SPE Games Licensing Business: Growth Strategy Discussion
November 2010
CONFIDENTIAL Key Issues to be Discussed
How can SPE make more money from its Games Licensing business?
1. Where are the shortfalls in licensing opportunities (“gaps”) for SPE’s near- term property slate, and how can they be filled?
2. What strategies and tactics can SPE employ to make more money from its Games Licensing business in the long-term?
page 2 The most attractive licensing opportunities to SPE are console video games and mobile games for TV game shows – other categories typically yield relatively small MGs
Typical Games LicensingLicensing Opportunities Available toto SPESPE
Casual Online Console VideoVideo Mobile Games / MMOGs / Virtual Downloadables Games (incl. Games Apps Worlds Social)
Major VG publishers - Standalone, e.g., Activision/Blizzard, EA, THQ, Ubisoft
Major VG publishers – Major VG publishers – Console Makers, i.e., SCEA, Console Makers, i.e., Microsoft SCEA, Microsoft Potential Partners Major VG publishers – media congloms, i.e., Disney, Warner Bros.
Niche Developers / Niche Developers / Niche Developers / Niche Developers, e.g., Publishers, e.g., Publishers, e.g., Zynga, Publishers, e.g., SOE, Killspace, A2M, Saber, Gameloft, Ngmoco, Popcap, Oberon, Iwin, Nexon, Trion, Cryptic, Terminal Reality Digital Chocolate, Glu, Bigpoint, MumboJumbo, Bigpoint Hands-On, Paramount Spil Games
•AAA = e.g., WOF / Expected •AAA = $1MM+ •AAA = $200K – $500K Jeopardy offer of Expected $10MM+ • $200K – $1MM+ • $300K – $1MM+ Licensing MGs •A-AA = $200K – $800K •A-AA = $50K – $150K Licensing MGs •A-AA = $200K – $1MM
• Develop for PS3, Xbox • Develop for PS3 and • Develop for Iphone, • Revenue models • Revenue models 360, Nintendo Wii Xbox Live Arcade Android, Windows include subscription include hybrid retail (XBLA) Mobile and in-game item sales sales and subscription Standard • Revenue model is sale models, free, in-game (Blizzard, SOE), free of box product at brick • Revenue model is sale • Revenue models item sales, lead move into pure Business and mortar retailers direct to consumer via include “Freemium” generation (Zynga), ad- subscription (Club (Walmart, Gamestop, downloadable services with in-game micro- supported, and Penguin), free-2- Model(s) etc), online retail such as Playstation transactions and one- browser based: free, play/micro transactions (Amazon.com) Store, Xbox Live time flat fee subscription, in-game (Nexon, Gaia), and ad- Arcade, Steam item sales (Bigpoint) supported (Spil Service, etc. Games)
page 3 Status Update: SPE Film Games (AAA) Licensing Deals
LEGEND: = CONFIRMED = ACTIVE CONVERSATION = TARGETING
Casual Online Games Property Rating Console Video Games Downloadables Mobile Games / Apps (including Social) MMOGs / Virtual Worlds
Partner: Activision Partner: Oberon, Bigpoint, Partner: SEE Virtual, Nexon, Royalty Rate: Partner: Gameloft, EA, Glu etc. Cocoban Men in Black 3 AAA Consoles - 7% escalating to 11% Royalty Rate: TBD Royalty Rate: TBD Royalty Rate: TBD Handheld - 6% escalating to 8% MG: $200K - $400K MG: $100K - $300K MG: $300K - $600K MG: $1MM
Partner: Gazillion Partner: Activision Partner: Gameloft Partner: Playdom (Disney) Royalty Rate: TBD Spider-Man 4 AAA Royalty Rate: TBD Royalty Rate: TBD Royalty Rate: TBD MG: TBD MG: $15MM+ MG: TBD MG: TBD *Deal may include classic and film
Partner: Cryptic, Nexon, Partner: Atari Partner: Gameloft, EA, Glu Partner: Bigpoint, Oberon Bigpoint Ghostbusters AAA Royalty Rate: TBD Royalty Rate: TBD Royalty Rate: TBD Royalty Rate: TBD MG: $1.5MM Option MG: $200K - $500K MG: $300K MG: $300-600K
Partner: Capcom Mobile Partner: Ubisoft Royalty Rate: Partner: Animax, Large Consoles - 8% esc. to 13% 20% - Rev. up to $2MM Animal Property owner wants to wait Smurfs AAA Handheld - 6% esc. to 9% 25% - Rev. $2-4MM Royalty Rate: 10-12% until 2nd film MG: $400K 30% - Rev. $4MM+ MG: $200K MG: $200K
Exploited
page 4 Status Update: SPE Film Games (AA) Licensing Deals
