RealArcade acquires Zylom

[Phil Steinmeyer]

Announced today, link here (http://news.ft.com/cms/s/eb5a4e8a-9745-11da-82b7-0000779e2340.html):

Some financial guesswork (originally posted on my blog):

>>

The article states that Zylom has $8 million in annual revenues, and RealArcade had $14.7 million in revenues last quarter. Let’s annualize the latter figure to $60 million. So, the #1 portal has $60 million in revenues, and, let’s say that Zylom’s $8 million put it at #6 or so (lower than the estimate from yesterday, but that lumped AOL, Pogo, and MSN together).

One could make a reasonable inference that Portals 2-5 do about $20 million each, and 7-10 do about $5 million each, putting the annual revenues for the top 10 portals at about $170 million. Add in all the smaller fry below #10, and you probably get to about $200 million in annual revenue, currently, for the casual games biz (narrowly defined as downloadable PC games, excluding mobile etc).

$200 million sounds pretty reasonable to me, and roughly bisects the typical $80-$400 million range one usually hears.

[svero]

Whoah.. that's major! That really solidifies Real's position in the casual market, especially in europe.

[berserker]

Announced today, link here (http://news.ft.com/cms/s/eb5a4e8a-9745-11da-82b7-0000779e2340.html):


wow :eek: THAT was a real surprise to me.
Seems like Real extended their distribution by heavily steping towards European casual market in a blink of an eye.
I wonder whether Real will become a huge monster like EA did in retail? Or is already? :)
Thoughts on who's next?...

[Phil Steinmeyer]

It will certainly help Real gain even more clout/leverage in negotiating with developers/publishers. Accept our terms, or else...

[Vorax]

It will certainly help Real gain even more clout/leverage in negotiating with developers/publishers. Accept our terms, or else...

We are the Real.

Lower your percentages and surrender your customers.

We will add your graphical and technological distinctiveness to our own.

Your game will adapt to service us.

Resistance is futile.

:)

[soniCron]

*waits for cliffski's post about how Real isn't the only method of distribution* ;)

[Mike Boeh]

We are the Real.
Lower your percentages and surrender your customers.
We will add your graphical and technological distinctiveness to our own.
Your game will adapt to service us.
Resistance is futile.
:)

This has certainly not been the case in our dealings with Real. They have always been a pleasure to work with.

[cliffski]

jesus its not like real are the only method of.... oh damn. :D

[berserker]

This has certainly not been the case in our dealings with Real. They have always been a pleasure to work with.

I second that. In my opinion developer with good lineup of proprietary titles can have quite some leverage in negotiations with portals.

[Vorax]

This has certainly not been the case in our dealings with Real. They have always been a pleasure to work with.

I was actually sarcastically joking based on Phil's comment. I don't think Real are that bad.

There are so few opportunities to quote the Borg - I saw one and took the shot :)

[Stu]

So we've recently seen Popcap, Big Fish and Real make moves on the European casual games market.

Has anyone estimated the size of the European casual games market? Is it growing more rapidly than the US market? (I think yes) What percent of annual revenue of the entire industry constitutes the European market? Feel free to round to the nearest percent. :)

I'm guessing the value in these moves lies more in what this market promises to be in the near future as opposed to what it is today. If Zylom is the king of portals that cater to Europe and their annual revenue totals $8 million, that doesn't suggest a huge slice of the pie.

[DFG]

I work the other way with Real (they supply me with titles) and I have also found them great to work with - fantastic communication and really fast at getting things done.

That is an interesting play by Real - I didn't even know Zylom existed until last week :)

Yahoo has also been making moves into the Euro market through their local versions of the portal.

[DFG]

More numbers here:

http://www.thestreet.com/_googlen/tech/internet/10267007.html?cm_ven=GOOGLEN&cm_cat=FREE&cm_ite=NA

Analysts polled by Thomson First Call estimate Real will report $326 million in revenue for 2005. Real is scheduled to release its quarterly earnings next Tuesday.

$750,000 in net revenue last year and they were bought out for $21 million - that is an enormous multiple. Value must have been access to the Euro market and not net revenue alone.

Also here:

http://www.redherring.com/Article.aspx?a=15626&hed=RealNetworks+Buys+Game+Maker&sector=Industries&subsector=InternetAndServices

Real is using the $761 million that Microsoft agreed to pay last October to fund the acquisition

[arcadetown]

Real while driving a hard bargain is definitely professional to work with. They let us know something is available and turn builds around pretty quick. Also worked from developer end, while getting turned down was also professional in that got feedback. Most simply don't respond (yes we can also be guilty given we're stretched thin).

$21mil for $750k net revenue... anyone got some cash burning a hole in their pocket for a solid growing portal?!

