% women
 Diner Dash (Playfirst) Men
 Mystery Case Files (Big Fish Games) 26%
 Popular social games include:
Men
 Cityville, Farmville, Frontierville, Mafia Wars (Zynga) Women
48%
 Dark Orbit , Deepolis, Farmerama (Bigpoint) 52%
 Millionaire City (Digital Chocolate) Women
 Pet Society (Electronic Arts) 74%

With multiple business models Social players: older (so wealthier) than expected
 Subscription and in-game item sales (micro-transactions) models most profitable 25%
 Advertising supported models are cyclical, with generally lower margins 20%
 Bigpoint (browser “core” – between hardcore and pure casual gameplay): free, 15%
subscription and in-game item sale, limited advertising
10%
 Zynga (social): free, in-game item sales (micro-transactions)
5%
 Spil (casual): free, advertising supported, micro-transactions
 Big Fish Games (casual): try before you buy, downloads, retail, multi-platform 0%
 Casual/social game development costs of less than $500k are much lower than <18 18-21 22-29 30-39 40-49 50-59 60+
console game development costs

Sources: Casual Games Association, DFC Intelligence, Inside Network, ISG (US/UK age
Knowledge
Relationships
26 statistics 2010)
*Note: Casual Gaming Association includes casual/social games played on mobile, iPhone,

Digi-Capital Ideas
social networks, PC, Mac and Xbox LIVE Arcade platforms, using different definitions to
the earlier PWC definitions
+Note: MAU is total monthly active users, not unique users
 Social games market dynamics are changing

Social games are the leading social applications Top 40 Facebook app publishers MAU* (M)
 ~70% of the Monthly Active Users for top 40 Facebook application publishers come
Daily Telaxo 7 Social Zoosk 7 50 Cubes 6
from games Horoscope 8
Cie Games 8
Graph 7 Myspace 6
Funzio 6
HTC 6
GSN 8
 Half of the top 40 Facebook applications are games Frases Boyaa 9
Photobucket 7
Diarias 9 Kabam 9
Digitware MindJolt 9
Conduit 9 Zynga
Driven by the nature of social networks 9 Yelp 10
LOLapps 10
278

TubeYou 10
 Cross-promotion using social networks and social games platforms is critical to the Yahoo! MiniMax 11
11
growth of social games RockYou! 14
SNAP 15
 Investment in “on platform” cross-promotion and marketing generally produces Popcap 15
Wooga 16
much higher return on investment than “off platform” Microsoft 16
 The strongest social games are built around game design focused on acquiring Social Point 16
RootMusic 17
users, generating revenue from virtual items and increasing user engagement and Digital Chocolate 19 CrowdStar
42
lifetime Badoo 40
AppBank 19 @Apps 21
Electronic Arts 36
Causes 26
Takeoff Monkey 23
But the social networks also pose a significant challenge 6 Waves 25 Playdom 25

 The major social networks dominant positions make them excellent marketing and
distribution partners Broader distribution
 Social games companies which are primarily dependent on one social network have
more limited leverage in commercial negotiations
 70:30 revenue split between games developers and social networks is not
uncommon, but there are market rumours of more extreme splits in favour of some
social networks
 Social networks’ commercial policies can have significant impact across both social
games developer and middleware sectors Fewer More
games games
So a portfolio of distribution and games is needed
 As in any industry, reliance on one product or one distribution channel poses
potential risks
 Diversified social games companies with a portfolio of games and distribution
channels generally have the greatest control over the destiny of their businesses,
and hence lower long term risks
Narrower distribution

Source: InsideNetwork
Knowledge
Relationships
27 *Monthly Active Users Feb 2010

Digi-Capital Ideas
 Online/mobile games middleware offers another way to play
Today’s online/mobile games middleware market: disparate, unintegrated solutions

Technology Development Monetization Analytics Optimization Delivery Marketing/ Payment Security

Distribution

Services Games Virtual item Measure and Optimize game Deliver games Distribution on Payment Anti-fraud,
delivered development (micro- analyse key performance across social/casual/ across anti-piracy,
engine/SDK transactions), online/mobile across platforms browser based platforms and revenue
virtual game metrics multiple and mobile geographies assurance
currency, for continuous platforms platforms
subscription, feedback loop
in-game
advertising,
and sales tools

Example Multiple
company independent
firms

There is the potential for an integrated games middleware solution

Development Monetization Analytics Optimization Delivery Marketing/ Payment Security

Distribution

Integrated online games middleware solution

Across casual, social, browser based, smartphone, set-top box, connected console, PC, including all major platforms and devices

Knowledge
Relationships
28
Digi-Capital Ideas
 There are opportunities across the casual/social value chain

Developer Publishers Portals Aggregators Middleware

Creation, design and Funding, distribution and Casual/social game Intermediary between Enable the creation and
development of a game project management destination websites developers, publishers distribution of casual/
and portals social games

More Zynga acquisitions? Disney and GameStop buys Next after Playfish/Playdom? Chinese major investments? Middleware consolidation

Zynga ‘s series of acquisitions in Disney buys Playdom for $763M Zynga, Bigpoint and GameForge Chinese games companies set to Visa’s acquisition of Playspan and
2010 to leverage its position may and GameStop buys Kongregate are subject to constant accelerate foreign investment in Google’s acquisition of Jambool may
continue in 2011 speculation about IPO or exit 2011 in line with 12th 5 year plan lead to more early stage consolidation

Knowledge Sources: Mergermarket, Companies, PaidContent, TechFlash, Financial Times

Relationships
29
Digi-Capital Ideas
 Particularly for integrated online companies like
Tencent is the greatest games company may not know well
 China has 29% internet penetration, but 382M users Tencent Games quarterly revenue (RMB M)
 China forecast to reach 56% internet penetration (754M users) by 2015
 Tencent holds dominant or leading stakes in many Chinese online/mobile markets (IM,
2,500
games, eCommerce, search, mobile services)
 Tencent’s Chinese games market share was 20% in 2009 with forecast 27% by 2012
2,000
 Total peak concurrent users across all games categories of ~20M
 Tencent’s market cap is substantially more than Activision Blizzard, Electronic Arts, Casual/social online
1,500
GamesStop, Take2, THQ, Atari, Game Group and Ubisoft combined
Board & chess
1,000
Tencent’s integrated model is where the market is headed
 Tencent generates ~50% operating margin 500
MMO
 Online/mobile games (MMO, board & chess, casual/social) generate >40% revenue
 Business model appears to be migrating from virtual items (higher Average Revenue per -
User) to subscriptions (short term revenue reduction, but lower volatility) 3Q09 4Q09 1Q10 2Q10E 3Q10E 4Q10E

 Integrated model with upgrades/privileges across online, mobile and offline (not just
games) is a significant advantage for customer acquisition, development and retention
 Enhanced capabilities to cross-promote, upsell and cross-sell
Tencent Chinese revenue leadership ($M)
Tencent will be in your market soon, if it isn’t already
 Tencent is growing through domestic partnerships:
 China Unicom (fixed line, 3G, operations, “QQ Wallet”)
 Hunan TV (talent, animation, online/mobile games)
 China Merchants Bank (financial services)
 Tencent is expanding with international partnerships/investments:
 Riot Games (League of Legends MMO)
 Digital Sky Technologies (Facebook, Zynga, Mail.ru investor)
 Vina Games (Vietnamese online games/internet)
 MIH India Global Internet (licensed software, content & trademarks)
 Naspers (36% Tencent investor) with global reach in high growth markets
 $760M investment fund, including games focus

Western video games and media are learning from Tencent

Knowledge Source: CapitalIQ, Credit Suisse, Company, Shanghai Securities

Relationships
30 News, Reuters, People’s Daily

Digi-Capital Ideas
 Casual/social games are driving larger company valuations

USD millions, except per share data Enterprise Value Multiples

Price % of 52 Market Net Enterprise Revenue EBITDA
Company (18-Feb-11) Week High Cap Debt Value CY2009 CY2010 CY2011 CY2009 CY2010 CY2011