LEGEND: = CONFIRMED = ACTIVE CONVERSATION = TARGETING
Casual Online Games Property Rating Console Video Games Downloadables Mobile Games / Apps (including Social) MMOGs / Virtual Worlds
Partner: Oberon, Bigpoint, Partner: TBD Partner: Gameloft, EA, Glu Debatable whether a partner etc. Karate Kid 2 AA Royalty Rate: TBD Royalty Rate: 15-25% would spend the necessary Royalty Rate: TBD MG: $250K - $500K MG: $150K dollar amounts MG: $200K
Developer: Saber Royalty Rate: PART OF SABER DEAL 10% - 1-75K units Not enough time to develop Battle LA AA Not enough time to develop Developer: Saber Not enough time to develop 14% - 75-300K units and lack of category fit Royalty Rate: 10-17% 17% - 300K+ units MG: $50K
Partner: Activision Royalty Rate: Partner: Activision Partner: TBD Partner: TBD SPDE published game for Zombieland 2 AA 8% - 1-500K units Royalty Rate: 20% Royalty Rate: TBD Royalty Rate: TBD first film 10% - 500K+ units MG: $250K MG: TBD MG: $300K - $600K MG: $500K
Partner: Killspace Partner: TBD Priest AA Not enough time to develop Royalty Rate: TBD Royalty Rate: TBD Lack of category fit Not enough time to develop $50K - $150K MG: $100K
Partner: Atari Royalty Rate: Partner: Activision, Atari, Game Developers Partner: Konami, Capcom Partner: TBD 6% - 0-12MM Underworld 4 AA Royalty Rate: TBD Royalty Rate: TBD Royalty Rate: TBD 7% - 12-25MM MG: $250K - $600K MG: $100K - $200K MG: TBD 8% - 25-45MM 9% - 45MM+ MG: $150K
No Active Conversations / Part of console if given No Active Conversations / No Active Conversations / Potential opportunity Total Recall AA Awaiting Script enough time Awaiting Script Awaiting Script depending on script
page 5 Status Update: SPE Film Games (A) Licensing Deals
LEGEND: = CONFIRMED = ACTIVE CONVERSATION = TARGETING
Casual Online Games Property Rating Console Video Games Downloadables Mobile Games / Apps (including Social) MMOGs / Virtual Worlds
Partner: TBD Evaluating Nintendo DS Evaluating PS3/XBLA Partner: TBD Royalty Rate Avg.: Hugo Cabret A opportunities but poor timing opportunities but poor timing Royalty Rate: TBD Lack of category fit 15% - 25% of release of release MG: $50-$200K MG: $50-$100K
Partner: TBD Partner: THQ, Ubisoft Partner: TBD Royalty Rate Avg.: Still evaluating whether Hotel T A Royalty Rate: 8-12% Royalty Rate: TBD 15% - 25% property fits with category MG: $250K-$500K MG: $50-$200K MG: $50-$100K
Partner: TBD Partner: THQ, Ubisoft Partner: TBD Royalty Rate Avg.: Still evaluating whether Pirates A Royalty Rate: 8-12% Royalty Rate: TBD 15% - 25% property fits with category MG: $250K-$500K MG: $50-$200K MG: $50-$100K
Partner: TBD Partner: THQ, Ubisoft Partner: TBD Royalty Rate Avg.: Arthur Christmas A Royalty Rate: 8-12% Royalty Rate: TBD Lack of category fit 15% - 25% MG: $250K-$500K MG: $50-$200K MG: $50-$100K
On track but for small MGs due to lack of Not exploited, as property awareness expected, due to lack of category fit
page 6 Status Update: SPE TV Games Licensing Deals LEGEND: = CONFIRMED = ACTIVE CONVERSATION = TARGETING
Casual Online Games Property Rating Console Video Games Downloadables Mobile Games / Apps (including Social) MMOGs / Virtual Worlds
Partner: THQ Partner: SOE Royalty Rate: Partner: SOE Royalty Rate: 10-12% (esc. Wheel of Fortune AAA Wii: 10-12% SPHE Royalty Rate: 10-12% Lack of category fit for Playstation & PC) DS: 8-12% MG: TBD MG: $500K MG: $1.5MM
Partner: SOE Partner: THQ Partner: SOE Royalty Rate: 10-12% (esc. Jeopardy AAA Royalty Rate: 7-10% SPHE Royalty Rate: 10-12% Lack of category fit for Playstation & PC) MG: $1.5MM MG: TBD MG: $500K
Partner: Ludia Partner: iWin Pyramid AA Royalty Rate: 20% Royalty Rate: 25-30% Lack of category fit MG: $200K MG: $500K
Partner: Three G Partner: Ludia (Ubisoft as distributor) Royalty Rate: 80% (3G) / Dating Game AA Royalty Rate: 20% SPHE 20% (SPE) until devel. costs Lack of category fit MG: $120K recouped; 50/50 thereafter MG: $30K
