Should Facebook Be Worried?

Be warned Facebook. Google is angry. In reaction to Facebook recently overtaking the company as the world’s most visited website, Google is planning to develop a competing social networking platform, and after multiple failed attempts to capture some of Facebook’s market share, Google will likely chase success with its wallet.

This time, however, Google has a new strategy that revolves around the fastest growing social initiative on the web – social gaming, which has exploded onto the scene over the last two years. And when Google commits to becoming the industry leader in a given area, its competitors have two choices: either fade away or open the purse strings. Given that several players will choose the latter option, the implications of consolidation are twofold for social gaming developers: (1) Google and its competitors will pay large sums to acquire social gaming developers rapidly and (2) the opportunity for social gaming developers to reap the benefits of consolidation will close quickly.

Like Facebook, Google will try to build upon the momentum of social gaming to attract users to its social network and project itself into this new, rapidly growing space. Google’s speculated $100 million investment in Zynga in June 2010 confirmed this strategy, and the company is also rumored to be in discussions with Playdom and Playfish about the possibility of offering their games on its new platform.

While social gaming industry is now the lynchpin of what will likely become a heated competition between two internet icons, there are plenty of others that may play a role in the race to snatch up social gaming developers. Within the past week, a flurry of press releases announced the acceleration of consolidation efforts in the social gaming industry. Walt Disney Co. announced its acquisition of Playdom for $563 million, and GameStop Corp. announced its plan to acquire Kongregate, Inc.

Add the interest generated from multi-media conglomerates, traditional game distributors, and growing companies within the sector, such as Zynga, to the brewing battle between Facebook and Google, and social gaming developers could be positioned for big pay days in the near future. The beauty of social gaming lies in its scalability, i.e. once the software is developed, the additional cost of servicing new customers is negligible. As a result, there is enormous potential for explosive revenue growth, and based on estimates that the social gaming market will triple in size by 2012, Disney, Google, and others believe they have identified an incredible investment opportunity.

For companies who want to compete in the social gaming industry, the race is on, and no one wants to miss out on the next Zynga. Zynga exploded over the past two years, and its value surpassed $1 billion in a flash. For companies who want a piece of the social gaming pie, engaging in aggressively acquisitive behavior may be the best way to ensure that competitors do not gain significant advantages in the market, which can be used as a platform for vast social network expansion. This acquisition pressure signals rewarding times for social gaming developers who are willing to take their chips off the table and cash out at remarkable purchase prices.

However, history has shown that Google does not simply enter new markets; Google dominates them. For developers, this means that the timeframe for a successful exit is narrow. Revenue in the industry is driven by customer volume, and niche players will be unable to compete with Google once the internet giant establishes its platform. The opportunity for developers will be found in partaking in the benefits of Google, Disney, and others’ development and expansion efforts, not competing with them.

Fortunately, the potential of social gaming is attracting a vast buyer universe, and social gaming developers will be able to lever widespread interest to secure enormously lucrative transaction prices. Bottom line, the time to sell is now; the big market players have their checkbooks ready, and social gaming developers would be wise to take advantage of the momentum generated by recent acquisitions.

John Fennebresque, Jr. is the Managing Partner of Fennebresque & Company, an investment banking firm with offices in Raleigh and Charlotte, NC. The firm specializes in working with companies with less $250 million of revenue in pursuing company sales, acquisitions, and capital raises. John Fennebresque may be contacted at [email protected].