US and Europe
Electronic Arts Inc. 19.28 95.3% 6,446 (1,971) 4,475 1.18 x 1.20 x 1.15 x n.m. 17.2 x 8.1 x
G5 Entertainment AB 3.58 84.8% 27 (0) 26 17.71 x n.a. n.a. n.m. n.a. n.a.
GigaMedia Ltd. 1.22 36.5% 68 (37) 30 0.19 x 0.48 x 0.83 x 7.6 x n.a. n.a.
RealNetworks Inc. 4.04 74.7% 548 (334) 214 0.38 x 0.53 x 0.60 x n.m. n.m. 7.0 x

Median 0.78 x 0.53 x 0.83 x 7.6 x 17.2 x 7.5 x

Mean 4.87 x 0.74 x 0.86 x 7.6 x 17.2 x 7.5 x

Asia
Asiasoft Corporation 0.33 88.1% 100 (27) 73 1.49 x 1.55 x 1.48 x 7.0 x 5.0 x 4.7 x
Astro Corporation 1.81 74.0% 120 (3) 117 6.34 x 11.13 x 10.27 x n.m. n.a. n.a.
Gamania Digital Entertainment Co., Ltd. 1.47 71.7% 244 (30) 214 1.22 x 1.21 x 1.11 x 7.1 x n.a. n.a.
InterServ International Inc. 2.04 37.3% 57 (23) 35 3.67 x n.a. n.a. 14.4 x n.a. n.a.
IPVG Corp. 0.03 58.9% 21 9 30 1.02 x n.a. n.a. 14.0 x n.a. n.a.
Kingsoft Corporation Ltd. 0.55 63.9% 622 (198) 424 2.73 x 2.60 x 2.25 x 6.5 x 6.4 x 5.2 x
NetEase.com, Inc. 44.48 94.9% 5,776 (1,339) 4,437 7.77 x 5.54 x 4.55 x 13.5 x 10.9 x 8.9 x
Perfect World Co., Ltd. 21.42 50.8% 1,074 (229) 844 2.59 x 2.28 x 1.98 x 4.8 x 5.3 x 4.7 x
Shanda Games Limited 6.07 68.7% 1,732 (486) 1,246 1.71 x 1.87 x 1.71 x 4.2 x 5.3 x 4.8 x
Shanda Interactive Entertainment Ltd. 43.46 87.4% 2,502 (939) 1,563 1.96 x 1.90 x 1.62 x 4.4 x 7.7 x 6.2 x
Tencent Holdings Ltd. 26.75 98.2% 49,116 (2,055) 47,061 24.88 x 15.89 x 11.88 x 48.6 x 29.1 x 21.6 x

Median 2.59 x 2.28 x 1.98 x 7.0 x 6.4 x 5.2 x

Mean 5.03 x 4.88 x 4.09 x 12.4 x 10.0 x 8.0 x
Median 1.96 x 1.88 x 1.66 x 7.1 x 7.1 x 6.2 x
Mean 4.99 x 3.85 x 3.29 x 12.0 x 10.9 x 7.9 x
Source: CapitalIQ
Note: Calendarized to December year end

Knowledge
Relationships
31
Digi-Capital Ideas
 Generating substantial M&A

Selected M&A
Deal Revenue EBITDA Target
Date Target Acquirer Comments
value multiple multiple description

Visa’s acquisition moves its traditional business

9 Feb 11 $190m n.a. n.a. Virtual goods payment platform
more actively into the virtual goods payment sector

US-based developer of social and Zynga New York will form part of Zynga’s
21 Jan 11 n.a. n.a. n.a.
branded games continuing growth across social and mobile games

US-based developer of
22 Oct 10 n.a. n.a. n.a. WonderHill becomes Kabam’s San Francisco studio
social games

The acquisition will combine Shanda Games' online

Online game development studio
08 Sep10 $95m n.a. n.a. game platform with Eyedentity's game
in Korea
development capabilities

Social Gold virtual currency Google extends its presence in the games sector
13 Aug 10 Est. $70m n.a. n.a.
platform with Jambool’s monetization platform

Google extends its presence in the social games

6 Aug 10 Est. $228m n.a. n.a. Widget maker for social networks
sector with Slides widgets

Strengthen digital gaming portfolio, acquire

27 Jul 10 $763m n.a. n.a. Social games developer management and extend reach on social networks
Facebook and MySpace

Strengthens GameStop's digital platform and its

27 Jul 10 n.a. n.a. n.a. Social gaming platform
strategy to be the gaming aggregator of choice

US-based developer of Challenge Games' Co-Founder will become Zynga' s

03 Jun 10 n.a. n.a. n.a. multiplayer Web-based fantasy General Manager and Vice President. The Challenge
games Games' 35 employees will join Zynga’s workforce

Enables online friends to converse

privately over the Web; and share The engineering team of Sharegrove will join
26 May 10 n.a. n.a. n.a.
Web pages, pictures, and audio Facebook
and video files
Publishes games from casual Lloyd Melnick, Founder of Merscom and team
26 Apr 10 n.a. n.a. n.a. game developers on PC, console, of 20 producers, designers, artists and
and iPhone platforms engineers will join Playdom

Knowledge Sources: CapitalIQ, MergerMarket, TechCrunch, Companies

Relationships
32
Digi-Capital Ideas
 Generating substantial M&A (continued)

Selected M&A
Deal Revenue EBITDA Target
Date Target Acquirer Comments
value multiple multiple description

Australian-based casual games Consolidation of the Australian casual games

08 Apr 10 n.a. n.a. n.a.
developer market

The founders of Offbeat are joining Playdom in

Offers massively multiplayer
leadership roles, and the 12 developers and
03 Mar 10 n.a. n.a. n.a. online and casual games on
designers of Offbeat will join Playdom's
Facebook
existing 15-person Seattle studio

Develops FunCards, a card game Acquired an unknown minority stake to enter a

26 Feb 10 n.a. n.a. n.a.
for playing cards with friend high growth market
(Undisclosed stake)
Hi5 added several of Big Six's executives to its
24 Feb 10 Big Six Games, Inc n.a. n.a. n.a. US-based social games developer management team and strengthened its online
games presence
US-based operator of online
The combination of Shanda’s games and Mochi’s
games advertising network for
12 Jan 10 $80m n.a. n.a. distribution platform will create a better online
game developers, advertisers and
game media platform
publishers
The acquisition raised capital to fund growth
08 Dec 09 Tiger Global $180m n.a. n.a. US-based online social games and expansion whilst also putting off an IPO of
Management LLC the company
(Undisclosed stake)

Developer of free-to-play casual Electronic Arts continues to expand away from

09 Nov 09 $400m n.a. n.a. social games that can be played on its core console games sports offerings into
social networking platforms high growth casual games, but at a price

Ireland-based publisher and The deal improved Gamestop’s digital media

04 Nov 09 n.a. n.a. n.a.
developer of online games business and helped it extend outside the US
(Majority stake)
US-based provider of video game The acquisition was in line with Google’s
05 Aug 09 $132m 8.1x n.a. compression software, games and strategy of pursuing innovation and video
social networking quality on the web

The acquisition will allow the combined entity

Canadian based owner of online
27 Jul 09 $30m n.a. n.a. to provide a full suite of social advertising
games and social networking sites
solutions for developers and advertisers

Knowledge
Relationships
33
Digi-Capital Ideas
 And attracting significant investment

Selected private placements

Deal Target Deal Target
Date Target Investor Date Target Investor
value description value description
Institutional
17 Feb 11*
* and existing n.a.* Largest Facebook social games Offers Hangout.net, a casual 3D
company* 19 Mar 10 $2m social networking site
investors*

10 Feb 11 $15m Gamer social network 09 Feb 10 Offers a social networking website
$3m

To be invested
Tencent investment fund,
24 Jan 11 in next 2-3 $760m including games focus Allows employees to connect and
03 Feb 10 $10m share by posting messages
years