Largely exploited Not exploited, as expected, due to lack of category fit
page 7 SPE can fill its current “gaps” by subsidizing development costs for potential partners – however, this strategy is only “affordable” (< $1 MM) for casual and mobile games
Typical TitleTitle DevelopmentDevelopment CostsCosts
$MM
$10MM $20MM Console Video Games
$1.0MM $1.5MM Expensive in Downloadables platform transition Extremely expensive in declining market $200K $600K Mobile Games / Apps Affordable in $200K $800K growing markets Casual Online Games (including Social)
$5MM $10MM MMOGs / Virtual Worlds Extremely expensive
$0 $5 $10 $15 $20 $25
page 8 For Casual Games, SPE may be able to strike deals that allow us to subsidize development costs without cash out-of-pocket in exchange for greater upside in the form of equity
Proposed “Creative” Casual Games Deals: Conceptual Overview
• SPE licenses casual games rights to Partner for ~3 or more properties • SPE forgoes typical MGs • SPE provides marketing support
• Partner pays SPE the typical royalty rate for casual games licenses • Partner gives equity to SPE at a valuation greater than the typical MGs SPE would receive
• Gaps filled for target properties • Effective development cost relief • Greater in-year EBIT booked vs. via eliminated MGs typical MGs Pros • Equity participation in growth • Property licenses that typically company within “hot” casual games increase market valuation market • Critical mass of properties to • Increased efficiency and reduced scale up title library transaction costs vs. one-off deals
• Some increased risk • Dilution of equity holders
Cons • Some increased management • Some increased management complexity complexity
page 9 Proposed Creative Casual Games Deals: Conceptual Economic Upside
3 properties x $250K MG per property SPE Gives: = $750K MG value
Equity in property valued at >= 150% of forgone MG value
>= $750K x 1.5 SPE Receives: >= $1.125MM in Equity
Royalty rate of 6%- 30%
In year - $1.125MM of equity as revenue (vs. $750MM with MGs)
SPE Nets: In year - Royalty rate of 6% - 30% (from dollar one)
Additional equity upside
page 10 Proposed Creative Casual Games Deals: Next Steps
• Secure internal approval to pursue
• Approach potential partners including those represented by Raine Capital
• Consider expanding to Mobile Games upon success
page 11 Longer-Term Growth Strategies/Tactics for SPE’s Games Licensing Business
• Coordinate games development with film development and production efforts – Increase lead time between film greenlight and release beyond 18 to 24 months to allow for the development of console games – Share initial treatments, storylines, and pre-production / production assets for film with SPCP and games development partners – Coordinate required feedback from film director / key staff to games developers – Limit film producer/director input and control over games development process
• Integrate games marketing & promo into film marketing & promo to help drive games sales – Coordinate marketing programs for film and games – Secure preferred movie media buy rates for games
• Expand SPE’s portfolio of games-friendly properties – Prioritize game-friendliness in development of internal properties and acquisition of external properties – Secure all games rights for all acquired properties going forward
• Determine appetite, if any, for increased investment in Games opportunities in exchange for greater upside – Finance development and/or marketing – Invest in Games partners for equity participation – Add more internal resources as needed whether dedicated or allocated
page 12 APPENDIX
CONFIDENTIAL Recent Social and Mobile Gaming Transactions
Enterprise Est. Announced Value Revenue EV / Date Acquiror Target Target Description ($MM) ($MM) Revenue
Publisher of the iPhone hits "Angry Birds" and "Cut the 10/20/2010 Electronic Arts Chillingo $20 NA NA Rope"