[Phil Steinmeyer]

$21mil for $750k net revenue... anyone got some cash burning a hole in their pocket for a solid growing portal?!

Just to be clear - Zylom had $8 million in revenue and $750K in net income (i.e profit). Paying a ~30X multiple of net income isn't that ridiculous in a fast growing tech industry.

[arcadetown]

Wasn't saying that's rediculous at all. Approx 3x gross is very reasonable (perhaps even cheap) and probably arrived at since their net margin was relatively low for a tech company. Who knows. Anyhow it shows some are willing to spend what it takes to make something happen.

[DFG]

I think it is ridiculous :) Although...

Based in the Netherlands and founded in 2001, Zylom has developed 70 including Mirror Magic and Hotel Solitaire as well as PopCap’s Bejeweled and Iwin’s JewelQuest.

http://www.netimperative.com/2006/02/08/RealNetworks_gaming/view

[svero]

Zylom developed Jewel Quest and Bejeweled? I dont think so....

[Stu]

I assumed when they said "developed" they were referring to games that Zylom had translated to several languages. I could be wrong. There was another reference in one of these articles about Real adding 70 titles with this acquisition. Looking at the 70 games I don't see many that Zylom did develop and most of them already appear on Real.

[arcadetown]

In comparison look at Disney recently purchasing Pixar for $7.5bil where Pixar had $273mil gross and $141 net in last annual report. That's 27x gross and 53x earnings, wow eh?

[Chris Evans]

In comparison look at Disney recently purchasing Pixar for $7.5bil where Pixar had $273mil gross and $141 net in last annual report. That's 27x gross and 53x earnings, wow eh?

When you get bought out for $7.5 billion, where does the money go exactly? Especially for a private company. Do the founders take most of the money and go purchase a south pacific island or something?

[Indiepath]

When you get bought out for $7.5 billion, where does the money go exactly? Especially for a private company. Do the founders take most of the money and go purchase a south pacific island or something?
Tax man gets most of it :D

[ManuelFLara]

In the Disney-Pixar deal I think they paid with Disney stock, so there's no "cash" to spend for anyone.

[Anthony Flack]

$7.5 billion worth of stock? Sounds like Pixar kind-of bought Disney...

[Red Marble Games]

I think that's not so far from the truth. I read that Steve Jobs alone now owns 5% of Disney as a result of this acquisition. Zoinks.

[princec]

Just to be clear - Zylom had $8 million in revenue and $750K in net income (i.e profit). Paying a ~30X multiple of net income isn't that ridiculous in a fast growing tech industry.
I disagree, someone's taking a massive risk there and paying way over the odds. At the stage Real are at one would expect a valuation somewhere in the between 5x profits and 2x revenues.

Cas :)

[Vorax]

I disagree, someone's taking a massive risk there and paying way over the odds. At the stage Real are at one would expect a valuation somewhere in the between 5x profits and 2x revenues.

Cas :)

It's a matter of buying market as much as buying the company. To setup in Europe would cost $10-15 million in investment anyway. Then they would be faced with building market share against several established competitors. It would likely be years before they were in the black. By buying out Zylom, they side step all of that and take out a major compeititor. They can now look at several options to reduce costs and grow the market further, leveraging Zyloms existing customer base and expanding. Since this is in a growth market, the numbers should easily justify the purchase.

[princec]

Hm, I'd be pretty cagey about that purchase. It seems vastly overvalued.

Cas :)

[Phil Steinmeyer]

Real Networks (RNWK) has a $1.34 Billion market cap, and trades at 92X earnings. So buying a company at 35X earnings is actually a bargain for them...

[James C. Smith]

When you get bought out for $7.5 billion, where does the money go exactly? Especially for a private company. Do the founders take most of the money and go purchase a south pacific island or something?

The depend if the founders own stock in the compnay.

I would assume the money goes to the shareholders. Even private companies have shareholders. Sometimes one guy owns it all but often some shares are owned by many people. Sometime employees get shares as incentives and often many shares are owned by investors who helped start the company. Those shares can even be bought and sold. But because the company is private, they are not bought and sold on the open market and each sale must be above by the company (the other shareholders). A private company is allowed to decide who can own their stuck. But they still have stock and it is usually owned by many people.

That money may also need to go to pay off debts the company has.

And usually these purchases are not for cash. It could be 7.5 billion with of stuck in the company that made the purchase. In other words, the Pixar shareholders may have received 7.5 billion worth of Disney stock and no cash at all. But usually there is a combination of cash and stock.

[DFG]

I think that article made a mistake about Zylom's development. Thought about that a bit more after I posted it.

Real's PE is higher than Google's .

Seems like they are doubling down on Casual Games to be major focus of the company. To spend that much of the Microsoft settlement on acquiring one company...