Global Video Games Fundraising, Investment, M&A and JV Review

Contents

Video games market trends: fundraising, investment, M&A and JV opportunities Video games market analysis Console Massively Multiplayer Online (MMO) Casual/Social Online Mobile Online gambling and skill based In-game advertising About IBIS Capital

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Market trends: fundraising, investment M&A and JV opportunities

The video games industry is big, getting bigger and changing

Pure console* remains the largest low growth sector, online and mobile drive market growth
Global Video Game Sector Revenue ($M)
100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2005

2006

2007

2008 Console games

2009 Online games Mobile games

2010 PC games

2011 In-game Advertising

2012

2013

2014

Asia Pacific and Europe to pass North America driven by higher online and mobile growth rates
Regional Video Game Market Revenue ($M)
100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2005

2006

2007

2008

2009 North America EMEA

2010 Asia Pacific

2011 Latin America

2012

2013

2014

Source: PWC (excludes hardware revenue) * Note: Pure console excludes MMO

Note: Online includes MMO, casual and social games

Console game costs, revenue and risks are accelerating

Investment per game is accelerating
Average game development costs are growing Xbox, PS2, Gamecube: $3-5M Wii: $5-7M XBox360, PS3: $15-30m Next console cycle: ? Strong development project management is crucial Marketing costs are substantial Equivalent to development cost or higher Retail, distribution and hardware royalties are significant 30-40% of retail turnover 500K to 1M units just to break even (ex-overheads)

Console games are hit driven, with investment no guarantee of success

120 100 80 $M 60 40 20 0
n ho ld IX lo fD ut y: M W 2 St ee l Cr ac kd ow Cr ee d la ne o ue St ra ng le Sh en m Au to Ha l as y IV 3 t

18 16 14 12 10 8 6 4 2 0 M Units

Lo st P

Fi na lF an t

Hardware: $22B Revenue Software: $55B Revenue Total $77B video games vs $85B film global revenue Up to $60 per game sold vs $10-20 per cinema ticket/DVD Video games growth to be driven by online, mobile and next console cycle

As sa ss i

Development Cost ($M)

Sales (M Units)

Franchises selling tens of millions of units are lower risk

250

But failed games can be deadly

2001 Daikatana ION Storm Dallas closed 2004 Malice Argonaut into receivership 2008 Hellgate Flagship into receivership 2008 Haze Free Radical into receivership 2009 Tabula Rasa NCSoft closes $69M MMO after 15 months sales following 7 year development 2009 Duke Nukem Forever Take2 closes 3D Realms without any game release following 12 year development
Global Unit Sales (M)

200

150

100

50

0
Mario Pokemon Tetris The Sims Need for Speed Final Fantasy Grand Theft Auto FIFA Madden NFL Legend of Zelda

Sources: Companies, IDC, Companies, Gamasutra, VGChartz, Gamezone, IndustryGamers, Mainichi Shinbun, The Ledger, News Limited, GameSpy, GameSpot, VideoGaming247, LA Times, NTV, Digital Battle, IGN, Time Magazine, Forbes, MontrealTechWatch, Newsday, Gamesindustry.biz, Wired Note: Development Cost excludes marketing and distribution

G ra nd

Ca l

Th ef t

Video games rivalled Hollywood in 2009

Re d

n' s

Online/mobile games are growing and fragmenting the market

Online*/mobile growing scale and share
2009 $19B revenue = 32% share of total video games 2014 $44B revenue = 50% share of total video games

As consumer markets fragment

Wii grew Casual Console market (60M+ Wiis sold) Apple grew Casual/Social Mobile market (3B Apps sold) WoW grew Hardcore Online market (11.5M+ subs) Zynga, Spil, Playfish, Yahoo! grew Casual/Social Web market (200M players) King.com grew Casual Skill Web market (20M players) Bigpoint bridged Casual to Hardcore online market (web delivery, PS2 quality, no downloads) Onlive hopes to expand Casual to Hardcore markets across TV and web (digital delivery, no console, PS3 quality)

Console/PC

Supported by profitable business models

Best companies growing revenue 100%+ annually while also generating 20-30%EBITDA margins App Store: free to $10 per game WoW: $12.99-$14.99 monthly fee Spil: free, advertising supported Zynga: free, micro-transactions, lead generation King.com: rake of user bets, micro-transactions Bigpoint: free, subscription and in-game item sales (microtransactions), no advertising

Casual Gamers

Hardcore Gamers

Web/Mobile And requiring different skills and approaches

Multiple, parallel game development business platforms (not one game hit driven companies) Multiple distributors (not just Facebook) Rapid, low cost game development and continuous daily redevelopment cycles for rapid market response Fast failure (cut commercial losers, back commercial winners)
Sources: PWC, Bigpoint, Companies, Casual Gaming Association, TechCrunch *Note: Online includes MMO, casual and social games

With investment dynamics entering a new phase

Majors focus on franchises, digital and cost
Highest game sales come from existing franchises Retail market increasingly hit driven with downward retail volume and margin pressure, similar to filmed entertainment Majors adopting similar strategies to maximise short to medium term earnings, but risking declining long term growth: Activision Blizzard: 75% revenue from franchises, with select few new properties EA: fewer & bigger hits in core, drive digital (Playfish acquisition), manage costs THQ: fewer, better games Ubisoft: new franchise refresh every 12-18 months
120 100 80 60 40 20

Global Video Games Private Fundraising

$1,200m $1,000m $800m $600m $400m $200m $0m 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

With negative impact on independents

Independents rely on advances and third party work from majors Narrower major focus = fewer advances and less third party work Fewer, bigger hits for majors increases investment per game, competition and risk for independent releases Hit driven, high risk market has lead to many independents struggling to adapt and survive

Funds raised

Number of investments

Fundraising remains robust for the right pitch

Casual/Social MMO Mobile/iPhone Educational Digital distribution Niche (geography/culture) console games Video games technology (3D game engines, motion capture etc)
80 70 60 50 40 30 20 10 0 1998 1999 2000

Global Video Games M&A

3,000 2,500 2,000 1,500 1,000 500 0 2001 2002 2003 2004 2005 2006 2007 2008 2009

Quality consolidating M&A set to rebound

Consolidation of major publishers and online (EA/Playfish) Consolidation of major media and online (Disney/Playdom) Consolidation within crowded casual/social market Consolidation of offline and online gambling
Sources: CapitalIQ (excludes Vivendi Activision and Vivendi Universal Publishing deals), NPD Group, Charttrack, GfK, Activision Blizzard, Companies Note: Funds raised/transaction value only includes disclosed amounts

Transaction Value ($M)

Number of Transactions

Deal activity is being driven by subsector consolidation

Consolidation Curve for Video Games
Sector Consolidation High Sector Launch Sector Growth for Scale Sector Consolidation Sector Equilibrium

Console

MMO

Online gambling Medium

Skill based

In-game Advertising

Casual/Social

Mobile Low
- VC Investment (high risk, high return) - Some small M&A - Growth equity investment (medium risk, medium return) - High volume, midmarket strategic M&A - Leveraged buyouts (medium risk, medium return) - Low volume, large scale strategic M&A (high risk, low returns) - Limited M&A/ investment (low risk, low returns) - Cost focus - Alliances or spinoffs

Expected Deal Activity*

* Note: some outlier deals may occur (e.g. Massive/Microsoft In-game advertising deal)

With clear investment, M&A and JV opportunities

For Major Video Games Companies
Sector Investment, M&A and JV Opportunities Console
Core franchise organic investment Limited new IP investment until 8th generation consoles Avoid large, value destroying M&A Acquire economically challenged AAA independents to control internal costs JV with major media for licensed games/ marketing investment

MMO
Invest in growth capital game fund Mid-market strategic M&A Avoid large, value destroying M&A Focused new IP investment in non-fantasy MMO market growth Focused new IP investment in casual/ social subscription/ microtransaction MMO market JV with major media for licensed MMO marketing/ investment

Casual/ Social
Invest in growth capital game fund Mid-market strategic M&A in subscription /microtransaction market Avoid large, value destroying M&A Focused new IP investment in parallel low cost subscription/ microtransaction game development JV with major media for licensed casual/social marketing/ investment

Mobile
Invest in growth capital game fund Small strategic M&A Avoid large, value destroying M&A Focused new IP investment in parallel, low cost mobile game development JV with major media for licensed mobile games marketing/ investment

Online Gambling
Avoid due to distance from core video games competencies

Skill Based
Invest in growth capital game fund Mid-market strategic M&A Avoid large, value destroying M&A Focused new IP investment in extending skill based model to core franchises

In-game Advertising
Small strategic M&A Avoid large, value destroying M&A Limited organic investment due to small market size

With clear investment, M&A and JV opportunities (cont)

For Independent Video Games Companies
Sector Investment, M&A and JV Opportunities Console
Organic investment (if possible) Exit to major video games company JV with major media for licensed games/ marketing/ investment Restructure to focus on self publishing, downloadable content, casual/ social or mobile markets, with parallel development and low cost/ offshoring

