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Finance

Zynga's OMGPOP acquisition: Reaction roundup

Zynga's OMGPOP acquisition: Reaction roundup

Thu 22 Mar 2012 7:26am GMT / 3:26am EDT / 12:26am PDT
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More information and analysis on the deal

The sudden acquisition of OMGPOP by Zynga happened as rapidly as the stunning growth of Draw Something, the OMGPOP game that catalyzed the deal. Apparently a number of companies were interested in OMGPOP, but the deal went to Zynga. Comments, speculation and analysis continue to swirl about the nature and scope of the deal.

The statistics generated by Draw Something are impressive. Draw Something is only 6 weeks old, and it's already been downloaded over 37 million times. The game has over 20 million daily active users, and it's the top app in 84 countries around the world. There are currently some 3,000 drawings created every second, and over 1 billion every week. Business Insider noted that it took AOL 9 years to hit 1 million users; it took Facebook 9 months; and Draw Something did it in 9 days. Small wonder, then, that multiple companies were interested in acquiring OMGPOP, and offering lofty prices.

While Zynga has declined to give any financial information about the deal, sources pegged the deal at $180 million, plus another $30 million in employee retention (which may or may not be structured as an earnout, where the acquired unit must meet certain goals in order to trigger the additional payment). This brings the total deal value to $210 million. This may seem like an enormous amount for a company that has struggled for 6 years, and finally had one success - but that one success is growing amazingly fast. Currently it's generating some $250,000 per day in revenue, and that's after Apple has taken out its 30% cut. That's a yearly total of over $91 million, assuming it stays at that level. So $210 million actually looks like a fairly reasonable price.

"Currently it's generating some $250,000 per day in revenue, and that's after Apple has taken out its 30% cut"

Business Insider's Henry Blodget noted that there has been a lot of talk about the deal at Ignition West, their business conference in San Francisco today. Regarding the size of the deal, Simon Khalaf, CEO of mobile analytics firm Flurry, commented: "OMGPOP sold way too early. They're leaving $800 million on the table." That sounds excessive, when some have even been questioning the $210 million deal as perhaps too much. Yet, when you look at how rapidly Rovio has become a company that spurns the idea of a billion dollars, it's not out of the realm of possibility. Rovio, too, is a one-hit wonder, which has yet to show that it can produce a second title not based on Angry Birds that can be a success. Draw Something has had a far speedier ramp than Angry Birds, up to this point. Yes, it may stall out at any point, but there's nothing to indicate that yet.

Ryan Lawler at GigaOM said: "What Zynga is picking up isn't just a hit game, the team that built it, or even the 35 other titles that OMGPOP has created over the last six years. And it's not just buying potential ad or in-game sales revenue from Draw Something users. What Zynga's really buying is a huge engaged audience that it can funnel into its other social gaming properties." It's an excellent point; Zynga has proven to be very adept at cross-marketing its games to its huge audience. Draw Something adds millions more to that audience; indications are that there's not a big cross-over between the Draw Something audience and Words With Friends. Adding tens of millions of potential players in one deal is a significant factor in the valuation.

Josh Constine at TechCrunch has a different perspective: "By acquiring OMGPOP, Zynga gets mobile talent, a huge user base to cross-promote from, and the opportunity to keep the drawing game audience unified. From here it can turn on its viral optimization engine, fix the game mechanic flaws, and offer much more compelling in-app purchases. Zynga's been printing money through the virtual economy for years, now it's about to start drawing it." He thinks the game has serious flaws that will need to be addressed, and Zynga is highly skilled at collecting user data, analyzing it, and tweaking gameplay to optimize it for best results. The value of 40 experienced employees in already established offices should not be discounted, either. Based in New York, Zynga's new offices can draw on a talent pool that's not being sought after as eagerly as the San Francisco talent, where the sheer number of companies in the area looking to hire can drive up the price of new hires.

Rumors abounded as to other OMGPOP suitors: DeNA, GREE, Electronic Arts, and others. Ultimately, though, OMGPOP ended up with Zynga, and after a very brief courtship (as these deals go... it can often take weeks or months to arrive at a deal). OMGPOP board member Bijan Sabet of Spark Capital commented to TechCrunch: "We had a lot of conversations. There were lots of companies that were interested in OMGPOP. But we saw that Zynga's price was good for all shareholders and employees so the board was unanimous. Zynga kept all the employees, who are coming along and staying in New York City. Dan got along with Mark Pincus and David Ko. It just felt really right." The key was the comfort level that OMGPOP CEO Dan Porter felt with Zynga's David Ko and Mark Pincus. Other companies may have offered better financial deals, but Porter felt that the working environment at Zynga would be much more compatible with his vision and temperament.

"Zynga's been printing money through the virtual economy for years, now it's about to start drawing it"

Josh Constine, TechCrunch

Ultimately the deal is a big boost for Zynga on multiple levels. Zynga gains the #1 app in the market before it's had a chance to burn out, and there are significant dangers ahead for a game that's attempting to scale so fast. Zynga is probably better suited than any other game company, technically, to help with the scaling issues at this point. Zynga has also gained a set of 35 other games, 40 experienced employees, and a New York office. Additionally, Zynga has shown it can move fast to take advantage of a good opportunity. Successfully concluding this deal means that Zynga is aggressive about seizing opportunities, and is able to close them. It's also a validation for Mark Pincus as CEO, who has come under fire in the press in past months for his management style. If Pincus was really difficult to work with, this deal would not have gone to Zynga.

Kim-Mai Cutler at TechCrunch, who originally broke the story of the acquisition, noted that Zynga could have cloned Draw Something. "On the one hand, if Zynga lost, it was probably going to do a 'Draw With Friends' anyway. That would have split the available market with OMGPOP, a situation we've seen when Zynga has launched titles like Dream Zoo, Dream Pet House and Dream Tower." With Draw Something already at a solid #1, any Zynga effort to clone it would have never achieved the same audience size, at least not any time soon. Acquiring the game instead of cloning it forestalls more negative PR and gives Zynga a number of other advantages as well. Certainly, some will complain that Zynga is buying a game design instead of creating their own, but that's an empty argument. Companies with the ability to make deals can always grow faster by acquiring the right properties and employees, rather than trying to do everything in-house. The trick, of course, is to successfully integrate the new games and new employees into the existing company and take full advantage of the opportunity. Zynga has already shown they can do this quite well with the Newtoy acquisition, where they doubled the size of the already successful Words With Friends audience in 120 days.

Zynga's acquisition of OMGPOP solidifies their position in the mobile market, and puts other companies on notice for future business deals. You'll have to get up very early in the morning to beat Zynga at a deal. We won't know the full effect of this deal on Zynga for months, but the odds are good that in a year's time this will be seen as a very good deal indeed for Zynga.

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