Video Game Landscape Overview Final

A peak at... Video Game Sector October 1, 2007 Please note that any and all views expressed in this document are Darren Herman’s and independent of any company Darren Herman is afﬁliated with. 1

Preface This document serves as an informal guide to the video game industry in these rapidly changing times. I’ve been fortunate to be a part of the changing landscape and hope to continue in helping shape this amazing industry. Whether you’re a billion dollar media company looking for your next acquisition, a game publisher expanding, or a development studio looking to ramp up product, this document hopefully will shed some light on the industry, trends, and participants. Could I cover everything/everyone? No. If you want to go in-depth in any area, please contact me and we’ll talk further. Disclosure: Please note that I’m not currently ﬁnancially motivated to promote one company over another in this document. Please also take this document with a grain of salt and contact me with any questions, comments, feedback at darrenherman@gmail.com http://www.darrenherman.com / October 1, 2007 2

Thank You. • Before we move forward, I’d personally like to thank the following gentlemen who have helped nit-pick and shape this document. Your continued support has been tremendous. • Adrian Crook / http://www.freetoplay.biz • Brandon Berger / http://brandonberger.com/blog/ • Roger Ehrenberg / http://www.informationarbitrage.com http://www.darrenherman.com / October 1, 2007 3

Cloud of Contents game platforms casual games online video game ecosystem games console games console war trends within video games keep your eyes on... increasing the LVG harnessing the Internet kill stereotypes select m&a within the video game sector m&a opportunities companies to watch the end http://www.darrenherman.com / October 1, 2007 4

Reasons Why • There are many reasons why I’m so fascinated with the video game sector, but lets let the numbers do the talking. I’d be remiss if I didn’t mention... http://www.darrenherman.com / October 1, 2007 5

Video Game Ecosystem there are so many industry constituents, it’s impossible to simply recap them all NewsCorp acquires Gamer Services Industry Services IGN, Disney acquires Club Penguin, in-game ad ﬁrms legal ancillary revenue streams for pubs/devs gamer blogs, power leveling, etc Hardcore PC Console Casual Online Video Game Top publishers include Activision, Electronic Gamer Arts, Nintendo, Sony Computer Entertainment, Take-Two, etc Game Engine IAC most recently acquires majority share in GarageGames Game Developer http://www.darrenherman.com / October 1, 2007 6

Game Platforms • Console (PS3, Xbox 360, Wii) • PC Based • Handheld (Mobile, PSP, DS, etc) What is the difference between Consoles & PC’s in the future? Consoles today are nothing more than computers tailored to high-end video games. Why do you need both? The Apple iPhone may change the handheld sector. Will the iPhone kill the PSP? No, but the iPhone is causing all the handheld manufacturers to innovate and potentially include mobile phone functionality. Would love to see the killer handheld device which would be a PSP type device that can play video games (all types) with phone & wiﬁ capabilities (Twitter, Skype, Google Reader [RSS], GMAIL, Exchange, etc) http://www.darrenherman.com / October 1, 2007 7

Casual Games (can be Console, PC, or Handheld) • Casual Games are like casual sex • No commitment • Easy to get and easy to leave • Generally free http://www.darrenherman.com / October 1, 2007 8

Online Games (can be Console, PC, or Handheld) • Games that utilize the power of the web (frequently includes Massively Multiplayer Online Games [MMO]) • In browser or thru downloadable application - AIR, Shockwave, C++, etc • Business plans that include any or all of the following: subscription, virtual goods, skill based wagering, in-game advertising, pay-per-play • Newer games take advantage of the “social web” [Web 2.0 for all you buzzmasters] http://www.darrenherman.com / October 1, 2007 9

Console Games • Developed for Sony PS3, Nintendo Wii, Microsoft Xbox 360 • Games can come out on multiple consoles or are exclusive to one particular console (e.g. Halo 3/Xbox 360 & Wii Sports/Wii) • Tend to be the most expensive games to produce ($5-30MM) and mirror the music industry as a hit-driven business • Franchises are valuable (EA’s Madden has shipped over a dozen versions over the years) • Console games can utilize live Internet components if their respective console is connected to the Internet and the developer has incorporated this functionality • Models are emerging to extend gameplay and increase the lifetime value of the gamer http://www.darrenherman.com / October 1, 2007 10