MMO
Organic investment for new IP in nonfantasy MMO market growth (if possible) VC fundraising for casual/social subscription/ microtransaction non-fantasy MMO market Growth equity buyout for casual/social subscription/ microtransaction MMO market JV with major media for licensed MMO marketing/ investment

Casual/ Social
VC fundraising for subscription/ microtransaction market Growth equity buyout for subscription/ microtransaction market Exit to major video games/ media company JV with major media for licensed casual/social games marketing/ investment

Mobile
VC fundraising Exit to major video games company JV with major media for licensed mobile games marketing/ investment

Online Gambling
VC fundraising for online gambling technology and niche/ geographic online gambling Growth equity buyout for gambling technology and niche/ geographic online gambling LBO for large generic gambling franchises JV with major media for licensed marketing/ investment

Skill Based
Growth equity buyout Exit to major video games/ media company JV with major media for licensed marketing/ investment

In-game Advertising
VC fundraising Exit to major video games/ media company

10

With clear investment, M&A and JV opportunities (cont)

For Venture Capital and Private Equity Firms
Sector Venture Capital Investment Opportunities Console
Avoid pure console investments due to risk profile and sector consolidation

MMO
Invest in casual/social subscription/ microtransaction non-fantasy MMO market Avoid hardcore MMO market due to risk profile

Casual/ Social
Invest in casual/social subscription/ microtransaction market Avoid pure advertising supported market because of business model

Mobile
Invest in parallel, low cost mobile game development

Online Gambling
Invest in online gambling technology providers Invest in niche/ geographic online gambling franchises Avoid generic gambling franchises due to sector consolidation Growth equity buyout of online gambling technology providers Growth equity buyout of niche/ geographic online gambling franchises LBO of large generic gambling franchises

Skill Based
Selective investment in new niches Avoid investment in already consolidated parts of the sector

In-game Advertising
Invest in ingame advertising technology Avoid in-game advertising agencies due to business model

Private Equity Buyout Opportunities

Avoid pure console buyouts due to risk profile and sector consolidation

LBO in hardcore MMO market Growth equity buyout in casual/social subscription/ microtransaction MMO market

Growth equity buyout in casual/social subscription/ microtransaction market Avoid pure advertising supported market because of business model

Develop sector relationships in anticipation of sector maturity

Growth equity buyout

Develop sector relationships in anticipation of sector maturity

11

With clear investment, M&A and JV opportunities (cont)

For Major Media Companies
Sector Investment, M&A and JV Opportunities Console
JV with major/ independent video games companies for licensed games/ marketing/ investment Strategic M&A of independent studios to build internal capability for significant IP portfolios and leveraging marketing platforms

MMO
Invest in growth capital game fund JV with major/ independent video games companies for licensed MMO marketing/ investment Mid-market strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid large, value destroying M&A

Casual/ Social
Invest in growth capital game fund JV with major/ independent video games companies for licensed casual/social games marketing/ investment Mid-market strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid standalone organic investment due to different core competencies

Mobile
Invest in growth capital game fund JV with major/ independent video games companies for licensed mobile games marketing/ investment Small strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid standalone organic investment due to different core competencies

Online Gambling
JV with independent online gambling companies for licensed online gambling marketing/ investment Avoid organic investment and M&A due to different core competencies

Skill Based
Invest in growth capital game fund JV with independent video games companies for licensed marketing/ investment Mid-market strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid standalone organic investment due to different core competencies

In-game Advertising
Small strategic M&A to build internal capability for significant IP portfolios and leveraging client relationships Avoid large, value destroying M&A Avoid standalone organic investment due to different core competencies

12

Console Sector

13

Console games have driven the video games market

A consolidated sector driven by hardware cycles
Wii dominates current 7th generation consoles with 47% of global platform revenue, followed by the Xbox360 at 35% and PS3 at 18% Market forecast of $37B revenue by 2014, fuelled by North American and European growth from anticipated 8th generation platforms (2014-2016). AsiaPacific growth limited by piracy and high share of MMO/casual/social online games Console games profits for Sony/Microsoft come from software, as consoles sold at a loss. The lower cost Wii has generated hardware profits for Nintendo Software pureplays can be highly profitable, but decline in packaged goods retail sales led to losses for many firms in 2009 8th generation console cycle forecast to drive growth, but such growth is likely to be constrained by growing MMO, casual/social online and mobile games marketshare The launch of Apples iPad and imitators may change the console market in ways that are likely to be greater, but take much longer to occur, than anticipated Digital downloadable content and game delivery reduce likelihood of a 9th generation console cycle, creating potentially significant long term issues for Sony, Microsoft, Nintendo and GameStop
$40B $35B $30B $25B $20B $15B $10B $5B $0B 2005

Worldwide pure console* software market

2006

2007

2008

2009
EMEA

2010
North America

2011

2012

2013

2014

Asia Pacfic

Latin America

The console market has gone through 7 overlapping platform/technology cycles

1st generation 1970 1975 1980 3rd generation 1985 1990 4th generation 7800 5th generation 1995 2000 6th generation 7th generation 2005

2nd generation 2600 Colour TV game 5200

Sources: PWC, Companies * Note: Pure console excludes MMO games

14

But its mature value chain is changing

Changes in industry dynamics impact all stages of the value chain
Development
Inhouse development Outsourced development IP & technology licensing Majors have multiple inhouse game development studios globally Independents receive advances from Majors for game development to cover costs, with royalties after agreed sales target reached Technology providers license game engines, motion capture, facial animation etc Third-party independent studios often used for licensed IP games and assistance on in-house development For example, BioShock 2 was developed for Take-Two by inhouse and outsourced developers Inhouse: 2K Marin, 2K Australia, 2K China Outsourced: Digital Extremes (multiplayer) Arkane Studios (level design assistance)

Publishing
Financing Manufacturing Marketing Major publishers and banks finance game development Ancillary services such as market research, advertising and technology assistance provided Game bonders increasingly carry completion risk Console manufacturers charge publishers a royalty for each game manufactured at time of manufacture Publishers carry inventory risk Due to increasing marketing budgets and consumer focus on hits, major publishers are reducing the number of games published Project management is provided to manage quality control and risks

Distribution
Physical distribution Digital distribution Retail negotiation Major publishers often distribute their own games, although Take-Two sold its distributor Jack of All Games to Synnex in 2009 Shift to digital distribution likely to reduce the role of physical distributors in the medium term Digital distribution growing through Xbox Live Arcade, Playstation Network, Wii Ware and major independent distributors such as Valves Steam Independent publishers rely on third party distributors such as Synnex and Ingram Micro

Retail
Physical retail Web retail Downloadable content Physical retail continues to be challenged by web retailers such as Amazon Retailers such as market leader GameStop make more profit from used than new software sales Used sales cannibalise new sales Majors using downloadable content to combat used market Downloadable content share growing with fast broadband Downloadable add-on game modules generate post-launch sales Retail remains highly seasonal, with almost half of all sales in Q4

Sources: Companies, Credit Suisse

15

The console software market is still driven by major publishers

Integrated Publisher
Nintendo 3DS launch New 3D device without special glasses

PS4 in 2014-16? Sony has announced development of an 8th generation console for potential launch in 2014-16

THQ cost cuts THQ asset sales (Big Huge Games) and staff cuts

Niche Game Portfolio

Diversified Game Portfolio

Icahn Take2 13.7% stake Activist Carl Icahn has already forced Board changes and may push for further corporate activity

Independents open to exit Many independents would welcome an exit due to market conditions

Independent Developer

Sources: Sony, Fast Company, Mergermarket, PatentGenius.com

16

But sector economics are increasingly risky

Publishers gross profit is approximately 1/3 of retail price
VA T/Sales Tax 1 5% P ublisher Gro ss P ro fit 35%

Retail M argin 25%

Distributio n M argin 5%

Hardware M anufacturer Ro yalty 20%

For major AAA $60 retail console game, 1-2M unit sales are needed to break even*
200

150

100 $M 50 0.5 -50 Retail Revenue Publisher Retail Profit Publisher Gross Profit Publisher Net Profit 1.0 1.5 Units Sold (M) 2.0 2.5 3.0

* Assuming $25M development and $15M marketing spend

17

And development financing is becoming like film financing

Complex financing structures to effectively manage risks, with significant transaction costs
Royalties Co-pub/distribution agreement

Parent Company/ Developer

IP Milestone Approvals

Publisher/ Distributor

Game development and delivery of Gold Master Candidate

Bank Borrower/Developer (via Special Purpose Vehicle)

Loan of budgeted costs including transactional costs (payable per milestone) Development Completion Agreement

First priority Completion Guarantee Agreement

IP

Completion Bond Guarantor (e.g. IFG)

Second priority

Reporting Cost reporting

Due diligence, development progress monitoring and milestone approvals

Specialist Auditor (e.g. Games Audit)