20 Jan 11 $30m Social games developer and Undisclosed

31 Jan 10 Publishes and delivers casual
publisher $1m
investors video games

Multi-platform casual-games
10 Nov 10 $16m platform, with expertise in PC, n.a. Develops and publishes social
25 Jan 10 games in Russia
online and mobile

Publishes, and distributes online Shenzhen Fortune

games for social networks and Develops and operates online
20 Oct10 $20m 20 Jan 10 Venture Capital $20m games in China
web communities
Management
Develops, publishes, and provides Develops social games
29 Sep 10 $6m casual games, including 20 Jan 10 $18m applications
Diner Dash

Largest Facebook social games Develops social games for

15 Jun 10 $150m+ company 14 Dec 09 $2m networking sites

Provides an online social and

Develops location based social 07 Dec 09 $4m games community for children
14 May 10 $20m games aged 6 to 14

Operates as a social network in Operates a virtual currency

Latin America, Europe, Asia, and 01 Dec 09 $11m platform for social media
09 Apr 10 n.a. developers
Africa

Produces social games for Develops multi-platform social

01 Apr 10 9 investors $1m platforms 01 Dec 09 11 investors $2m games

25 Mar 10 Develops social web games Undisclosed Develops, publishes, and operates
n.a. 24 Nov 09 $5m free to play online games
investor

Sources: CapitalIQ, Mergermarket, Wall Street

Knowledge Journal, New York Times, Shanghai Securities News,

Relationships
34 Reuters, People’s Daily

Digi-Capital Ideas *Fundraising round reported in WSJ and NYT at

time of publication, details to be confirmed
 With clear investment, M&A and JV opportunities

Firm Type Major Independent Venture Capital Private Equity Major Technology,
Video Games Video Games Media & Telecoms
Investment, M&A  Invest in growth capital  VC fundraising for  Invest in casual/  Growth equity buyout  Invest in growth
and JV game fund subscription/micro- social subscription/ in casual/ social capital game fund
Opportunities  Mid-market strategic transaction and micro-transaction subscription/ micro-  JV with major/
M&A in subscription/ middleware markets and middleware transaction and independent video
micro-transaction and  Growth equity buyout markets middleware markets games companies for
middleware markets for  Avoid pure  Avoid pure licensed casual/
 Avoid large, value subscription/micro- advertising advertising social games
destroying M&A transaction market supported market supported market marketing/
 Focused new IP  Exit to major video because of business because of business investment
investment in parallel games/media model model  Mid-market strategic
low cost subscription/ company M&A to build internal
micro-transaction game  JV with major media capability for
development for licensed casual/ significant IP
 JV with major media for social games portfolios and
licensed casual/social marketing/ leveraging marketing
marketing/investment investment platforms
 Avoid large, value
destroying M&A
 Avoid standalone
organic investment
due to different core
competencies

Knowledge
Relationships
35
Digi-Capital Ideas
 Mobile Sector

Knowledge
Relationships
36
Digi-Capital Ideas
 Mobile games have been reinvigorated by smartphone growth

Smartphone marketshare is accelerating Global mobile games revenue ($B)

 Global mobile phone penetration 67% in 2009, 5B subs in in 2010E
 Mobile phone penetration >100% in many developed markets
 Total global mobile phone market volume growth Q1 2010 = 21.7% 14
 Global smartphone market volume growth Q1 2010 = 56.7% (18.8% of
12
total market volume in Q1 2010 vs 14.4% in Q1 2009)
10

8
Driving mobile games revenue growth
 Global mobile games market forecast to grow to >$13B by 2014 6

 The mobile games market landscape is adapting to consumer trends and 4

market demand: 2
 Mobile game publishers are bypassing network operators to sell
0
directly to consumers via iTunes and Android Market 2005 2006 2007 2008 2009 2010E 2011F 2012F 2013F 2014F
 High connectivity and multiplayer games becoming mass market
due to unlimited data packages
 In-game advertising being used to supplement mobile game
revenues
 Integrated applications increasing to allow converged gameplay
Global mobile broadband penetration
with console/MMO/casual/social games
60%

New players have entered from multiple markets 50%

 Network operators (e.g. Vodafone Live!) 40%
 Manufacturers (e.g. Apple App Store)
 Web advertising platforms (e.g. Google) 30%
 Console games majors (e.g EA Mobile) 20%
 Independent games companies (e.g. Rovio)
10%

With low barriers to entry 0%

 Development costs tens to hundreds of thousands, not millions 2003 2004 2005 2006 2007 2008 2009 2010E
 >10B iPhone Apps downloaded, many of which are independently
developed games Developed World Developing
 App stores enable direct sales, bypassing network operators

Knowledge Source: ITU, PWC, IDC

Relationships
37
Digi-Capital
* Note: Online includes MMO, casual and social games
Ideas
 Attracting major corporates and multiple independents
Japan's DeNa $400m EA claims market leadership Microsoft
Ngmoco acquisition But 40% of mobile games revenue still and Nokia
DeNA acquisition to leverage from “feature” phones, not smartphones To address
Mobage globally “burning platform”
questions, the
Public
giants are joining
forces against
Apple and Google

Mobile Multi-
pure- Platform
play Lupis Labs

THQ smartphone
focus
THQ sells THQ
Wireless
Operations and
Global Carrier
CLAPFOOT
GAMES division to focus on
smartphones
iPhone/Android App stores
revolutionise independents Private
Independents now sell direct via
App stores, bypassing operators

Knowledge Source: Companies

Relationships
38
Digi-Capital Ideas
 Apple is aiming to be the mobile/tablet entertainment company

 Apple is far down the path of migrating from electronics and software to mobile communications and entertainment
 Apple’s strength is providing all components of the mobile entertainment value chain in elegantly integrated consumer products and services,
including hardware, software, eCommerce, applications and content
 iPad is the next stage of Apple’s mobile entertainment strategy, already spawning many imitators. This may change the video games market in
ways that are likely to have greater impact, but take much longer to occur, than anticipated. The tablet/smartphone browser market remains early
stage, with significant room for commercial development as 46M tablets are forecast to be sold in 2011E

Aiming for a complete mobile offering The App Store

 The App Store services iPhone, iPod Touch and iPad with >10B
apps downloaded to date
 App Store should generate an increasing proportion of Apple’s
non-hardware revenues, with unrealised profit potential
 70/30 App Seller/Apple revenue split for payment/promotion is
attractive, compared to Facebook Credits 70/30 (ex promotion)
iPod and some other distributors’ 40/60 split
iPod iPhone4
iMac functionality,
Touch
iPhone mobility
350,000
Mobility

300,000

Number of Available Apps

250,000
iPad
200,000

150,000

100,000
Macbook-Air Macbook
50,000

Nov-08

Nov-09
Jan-09

Jan-10
Jul-08

Jul-09

Jul-10
May-09

May-10
Mar-09

Mar-10
Sep-08

Sep-09

Sep-10
iMac

Entertainment functionality

Knowledge Source: IDC

Relationships
39
Digi-Capital Ideas
 But Google and Apple are fighting for market dominance
Apple remains the dominant mobile games platform in the US Mobile Applications 2010 (US)
 Apple has >2x more mobile apps than Android
 Android apps growth rate 5x Apple apps growth rate
 Apple mobile apps are paid for at twice the rate of Android apps 350,000 600%
 55% of the top 100 iPhone paid and free apps are games 300,000 500%
But Google is threatening its global position 250,000
400%
 Global smartphone sales grew substantially in 2010 to 297M units (+72% on 2009)
200,000
 Global smartphone marketshare changed dramatically in 2010 compared to 2009: 300%
 Nokia 38% (-20%), Google 23% (+482%), RIM 16% (-20%), Apple 16% (+9%), 150,000
Microsoft 4% (-52%) 200%
100,000
• Apple’s tablet marketshare dropped from 95% to 75% between Q3 and Q4 2010 due to
Android tablets (particularly Samsung), with Android tablets forecast to increase share 50,000 100%

