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Column: 'The Euro Vision: Sweet Music Meets Hard Cash'

Column: 'The Euro Vision: Sweet Music Meets Hard Cash'

September 27, 2006 | By Jon Jordan

September 27, 2006 | By Jon Jordan
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The latest edition of Gamasutra's regular 'The Euro Vision' column sees journalist Jon Jordan musings on the disconnect between US and European games companies when it comes to raising investment.

Though this column is supposed about developments in the European games market, we're in a global economy, so for reasons that might become apparent, we'll start this week with the news that MTV Networks has bought US developer Harmonix for $175 million.

Money, Money, Money

Apparently, I appear to be the only person in the world who's flabbergasted. I mean $175 million for a small independent developer. That's $25 million more than Francisco Partners has promised to invest in the seven studios that make up Foundation 9 Entertainment, and a pretty favourable comparison to the $300 million Elevation Partners dropped to merge Pandemic and BioWare. Which isn't to say Harmonix hasn't had success, but in the case of Guitar Hero, publisher RedOctane approached it to develop the concept, not the other way around. And the main reason for the game's success was the bundled guitar; again RedOctane's smarts. Perhaps the most striking contrast then is that Harmonix was valued at $75 million more than RedOctane, which was bought by Activision earlier in the year for around $100 million.

A victory for developers everywhere you might think, but behind the scenes, it's more symbolic of the powerful workings of the US investment community.

Because, for all its focus on creating software for the tone-deaf to make beautiful music with, Harmonix is an incredibly well run and managed company. The two founders come from MIT's Media Laboratory and the company holds six patents relating to real-time music creation systems, collaborative music making over a network and the three dimensional display of musical data. Most importantly, in terms of valuation, it was backed by venture groups such as Acer Technology Ventures and Softbank Investment Corp, which, in these situations, are always determined to secure multiple returns on their investment.

Add into the mix something of feeding frenzy among media giants such as MTV's parent Viacom and News Corporation, when it comes to acquiring new media companies, and the result was $175 million on the dotted line. Overpriced? No deal is overpriced at the time it's signed, but it will be interesting in future to work out how the addition of Harmonix's undoubtedly talented staff has boosted MTV's bottom line.

Poor Old World Cousins

When it comes to raising cash and getting maximum value when selling, the situation for European developers and technology companies is very different however. Few investors seem interested in the sector, and even fewer have reasonable amounts of cash to spill.

The one exception has been Benchmark Capital Europe. After negotiating its way to 40 percent of UK publisher Codemasters in 2005, this February it boosted its stake to 70 percent, dropping in more to fund the company's aggressive entry into the persistent online market. Details weren't provided in terms of the amounts of money involved, but considering Codemasters' annual turnover of around $90 million, it will have been in the order of tens of millions.

Underlining its new taste for games, in August Benchmark invested in upcoming UK middleware company NaturalMotion. It had previously raised $1.6 million from private individuals when it launched back in 2002, but the success of the euphoria real-time animation engine meant NaturalMotion was looking to expand its developer support services to sign up more publisher clients.

But with two deals done, it's unlikely Benchmark will be looking for any more. Other small players are looking at the game markets. For example, specialist UK investment company Zyzygy plc has a 41 percent stake in emerging online gaming developer and technology company Nice Tech. Consulting, management and venture company ANGLE plc has funded Cambridge University startup Geomerics. The sums involved aren't large however, being less than $1 million in each case, and probably insufficient to establish the companies without further investment.

One reason for this gap in UK and European circles is the way the investment cycle works. You invest to grow a company to the point where it's attractive as a trade sale, as in the case of Harmonix, or spend more to get it into shape for an IPO. Unfortunately no European media companies are interested in games, while its stock markets are frankly sick of them. During the past couple of years, Rage, Warthog and Argonaut went horribly bust in the UK, while in France, a similar fate was suffered by Kalisto, Titus and Cryo. Which will make the planned IPO of Codemasters at some point in the coming 24 months something of, well, a benchmark, especially for Benchmark.

Sales Curve On The Up

At least the major publicly traded UK publisher, SCi (once known as Sale Curve Interactive, acronym lovers) is currently in investors' good books. It's announced its first complete annual figures since it fought off Elevation Partners to buy up the UK's one-time publishing powerhouse Eidos. And demonstrating the ambition of the deal, it was noticeable just how much smaller SCi was than Eidos. SCi paid out 74 ($139) million, funded mainly by issuing new shares, back when its turnover was only around 30 ($57) million.

That ambition has paid off though with preliminary revenue for the twelve months ended 30 June 2006 at 179 ($337) million and a trading profit of 27 ($52) million. Driving sales were the resurrected Tomb Raider and Hitman brands, which sold 2.9 and 1.4 million units respectively. The company also distributed 2.7 million units of the first LEGO Star Wars game.

The bigger medium term question for SCi however will be to get its head around the North American market. Prior to buying Eidos, it didn't have any US muscle, preferring to cut distribution deals with more powerful partners such as Take Two. Many of the combined companys games are also culturally UK-centric, with popular soccer title Championship Manager and graphic novel character Rogue Trooper good examples. Hopefully it should be looking to sign up, or perhaps even acquire US studios. Just don't expect deals on anything like the scale of Harmonix.

[Jon Jordan is a freelance games journalist and photographer, based in Manchester, UK. He can't play the guitar or Guitar Hero, but likes taking photos of people who can.]

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