$83.3 Million Big Ones

By Joel Brodie | Sep 26, 2008 |

There are two numbers that are big news lately: $700 billion for the US government to bail out Wall Street and $83.3 million venture capital investment in Big Fish Games.

Both confuse and intrigue me. I can’t fully explain the $700 billion bail-out (and if I did, I would end up writing a boring and depressing tirade comparing the current administration with the Hoover presidency). But, I can share my thoughts on the $83.3 million that Big Fish Games just raised.

First, let me present the facts. On September 12, 2008, Big Fish Games announced it closed a $83.3 million venture funding round led by Balderton Capital, General Catalysts Partners and Salmon River Capital.

The reasons for the investment were undisclosed, and news reports raised more questions than answers. Why did Big Fish raise this huge amount of money? What do they plan to do with it? And what does it mean for you the casual gamer and the industry as a whole.

Why?

Big Fish did not need to raise money now. They are on record for having earned $50 million in revenues in 2007 and we have to assume by all their fans here on Gamezebo, they’re growing.

The simple answer is, because they can. My guess is that over $500 million has been raised by casual games companies this year if you count social games, virtual worlds, etc. Yet, there are rumblings that casual games are a bubble that is going to burst. Big Fish may have made the simple calculation that the time to raise money is when times are good instead of in the future when times are more uncertain. If someone offered you $83.3 million and the chance to cash out some of your initial investment, wouldn’t you take it?

What’s it for?

Big Fish is mum about its intentions, but we here at Gamezebo are no dummies. Here are our best guesses of what they’ll do with the money:

Travel abroad: Go the Rio and enjoy. OK, that’s just a joke to see if you are still reading. Let’s be serious now.

Like Genghis Khan, Conquer the Downloads Business: Rumors of the death of downloads are not true. Though social games and virtual worlds get all the buzz, the fact remains that Big Fish probably makes more money on downloads in a day than all the social games and virtual worlds make with their unproven business models in a year.

True, the download market is not growing, but this is due to inefficiencies on the supply side (developers, distributors), not demand (which is still growing). Big Fish’s strategy may be: let everyone else fight for the scraps in social games, we’ll own the download market and laugh ourselves to the bank.

In which case, Big Fish will use this money to double down on downloads: buy more download games studios; pay more money to lock in exclusives; build out more features on its download portal; beef up its affiliate program; and make it unbelievably expensive for any of its competitors to keep up with them.

In a slowly growing market as downloads is right now, the key is to be #1 by a long shot, much like Google in Search. Just like the US arms build-up against the USSR during the Cold War, the key to this strategy would be to outspend your competitors in a way to knock them all out of business.

Become the Electronics Arts of Casual Games:
Electronic Arts (EA) is the number one video games company because they create brands, not design games. That’s why 50 years from now, you’ll probably be playing Madden Football 2058, on your PlayStation 10, Xbox 720, iPhone, or whatever Android-like device is out by then.

Big Fish is already on the road of this franchise and expand strategy, having recently launched Mystery Case Files: MillionHeir for the DS in partnership with Nintendo. Big Fish could invest this money in buying a console games studio to help launch all their hit games across all platforms and build out their brands globally. If they are successful doing this, they would also be a very attractive acquisition candidate for EA as well.

Jump on the Social Games and Virtual Worlds Bandwagon: A lot of pundits were puzzled that Big Fish was able to raise this much money because their primary business is download and not social games. But, maybe the experts are missing the point. Perhaps, Big Fish was able to raise this money because they are secretly working on a virtual world of their own and pitched this to investors.

A year ago, Big Fish bought a very small casual games massively multiplayer game company. They immediately took down the studio’s web page but I saw it before it went down. It looked like they were building a Virtual Pets Online World. They have said nothing since then but maybe they pitched their investors that they were going to build a casual version of World of Warcraft.

Hold on to the money and chill: Big Fish intends to either go public or be acquired for a lot of money. To do so, two things must happen. One, they need to generate $100 million a year in revenues. Two, they need the mess on Wall Street to be fixed. No one will go public until the US economy is back on track. The former they can control, the latter, they can not. Maybe the plan is to hold onto the money so they can continue to grow the business until the time is right in 2 to 3 years to go public.  

What it means for you?

Though it is highly speculative what Big Fish plans to do with its $83.3 million, it’s a more clear what it means for the casual games business.

In the short term, there is no way this is a bad thing for casual gamers and the industry as a whole. Any time a casual game company raises such a huge amount, it validates the business model for casual game companies and ensures that a portion of it will be spent on creating games that users will enjoy playing.

Did you like the latest Mystery Case Files? My guess is that it costs $300,000 to develop. Now imagine what the next MCF will look like with a budget of $1,000,000+. Big Fish can now do this if they like.

Are you a casual game developer that is worried that it’s too risky to develop a download game and make your money? Big Fish now has $83.3 million ways to assuage your fears.

But here’s the rub for Big Fish’s competitors. On the one hand, this huge investment validates your business and makes you a more valuable company (e.g., it validates Real Networks’ decision to spin off its casual games division).

On the other hand, it raises the bar for competition and the specter that Big Fish will now be paying huge amounts of money for exclusives.

It’s my opinion that the reason that the download business is not growing is because large casual game companies have rested on their laurels instead of investing in new products and innovating. Launch another hidden object game. Charge the same price for downloads as you did 5 years ago. Don’t rock the boat.

With $83.3 million in their war chest, Big Fish is going to rock the boat. Its competitors now must decide whether they raise their game or let Big Fish sail away with the entire downloads business in tow, letting them drown in their mediocrity.

And if the end result of this $83.3 million is that Big Fish becomes a monopoly in the casual games downloads business, then in the long term, the biggest losers will be the casual game players themselves.

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