Casual/social games business models have migrated - 0%

 “Freemium” models with in-game micro-transactions and/or advertising support are Apple Google Nokia RIM
increasingly common Total Apps Paid Apps Annual growth
 17% of iPad games have in-App purchases vs 4% of iPhone games
 Rovio’s blockbuster Angry Birds is sold for 99c on iPhone, but now also generating
substantial revenue via free app with advertising on Android
 Apple’s model has appeared more commercially attractive to game developers, but
increased competitive action from Google may change perceptions

Game genre share (revenue/volume) and average price (US) Games share of top 100 apps by platform (US)
25% $9 60%
$8
50%
20% $7
$6 40%
15%
$5
30%
$4
10%
$3 20%
5% $2
10%
$1
0% $0 0%
iPad iPhone RIM Nokia Palm Microsoft
e

ia

rd
d

ce
Pl g

o
n
Ad de

d
ds
l
le

g
n

gy

ily

ic

na
ur

sin
t

ar

or
in
t io

io

iv

Ed Ca
us
or

zz

Ki

Di
m

i
ca

te
nt

Ro a c
at

Tr
Bo

io
ay

W
Ac

Sp

Pu

Ca
Fa

M
ra
ve

at
Ar

ul

R
St
m

uc

Paid Free
le
Si

Revenue Share Volume Share Average Price

Knowledge Source: Gartner, Distimo (US data), IDC

Relationships
40
Digi-Capital Ideas
 Mobile games have both strong valuations and M&A
Public company valuations
USD millions, except per share data Enterprise Value Multiples
Price % of 52 Market Net Enterprise Revenue EBITDA
Company (18-Feb-11) Week High Cap Debt Value CY2009 CY2010 CY2011 CY2009 CY2010 CY2011

Com2uS Corporation 9.81 56.5% 93 (34) 59 2.08 x 2.36 x 1.48 x 10.4 x 15.6 x 5.1 x
G5 Entertainment AB 3.58 84.8% 27 (0) 26 17.71 x n.a. n.a. n.m. n.a. n.a.
GameLoft SA 6.46 86.3% 483 (34) 449 2.58 x 2.36 x 2.10 x 19.8 x 12.1 x 9.7 x
GAMEVIL Inc. 23.35 70.5% 129 (38) 91 4.15 x 3.55 x 2.75 x 7.3 x 6.4 x 4.6 x
Glu Mobile, Inc. 4.11 99.2% 213 (11) 203 2.55 x 3.15 x 3.82 x n.m. n.m. n.m.
Hudson Soft Company 3.73 69.9% 108 (54) 54 0.27 x n.a. n.a. 2.7 x n.a. n.a.
Tose Co. Ltd. 7.11 87.2% 53 (26) 27 0.41 x 0.45 x 0.36 x 5.3 x n.a. n.a.

Median 2.55 x 2.36 x 2.10 x 7.3 x 12.1 x 5.1 x

Mean 4.25 x 2.37 x 2.11 x 9.1 x 11.4 x 6.5 x
Source: CapitalIQ
Note: Calendarised to December year end Selected M&A
Deal Revenue EBITDA Target
Date Target Acquirer Comments
value multiple multiple description
Develops games for mobile Words The new Zynga With Friends studio should
02 Dec 10 n.a. n.a. n.a.
With Friends and Chess With Friends form part of Zynga’s push into mobile games

iPhone games publisher (publisher,

EA is using Chillingo to increase market share
19 Oct10 n.a. n.a. n.a. but not owner, of Rovio’s
on the iPhone platform
original Angry Birds)

DeNA plans to integrate its Mobage software

Develops games and entertainment
12 Oct10 $400m n.a. n.a. with Ngmoco's own social networking
experiences for the iPhone
platform Plus+

Developer of music games for the Strengthens Disney’s portfolio of games and
01 Jul 10 n.a. n.a. n.a.
iPad, iPhone, and iPod Touch entertainment offerings in mobile

Development and publishing of Expands upon Glu’s development capabilities and

23 Jan 08 $36m 1.5x n.m.
2D and 3D mobile games pipeline for new game releases
The acquisition strengthens Oberon Media’s
Developing, publishing and
multi-platform strategy and will position
31 May 07 est. $114m n.a. n.a. distributing games for mobile
Oberon to provide services to mass market
phones
casual games

Knowledge Sources: CapitalIQ, Mergermarket, Companies

Relationships
41
Digi-Capital Ideas
 And early-stage investments are accelerating
Selected private placements
Deal Target Deal Target
Date Target Investor Date Target Investor
value description value description
A pioneering service providing Offers videogames, Internet platform
console games without a console 06 May 10 Accredited $5m and Internet/mobile gaming for flash
08 Feb11 $40m and smartphone
using the internet investors
Publishes lifestyle and children's Online platform, engages in
11 Jan 11 $6m content, including applications for 08 Apr 10 19 investors $3m aggregating, promoting, and
iPad and iPhone delivering mobile entertainment
content directly to members
Operates as a mobile social $2m Develops massively multiplayer
08 Nov 10 $9m 06 Apr 10 online (MMO) mobile games
network
Provides a mobile service that
Owns and operates a gaming 27 Mar 10 Angel $10m mixes social, locative, and games
20 Oct10 $12m portal that offers mobile phone elements
video games
Nominal Develops mobile games for social
Develops a 3D MMO games for 16 Feb 10 Debt networks
30 Sep10 n.a. amount
Apple's suite of mobile products

Develops games and Operates a community of game

11 Aug 10 n.a. entertainment experiences for the 14 Dec 09 $4m enthusiasts to build and play
iPhone location based mobile games

Design, marketing, and sale of $4m Develops mobile, casino and

30 Jun 10 $14m mobile games worldwide 25 Nov 09 online games

Provides a mobile service that

$20m $3m Develops and publishes mobile
29 Jun 10 mixes social, locative, and games 05 Nov 09 games in China
elements
Mobile application distribution Provides mobile content services
$11m and developer community in the n.a. for direct to consumer and B2B
23 Jun 10 17 Sep 09 business segments in Italy, Spain,
United Kingdom
Turkey and Brazil
Trinad Publishes and distributes
entertainment content for third Private Develops games for personal
21 Jun 10 Management, $3m 15 Sep 09 $1m
generation mobile networks investors computers and mobile phones
LLC
worldwide
Provides a mobile service that
Angel n.a. Develops applications and games mixes social, locative, and games
09 Jun 10 on mobile devices 04 Sep 09 $1m
investors elements

7 investors Nominal Develops games for personal Operates as a social games

28 May 10 computers and mobile phones 18 Aug 09 $3m platform for mobile devices
amount

Publishes augmented reality and Develops multiplayer and social

26 May 10 $4m entertainment games across games platforms for mobile
platforms 13 Aug 09 $3m
Chart Venture Partners devices and wireless networks
Conceives, develops and deploys
$20m Develops location based social $2m mobile games and mobile
14 May 10 04 May 09
games applications for publishers

Knowledge Sources: CapitalIQ, Mergermarket

Relationships
42
Digi-Capital Ideas
 With clear investment, M&A and JV opportunities

Firm Type Major Independent Venture Capital Private Equity Major Technology,
Video Games Video Games Media & Telecoms
Investment, M&A  Invest in growth capital  VC fundraising  Invest in parallel, low  Develop sector  Invest in growth
and JV game fund  Exit to major video cost mobile game relationships in capital game fund
Opportunities  Small strategic M&A games company development anticipation of sector  JV with major/
 Avoid large, value  JV with major media maturity independent video
destroying M&A for licensed mobile games companies for
 Focused new IP games marketing/ licensed mobile
investment in parallel, investment games marketing/
low cost mobile game investment
development  Small strategic M&A
 JV with major media for to build internal
licensed mobile games capability for
marketing/investment significant IP
portfolios and
leveraging marketing
platforms
 Avoid large, value
destroying M&A
 Avoid standalone
organic investment
due to different core
competencies