Security interests in developers rights

Sources: International Film Guarantors, Games Audit

18

So valuations reflect a mature industry in transition

USD millions, except per share data Company US players
Activision Blizzard, Inc. Electronic Arts Inc. GameStop Corp. Take-Two Interactive Software Inc. THQ Inc. Median Mean 11.41 15.14 19.51 10.14 4.78 87.8% 68.4% 68.2% 80.7% 54.2% 14,321 4,991 2,957 859 324 (3,342) (1,996) 15 (80) (158) 10,979 2,995 2,972 779 166 3.63 x n.a. n.a. 0.54 x n.a. 2.08 x 2.08 x 2.44 x n.a. n.a. 0.81 x n.a. 1.62 x 1.62 x 2.42 x n.a. n.a. 0.78 x n.a. 1.60 x 1.60 x n.m. n.a. n.a. 6.7 x n.a. 6.7 x 6.7 x 7.1 x n.a. n.a. n.m. n.a. 7.1 x 7.1 x 6.8 x n.a. n.a. n.m. n.a. 6.8 x 6.8 x

Price (13-Jul-10)

% of 52 Week High

Market Cap

Net Debt

Enterprise Value

CY2008

Enterprise Value Multiples Revenue EBITDA CY2009 CY2010 CY2008 CY2009

CY2010

APAC players
Capcom Co. Ltd. Giant Interactive Group, Inc. Konami Corp. Namco Bandai Holdings Inc. Nintendo Co. Ltd. Sega Sammy Holdings Inc. Shanda Interactive Entertainment Ltd. Square Enix Holdings Co., Ltd. The9 Limited Median Mean 15.89 7.20 15.53 8.97 296.64 14.33 40.16 19.26 4.27 71.2% 85.0% 65.8% 73.2% 79.4% 93.4% 62.3% 65.3% 42.3% 939 1,636 2,073 2,167 37,935 3,609 2,385 2,216 109 (128) (742) (41) (960) (14,201) (930) (1,247) (799) (247) 811 894 2,031 1,206 23,733 2,680 1,138 1,417 (138) n.a. 3.80 x n.a. n.a. n.a. n.a. 2.16 x n.a. n.m. 2.98 x 2.98 x n.a. 4.62 x n.a. n.a. n.a. n.a. 1.49 x n.a. n.m. 3.05 x 3.05 x n.a. 4.17 x n.a. n.a. n.a. n.a. 1.18 x n.a. n.m. 2.68 x 2.68 x n.a. 6.0 x n.a. n.a. n.a. n.a. 4.6 x n.a. n.m. 5.3 x 5.3 x n.a. 7.0 x n.a. n.a. n.a. n.a. 3.3 x n.a. n.m. 5.1 x 5.1 x n.a. 6.1 x n.a. n.a. n.a. n.a. 2.7 x n.a. n.m. 4.4 x 4.4 x

European players
Atari Digital Bros SpA Future PLC Game Group plc GameLoft SA Ubisoft Entertainment SA Median Mean Median Mean 5.37 1.72 0.25 1.03 4.70 9.33 37.1% 50.4% 61.1% 35.1% 87.9% 48.2% 113 24 85 352 351 881 12 65 18 (68) (25) (93) 125 89 103 284 326 788 n.a. 0.42 x 0.42 x n.a. 2.20 x n.a. 0.42 x 1.01 x 1.01 x 1.21 x n.a. n.a. 0.44 x n.a. 2.07 x n.a. 1.26 x 1.26 x 1.26 x 1.53 x n.a. n.a. 0.46 x n.a. 1.94 x n.a. 1.20 x 1.20 x 1.20 x 1.45 x n.a. 5.2 x 4.6 x n.a. n.m. n.a. 4.9 x 4.9 x 4.9 x 4.9 x n.a. n.a. 5.4 x n.a. 17.6 x n.a. 11.5 x 11.5 x 11.5 x 13.5 x n.a. n.a. 5.6 x n.a. 12.1 x n.a. 8.9 x 8.9 x 8.9 x 9.9 x

Source: CapitalIQ Note: Calendarised to December year end

19

In the advanced stages of consolidation

Selected M&A
Date Target Acquirer Deal value
$58m (26%) 03 May 10 (65%) n.a. n.a n.a. Develops online, video, and console games in Korea, North America, and Japan UK based developer and publisher of video games

Revenue multiple
5.9x

EBITDA multiple
12.4x

Target description
Video games publisher in South Korea

Comments
Wemade increased in presence in its core South Korean market by expanding beyond online games

05 Jun 10

Expansion in the South Korean market

04 Apr 10 (50%) 31 Mar 10

n.a.

n.a.

n.a.

The consideration for the acquisition will be used in part to pay down Codemasters 52 million ($79 million) debt Expand SouthPeak Interactive geographically into Europe

IRP GmbH

$4m

n.a.

n.a.

Switzerland based developer of video games

02 Mar 10

n.a.

n.a.

n.a.

UK based video games Increase development capabilities for games for developer of PlayStation Games Sonys PlayStation platform Publishes software for the Mac, Windows, iPhone, and console platforms

22 Feb 10

n.a.

n.a.

n.a.

The acquisition expands NgMoco beyond the mobile markets Synnex gains an established footprint in the video game hardware and software market as well as retaining distribution rights with the major publishers such as EA and Nintendo Id Softwares expertise in first person shooter games will compliment ZeniMaxs Bethesda Softworks divisions roll playing games such as Fallout 3 Warner Bros purchased the Midway assets out of bankruptcy and included the Joust, Mortal Kombat, Spy Hunter and Wheelman franchises The acquisition will allow Wigo Global to improve its competitiveness in game development

21 Dec 09

$43m

0.2x

n.a.

US-based marketer and distributer of video games US-based developer of video games such as Doom and Quake US-based developer of video games

24 Jun 09

n.a.

n.a

n.a.

21 May 09

$115m

0.5x

n.a.

22 Apr 09

Wigo Global Co. Ltd

$7m

0.5x

n.a.

South-Korean based developer of games software

Sources: CapitalIQ, Mergermarket

20

In the advanced stages of consolidation (continued)

Selected M&A
Date Target Acquirer Deal value
$63m D3 Inc

Revenue multiple
0.4x

EBITDA multiple
5.5x

Target description

Comments

09 Mar 09

Japan-based video game content Game portfolio expansion in its core Japanese developer market Developer of Video games including the Tombraider franchise Canadian-based video games developer South-Korean based developer of PC-based games The acquisition allows Square Enix to expand its games franchises to more focus on western markets Geographical expansion and the acquisition of 110 skilled game developers Geographic expansion into the development of games for the Asian market The sale of the majority of the company comes as Midway had a $800m debt due by the end of the year

12 Feb 09

$83m

0.4x

neg

03 Feb 09

n.a.

n.a.

n.a.

02 Dec 08

n.a.

n.a.

n.a.

02 Dec 08 (87.2% stake) 18 Nov 08

Mark Thomas (Private investor)

$19m

0.1x

n.a.

US-based developer of video games

$85m

0.8x

4.3x

Develops and sells computer In the new merged entity, Koei to hold 76% of game software for home use and the shares arcade games

Sources: CapitalIQ, Mergermarket

21

With limited pure console focused investment

Selected recent private placements
Date Target Investor Deal value
$4m
Chart Venture Partners

Target description
Publishes augmented reality and entertainment games across platforms

Date
02 Oct 09

Target

Investor

Deal value
$23m

Target description
Designs, develops and publishes casual/PC video games Develops entertainment software and games for consoles, handhelds and PCs Develops and publishes video games for consoles and PCs Develops and publishes games that join consoles, PCs, mobile and the Internet Low cost, emerging market game consoles

26 May 10

17 May 10

One investor

$14m

Low cost, emerging market game consoles Driving game developer in the United Kingdom Low cost, emerging market game consoles

01 Aug 09

47 investors

$12m

13 May 10

$9m

06 Jul 09

$8m

30 Nov 09

$8m

21 May 09

n.a.

20 Nov 09

Socius Capital Group, LLC

$5m

US-based console software developer

19 Mar 09

n.a.