Maker of iPhone and iPod touch games including hits "We 10/12/2010 ngmoco DeNA $400 (1) NA NA Rule" and "We Farm"
Social game developer. Hits include "Mobsters" and 7/27/2010 Disney Playdom $763 (2) $78 (3) 9.8x "Sorority Life"
Social game developer. Hits include "Pet Society" and 11/9/2009 Electronic Arts Playfish $408 (4) $75 (3) 5.4x "Restaurant City"
(1) DeNA will pay approximately $300MM upfront and will also pay performance linked earn-outs of up to $100MM (2) Disney will pay $563MM upfront and will also pay performance linked earn-outs of up to $200MM (3) SNL Kagan estimates (4) EA paid approximately $300MM upfront and will also pay performance linked earn-outs of up to $100MM page 14 Select Historical SPE Games Licensing Deals
Licensee Property Start Date End Date Guarantee Revenue ITD Royalties ITD
Activision Spider-Man I $13,977,712 $13,977,712
Activision Spider-Man II 28,231,235 28,231,235
Activision Spider-Man III 12/1/2000 12/31/2008 $2,750,000 28,938,405 28,938,405
Atari Interactive, Inc. Ghostbusters 10/8/2008 12/1/2012 1,400,000 2,718,356 2,168,356
Sony Online Entertainment Wheel Of Fortune 3/1/2006 3/31/2011 500,000 512,695 512,695
Sony Online Entertainment Jeopardy 1/1/2005 9/30/2010 500,000 500,000 236,967
THQ Inc. Monster House 3/31/2005 12/31/2009 500,000 1,396,523 1,396,027
UBI Soft Entertainment SA Open Season 11/1/2004 12/31/2010 2,000,000 4,016,386 4,016,386
UBI Soft Entertainment SA Surf's Up 11/1/2004 12/31/2010 2,000,000 2,465,363 2,465,363
UBI Soft Entertainment SA Cloudy With a Chance of Meatballs 5/1/2007 12/31/2012 1,500,000 1,500,000 974,893
TOTAL $11,150,000 $84,256,674 $82,918,038
page 15 Accounting for Equity Investments
Cost Method - less than 20% of the stock is acquired and no significant influence or control exists
Initial Investment Investment in VG Company XX • Not necessarily the amount of the MG per contract Revenue (MG) XX • Fair Value test must be performed (e.g., MG =$5MM and FV=$1MM, then $1MM must be recognized Dividends Received Cash XX Dividend Revenue XX
Equity Method - 20%-50% of the stock is acquired and significant influence or control exists
Initial Investment Investment in VG Company XX • Not necessarily the amount of the MG per contract Revenue (MG) XX • Fair Value test must be performed (e.g., MG =$5MM and FV=$1MM, then $1MM must be recognized Dividends Received Cash XX Investment in VG Company XX
Share of VG Co. Net Income Recognized as SPE Revenue Investment in VG Company XX Revenue from Inv. in VG Co. XX
page 16 Zynga: World’s leading social game developer
Overview Selected Games
• World’s largest social game developer with more than 360+MM monthly active users
• Game portals include Facebook, MySpace, iPhone, MSN Games, and MyYahoo
• Investors include Andreessen Horowitz, Avalon Ventures, Digital Sky Technologies, Foundry Group, Institutional Venture Partners, Kleiner Perkins Caufield & Beyers, SoftBank, The Pilot Group, Bob Pittman, Tiger Global Management, and Union Square Ventures
• Founded in January 2007 and headquartered in San Francisco, California
Key Metrics
Monthly Active Users 360MM+
Daily Active Users 65MM+
Employees 1,110+
Investor Capital Raised $360MM
Estimated 2009 Revenue $270MM
page 17 Popcap: Publisher of casual and puzzle games
Overview Selected Games
• Designs, develops, and publishes casual and puzzle games
• Games are played on the Web, desktop computers, cell phones, smartphones, PDAs, pocket PCs, iPods, iPhones, game consoles, and in-flight entertainment systems
• Offers its products to Web portals, retail stores, mobile operators and developers, and game device manufacturers, as well as online shops
• Founded in 2000 and headquartered in Seattle, WA
• Additional offices in Seattle, San Francisco, Chicago, Vancouver, B.C., Dublin, Seoul, and Shanghai
Key Metrics
Employees 300 Number of games downloaded worldwide 1.5BN+ Total number of games 35 Number of Bejeweled units sold 50MM+ Number of hours consumed playing PopCap games 1.1BN online each year