Knowledge
Relationships
43
Digi-Capital Ideas
 Console Sector

Knowledge
Relationships
44
Digi-Capital Ideas
 Console games are no longer driving market growth

A consolidated sector driven by hardware cycles Worldwide pure console* software market
 Wii dominates current 7th generation console unit sales globally with 46% of
consoles sold to date, followed by Xbox360 at 28% and PS3 at 26%. 2010 sales of
$40B
Xbox 360 were 42% higher than 2009, driven by 8M Kinects sold in its first 60 days
 Market forecast of $37B revenue by 2014E, fuelled by North American and European $35B
growth from anticipated 8th generation platforms (2014-2016). Asia-Pacific growth
limited by piracy and high share of MMO/casual/social online games $30B
 Console games profits for Sony/Microsoft come from software, as consoles generally
$25B
sold at a loss. The lower cost Wii has generated hardware profits for Nintendo
 Software pureplays can be highly cash generative, but decline in packaged goods $20B
retail sales has led to challenges (e.g. EA’s last profitable year in 2007, Activision
Blizzard profitable driven by console and MMO franchises, but revenue guidance $15B

down for 2011F) $10B

 8th generation console cycle forecast to drive growth, but such growth is likely to be
constrained by growing MMO, casual/social online and mobile games marketshare $5B
 The launch of Apple’s iPad and imitators may change the console market in ways that
$0B
are likely to have greater impact, but take much longer to occur, than anticipated
2005 2006 2007 2008 2009 2010E 2011F 2012F 2013F 2014F
 Digital downloadable content and game delivery (such as OnLive) reduce likelihood
Asia Pacfic EMEA North America Latin America
of a 9th generation console cycle, creating potentially significant long term issues for
Sony, Microsoft, Nintendo and GameStop

The console market has gone through 7 overlapping platform/technology cycles

1st generation 3rd generation 5th generation 7th generation

1970 1975 1980 1985 1990 1995 2000 2005
2nd generation 4th generation 6th generation
2600 5200 7800

Colour TV game

Knowledge
Relationships
45 Sources: PWC, VGChartz, Companies

Digi-Capital Ideas * Note: Pure console excludes MMO games

 As the mature value chain is changing
Changes in industry dynamics impact all stages of the value chain
Development
 Inhouse development
 Outsourced development
 IP & technology licensing
 Majors have multiple in-house
game development studios
globally
 Independents receive
advances from Majors for
game development to cover
costs, with royalties after
agreed sales target reached
 Technology providers license
game engines, motion capture,
facial animation etc
 Third-party independent
studios often used for licensed
IP games and assistance on in-
house development
 For example, BioShock 2 was
developed for Take-Two by
inhouse and outsourced
developers
 Inhouse: 2K Marin, 2K
Australia, 2K China
 Outsourced: Digital
Extremes (multiplayer)
Arkane Studios (level
design assistance)
Knowledge
Relationships
Digi-Capital Ideas
Publishing
 Financing
 Manufacturing
 Marketing
 Major publishers and banks
finance game development
 Ancillary services such as
market research, advertising
and technology assistance
provided
 Game bonders
increasingly carry
completion risk
 Console
manufacturers charge
publishers a royalty
for each game
manufactured at time
of manufacture
 Publishers carry
inventory risk
 Due to increasing marketing
budgets and consumer focus
on hits, major publishers are
reducing the number of
games published
 Project management is
provided to manage quality
control and risks
46
Distribution Retail
 Physical distribution  Physical retail
 Digital distribution  Web retail
 Retail negotiation  Downloadable content
 Major publishers often  Physical retail continues to
distribute their own games, be challenged by web
although Take-Two sold its retailers such as Amazon
distributor Jack of All  Retailers such as market
Games to Synnex leader GameStop make
more profit from used than
 Shift to digital new software sales
distribution likely to
reduce the role of  Used sales
physical cannibalise new
distributors in the sales
medium term  Majors using
 Digital distribution downloadable
growing through content to combat
Xbox Live Arcade, used market
Playstation  Downloadable
Network, Wii Ware, content share
OnLive and major growing with fast
independent broadband
distributors such as
Valve’s Steam  Downloadable add-on game
modules generate post-
 Independent publishers launch sales
rely on third party  Retail remains highly
distributors such as Synnex seasonal, with almost
and Ingram Micro half of all sales in Q4
Sources: Companies, Credit Suisse
 Although the console market is still driven by major publishers

Integrated Publisher
PS4 in 2014-16?
Sony has announced development of an 8th generation Microsoft Kinect
console for potential launch in 2014-16 Controller without a
controller generates
8M sales in first 60
days

Niche Diversified
Game Game
Portfolio Portfolio

Console to digital
OnLive goes live
Major console publishers
The console without a console
trying to adapt to online/
launches, with the impact of
mobile. Diversified
Independent market challenging console game delivery over
conglomerates such as
Many independents have sold to large broadband to be tested in the
Disney and Microsoft more
consolidators, some have ceased market in 2011
able to support reinvestment
trading, others are repurposing to
online/mobile, some quality AAA Independent Developer
independent studios still performing

Knowledge Sources: Companies, Mergermarket

Relationships
47
Digi-Capital Ideas
 But sector economics are increasingly risky

Publishers’ gross profit is approximately 1/3 of retail price

VAT/Sales Tax
15%

Publisher
Gross Profit
35% Retail
Margin
25%

Distribution
Margin
5% Hardware
Manufacturer
Royalty
20%

For major AAA $60 retail console game, 1-2M unit sales are needed to break even*

200

150

100
$M

50

-
0.5 1.0 1.5 2.0 2.5 3.0
Units Sold (M)
-50
Retail Revenue Publisher Retail Profit Publisher Gross Profit Publisher Net Profit

Knowledge * Assuming $25M development and $15M marketing spend

Relationships
48
Digi-Capital Ideas
 And development financing is becoming like film financing

Complex financing structures to effectively manage risks, with significant transaction costs

Royalties

Co-pub/distribution
agreement
Parent Company/ Publisher/
Developer Distributor
IP
Milestone Game development and delivery
Approvals of Gold Master Candidate
Bank First
priority
Loan of budgeted
Borrower/Developer costs including Completion
(via Special transactional costs Guarantee
IP
(payable per
Purpose Vehicle) Agreement
milestone)

Completion Bond Second

Development priority
Guarantor (e.g. IFG)
Completion
Agreement

Reporting

Cost reporting

Specialist Auditor
(e.g. Games Audit)
Due diligence, development progress
monitoring and milestone approvals

Security interests in developer’s rights

Knowledge Sources: International Film Guarantors, Games Audit

Relationships
49
Digi-Capital Ideas
 So valuations reflect a mature industry in transition

USD millions, except per share data Enterprise Value Multiples

Price % of 52 Market Net Enterprise Revenue EBITDA
Company (18-Feb-11) Week High Cap Debt Value CY2009 CY2010 CY2011 CY2009 CY2010 CY2011

US
Activision Blizzard, Inc. 11.07 87.5% 13,351 (3,508) 9,843 2.30 x 2.21 x 2.46 x 13.1 x 9.9 x 6.4 x
Electronic Arts Inc. 19.28 95.3% 6,446 (1,971) 4,475 1.18 x 1.20 x 1.15 x n.m. 17.2 x 8.1 x
GameStop Corp. 19.95 77.5% 3,020 66 3,087 0.34 x 0.33 x 0.31 x 3.8 x 3.7 x 3.6 x
Take-Two Interactive Software Inc. 16.28 97.2% 1,392 (192) 1,201 1.15 x 1.08 x 0.96 x n.m. 13.2 x 8.3 x
THQ Inc. 5.64 68.0% 383 (9) 374 0.42 x 0.45 x 0.42 x 1.5 x 5.7 x 12.0 x