Console War • It’s a battle • Nintendo has clear advantage in casual sector, but other consoles are taking note • Do not discount PS3. The game is not over and they are tracking well against Xbox360 http://www.vgchartz.com/ngwars.php http://www.darrenherman.com / October 1, 2007 11

Trends within Video Games • LVG (lifetime value of the gamer) • Harnessing the Internet • Kill stereotypes http://www.darrenherman.com / October 1, 2007 12

Keep your Eye on... • I’d argue the most important macro-trend currently is: • LIFETIME VALUE OF THE GAMER • In business, it’s always about revenue, but now more than ever, publishers/ developers are able to monetize gamers in new ways. Engaging gamers through new revenue opportunities have opened the doors for better games, enriching experiences, and the ability for gamers to harness games in new ways. • Gamers traditionally have purchased games at retail and paid the typical $29-59 price point. Why stop there? Internet connectivity has opened the door for new revenue models. http://www.darrenherman.com / October 1, 2007 13

Increasing the LVG •LVG (lifetime value of gamer) • Purchase price of the game ($0-$XX) • Subscription to game • Virtual goods purchased by primary and secondary transactions • Real money transactions (RMT) • In-game advertising • Skill based betting & wagering • Licensing and brand opportunities http://www.aolcdn.com/ch_gamedaily/american-gamer.jpg http://www.darrenherman.com / October 1, 2007 14

Harnessing the Internet • Publishers/developers who want to get ahead will harness the Internet for connectivity reasons • Developing on a closed platform will kill your market potential in the next few years • In the USA, the majority of PCs are connected and console penetration is increasing daily • People are inherently social, we don’t like playing alone IF we don’t have to (for the majority of games) http://www.darrenherman.com / October 1, 2007 15

Kill Stereotypes •When I give talks to ad agencies and brands, it’s amazing what stereotypes you uncover about gamers: • Not all gamers are pimple faced teens in the midwest who drink Sprite and eat pizza • Time to realize that the world is gaming • Not all gamers are male... a signiﬁcant percentage are female • Being a ‘gamer’ doesn’t mean you’re hardcore, you could be a ‘casual’ gamer http://www.darrenherman.com / October 1, 2007 16

Where Should I Spend my [Media Co.’s] Money? • Looking at the video game space for M&A purposes http://www.darrenherman.com / October 1, 2007 17

Select M&A within the Video Game sector • There have been some signiﬁcant recent acquisitions • 9/07 GarageGames Majority Investment by IAC (undisclosed) • 8/07 Club Penguin acquired by Disney ($350M+) • 2/07 Adscape acquired by Google ($24M) • 5/06 Massive Incorporated acquired by Microsoft (undisclosed) • 4/06 Xﬁre acquired by Viacom ($102M) • 11/05 GameTrailers.com acquired by MTVN (undisclosed) • 9/05 IGN acquired by NewsCorp ($650M+) • 6/05 NeoPets acquired by MTV ($160M+) http://www.darrenherman.com / October 1, 2007 18

M&A Opportunities • IMHO, I believe the Industry Services sector is where Media Companies should focus their attention (see page 6): • You do not alienate publishers and can work with everyone (largest pie) • It’s potentially easier to incorporate the vision of the acquiree into your company • Being a game pub/dev, it’s a hit driven business so there is higher implied risk • The market is ripe with new ideas, and we are years away from the market becoming saturated with Industry Services. Take your pick today. http://www.darrenherman.com / October 1, 2007 19

Companies to Watch http://www.darrenherman.com / October 1, 2007 20

The End • I’ve obviously got a lot more thoughts regarding the video game sector and it’s intersection with digital media. Feel free to reach out if you would like to chat further. • Share this document around with your colleagues, friends, grandparents, and anyone else you choose; Please give credit where due. I’d appreciate it. • Darren Herman / www.darrenherman.com / darrenherman@gmail.com http://www.darrenherman.com / October 1, 2007 21

Glossary • Casual game: a very simple lightweight game with no signiﬁcant commitment from the gamer • Dev: developer • Game engine: the backbone of the physics/graphics of a video game • Hardcore gamer: gamers who spend a signiﬁcant amount of time and money on gaming • LVG: lifetime value of a gamer • MMO: massively multiplayer online [game] • MMORPG: massively multiplayer online role playing games • Online game: a game that is played online (can be a casual or more intense game) • Pub: publisher • RMT: real money transaction http://www.darrenherman.com / October 1, 2007 22

Video Game Landscape Overview Final

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Notes on slide 1

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