Monday, March 28, 2005

Game company valuations rise

Game industry is enjoying lot of interest outside its borders. Namely media companies are looking into expanding their reach into games. This will increase the prices of all game companies, because bigger companies are complete and easy to manage and small game companies, because they are the fuel for bigger companies to grow even bigger.


WHY BUY?
Game development is slow and there is always danger of flops. By purchasing smaller game developers with existing titles, the random market-testing phase for franchise and initial development cycle can be cut away and lot of time can be saved. Such a huge timesavings mean lot of dollars or euros.


WHY GROWTH?
Why the big players need to grow? Huh, beats me, I don’t really understand the logic of perpetual GDP growth, I need my basic stuff and I am not shopping for larger, bigger, better or more expensive. Uh, enough chatter, game industry just mimics other industries. Everybody wants to grow, because they think that their company is special and has the right to remain independent.


MONEY BUYS LOYALTY
If you are a small company and your company’s ownership is divided among several owners, there are going to be some disagreements if somebody introduces big take-over offer to the picture. There are always those who just take the money and run. So, here is answer to the growth. Bigger engine makes more money and if the growth is fast enough, everybody will be happy with the company. Growth means money for everybody in the picture and owners are just one big happy family.


VALUATION CYCLE
So the situation is like this:
  • Media companies want to buy game companies to strengthen their competitive position.
  • Game companies want to remain independent and defend themselves by buying smaller competitors
  • Small game companies fight back by loyal ownership or successful games.

The cycle raises the company valuations from the lowest level to the highest, even the original boost comes from the top. Is there a point that I am trying to make? Next post will tell...
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