Median 1.15 x 1.08 x 0.96 x 3.8 x 9.9 x 8.1 x

Mean 1.08 x 1.05 x 1.06 x 6.1 x 9.9 x 7.7 x

Asia
Capcom Co. Ltd. 18.54 81.0% 1,096 (183) 913 1.04 x 0.88 x 0.84 x 6.5 x 5.1 x 4.7 x
Konami Corp. 19.85 83.7% 2,649 (51) 2,598 0.79 x 0.81 x 0.78 x 5.6 x 6.1 x 5.6 x
Namco Bandai Holdings Inc. 11.28 95.0% 2,667 (808) 1,858 0.36 x 0.40 x 0.39 x 3.2 x 7.4 x 4.9 x
Nintendo Co. Ltd. 304.65 77.0% 38,959 (12,905) 26,054 1.41 x 1.81 x 1.81 x 5.2 x 9.1 x 10.3 x
Sega Sammy Holdings Inc. 22.42 99.8% 5,931 (1,665) 4,266 0.90 x 0.88 x 0.85 x 7.0 x 4.8 x 4.2 x
Square Enix Holdings 18.56 75.5% 2,136 (831) 1,305 0.61 x 0.73 x 0.73 x 3.2 x 4.6 x 4.5 x

Median 0.84 x 0.84 x 0.81 x 5.4 x 5.6 x 4.8 x

Mean 0.85 x 0.92 x 0.90 x 5.1 x 6.2 x 5.7 x

Europe
Atari 4.74 68.7% 101 35 136 0.82 x n.a. n.a. 10.3 x n.a. n.a.
Game Group plc 1.09 63.9% 374 103 477 0.16 x 0.18 x 0.18 x 2.3 x 3.6 x 3.6 x
GameLoft SA 6.46 86.3% 483 (34) 449 2.58 x 2.36 x 2.10 x 19.8 x 12.1 x 9.7 x
Ubisoft Entertainment SA 11.63 75.6% 1,101 75 1,176 0.94 x 0.86 x 0.80 x n.m. 4.5 x 3.1 x

Median 0.88 x 0.86 x 0.80 x 10.3 x 4.5 x 3.6 x

Mean 1.13 x 1.13 x 1.03 x 10.8 x 6.7 x 5.5 x

Median 1.03 x 1.00 x 0.91 x 10.8 x 5.6 x 4.6 x

Mean 1.38 x 1.30 x 1.18 x 13.6 x 7.0 x 5.5 x
Source: CapitalIQ
Note: Calendarised to December year end

Knowledge
Relationships
50
Digi-Capital Ideas
 In the advanced stages of consolidation
Selected M&A
Deal Revenue EBITDA Target
Date Target Acquirer Comments
value multiple multiple description
PC/console/handheld user Expansion of Autodesk’s existing games
17 Feb11 $36m n.a. n.a.
interface middleware provider middleware offering

19 Jan 11 n.a. n.a. n.a. Console games developer Purchase of music games developer

Consolidation within the Polish

13 Jan 11 n.a. n.a. n.a. Polish console games developer
developer market

Developer of Rock Band and Viacom/MTV disposal following challenging

23 Dec 10 n.a. n.a. n.a.
Guitar Hero trading conditions

Developer of Chronicles of Zenimax adds another quality console

11 Nov 10 n.a. n.a. n.a.
Riddick and The Darkness developer to its studios

Resident Evil creator’s game Zenimax adds another quality console

28 Oct 10 n.a. n.a. n.a.
development studio developer to its studios

A third party developer of video

A strategic purchase as Blue Castle developed
15 Sep10 n.a. n.a. n.a. games for Capcom and 2K games
Capcom’s hit Dead Rising 2
(Take-Two Interactive)

Video games publisher in South Wemade increased in presence in its core South
05 Jun 10 $58m 5.9x 12.4x
Korea Korean market by expanding beyond online games
(26%)
Develops online, video, and
03 May 10 n.a. n.a n.a. console games in Korea, North Expansion in the South Korean market
(65%) America, and Japan

The consideration for the acquisition will be used

UK based developer and publisher
04 Apr 10 n.a. n.a. n.a. in part to pay down Codemasters’ £52 million ($79
of video games
million) debt
(50%)

Switzerland based developer of Expand SouthPeak Interactive geographically

31 Mar 10 IRP GmbH $4m n.a. n.a.
video games into Europe

Knowledge Sources: CapitalIQ, Mergermarket, Companies

Relationships
51
Digi-Capital Ideas
 In the advanced stages of consolidation (continued)
Selected M&A
Deal Revenue EBITDA Target
Date Target Acquirer Comments
value multiple multiple description
UK based video games developer Increase development capabilities for games for
02 Mar 10 n.a. n.a. n.a.
of PlayStation Games Sony’s PlayStation platform

Publishes software for the Mac The acquisition expanded NgMoco’s portfolio
22 Feb 10 n.a. n.a. n.a.
and iPhone platforms to the Mac (as well as more iPhone games)

Synnex gains an established footprint in the

US-based marketer and video game hardware and software market as
21 Dec 09 $43m 0.2x n.a.
distributer of video games well as retaining distribution rights with the
major publishers such as EA and Nintendo
Id Software’s expertise in first person shooter
US-based developer of video
games will compliment ZeniMax’s Bethesda
24 Jun 09 n.a. n.a n.a. games such as “Doom” and
Softworks’ division’s roll playing games such as
“Quake”
‘Fallout 3’
Warner Bros purchased the Midway assets out of
US-based developer of video
21 May 09 $115m 0.5x n.a. bankruptcy and included the Joust, Mortal Kombat,
games
Spy Hunter and Wheelman franchises

Wigo Global The acquisition will allow Wigo Global to

South-Korean based developer of
22 Apr 09 Co. Ltd $7m 0.5x n.a. improve its competitiveness in game
games software
development

Japan-based video game content Game portfolio expansion in its core Japanese
09 Mar 09 $63m 0.4x 5.5x
developer market
D3 Inc
Developer of Video games The acquisition allows Square Enix to expand
12 Feb 09 $83m 0.4x neg including the Tombraider its games franchises to more focus on western
franchise markets

Canadian-based video games Geographical expansion and the acquisition of

03 Feb 09 n.a. n.a. n.a.
developer 110 skilled game developers

South-Korean based developer of Geographic expansion into the development of

02 Dec 08 n.a. n.a. n.a.
PC-based games games for the Asian market

The sale of the majority of the company comes

Mark Thomas US-based developer of video
02 Dec 08 $19m 0.1x n.a. as Midway had a $800m debt due by the end of
(Private investor) games
the year
(87.2% stake)

Knowledge Sources: CapitalIQ, Mergermarket

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 With limited pure console investment
Selected private placements

Deal Target Deal Target

Date Target Investor Date Target Investor
value description value description
Major publisher consolidating the Low cost, emerging market game
30 Sep10 $150m games industry across platforms 30 Nov 09 $8m consoles

Third party game developer with Socius Capital US-based console software
30 Sep10 n.a. clients such as Konami and EA 20 Nov 09 $5m
Group, LLC developer

n.a. Develops console games Provides a 3D game development

24 Sep10 $10m 19 Oct 09 $6m tool

Low cost, emerging market game Designs, develops and publishes

13 Aug 10 One investor $15m consoles $23m
02 Oct 09 casual/PC
video games

Develops and publishes Develops entertainment software

16 Jul 10 $7m interactive entertainment $12m and games for consoles,
01 Aug 09 47 investors
software for consoles handhelds and PCs

Publishes augmented reality

$4m and entertainment games $8m Develops and publishes video
26 May 10 06 Jul 09 games for consoles and PCs
across platforms
Chart Venture Partners

Low cost, emerging market game Develops and publishes games

17 May 10 One investor $14m consoles 21 May 09 n.a. that join consoles, PCs, mobile
and the Internet

Driving game developer in the Low cost emerging market

13 May 10 $9m 09 Mar 09 One investor $6m game consoles
United Kingdom

Knowledge Sources: CapitalIQ, Mergermarket

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Digi-Capital Ideas
 And clear investment, M&A and JV opportunities