19 Oct 09

$6m

Provides a 3D game development tool

09 Mar 09

One investor

$6m

Low cost emerging market game consoles

Sources: CapitalIQ, Mergermarket

22

And clear investment, M&A and JV opportunities

Firm Type Investment, M&A and JV Opportunities

Major Video Games

Core franchise organic investment Limited new IP investment until 8th generation consoles Avoid large, value destroying M&A Acquire economically challenged AAA independents to control internal costs JV with major media for licensed games/ marketing investment

Independent Video Games

Organic investment (if possible) Exit to major video games company JV with major media for licensed games/ marketing/ investment Restructure to focus on self publishing, downloadable content, casual/ social or mobile markets, with parallel development and low cost/ offshoring

Venture Capital
Avoid pure console investments due to risk profile and sector consolidation

Private Equity
Avoid pure console investments due to risk profile and sector consolidation

Major Media
JV with major/ independent video games companies for licensed games/ marketing/ investment Strategic M&A of independent studios to build internal capability for significant IP portfolios and leveraging marketing platforms

23

Massive Multiplayer Online (MMO) Sector

24

The MMO sector is both high growth and consolidated

The MMO sector is highly cash generative
MMOs are video games with thousand of simultaneous players Business models are retail, subscription, micro transactions (in-game currency commission and items) and advertising WoW customers pay $12.99-14.99 monthly fees MMOs operate across all major platforms
30,000,000

MMO subscriber growth forecast

Regression Forecast

25,000,000

Total Subscribers

20,000,000

Market growth rates are forecast to accelerate

There are currently over 15M paying MMO subscribers globally, with a strong presence in China and South Korea The MMO subscription market is forecast to reach 30 million by 2012 based on regression analysis of recent data

15,000,000

10,000,000

5,000,000

Current Subscribers

But MMOs are also hit driven and high risk

Many retail MMOs have grown during their launch year, followed by up to 3 years of stability before an often sharp decline MMOs that rely purely on digital distribution tend to grow slowly MMO expansion packs help to manage churn and ongoing retail presence Poor launches are generally fatal: NCSoft shut $69M Tabula Rasa after only 15 months of sales and a 7 year development

0
Jan- Aug- Mar- Oct- M Dec- Jul- Feb- Sep- Apr- Nov- Jun- Jan- Aug- Mar- Oct- M Dec- Jul- Feb1997 1997 1998 1998 ay- 1999 2000 2001 2001 2002 2002 2003 2004 2004 2005 2005 ay- 2006 2007 2008

MMO subscriptions market share*

EverQues t 1.1% EverQues t II 1.2% EVE Online 1.5% Lord of the Rings Online 0.9% City of Heroes / Tibia Villains 0.6% All Others 0.8% 5.4%

World of Warcraft currently skews the market

World of Warcraft accounts for ~2/3 of subscriptions, and is a significant profit driver for Vivendi The strength of the fantasy MMO market (>90% subscriptions market share) has prompted many copycat offerings, with 35+ males the largest player demographic There appears to be significant untapped potential for MMOs in other game genres, suggesting a Blue Ocean Strategy approach to opening new genres (as with Nintendo Wii in the console market) APB from independent RealTimeWorlds attempted to expand a different MMO genre in 2010 following $50m investment

Dofus 2.8% Final Fantas y XI 3.1% Lineage II 6.3%

Lineage 6.6% World of Warcraft 62.2%

RuneScape 7.5%

Sources: IBIS Capital, MMOGChart (2008), Companies *April 2008

25

Yet remains an early stage market with evolving dynamics

Warcraft 2011 film? Rumoured preproduction with Saving Private Ryan screenwriter

Subscription/Micro-Transactions

Ankama approaches? Rumoured approaches from financial and trade buyers

Casual

Hardcore

Advertising Supported

Jagex Game / Intergi Entertainment North American Alliance Intergi to handle North American sales

Sources: MergerMarket, IMDB, Companies

26

And a clear hierarchy of successful business models

Business models are solidifying Revenue Potential Subscription-based models generate highest revenue, but require substantial development and marketing investment Tens of Advertising / Free games are cheaper to develop millions of Marketing and market, but generally generate dollars less revenue Hybrid freemium models such as Bigpoint are establishing a significant presence and delivering solid results, blurring the line between MMO and Free-2-Play / casual/social games Hundreds of millions of dollars Micro-transactions

Pure Subscription / Time-based

Hundreds of millions of dollars

Hybrid retail sales and subscriptions

Billions of dollars

27

The MMO sector is ripe for investment and M&A

Selected M&A
Date Target Acquirer Deal value
$21m 29% Shanghai Dacheng Network Technology

Revenue multiple
n.a.

EBITDA multiple
n.a.

Target description
Development and provision of online games, in particular MMOGs

Comments
Expands product portfolio beyond Tencent Instant Messenger The acquisition is in line with KongZhongs strategy to expand into the two fastest growing video games segments in China (MMORPGs and Mobile games) The acquisition will reduce risks in internal development of future online games and improve margins through the low-cost structure of Cryptics engine

19 Apr 10

15 Dec 09

$80m

n.a.

n.a.

China-based developer of 3d MMORPGs

09 Dec 08

$75m

4.4x

n.a.

US based developer of massively-multiplayer online role playing games

Selected private placements

Date
08 Jul 10

Target

Investor

Deal value
$4m

Target description
Asynchronous massive multiplayer online games for iPhone Develops multiplayer online games and entertainment Develops and operates online games in China

Date
30 Nov 09

Target

Investor

Deal value
n.a.

Target description
Develops and operates online games in China Develops multiplayer games and platforms for iPhone Develops MMOs for console and PC Develops, produces and distributes MMOs for kids A worlds and MMO games production company Offers MMO games for casual gamers Publishes online computer games with a focus on virtual worlds

29 Oct 09

$4m

22 Mar 10

$20m

01 Aug 09 20 Jan 10 $20m

47 investors

$12m

31 Jul 09 06 Jan 10 4 investors $3m Develops and publishes browserbased casual MMOs and social games Develops, publishes, and licenses multiplayer online games including EVE Develops and licenses MMO tech platform and develops third party racing games Undisclosed Angel investor

$1m

16 Feb 09

$4m

22 Dec 09

4 investors

$18m

07 Oct 08 Private investors including CEO

$1m

15 Dec 09

$3m

25 Jul 08

$1m

Sources: CapitalIQ, Mergermarket

28

With clear investment, M&A and JV opportunities

Firm Type Investment, M&A and JV Opportunities

Major Video Games

Invest in growth capital game fund Mid-market strategic M&A Avoid large, value destroying M&A Focused new IP investment in nonfantasy MMO market growth Focused new IP investment in casual/ social subscription/ micro-transaction nonfantasy MMO market JV with major media for licensed MMO marketing/investment

Independent Video Games

Organic investment for new IP in nonfantasy MMO market growth (if possible) VC fundraising for casual/social subscription/microtransaction nonfantasy MMO market Growth equity buyout for casual/ social subscription/ micro-transaction MMO market JV with major media for licensed MMO marketing/ investment

Venture Capital
Invest in casual/ social subscription/ micro-transaction in non-fantasy MMO market Avoid hardcore MMO market due to risk profile

Private Equity
LBO in hardcore MMO market Growth equity buyout in casual/ social subscription/ micro-transaction MMO market

Major Media
Invest in growth capital game fund JV with major/ independent video games companies for licensed MMO marketing/ investment Mid-market strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid large, value destroying M&A

29

Casual/Social Online Sector

30

Casual/social online games are growing extremely rapidly

Casual/social online games have two primary forms
Casual/social online games require little experience or time commitment, with simple rules and gameplay accessed through a web browser The primary forms of casual/social online games are: Casual: single player, played on a casual games platform such as Spil Social: multiplayer, played either on a casual/social games platform (e.g. Bigpoint) or via a social network such as Facebook (e.g. Zynga)

Peak casual/social games hours

The global market is high growth

$2.25B revenue 2007, $3B revenue 2009* >200m monthly unique players globally China and Korea generated $1B revenue in 2007 Casual/social games have a high proportion of paying female customer (74%) Popular casual games include: Bejeweled (PopCap Games) QQ Games Collection (Tencent China) Diner Dash (Playfirst) Popular social games include: Farmville (Zynga) Dark Orbit and Deepolis (Bigpoint) Pet Society (Playfish)

Heaviest play times are 79pm and 11-2pm around lunch and dinner Casual/social gamers who pay for a subscription and/or are community users average 7-15 hours of online play per week

Casual/social players vs payers

Players Women account for 52% of casual/social game players

Men 48%

Women 52%

With multiple business models

Subscription and in-game item sales (micro-transactions) models most profitable Advertising supported models are cyclical, with generally lower margins Bigpoint (browser core between hardcore and pure casual gameplay): free, subscription and in-game item sale, limited advertising Zynga (social): free, in-game item sales (micro-transactions), lead generation Spil (casual): free, advertising supported, micro-transactions Casual/social game development costs of less than $500k are much lower than console game development costs

Payers Women account for 74% of paying players

Men 26%

Women 74%

Source: Casual Games Association, DFC Intelligence *Note: Casual Gaming Association includes casual/social games played on mobile, iPhone, social networks, PC, Mac and Xbox LIVE Arcade platforms, using different definitions to the earlier PWC definitions

31

Providing opportunities across the casual/social value chain

Developer
Creation, design and development of a game

Publishers
Funding, distribution and project management

Portals
Casual/social game destination websites

Aggregators
Intermediary between developers, publishers and portals

Tools & Technology

Enable the creation and distribution of casual/ social games

More SPIL acquisitions? SPIL acquired Onrpg.com to enter the MMO sector, opening the door to acquiring other developers to extend its offering

Disney and GameStop buys Disney buys Playdom for $763M and GameStop buys Kongregate

Next after Playfish/Playdom? Zynga, Bigpoint and GameForge are subject to constant speculation about IPO or exit

Google investment in Zynga Unconfirmed rumours of Google investing between $100 million and $200 million in Zynga

Microsofts casual expansion Microsoft has boosted the video game-related capabilities of Bing, integrating around 100 casual games directly

