Draw Something Changes the Game Quickly for Omgpop
nytimes.com
nytimes.com
Can anyone make a case that paying 180mm for a drawing game makes rational financial sense? Of course, Zynga probably paid with it's overinflated stock, so it's more like AOL buying Time Warner at the peak
If you assume that 40 employees - a close knit team - works out at $1mm in value per head over 4 years, that is $40mm. If you consider that Draw Something is making, say, $200,000 a day in revenue - that is $1.4mm revenue a week. $5.6mm revenue a month. $67mm revenue a year. That is for the first release, what if this is the next Angry Birds? imagine the value of that audience to up-sell new titles, new micro-transactions, and so on.
Suddenly it looks cheap if you consider the massive popularity of Draw Something, this is a game that everyone loves! For Zynga, a publicly traded company, this matters. It's important to look like you're responsive to potential killers (mobile is something Zynga does not focus on much yet, but need to.)
And we haven't even mentioned the fact that OMGPOP are OMGHOT right now! Imagine the premium you'd have to pay for this company, they must be flooded with VC term sheets ("yo raise $40mm from us and give yourselves $20mm.") OMGPOP can turn this into the Zynga of Mobile. We've already valued the company at nearly $100mm from the team and singular game, a 2x multiplier doesn't seem ridiculous when you think about it.
OMGPOP will be to Zynga what the YouTube acquisition was to Google: huge.
If this is a fluke, why would anyone expect the developers to be able to replicate the success on other games in the future? I think I read somewhere the current run-rate revenue of draw is around 100k a day. But you would expect that to tail off when it reaches saturation. Probably most of that comes from the initial purchase, rather than in game purchases. So you're looking at more than 6x of current revenue which will decrease over time, just to break even on the purchase, and not counting expenses.
Don't get me wrong, I'm sure the developers are talented, and they deserve getting paid. The only people losing are the shareholders of Zynga, and less the management, since they've been dumping the stock. I think Zynga is probably under a lot of pressure to diversify it's revenue away from Facebook, as well as grow the revenue to justify it's valuation.
Comparing acq of OMGPOP to Youtube is just silly.
I have another rule for computer/web games in particular. If someone says they've created 35 games it almost always means their small simple Flash games. And again, almost always clones of some other game that already existed. It's very very rare that someone truly designs an original game, from scratch, whether a computer game or board game, etc.
Taking quick look at OMGPOP's site... let's see, clones/reimpls of Checkers, Connect Four, Missile Command... I'll stop now.
Active users for mobile games are extremely monetizable. While most individual games will eventually fade away in popularity, you can advertise your new games to your existing userbase in order to keep them hooked in. Zynga does this extremely effectively for their new game launches. The hard part, especially on mobile, is acquiring users in the first place - these can be expensive, as the natural viral mechanisms that you saw in the early days of Facebook games are typically much harder to come by on mobile, so huge, fast breakout hits like Draw Something are rare.
Whether that translates into $180M of value for Zynga, or if it ends up being more like $50M or $500M depends on a lot of things, but it seems like a good bet to take that the net lifetime value of all those Draw Something users will be huge when plugged into the Zynga ecosystem.
Of course, that's before even beginning to quantify the value of the Draw Something team and the domain knowledge in their heads.
Acquisition of OMGPOP
On March 21, 2012, we acquired 100% of the outstanding stock of OMGPOP, Inc., a provider of social games for mobile phones, tablets and PCs, for purchase consideration of approximately $180 million in cash. We acquired OMGPOP to expand our social games offerings. We will include the financial results of OMGPOP in our consolidated financial statements from the date of acquisition.