% of PopCap customers that are female 65%+ % of PopCap customers that are over the age of 29 75%+
page 18 Oberon: Provider of casual game solutions
Overview Selected Games
• Multi-platform casual games company, delivering global, integrated casual games solutions across online, social, mobile/smartphone, interactive TV and retail categories
• Offers hosting, merchandizing, account integration and analytics, developer services, and advertising and branding services
• Founded in 2003 and headquartered in New York with offices across North America, Europe and Asia
• Backed by Goldman Sachs, Morgan Stanley and Oak Investment Partners
GAME PUBLISHING DIVISION
• PC publishing division: creator of Dream Day series, as well as the first casual games for bestselling authors James Patterson, Nora Roberts, and Agatha Christie
• Mobile division: creator of Fast and Furious
• Interactive Television group: provides casual game content for the for the living room, currently available to 38MM homes through partners such as DISH Network, DirecTV, and Bell ExpressVu
• Headquartered in New York, NY
page 19 iWin: Cross-platform publisher and distributor of casual games
Overview Selected Games
• Cross-platform publisher and distributor of innovative, high quality casual games for the mass market
• Reaches it’s target audience of middle age females through a multi-platform strategy: PC downloadable & retail, social networks, mobile, handhelds and game consoles
• Top franchises is Jewel Quest which has sold over 4MM units and generated $30mm in gross revenue
• Published Family Feud on Facebook which has reached ~7MM active players monthly
• Founded in 2001 with offices in San Francisco, Seattle and Kiev, Ukraine
Key Metrics
Number of iWin.com visitors per month 5MM
Hours of gameplay per month 12MM
Number of employees 100+
Number of games produced 90+
page 20 Bigpoint: International leader in browser-based online games
Overview Selected Games
• Branch segment: Browser-based online games from different genres (action shooters to fantasy role-playing)
• Business areas: Development, publishing, and aggregated distribution
• Largest German gaming portal and one of the top 3 gaming portals worldwide
• Founded in 2002 and headquartered in Hamburg with locations in Berlin, San Francisco, and Malta
Key Metrics
Number of online games on 60+ Bigpoint.com Number of employees 500+
Number of bigpoint.com registrations 141.3MM
Number of daily registrations 250K+
Page impressions 1BN+
Number of languages 25
page 21 MumboJumbo: Developer and publisher of premium casual games
Overview Selected Games
• WW publisher, developer and mass marketer of premium casual games for PCs and game consoles
• Games are downloadable at its website as well as key game portals operated by RealNetworks™, Microsoft, Yahoo! and Big Fish, or purchased at retail through mass merchants, computer retailers and specialty outlets
• Publishes and distributes software through subsidiaries in North America and the United Kingdom, as well as regional distributors worldwide
• Founded in 2001 and headquartered in Dallas, Texas
Key Metrics
Number of employees 35
Number of LUXOR downloads 75MM+
Number of development studios 3 (Dallas, LA, Russia)
page 22 Spil Games: Large portfolio of online game properties
Overview Selected Properties
• Owns and operates a global family of web properties dedicated to online games
• Business models: Advertising on the websites and partner revenue-share – Spil Games’ properties account for 5% of portfolio, reminder is from partnerships with other game publishers and developers
• Office locations: London, UK (Sales) Hamburg, Germany (Sales) Poland (Development) China (Game Development)
• Founded in November 2000 and headquartered in Hilversum, the Netherlands
Key Metrics
Number of online game properties 50
Number of available languages 20
Number of monthly uniques 115MM+
Number of games 4,000+
page 23