Sources: Mergermarket, Companies, PaidContent, TechFlash, Financial Times

32

But there is a gap in online/mobile games investment

Major publishers arent structured for online/mobile investment
Major publishers core competencies focus on management of $20m+ serial, high risk, complex developments, launches and commercialisation Online/mobile games require rapid, multiple, small scale parallel development platform investments, completely different to major publishers business cultures Major publishers are not investing significantly organically Major publishers are wary of large scale online/mobile video games M&A in early stage, fragmented markets where market dominance is not yet clear

Game Fund Structure

Limited Partners Financial investors and/or major strategic corporates

Generalist VC video games investment is in decline

Despite rapid market growth, VC investment across video games in 2009 had dropped by 60% from its high point in 2007 due to general VC market weakness and limited knowledge and relationships across complex, fast moving online/mobile games sectors High quality, high growth online/mobile video games companies are struggling to secure VC investment to maximise growth during the critical stage before industry consolidation Quality demand exceeds quality supply of investment and board representation

Game Fund $75M funds committed 6 year fund lifetime 3 year investment period

So a growth capital game fund offers substantial opportunity

Growth capital game fund investing in online/mobile game companies, not individual games Working capital and equity investments in multiple, parallel game development business platforms (not one game hit driven companies) Growth capital returns (>30% IRR, 3-6X money multiple), not lower return project funding

General Partners Source, invest in, oversee and exit portfolio companies

To profit from opportunities and manage risks in a complex market

Say $75M online and mobile game fund, investing $25M+ per year Online/mobile video games working capital, VC A, B, C rounds and growth equity Both US and European focus General Partners with strong industry, financial and entrepreneurial track records Both strategic (major video game and media corporates) and financial Limited Partners Co-investment with Tier 1 VC/PE firms and/or Limited Partners for larger deals Market leading video games investment market analysis Follow-on fund sizes could be increased if outstanding returns delivered

Portfolio Companies

33

With casual/social games helping larger company valuations

USD millions, except per share data Company
US and European players Electronic Arts Inc. G5 Entertainment AB GigaMedia Ltd. Playlogic Entertainment Inc. RealNetworks Inc. Median Mean Asian players Asiasoft Corporation Public Company Limited Astro Corporation Gamania Digital Entertainment Co., Ltd. InterServ International Inc. IPVG Corp. Kingsoft Corporation Limited Netease.com Inc. Perfect World Co., Ltd. Shanda Games Limited Shanda Interactive Entertainment Ltd. Median Mean Median Mean

Price (13-Jul-10)

% of 52 Week High

Market Cap

Net Debt

Enterprise Value

CY2009

Enterprise Value Multiples Revenue EBITDA CY2010 CY2011 CY2009 CY2010

CY2011

15.14 0.64 2.29 0.20 3.41

68.4% 95.2% 40.2% 23.3% 63.0%

4,991 5 127 14 461

(1,996) (0) (37) 5 (335)

2,995 5 90 19 126

0.72 x 3.53 x 0.56 x 1.73 x 0.22 x 0.72 x 1.35 x

0.78 x n.a. 1.10 x n.a. 0.30 x 0.78 x 0.73 x

0.76 x n.a. 0.98 x n.a. 0.32 x 0.76 x 0.69 x

14.0 x n.m. n.m. n.m. n.m. 14.0 x 14.0 x

6.9 x n.a. 7.1 x n.a. 16.4 x 7.1 x 10.1 x

5.8 x n.a. 3.1 x n.a. 7.0 x 5.8 x 5.3 x

0.28 1.70 1.64 3.71 0.03 0.52 34.30 24.24 6.38 40.16

97.3% 63.1% 76.7% 61.3% 50.0% 42.9% 70.7% 48.0% 49.1% 62.3%

85 112 260 104 20 570 4,451 1,213 1,838 2,385

(29) (10) (28) (33) 9 (192) (1,134) (274) (388) (1,247)

56 103 233 72 29 378 3,317 939 1,450 1,138

1.22 x n.a. 1.45 x 8.34 x 1.07 x 2.50 x 5.98 x 2.97 x 2.04 x 1.47 x 2.04 x 3.00 x 1.60 x 2.41 x

1.20 x n.a. 1.69 x n.a. n.a. 2.29 x 6.07 x 2.99 x 2.04 x 1.49 x 2.04 x 2.54 x 1.59 x 2.00 x

1.15 x n.a. 1.59 x n.a. n.a. 1.96 x 4.05 x 2.30 x 1.61 x 1.18 x 1.61 x 1.98 x 1.38 x 1.59 x

5.8 x n.a. 8.4 x n.m. 14.6 x 5.9 x 10.4 x 5.5 x 5.1 x 3.3 x 5.9 x 7.4 x 5.9 x 8.1 x

4.1 x n.a. n.a. n.a. n.a. 5.2 x 10.3 x 5.3 x 5.0 x 3.3 x 5.1 x 5.5 x 5.3 x 7.1 x

3.9 x n.a. n.a. n.a. n.a. 4.3 x 7.4 x 4.0 x 4.0 x 2.7 x 4.0 x 4.4 x 4.0 x 4.7 x

Source: CapitalIQ Note: Calendarized to December year end

34

Generating substantial M&A

Date Target Acquirer Deal value
$763.2M

Revenue multiple
n.a.

EBITDA multiple
n.a.

Target description
Social games developer

Comments
Strengthen digital gaming portfolio, acquire management and extend reach on social networks Facebook and MySpace Strengthens GameStop's digital platform and its strategy to be the gaming aggregator of choice

27 Jul 10

27 Jul 10

n.a.

n.a.

n.a.

Social gaming platform

17 Jun 10

n.a.

n.a.

n.a.

US-based operator of a social networking site

AOL disposed of Bebo after it acquired the company for $850m in March 2008

03 Jun 10

n.a.

n.a.

n.a.

26 May 10

n.a.

n.a.

n.a.

Challenge Games' Co-Founder will become US-based developer of Zynga' s General Manager and Vice President. multiplayer Web-based fantasy The Challenge Games' 35 employees will join games Zyngas workforce Enables online friends to converse privately over the Web; The engineering team of Sharegrove will join and share Web pages, pictures, Facebook and audio and video files Publishes games from casual game developers on PC, console, and iPhone platforms Lloyd Melnick, Founder of Merscom and team of 20 producers, designers, artists and engineers will join Playdom

26 Apr 10

n.a.

n.a.

n.a.

08 Apr 10

n.a.

n.a.

n.a.

Australian-based casual games developer Offers massively multiplayer online and casual games on Facebook Develops FunCards, a card game for playing cards with friend US-based social games developer

Consolidation of the Australian casual games market The founders of Offbeat are joining Playdom in leadership roles, and the 12 developers and designers of Offbeat will join Playdom's existing 15-person Seattle studio Acquired an unknown minority stake to enter a high growth market Hi5 added several of Big Six's executives to its management team and strengthened its online games presence

03 Mar 10

n.a.

n.a.

n.a.

26 Feb 10 (Undisclosed stake) 24 Feb 10 Big Six Games, Inc

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Sources: CapitalIQ, MergerMarket, Companies

35

Generating substantial M&A (continued)

Date Target Acquirer Deal value
$80m

Revenue multiple
n.a.

EBITDA multiple
n.a.

Target description

Comments

12 Jan 10

US-based operator of online The combination of Shandas games and Mochis games advertising network for distribution platform will create a better online game developers, advertisers game media platform and publishers US-based online social games The acquisition raised capital to fund growth and expansion whilst also putting off an IPO of the company

08 Dec 09 (Undisclosed stake)

Tiger Global Management LLC

$180m

n.a.

n.a.

09 Nov 09

$400m

n.a.

n.a.

Developer of free-to-play casual social games that can be played on social networking platforms Ireland-based publisher and developer of online games US-based provider of video game compression software, games and social networking Canadian based owner of online games and social networking sites

Electronic Arts continues to expand away from its core console games sports offerings into high growth casual games, but at a price The deal improved Gamestops digital media business and helped it extend outside the US The acquisition was in line with Googles strategy of pursuing innovation and video quality on the web The acquisition will allow the combined entity to provide a full suite of social advertising solutions for developers and advertisers The acquisition will allow Chengdu to expand its position in the fast growing online Chinese games market The acquisition will increase advertising revenue with a higher number of users

04 Nov 09 (Majority stake) 05 Aug 09

n.a.

n.a.

n.a.

$132m

8.1x

n.a.

27 Jul 09

$30m

n.a.

n.a.

05 Jun 09 Dreamwork net Co. Ltd 09 Mar 09 Chengdu B-ray Media Co. Ltd

$65m

4.6x

7.6x

Chinese online game developer

$10m

n.a.

n.a.

US-based online social network

12 Jan 09

n.a.

n.a.

n.a.

US-based developer and distributor of online casual games US based developer of massively-multiplayer online role playing games

The proceeds of the sale will be reinvested into Caf.com, Boontys seller The acquisition will reduce risks in internal development of future online games and improve margins through the low-cost structure of Cryptics engine

09 Dec 08

$75m

4.4x

n.a.

