Earlier this week, Hasbro paid $112 million in cash to take a 70% stake in Colorado-based Backflip Studios, the company behind mobile games Dragonvale, NinJump, and Paper Toss. Although the public markets remain significantly depressed in gaming, we believe the Backflip deal is a sign that there is growing activity, and even enthusiasm again for the gaming industry.
As smartphone adoption has grown rapidly in the last 24 months, the majority of large publishers have been unable to devise a winning mobile strategy, in part because they have been heavily focused on monetizing Facebook and the internet. Surveying the top ten iOS and Android titles over the last 6 months, you certainly don’t see consistency in rankings from the Social Power Players – Zynga, Gree, DeNA, etc. Perhaps because these companies still have not figured out how to build network power on mobile like they have on internet, mobile remains a highly fragmented platform.
Since mobile is ripe for consolidation, Hasbro’s acquisition of Backflip Studios makes a lot of sense. The acquisition instantly puts Hasbro in a position to compete with the social incumbents via mobile; moreover, with Hasbro’s core expertise in toys, the company increases the potential to grow franchises like Dragonvale into more than games (think Rovio and Angry Birds).
From an industry perspective, as more success stories like Backflip occur, investors will have no choice but to re-evaluate their strategy in gaming (especially when there are businesses like King.com and Supercell that still haven’t had a true exit). Of course, this time investors are more educated about the space and will look at assets with greater scrutiny than 2-3 years ago – investors are still open to looking at development houses, but will only bet on the best ones.
The best developers will be those that can make hit games consistently and wed creativity and analytics harmoniously. On the creative side, developers need to create (and wholly own) titles that are engaging and fun (as obvious as that sounds). No longer will “me-too” games cut it – Zynga has proven that replication is a very hard business to be in. On the analytics side, developers need to understand deeply how to measure fun and how to take insights learned from previous games then apply that knowledge toward future titles. Investors certainly are keen to providing capital to grow paid acquisition, but developers should already be knowledgeable about their channels and be targeted in their acquisition strategy before they think to raise outside capital.