Firm Type Major Independent Venture Capital Private Equity Major Technology,
Video Games Video Games Media & Telecoms
Investment, M&A  Core franchise organic  Organic investment  Avoid pure console  Avoid pure console  JV with major/
and JV investment (if possible) investments due to investments due to independent video
Opportunities  Limited new IP  Exit to major video risk profile and sector risk profile and sector games companies for
investment until 8th games company consolidation consolidation licensed games/
generation consoles  JV with major media marketing/
 Avoid large, value for licensed games/ investment
destroying M&A marketing/  Strategic M&A of
 Acquire economically investment independent studios
challenged AAA  Restructure to focus to build internal
independents to control on self publishing, capability for
internal costs downloadable significant IP
 JV with major media for content, casual/ portfolios and
licensed games/ social or mobile leveraging marketing
marketing investment markets, with parallel platforms
 Explore strategic development and low  Explore strategic
options for cost/ offshoring options for
underperforming assets underperforming
assets

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Digi-Capital Ideas
 Online Gambling Sector

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Digi-Capital Ideas
 Online gambling continues to cannibalise offline

Online Gambling is high growth Global Online Gambling Revenue ($B)

 Ongoing revenue CAGR has been over 15% for the last decade
 Growing market share compared to offline (4.8% in 2008 grew to
6.3% in 2012)
 Online gambling uses the web and mobile to enable wagering, casino 25
games, poker, lotteries, bingo and skill games
20
 B2C business models are based on odds stacked in the house’s favour
or scaled commission fee (“rake”) 15

The line between B2C and B2B firms is blurring 10

 Content developers create and design games

5
 Platform developers develop software platforms to host games, as
well as providing payment integration and statistical analysis 0
 Casino operators serve customers directly 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E
 Combined B2B/B2C businesses are emerging, such as 888.com and
its B2B unit Dragonfish

Consolidation is set to accelerate

 Europe is the largest market, supplanting the US after the Unlawful
Internet Gambling Enforcement Act 2006 Market share by game type and region
 The market in Europe has been consolidating, with PartyGaming
(~14%%) and William Hill Plc (~5%) the largest firms Skill Based South America
 Should US legislation change significantly, transatlantic consolidation 4% 2% Africa
Bingo Oceania
would become increasingly attractive 8% 7% 1%
 Legislation has been introduced in the US to attempt to legalise
online poker (20% of the gambling market globally), but the situation Asia and
Lottery
remains unresolved 13%
Middle East
Wagering 15%
 Africa and South America are forecast to grow quickly from a low
35% Europe
base
49%
Poker North
Skill based games avoid some US restrictions 20%
Casino America
 Although a small subsector, games of skill avoid some legal/ 20% 26%
regulatory restrictions in various US states, European and Asia-
Pacific markets

Knowledge Sources: Barclays Capital, Viaden Media, Online-Casinos.com, Christiansen

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Digi-Capital Ideas
 Sector dynamics and growth are leading to consolidation

Online
Content Pureplay PartyGaming / bwin merger
Online Pureplay Merger announced, creating €682M
revenue €196M EBITDA largest listed
online gambling business globally

Betfair IPO
£1.4B IPO - Betfair's
shareholders sold 15.2%
raising £211m

B2B Platform B2C

Developers

888 / Dragonfish
888 entered B2B platform market
with Dragonfish to leverage
inhouse technology

Unibet / Sportingbet merger collapse

Press reports that leak during initial
merger discussions lead to withdrawal Combined Offline/Online

Knowledge Sources: Companies, MergerMarket, The Times

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Digi-Capital Ideas
 Skill based games avoid some regulatory challenges

Skill based games not positioned as gambling

 Competitive online games, but where the outcome is determined
by players’ skill rather than chance
 Players can play for virtual coins, or take part in real cash
tournaments for cash prizes
 Games include arcade, puzzle, word, trivia and other skill games
 Players can play versions of most games for free
 Business models are based on:
 Scaled commission fee (“rake”)
 Entry fees for tournaments
 Micro-transactions
 Advertising
 Interest on players’ funds invested
 Those models which are not advertising based are less cyclical

So avoid some regulatory challenges

 Skill games are by definition not games of chance, which enables
them to operate in various US States, European and Asia-Pacific
markets

The market continues to grow

 King.com launched in 2003, with more than 350M games played
in January 2009. The website is available in nine languages, and
includes skill game versions mainstream TV properties such as
“American Idol” and “Deal or No Deal”
 Established, profitable business models
 Games are developed both internally and by third party
developers
 The skills based market tends to target women over the age of 35,
similar to the casual games market

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Digi-Capital Ideas
 Strong economics and growth support valuations

USD millions, except per share data Enterprise Value Multiples

Price % of 52 Market Net Enterprise Revenue EBITDA
Company (18-Feb-11) Week High Cap Debt Value CY2009 CY2010 CY2011 CY2009 CY2010 CY2011

32Red Plc 0.33 97.6% 23 (2) 21 1.01 x 0.76 x 0.70 x 15.0 x 8.0 x 6.4 x
888 Holdings Public Limited Company 0.76 40.4% 262 (66) 196 0.80 x 0.77 x 0.75 x 5.6 x 7.1 x 6.5 x
GVC Holdings PLC 1.66 50.5% 52 (7) 45 0.61 x 0.57 x 0.45 x 1.9 x 3.6 x 3.3 x
Net Entertainment NE AB 10.12 75.0% 400 (7) 393 8.39 x 6.83 x 5.43 x 17.8 x 15.0 x 11.5 x
PartyGaming Plc 2.82 51.2% 1,155 (201) 955 1.57 x 1.43 x 1.32 x 5.5 x 5.3 x 4.8 x
Playtech Limited 5.91 65.9% 1,433 (82) 1,351 8.62 x 6.80 x 6.01 x 13.5 x 10.6 x 9.2 x

Median 1.29 x 1.10 x 1.04 x 9.5 x 7.5 x 6.4 x

Mean 3.50 x 2.86 x 2.44 x 9.9 x 8.3 x 7.0 x
Source: CapitalIQ
Note: Calendarised to December year end

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Digi-Capital Ideas
 And consolidating M&A is accelerating

Selected M&A
Deal Revenue EBITDA Target
Date Target Acquirer Comments
value multiple multiple description
Online casino that offers The acquisition provides SkyCity with a
10 Nov 10 (50% n.a. n.a. n.a. gambling, jackpots, and table foothold in the online casino market, to bolster
stake) games in New Zealand its offline operations

The acquisition will grow Webis Holdings plc’s

09 Sep 10 $0.1m n.a. n.a. Online racing services
operations in Europe

The new company will becoming the worlds

Online gambling operations largest gaming firm, 48.4% owned by existing
29 Jul 10 $1,744m 2.8x 15.7x
including casino and betting Party Gaming shareholders and 51.6% by bwin
shareholders
Enables users to play puzzle,
The acquisition expands 888 into the mobile
14 Jun 10 $48m n.a. n.a. board, card and casino games on
and social networking games market
PCs and Windows mobile phones

Provides integrated software and Following the deal Orbis will be rebranded
07 May 10 $23m 1.2x 11.9x hardware to the bookmaking OpenBet and Alphameric will be rebranded as
marketplace Timeweave

The acquisition allows Playtech to increase it’s

Developer of Bingo and
15 Feb 10 $57m 2.8x 9.2x market share in Bingo to compliment its
networked games
current Poker and Casino offerings

US-based provider of wagering The acquisition is within Sportech’s strategy to

27 Jan 10 $75m 0.7x n.a. systems for horseracing, become a leading global provider of sports related
(Scientific Games greyhound racing and jai-alai gambling systems
Racing LLC division)
To match the rapid expansion of 888’s B2B
22 Dec 09 $95m 3.6x n.a. Online Bingo business segment (Dragonfish), Wink expands 888’s
presence in the UK Bingo market