Sources: CapitalIQ, Mergermarket

36

And attracting significant investment

Selected recent private placements
Date
15 Jun 10

Target

Investor

Deal value
n.a.

Target description
US-based online social games

Date
20 Jan 10

Target

Investor

Deal value
$18m

Target description
Develops social games applications

14 May 10

$20m

Develops social games for networking sites Operates as a social network in Latin America, Europe, Asia, and Africa Produces social games for platforms

14 Dec 09

$2m

Develops social games for networking sites Provides an online social and games community for children aged 6 to 14 Operates a virtual currency platform for social media developers Develops multi-platform social games Develops, publishes, and operates free to play online games

09 Apr 10

n.a.

07 Dec 09

$4m

01 Apr 10

9 investors

$1m

01 Dec 09

$11m

25 Mar 10

n.a.

Develops social web games

01 Dec 09

11 investors

$2m

19 Mar 10

$2m

Offers Hangout.net, a casual 3D social networking site Offers a social networking website Allows employees to connect and share by posting messages Publishes and delivers casual video games Develops and publishes social games in Russia Develops and operates online games in China

24 Nov 09

Undisclosed investor

$5m

09 Feb 10

$3m

24 Nov 09

Undisclosed investor

$2m

Development of social games Operates an online social games company in Chile Designs, develops and publishes casual/PC video games

03 Feb 10

$10m

17 Nov 09

$4m

31 Jan 10

Undisclosed investors

$1m

02 Oct 09

$23m

25 Jan 10

n.a.

03 Jun 09

$4m

Online social network for gamers

20 Jan 10

Shenzhen Fortune Venture Capital Management

$20m

02 Jun 09

5 investors

$1m

Operates Elf Island Website of online games for children

Sources: CapitalIQ, Mergermarket

37

With clear investment, M&A and JV opportunities

Firm Type Investment, M&A and JV Opportunities

Major Video Games

Invest in growth capital game fund Mid-market strategic M&A in subscription/ micro-transaction market Avoid large, value destroying M&A Focused new IP investment in parallel low cost subscription/ micro-transaction game development JV with major media for licensed casual/social marketing/investment

Independent Video Games

VC fundraising for subscription/microtransaction market Growth equity buyout for subscription/microtransaction market Exit to major video games/media company JV with major media for licensed casual/ social games marketing/ investment

Venture Capital
Invest in casual/ social subscription/ micro-transaction market Avoid pure advertising supported market because of business model

Private Equity
Growth equity buyout in casual/ social subscription/ micro-transaction market Avoid pure advertising supported market because of business model

Major Media
Invest in growth capital game fund JV with major/ independent video games companies for licensed casual/ social games marketing/ investment Mid-market strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid large, value destroying M&A Avoid standalone organic investment due to different core competencies

38

Mobile Sector

39

Mobile games are being reinvigorated by smartphone growth

Smartphone marketshare is accelerating
Global mobile phone penetration 67% in 2009, 5B subs in in 2010F Mobile phone penetration >100% in many developed markets Total global mobile phone market volume growth Q1 2010 = 21.7% Global smartphone market volume growth Q1 2010 = 56.7% (18.8% of total market volume in Q1 2010 vs 14.4% in Q1 2009)

Global mobile games revenue growth is strong

Mobile Games Revenue ($B) 14 12

Driving mobile games revenue growth

Global mobile games market forecast to grow to >$13B by 2014 The mobile games market landscape is adapting to consumer trends and market demand: Mobile game publishers are bypassing network operators to sell directly to consumers High connectivity and multiplayer games becoming mass market due to unlimited data packages In-game advertising being used to supplement mobile game revenues Integrated applications increasing to allow converged gameplay with console/MMO/casual/social games

10 8 6 4 2 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mobile games platforms

Java is the most common platform for mobile games, but limitations require native binary formats for sophisticated games. Apple is blocking the use of Adobes Flash platform on its own mobile devices

New players are entering from multiple markets

Network operators (e.g. Vodafone Live!) Manufacturers (e.g. Nokia Ovi, Apple App Store) Web advertising platforms (e.g. Google) Console games majors (e.g EA Mobile, THQ Wireless) Independent games companies (e.g. Glu Mobile)

With low barriers to entry

Development costs tens to hundreds of thousands, not millions >3B iPhone Apps downloaded, many of which are independently developed games

Source: ITU, PWC, IDC * Note: Online includes MMO, casual and social games

40

Attracting both corporates and independents

EA is market leader EA has 34% mobile games publishing market share in the US. EA has launched 20 Hasbro brands on multiple platforms with iPhone apps driving growth

Public

Pure-play
Independent Developers Opportunity for independent mobile developers to help majors and media companies extend brands into mobile

Corporate
Strong mobile services competition Microsoft, Nokia, Apple and Google focused on mobile services growth including games

ngmoco raises $25m to buy Freeverse in 2010 Backed by Institutional Venture Partners, Kleiner Perkins, Norwest Venture Partners and Maples Investments

Private

Source: Companies, TechCrunch

41

Apple is aiming to be the mobile entertainment company

Apple is far down the path of migrating from electronics and software to mobile communications and entertainment Apples strength is providing all components of the mobile entertainment value chain in elegantly integrated consumer products and services, including hardware, software, eCommerce, applications and content iPad is the next stage of Apples mobile entertainment strategy, likely to spawn many imitators. This may change the video games market in ways that are likely to be greater, but take much longer to occur, than anticipated

Aiming for a complete mobile offering

The App Store

The App Store services iPhone, iPod Touch and iPad with >3B apps downloaded to date App Store should generate an increasing proportion of Apples non-hardware revenues, with substantial unrealised profit potential 70/30 App Seller/Apple revenue split

iPod

iPod Touch

iPhone

iMac functionality, iPhone mobility

Number of Available Apps

160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 09/07/2008 09/09/2008 09/11/2008 09/01/2009 09/03/2009 09/05/2009 09/07/2009 09/09/2009 09/11/2009 09/01/2010

Mobility

iPad

Macbook-Air

Macbook

iMac Entertainment functionality

Source: IDC

42

And is already the mobile games app platform of choice

Apple is the dominant mobile games app platform in the US
Apple has >7x more mobile apps than Android Apple has >4x new mobile apps developed per month than Android Apple mobile apps are paid for at twice the rate of Android apps 58% of Apple mobile apps are games
160 140 120 100 (K) 80 60 40

Mobile Applications (US)

16% 14% 12% 10% 8% 6% 4% 2% 0% Apple Android Apps in Store (K) Nokia Blackberry Palm Windows

Consumers are prepared to pay for quality

The highest volume mobile apps sell for $0.99 The highest grossing mobile apps sell for $9.99

Casual/social games business models migrating to mobile

Freemium models with in-game micro-transactions emerging For example, TapTap Revenge 3 (free app with in-app purchases of $0.99) generated more revenue than FIFA10 (one-off app sale at $6.99) in Jan 2010

20 0

Paid vs Free Apps (K)

Growth Rate (%)

Game genre share (revenue/volume) and average price (US)

25% 20% 15% 10% 5% 0%
Ac ti o n Ar ca Ad de ve nt ur Si e m ul at io n Sp or ts S tr a te gy Fa m ily Pu zz le R ac R ol in e Pl g ay in g Bo ar d M us ic Tr iv ia Ca E du r ca d tio na l K id s W or d Ca si no Di ce

Most popular app categories by platform (US)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Music Utlilities Entertainment Other Other Other

$9 $8 $7 $6 $5 $4 $3 $2 $1 $0

Games
Personalisation

Games
Apple Nokia Blackberry

Revenue Share

Volume Share

Average Price

Source: Distimo (US data)

43

Mobile games have both strong valuations and M&A

Industry comparable metrics
USD millions, except per share data Price Company G5 Entertainment AB GameLoft SA Glu Mobile, Inc. Hudson Soft Company Tose Co. Ltd. (13-Jul-10) 0.64 4.70 1.14 3.62 6.86 % of 52 Week High 95.2% 87.9% 67.5% 49.8% 85.2% Market Cap 5 351 35 104 51 Net Debt (0) (25) 5 (47) (20) Enterprise Value 5 326 39 57 32 Enterprise Value Multiples Revenue CY2008 CY2009 CY2010 2.47 x 2.20 x 0.44 x 0.27 x 0.46 x 3.69 x 2.07 x 0.49 x 0.30 x 0.48 x n.a. 1.94 x 0.69 x 0.30 x 0.53 x EBITDA CY2008 CY2009 21.5 x 26.2 x n.m. 1.6 x n.a. n.a. 17.6 x 9.7 x n.a. n.a.

Median Mean

0.46 x 1.17 x

0.49 x 1.41 x

0.61 x 0.87 x

21.5 x 16.4 x

13.7 x 13.7 x

Selected M&A activity

Date
1 Jul 10

Target

Acquirer

Deal value
n.a.

Revenue multiple
n.a.

EBITDA multiple
n.a.

