Does the game industry have anything in common with professional sports? Maybe when it comes to studio acquisitions. Dan Lee Rogers is a developer agent, and in a talk at GDC Canada in Vancouver on Tuesday, he discussed his experiences representing developers in negotiations with publishers.
"With sports players, you know about what they're worth, because you knew what the last guy was worth," said Rogers, who until recently worked for Interactive Studio Management. "If Manny Ramirez plus X, the next guy who's a little better, should be worth more theoretically. In our industry, there are a lot of moving parts, and it's a little harder to put it together."
Rogers referred back to a series he wrote a few years ago, The End Game, that attempted to chronicle the notable developer acquisitions over the two decades up until that point.
In 2002, Angel Studios was acquired by Take-Two for $28 million. In the same year, a studio in the same area and of similar size and with games of similar quality, Luxoflux, was acquired by Activision for only $9 million.
Similarly, in 2002, Atari paid $47 million for Shiny while EA paid $14 million for Black Box. The main difference was that Shiny at the time held the rights to The Matrix games. "Is that how much The Matrix would have been worth then?" asked Rogers.
Rare was purchased for $375 million by Microsoft in 2002, while Traveller's Tales was purchased by Warner Bros. in 2007 for $210. "Rare was not producing its own intellectual property; Traveller's Tales was not producing its own intellectual property. Traveller's Tales had acquired the use of the LEGO property; Rare had none," said Rogers. "So why was Rare so much more?"
Then, there was BioWare/Pandemic, which EA acquired for $860 million in total.
Rogers has been tracking data on game developer acquisitions since 1991. From 1991 to 2008, there's been a broad trend in total annual dollar value of acquisitions, but the curve is extremely spikey -- mainly based on reactions to ongoing changes in the necessities of development brought on by hardware shifts, rather than any predictable growth cycle.
"Developers either have the promise of technology, or the actual technology, that the publisher will need," Rogers explained. Studios may also accrue value for their expertise in new hardware or trends, he added.
Thinking Like a Publisher
"Let's think like a publisher," Rogers said -- after all, publisher perception is the primary factor that determines developer value. "They all have one thing in common: they all are out there to make money," he said. "Never forget that."
"The reason the publisher is in the business is because they need to make money. It's not that they want to make money; they have to make money. And if they're a public company, they really have to make money. They have to grow their business."
Rule 1: Publishers don't think like developers.
"It sounds really simple, but it's simply true," said Rogers. "They don't think like you. They don't act like you. They act like publishers. They're concerned with their profit, not yours, and if you've ever been an independent developer, you know. If something has to get cut, it's going to be you. The only time they are interested in you is when your profitability affects their profitability."
Rule 2: You are not the center of the publisher's universe.
"That's where we can start to understand why they buy developers," Rogers said. Executives' considerations include growing business, keeping ahead of the competition, developing the next Halo or GTA. Middle management worries about keeping projects on time and under budget, and not being fired.
As Activision's Bobby Kotick said in a 2007 annual report, "We will continue to evaluate potential acquisition candidates as to the benefit they bring to us."
Rule 3: Publishers buy developers because they need them, not because they want them.
Among factors that add value to an acquisition, development expertise and proprietary tech are actually relatively low-value to publishers, Rogers said, based on interviews with publishers he obtained while conducting research.
Up from there is IP rights acquisition, which publishers consider more valuable, such as Traveller's Tales with the LEGO rights. Even more valuable is franchise acquisition, in cases where the developer owns the entire property inside and out as well as its associated technology, such as Harmonix with Rock Band, RedOctane with Guitar Hero, or DICE with Battlefield.
Then, there is strategic value, which comes into play in cases like Microsoft buying Rare -- when it is so important for Microsoft to succeed with Xbox versus the competition, and raise the quality bar on Xbox titles, that it is willing to pay an enormous premium for a studio that it feels can help it achieve that goal.
Some cases, like BioWare/Pandemic, bring both strategic value and franchise acquisition -- the move brought 10 new franchises to EA, along with a high quality reputation at a time when EA was attempting to reinvigorate itself. According to Rogers, studios must ask themselves, "What did we do that the publisher is going to need?"
In the end, development and tech-driven acquisitions tend to go in the range of $5-30 million, and IP-driven acquisitions for $30-50 million. Franchise-driven acquisitions frequently run $100-200 million, while strategically-driven acquisitions are often in excess of $200 million or even multiple times that.
Increasing Your Value
"You're always in a better position if you're cash-positive," Rogers said. "I know that's a difficult place for independence developer, but if you have a positive revenue stream, that brings a lot of value to the publisher looking to acquire you."
"We're not talking about a lot [of profit]," he said, explaining that studios don't need to be massive money-making machines to be high-valued -- but having any profit is hugely beneficial. "Believe me, the other independent developers have just as little money as you do, even the big ones."
Rogers warned against overvaluing internal "made up" IP which hasn't actually demonstrated huge sales potential. "We're not going to be able to convince the bean counters that your intellectual property is worth zippity doo-dah -- unless you have a patent," he said.
"There's a huge legal storm coming called patent trolling. It's to our industry what slip-and-fall accidents were to attorneys," he said. "Every publisher is stacking up patents like nuclear weapons. When Sony goes to sue Activision over a patent violation, Activision says, 'You do that, and we'll launch these three on you.'"
Holding patents can give a developer a strategic advantage, Rogers said. He pointed to the iPhone market as an environment ripe for the creation of new game technologies, and therefore patents.
It can also be valuable to have a solid existing workforce -- but past a certain size, it actually becomes a negative. After all publishers, are capable of simply hiring employees on their own.
"A publisher might buy 100 employees with a particular specialty in a genre that they need to fill," Rogers said, "but plugging in 400 people that all have general expertise starts to look not as valuable."
Other factors that are unattractive to publishers include existing debt, legal entanglements, and long-term real estate obligations like leases that might make it difficult for the publisher to relocate the team.
In response to an attendee question, Rogers addressed acquisitions paid in company stock. A current stock-based acquisition by EA, for example, is likely to be a good value right now due to the depressed state of the market.
However, he contrasted that with studios who were acquired a few years ago by companies like Midway and THQ for stock when the market was stronger -- leaving them currently with enormously deflated value as those companies have taken a fall.