When Small Means Big
ngmoco's purchase price may have shocked some - but the company's track record easily justifies it
Who are the world's biggest games companies? It's a tougher question than it sounds. If you want an answer, first you need to narrow down your terminology - what do you mean by "big"? Are we referring to the number of games sold? To the annual turnover? To the market capitalisation or valuation?
This is a question which is somewhat trickier in the technology and entertainment arenas than it is in traditional businesses. Cars, for example, come with many different price tags but the majority fall within a single order of magnitude and manufacturers operate in broadly similar conditions - so there's usually a tight relationship between selling the most cars, having the highest turnover and even, market peculiarities permitting, having the highest valuation.
Game companies are different. Some make their profits from selling games for 59 pence. Others focus on markets ten times more expensive, but usually under £10. Still others - those whom we would generally consider "traditional" games companies - can sell games for ten times higher again. Depending on your perspective, some of those companies may be scarcely recognisable as games businesses. The enduring success of others may be utterly baffling to you.
I mention this, obviously, because plenty of people have seemed very baffled by the enormous price tag which was placed on mobile developer ngmoco earlier this week. The San Francisco based firm was picked up by Japanese social and mobile gaming giant DeNA, a name almost entirely unknown outside its native country, for an eye-watering $400 million.
Amid the storm of congratulations aimed at ngmoco, a company whose products and staff alike tend to be widely liked by industry peers, the acquisition has also raised some eyebrows - and even some hackles.
There's no denying, after all, that ngmoco fits the label of "upstart" rather nicely. The company was only founded two years ago and has mostly focused its efforts on the iPhone - a platform which is itself only three years old and which despite stupendous success as a gaming device, still struggles for acceptance among the pastime's more vocal, traditional consumers.
In other words, some people - and I refer not only to gamers here, but to plenty of gainfully employed people within the industry itself - feel like ngmoco hasn't paid its dues. The industry is full of respected, aged companies which have laboured for years on core franchises, but whose valuation isn't even within spitting distance of ngmoco's nine-figure sum.
Since the deal was announced, I've heard people simply complaining that the sums involved don't seem fair. It's not the most mature of responses, but at least it's a little more intellectually honest than those who are disguising similar sentiments by sucking at their teeth and questioning whether DeNA has bought a turkey off the back of mobile gaming hype.
DeNA may not be a company which many people had heard about until this week, but it's hardly a lumbering corporate behemoth paying out over the odds to engage with a cool new market sector, and nor is it an inexperienced player hoodwinked by hype. It's tough to own a mobile phone in Japan for very long without running into DeNA's work - the firm operates the country's largest social and gaming mobile portal, boasting around 11 million users, which accounts for almost one in every ten people in Japan. Its game catalogue is littered with success stories and with big domestic entertainment brands.
DeNA knows what it's doing, in other words - and it knows what it's doing well enough to be able to identify the areas in which it doesn't really have a clue what it's doing, such as engagement with overseas markets. Even more importantly, it knows that its own market in Japan is threatened right now, not by a rival but simply by progress, and that ngmoco is the company best placed to ward off that threat by embracing that progress.
The iPhone and the new business ecosystem which has developed around it has blindsided Japan just as much as it did the rest of the world. It wasn't hard to predict that the iPhone would be successful, but few foresaw that the real payload of the device was the App Store, a fundamental restructuring of the business model for mobile content which has rapidly spread to other handset manufacturers and has destroyed forever the dream of network operators becoming media giants.
In Japan, the change has happened more slowly than elsewhere - not so much because of slower iPhone adoption (the phone does a healthy business in Japan, despite countless predictions of doom) as because there was actually a thriving mobile gaming market here before the new platform arrived. In the West, despite the best efforts of some very dedicated and creative people, mobile gaming had never clicked with most consumers; in Japan, in spite of fairly tortuous phone interfaces and purchasing systems, the consumption of mobile content was well-established. Japan, in other words, has inertia to overcome, whereas the App Store model blew through Western markets like a hurricane.
Yet the change is coming in Japan, and DeNA knows that, just as it knows that it needs to globalise. Considered in the context of Japan's biggest player opening a doorway to the world while simultaneously safeguarding its home market from a major threat, $400m no longer sounds quite so insane - even if ngmoco is only a few months past its second birthday.
Besides which, companies don't "pay their dues" - that's not how business works - and nor do games companies have any responsibility to prove themselves at the sacred alter of core gaming before they can go off and become market behemoths. An informed look at ngmoco's success suggests that it is neither down to hype nor to some kind of bubble in the mobile sector. Rather, it's a combination of perfect positioning and extremely agile, clever business thinking.
ngmoco positioned itself like a surfer two years ago, ready to ride the wave of the iPhone's growing success all the way home. In itself, that's not such a remarkable thing - many other fledgling developers hopped on board with the iPhone at the outset, although few of them had the kind of industry pedigree represented by ngmoco's founder, former EA executive Neil Young. What's remarkable, instead, is that ngmoco has managed to stay on its board at the crest of the wave for two years.
That's been no mean feat, requiring courage, insight and extraordinary business acumen. No aspect of the ngmoco story demonstrates that quite so clearly as the company's decision, in spite of some success in the paid-for market, to abandon all of its paid-for products and cease development of any game which couldn't be readily moved to a freemium model.
At the time, the wisdom of that decision was widely questioned, but it has proven to be exactly the right position to take. Most of all, it demonstrated that despite the traditional gaming backgrounds of many of the firm's executives, ngmoco was a company willing to think deeply about the new market it was founded to exploit, and to consider approaches which would never have floated in the traditional games market from whence they came.
ngmoco's purchase price is justified several times over. It is justified by the company's record of growth, by the millions of games which it has sold, and perhaps more than anything, by the unique experience and knowledge which it brings to its new parent company. ngmoco's games may not be your personal cup of tea - but they are a beverage enjoyed by millions, and that in itself shows a diversity in the industry which deserves to be celebrated.