Target description

Comments

Developer of music games for the Strengthens Disneys portfolio of games and iPad, iPhone, and iPod Touch entertainment offerings in mobile Development and publishing of 2D and 3D mobile games Developing, publishing and distributing games for mobile phones Publishes wireless entertainment applications, including games, ring tones and images Produces and distributes mobile entertainment content and applications Expands upon Glus development capabilities and pipeline for new game releases The acquisition strengthens Oberon Medias multi-platform strategy and will position Oberon to provide services to mass market casual games The acquisition of JAMDAT was in line with EAs strategy to expand into high growth games segments CYBIRD Holdings offers mobile content and mobile marketing solutions. Airborne Media will provide scale in the games and entertainment sectors

23 Jan 08

$36m

1.5x

n.m.

31 May 07

est. $114m

n.a.

n.a.

08 Dec 05

$699m

10.2x

49.9x

21 Jun 05

$60m

n.a.

n.a.

Sources: CapitalIQ, Mergermarket, Companies

44

And are attracting multiple small early-stage investments

Selected recent private placements
Date
30 Jun 10

Target

Investor

Deal value
$14m

Target description
Design, marketing, and sale of mobile games worldwide Provides a mobile service that mixes social, locative, and games elements Mobile application distribution and developer community in the United Kingdom Publishes and distributes entertainment content for third generation mobile networks worldwide Develops applications and games on mobile devices Develops games for personal computers and mobile phones Publishes augmented reality and entertainment games across platforms

Date
14 Dec 09

Target

Investor

Deal value
$4m

Target description
Operates a community of game enthusiasts to build and play location based mobile games Develops mobile, casino and online games Develops and publishes mobile games in China Provides mobile content services for direct to consumer and B2B business segments in Italy, Spain, Turkey and Brazil Develops games for personal computers and mobile phones Provides a mobile service that mixes social, locative, and games elements Operates as a social games platform for mobile devices Develops multiplayer and social games platforms for mobile devices and wireless networks Conceives, develops and deploys mobile games and mobile applications for publishers Develops mobile games An online platform, engages in aggregating, promoting, and delivering mobile entertainment content Operates an ad-supported mobile games and applications distribution platform

29 Jun 10

$20m

25 Nov 09

$4m

23 Jun 10 Trinad Management, LLC Angel investors 7 investors

$11m

05 Nov 09

$3m

21 Jun 10

$3m

17 Sep 09 Private investors

n.a.

09 Jun 10

n.a. Nominal amount $4m

15 Sep 09

$1m

28 May 10

04 Sep 09

$1m

26 May 10
Chart Venture Partners

18 Aug 09

$3m

06 May 10

Accredited investors 19 investors

$5m

08 Apr 10

$3m

06 Apr 10

$2m

Offers videogames, Internet platform and Internet/mobile gaming for flash 13 Aug 09 and smartphone Online platform, engages in aggregating, promoting, and 04 May 09 delivering mobile entertainment content directly to members Develops massively multiplayer 22 Apr 09 online (MMO) mobile games Provides a mobile service that mixes social, locative, and games elements Develops mobile games for social networks 27 Mar 09

$3m

$2m Nominal amount $6m

27 Mar 10

Angel Debt

$10m Nominal amount

16 Feb 10

11 Mar 09

$8m

Sources: CapitalIQ, Mergermarket

45

With clear investment, M&A and JV opportunities

Firm Type Investment, M&A and JV Opportunities

Major Video Games

Invest in growth capital game fund Small strategic M&A Avoid large, value destroying M&A Focused new IP investment in parallel, low cost mobile game development JV with major media for licensed mobile games marketing/investment

Independent Video Games

VC fundraising Exit to major video games company JV with major media for licensed mobile games marketing/ investment

Venture Capital
Invest in parallel, low cost mobile game development

Private Equity
Develop sector relationships in anticipation of sector maturity

Major Media
Invest in growth capital game fund JV with major/ independent video games companies for licensed mobile games marketing/ investment Small strategic M&A to build internal capability for significant IP portfolios and leveraging marketing platforms Avoid large, value destroying M&A Avoid standalone organic investment due to different core competencies

46

Online Gambling Sector

47

Online gambling continues to cannibalise offline

Online Gambling is high growth
Ongoing revenue CAGR has been over 15% for the last decade Growing market share compared to offline (4.8% in 2008 grew to 6.3% in 2012) Online gambling uses the web and mobile to enable wagering, casino games, poker, lotteries, bingo and skill games B2C business models are based on odds stacked in the houses favour or scaled commission fee (rake)

Global Online Gambling Revenue ($B)

25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% 15.8

R CAG

The line between B2C and B2B firms is blurring

Content developers create and design games Platform developers develop software platforms to host games, as well as providing payment integration and statistical analysis Casino operators serve customers directly Combined B2B/B2C businesses are emerging, such as 888.com and its B2B unit Dragonfish

Consolidation is set to accelerate

Europe is the largest market, supplanting the US after the Unlawful Internet Gambling Enforcement Act 2006 The fragmented market in Europe is ripe for consolidation, with Bwin (8% market share), PartyGaming (6.3%) and William Hill Plc (4.5%) the largest firms Africa and South America are forecast to grow quickly from a low base

Market share by game type and region

Bingo 8% Lottery 13% Skill Based 4% Wagering 35%
Asia and M iddle East 1 5% Euro pe 49% Oceania 7% So uth A merica 2% A frica 1 %

Skill based games avoid many US restrictions

Although a small subsector within online gambling, games of skill avoid many of the legal/regulatory restrictions of most US states and international markets
Poker 20% Casino 20%
No rth A merica 26%

Sources: Barclays Capital, Viaden Media, Online-Casinos.com, Christiansen Capital Advisers

48

Sector dynamics and growth are leading to consolidation

Online Content Pureplay

Online Pureplay

PartyGaming / bwin merger Merger announced, creating 682M revenue 196M EBITDA largest listed online gambling business globally

Betfair IPO? Potential 1.5B IPO

B2B Platform Developers

888/Dragonfish 888 entered B2B platform market with Dragonfish to leverage inhouse technology

B2C

US/European Consolidation? European firms like PartyGaming and 888 could become targets if the US Unlawful Internet Gambling Enforcement Act is amended

Combined Offline/Online

Sources: Companies, MergerMarket, The Times

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Skill based games avoid many regulatory challenges

Skill based games are similar to gambling
Online betting games, but where the outcome is determined by players skill rather than chance Games include arcade, puzzle, word, trivia and other skill games Business models are based on: Scaled commission fee (rake) Entry fees for tournaments Interest on players funds invested Micro-transactions Players can also play non-gambling versions of most games for free Independence from advertising revenue reduces cyclical risk

But avoid many regulatory challenges

Skill games are by definition not games of chance, which enables them to operate in many US States, European and Asia-Pacific markets Legislation has been introduced in the US to attempt to legalise online poker (20% of the gambling market globally), but the situation remains unresolved

The market continues to grow

King.com launched in 2003, with more than 350M games played in January 2009. The website is available in nine languages, and includes skill game versions mainstream TV properties such as American Idol and Deal or No Deal Established, profitable business models Games are developed both internally and by third party developers The skills based market tends to target women over the age of 35, similar to the bingo market

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Strong economics and growth support valuations

USD millions, except per share data Company
32Red Plc 888 Holdings Public Limited Company bwin Interactive Entertainment AG CryptoLogic Limited GVC Holdings PLC Net Entertainment NE AB PartyGaming Plc Playtech Limited Median Mean

Price (13-Jul-10)
0.22 0.63 41.55 2.14 1.64 9.10 3.64 6.95

% of 52 Week High
66.7% 34.4% 66.4% 27.1% 56.0% 78.2% 70.7% 82.9%

Market Cap
15 218 1,530 30 51 360 1,488 1,684

Net Debt
(2) (88) (240) (17) (24) (16) (157) (75)

Enterprise Value
13 131 1,290 13 27 343 1,330 1,609

Enterprise Value Multiples Revenue EBITDA CY2009 CY2010 CY2011 CY2009 CY2010 CY2011
0.68 x 0.53 x 2.53 x 0.33 x 0.39 x 8.50 x 2.98 x n.m. 0.68 x 2.28 x 0.66 x 0.51 x 1.98 x 0.33 x n.a. 6.25 x 2.62 x 8.84 x 1.98 x 3.03 x n.a. 0.49 x 1.80 x 0.27 x n.a. 4.80 x 2.48 x 7.67 x 2.14 x 2.92 x 10.1 x 3.7 x 12.1 x n.m. 1.2 x 18.1 x 10.5 x 17.3 x 10.5 x 10.4 x 6.2 x 3.2 x 7.9 x n.m. n.a. 12.5 x 8.9 x 12.5 x 8.4 x 8.5 x n.a. 2.9 x 6.5 x 11.2 x n.a. 9.0 x 8.3 x 11.1 x 8.6 x 8.2 x

Equity Value Multiples P/E Multiples CY2009 CY2010 CY2011

26.5 x 12.8 x 36.8 x n.m. 4.3 x 36.4 x 28.8 x 30.7 x 28.8 x 25.2 x 7.6 x 6.3 x 13.3 x 13.4 x n.a. 16.5 x 12.7 x 12.1 x 12.7 x 11.7 x n.a. 5.8 x 10.6 x 8.9 x n.a. 11.6 x 11.8 x 11.4 x 11.0 x 10.0 x

Source: CapitalIQ Note: Calendarised to December year end

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And consolidating M&A is accelerating

Date
14 Jun 10

Target

Acquirer

Deal value
$48m

Revenue multiple
n.a.