The acquisition includes Gigamedia’s Everest

Taiwan based online gambling
16 Dec 09 Mangas Capital $100m n.a. n.a. Poker Site and allows Gigamedia to realise the
software developer
(60% online gambling Entertainment potential of its online gambling business
business)
Develops and supplies gaming The acquisition adds an open platform, a range
08 Dec 09 $48m 10.6x n.a. software solutions for online of games which complement in-house products
gaming operations and an enhanced product pipeline

Knowledge Sources: CapitalIQ, Mergermarket

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Digi-Capital Ideas
 And consolidating M&A is accelerating (continued)

Selected M&A
Deal Revenue EBITDA Target
Date Target Acquirer Comments
value multiple multiple description
Geographical expansion into the Italian online
Online gambling company based
07 Sep 09 $161m 8.2x 75.1x gambling market which it expects to be
in Italy
deregulated

Operates The World Poker Tour, a

24 Aug 09 $12m n.a. n.a. series of international poker Allow for expansion of the WPT brand online
tournaments

Operates FoxyBingo.com, Aim to build a meaningful share of the $1.5

23 Jul 09 $159m 2.1x 7.9x Getminted.com, Think Bingo and billion global online bingo market and increase
Bingo Scotland its female client base

Mangas Capital Online sports betting companies, Expansion of Mangas’ sports betting
27 Feb 09 $139m n.a. n.a.
Entertainment both Malta registered capabilities across Europe

Creation of a new online betting company that will

Online JV between Playtech (29%)
20 Oct 08 n.a. n.a. n.a. be more competitive in the marketplace by using
and William Hill (71%)
(Online assets) Playtech’s platform technology

Mangas Capital France-based operator of online Expand Mangas’ presence into the casino,
15 Jun 08 $62m n.a. n.a.
Entertainment casinos gambling and gaming sector in Europe

Strengthens Unibet’s position in the Bingo and

Online gambling operator with a
03 Dec 07 $111m n.a. n.a. Nordic markets and especially within the
focus on the female market
female gamer market

Knowledge Sources: CapitalIQ, Mergermarket

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Digi-Capital Ideas
 With clear investment, M&A and JV opportunities

Firm Type Major Independent Venture Capital Private Equity Major Technology,
Video Games Video Games Media & Telecoms
Investment, M&A For pure online gambling  VC fundraising for  Invest in online  Growth equity buyout For pure online
and JV online gambling gambling technology of online gambling gambling
Opportunities  Avoid due to distance technology and providers technology providers
from core video games niche/geographic  Invest in niche/  Growth equity buyout  JV with independent
competencies online gambling geographic online of niche/geographic online gambling
 Growth buyout for gambling franchises online gambling companies for
For skill based games gambling technology  Avoid generic franchises licensed online
and niche/ gambling franchises  LBO of large generic gambling marketing/
 Mid-market strategic geographic online due to sector gambling franchises investment
M&A gambling consolidation  Avoid organic
 Avoid large, value  LBO for large generic investment and M&A
destroying M&A gambling franchises due to different core
 Focused new IP  JV with major media competencies
investment in extending for licensed
skill based model to marketing/
core franchises investment

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Digi-Capital Ideas
 In-game Advertising Sector

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Digi-Capital Ideas
 In-game advertising is early stage

In-game advertising is small but growing US Online PC games advertising revenue by category
 In-game advertising is seen by publishers as an additional revenue
stream to traditional game sales
 In-game advertising delivers targeted advertising
 Console: 68% male, median age 26
$2.5bn
 Casual/social: 50% male, median age 36 $2.3bn

 Mobile: 64% female, median age 31

$2.0bn
 Global market > $1B revenue, 12.9% CAGR forecast 2009-2014 $2.0bn

 Multiple formats (static and dynamic):

$1.5bn
 In-game $1.5bn
 Around-game
$1.2bn
 Advergames
$1.0bn $0.9bn
 Dynamic formats hold the greatest potential, whether via console (Xbox
$0.7bn
Live Arcade, Playstation Network), web or mobile, because of the $0.5bn
ability to dynamically target and update in-game advertising $0.5bn
$0.4bn
 Microsoft “redeployed” its Massive advertising business in October
2010, 4 years after its estimated $200-400M acquisition $0.0bn
 Sony PS3 in-game advertising is open, with players such as IGA and 2005 2006 2007 2008 2009 2010E 2011F 2012F
Double Fusion partnering with Sony and major game publishers In-game Around game Advergame
 Google Ad-Sense for Games focuses on casual/social web games, with a
view to expanding to console games

Relatively few firms Online in-game advertising: static or dynamic media advertising
that appears inside the game or during the game while its being
Corporate Independent loaded or played
Online around game advertising: static or rich media advertising
that appears outside of the videogame but shown in conjunction
with it
Online advergames: custom made games specifically created to
communicate a marketing message designed around a product or
service

Knowledge Sources: PWC, IDC

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Digi-Capital Ideas
 With limited, high profile M&A

Selected M&A

Deal Revenue EBITDA Target

Date Target Acquirer Comments
value multiple multiple description

Playdom had raised $43m as part of a Series A

US based provider of online video
funding round and said that the proceeds from
18 May 10 n.a. n.a. n.a. game services and in-game
the raising would be used for acquisitions and
advertising services
to expand the company’s portfolio of titles

Flash game advertising network Shanda extended its online video games
11 Jan 10 $80m n.a. n.a.
and payments platform strength in China into mobile

Google was looking for ways to extend its

Delivers advertising content to
17 Mar 07 n.a. n.a. n.a. advertising program and in-game advertising
on-line enabled game platforms
offered a logical extension

Microsoft’s acquisition further expanded its

est. $200m - Offers advertisers platforms to presence into the area of online advertising, an area
04 May 06 n.a. n.a.
$400m reach games audience in real time in which Microsoft sees future growth as well as
competition with Google

Knowledge Sources: CapitalIQ, TechCrunch

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Digi-Capital Ideas
 And clear investment, M&A and JV opportunities

Firm Type Major Independent Venture Capital Private Equity Major Technology,
Video Games Video Games Media & Telecoms
Investment, M&A  Small strategic M&A  VC fundraising  Invest in in-game  Develop sector  Small strategic M&A
and JV  Avoid large, value  Exit to major video advertising relationships in to build internal
Opportunities destroying M&A games/media technology anticipation of sector capability for
 Limited organic company  Avoid in-game maturity significant IP
investment due to small advertising agencies portfolios and
market size due to business leveraging client
model relationships
 Avoid large, value
destroying M&A
 Avoid standalone
organic investment
due to different core
competencies

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Digi-Capital Ideas
 About Digi-Capital

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Digi-Capital Ideas
 About Digi-Capital

Digi-Capital is an investment bank focused on high growth digital companies across video games, technology, media and telecoms in
Europe, North America and Asia (particularly China, Japan and South Korea), working with major corporates, high growth
independent and VC/Private Equity firms. The firm has a particular interest in helping Chinese companies to invest and partner
internationally, as well as to find foreign partners to collaborate in China.

Digi-Capital delivers shareholder value by leveraging its knowledge, relationships and ideas to manage clients’ investment banking
(M&A, investment, fundraising), corporate development (commercial partnerships, JVs, commercial negotiation, new market entry,
publishing/licensing) and board advisory needs. Digi-Capital works as an inhouse investment bank for high growth digital companies,
as well as providing specific solutions for corporate and finance clients.

Contact

Email: tim.merel @ digi-capital.com

Phone: +44 (0)788 0505 651
Skype: timmerel
Website: www.digi-capital.com
Blog: http://digitalcapitalist.blogspot.com
Twitter: www.twitter.com/digicapitalist

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Digi-Capital Ideas
 Knowledge
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Digi-Capital Ideas

Global Video Games Investment Review

February 2011

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www.digi-capital.com
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Digi-Capital Ideas