EBITDA multiple
n.a.

Target description
Enables users to play puzzle, board, card and casino games on PCs and Windows mobile phones

Comments
The acquisition expands 888 into the mobile and social networking games market

07 May 10

$23m

1.2x

11.9x

Provides integrated software and Following the deal Orbis will be rebranded hardware to the bookmaking OpenBet and Alphameric will be rebranded as marketplace Timeweave Developer of Bingo and networked games US-based provider of wagering systems for horseracing, greyhound racing and jai-alai The acquisition allows Playtech to increase its market share in Bingo to compliment its current Poker and Casino offerings The acquisition is within Sportechs strategy to become a leading global provider of sports related gambling systems To match the rapid expansion of 888s B2B segment (Dragonfish), Wink expands 888s presence in the UK Bingo market The acquisition includes Gigamedias Everest Poker Site and allows Gigamedia to realise the potential of its online gambling business The acquisition adds an open platform, a range of games which complement in-house products and an enhanced product pipeline Geographical expansion into the Italian online gambling market which it expects to be deregulated

15 Feb 10

$57m

2.8x

9.2x

27 Jan 10 (Scientific Games Racing LLC division) 22 Dec 09

$75m

0.7x

n.a.

$95m

3.6x

n.a.

Online Bingo business

16 Dec 09 (60% online gambling business) 08 Dec 09

Mangas Capital Entertainment

$100m

n.a.

n.a.

Taiwan based online gambling software developer Develops and supplies gaming software solutions for online gaming operations Online gambling company based in Italy Operates The World Poker Tour, a series of international poker tournaments Operates FoxyBingo.com, Getminted.com, Think Bingo and Bingo Scotland

$48m

10.6x

n.a.

07 Sep 09

$161m

8.2x

75.1x

24 Aug 09

$12m

n.a.

n.a.

Allow for expansion of the WPT brand online

23 Jul 09

$159m

2.1x

7.9x

Aim to build a meaningful share of the $1.5 billion global online bingo market and increase its female client base

Sources: CapitalIQ, Mergermarket

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And consolidating M&A is accelerating (continued)

Date
27 Feb 09

Target

Acquirer
Mangas Capital Entertainment

Deal value
$139m

Revenue multiple
n.a.

EBITDA multiple
n.a.

Target description
Online sports betting companies, both Malta registered

Comments
Expansion of Mangas sports betting capabilities across Europe

20 Oct 08 (Online assets) Mangas Capital Entertainment

n.a.

n.a.

n.a.

Online JV between Playtech (29%) and William Hill (71%)

Creation of a new online betting company that will be more competitive in the marketplace by using Playtechs platform technology Expand Mangas presence into the casino, gambling and gaming sector in Europe Strengthens Unibets position in the Bingo and Nordic markets and especially within the female gamer market

15 Jun 08

$62m

n.a.

n.a.

France-based operator of online casinos

03 Dec 07

$111m

n.a.

n.a.

Online gambling operator with a focus on the female market

Sources: CapitalIQ, Mergermarket

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With clear investment, M&A and JV opportunities

Firm Type Investment, M&A and JV Opportunities

Major Video Games

For pure online gambling Avoid due to distance from core video games competencies For skill based games Invest in growth capital game fund Establish growth stage game investment fund Mid-market strategic M&A Avoid large, value destroying M&A Focused new IP investment in extending skill based model to core franchises

Independent Video Games

VC fundraising for online gambling technology and niche/geographic online gambling Growth buyout for gambling technology and niche/ geographic online gambling LBO for large generic gambling franchises JV with major media for licensed marketing/ investment

Venture Capital
Invest in online gambling technology providers Invest in niche/ geographic online gambling franchises Avoid generic gambling franchises due to sector consolidation

Private Equity
Growth equity buyout of online gambling technology providers Growth equity buyout of niche/geographic online gambling franchises LBO of large generic gambling franchises

Major Media
For pure online gambling JV with independent online gambling companies for licensed online gambling marketing/ investment Avoid organic investment and M&A due to different core competencies For skill based games Invest in growth capital game fund

54

In-game Advertising Sector

55

In-game advertising is early stage

In-game advertising is small but growing
In-game advertising is seen by publishers as an additional revenue stream to traditional game sales In-game advertising delivers targeted advertising Console: 68% male, median age 26 Casual/social: 50% male, median age 36 Mobile: 64% female, median age 31 Global market > $1B revenue, 12.9% CAGR forecast 2009-2014 Multiple formats (static and dynamic): In-game Around-game Advergames Online formats hold the greatest potential, whether via console (Xbox Live Arcade, Playstation Network), web or mobile, because of the ability to dynamically target and update in-game advertising All Microsoft Xbox 360 game advertising must use Microsofts Massive Inc. Sony PS3 in-game advertising is open, with players such as IGA and Double Fusion partnering with Sony and major game publishers Google Ad-Sense for Games focuses on casual/social web games, with a view to expanding to console games

US Online PC games advertising revenue by category

$2.5bn

$2.3bn

$2.0bn

$2.0bn

$1.5bn $1.5bn $1.2bn $1.0bn $0.7bn $0.5bn $0.5bn $0.4bn $0.9bn

$0.0bn 2005 2006 2007 In-game 2008 2009 2010 Advergame 2011 2012

Around game

Relatively few firms

Corporate Independent

Online in-game advertising: static or dynamic media advertising that appears inside the game or during the game while its being loaded or played Online around game advertising: static or rich media advertising that appears outside of the videogame but shown in conjunction with it Online advergames: custom made games specifically created to communicate a marketing message designed around a product or service

Sources: PWC 2009, IDC 2008

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With limited, high profile M&A

Selected M&A activity
Date Target Acquirer Deal value
n.a.

Revenue multiple
n.a.

EBITDA multiple
n.a.

Target description
US based provider of online video game services and ingame advertising services

Comments
Playdom had raised $43m as part of a Series A funding round and said that the proceeds from the raising would be used for acquisitions and to expand the companys portfolio of titles Shanda extended its online video games strength in China into mobile

18 May 10

11 Jan 10

$80m

n.a.

n.a.

Flash game advertising network and payments platform

17 Mar 07

n.a.

n.a.

n.a.

Delivers advertising content to on-line enabled game platforms

Google was looking for ways to extend its advertising program and in-game advertising offered a logical extension Microsofts acquisition further expanded its presence into the area of online advertising, an area in which Microsoft sees future growth as well as competition with Google

04 May 06

est. $200m $400m

n.a.

n.a.

Offers advertisers platforms to reach games audience in real time

Sources: CapitalIQ, TechCrunch

57

And clear investment, M&A and JV opportunities

Firm Type Investment, M&A and JV Opportunities

Major Video Games

Small strategic M&A Avoid large, value destroying M&A Limited organic investment due to small market size

Independent Video Games

VC fundraising Exit to major video games/media company

Venture Capital
Invest in in-game advertising technology Avoid in-game advertising agencies due to business model

Private Equity
Develop sector relationships in anticipation of sector maturity

Major Media
Small strategic M&A to build internal capability for significant IP portfolios and leveraging client relationships Avoid large, value destroying M&A Avoid standalone organic investment due to different core competencies

58

About IBIS Capital

59

IBIS Capital is a specialist investment bank

IBIS Capital is a specialist media, digital and communications focused investment bank, delivering both financial advisory and investment services

Corporate Finance

Fundraising M&A Joint Ventures Growth Focus

Industry Contacts

Industry Expertise

Long/short Low volatility

Global Media Hedge Fund

Track Record

Small Cap Private Equity

Direct investment Digital focus

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About the authors

Tim Merel is a Corporate Finance Director with Video Games, Digital Media, Technology and Telecoms experience in industry, direct investment, financial services, growth company development and turnaround, across Europe, USA and Asia Pacific, with background in software engineering, law and business from Yale and Sydney University. Tim has the triumvirate of evil professions, having been a lawyer, worked for Rupert Murdoch, and now being an investment banker. When hes not doing sensible things, Tim writes adventure stories and plays a mean guitar

Graham Smith is focused on marketing and execution within the IBIS Capital investment banking team. His previous experience was at Dawnay, Day Corporate Finance, FinnCap and Arma Partners, where he focused on technology acquisitions. Grahams background is in Bioscience Enterprise and Natural Sciences from Cambridge. Grahams sporting history includes an official world ranking of 82nd in acrobatic rock and roll dancing

Contact: Tim Merel Email: tim.merel@ibiscapital.co.uk Phone: +44 788 0505 651

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