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The Best Value at SOE Daybreak Game Company Might not be MMOs

Columns By Ryahl Smith on February 05, 2015

The Best Value at SOE Daybreak Game Company Might not be MMOs

Wow, this news was a big surprise.  Sony Online Entertainment, the company who brought the world Everquest and Star Wars Galaxies is no longer part of Sony.  It has now been bought out by ColumbusNova Technology Partners, “a multi-stage, technology investment firm operating out of Silicon Valley and New York.”  Couple this with EA’s deal allowing Broadsword Online Games to maintain and operate Ultima Online and Dark Age of Camelot and three of the original MMO studios (SOE, EA-Origin, and Mythic) are either out of business or out of the MMO business. 

In this article, I want to discuss business acquisitions from a seller and buyer’s perspective.  I am working towards a speculative argument as to some of the things we might see from the SOE Acquisition.  Specifically, I think the more interesting aspects of this deal may have little to do with MMO’s. 


Why Multinational Companies Sell Assets

There is an abundance of authorship in academic, business, and public literature about acquisitions but most of it is written from the acquiring side.  Acquisitions, though, require a buyer and a seller and it often is useful to think about why something is up for sale.  In a nutshell, large companies sell assets when they (a) no longer make strategic sense or (b) when the company needs the cash from the sale more than they need the asset.  There are other reasons, of course, but both of those reasons appear to be at play here.

While Sony has grown revenues over the past few years, the bottom line has been negative for three of the past years.  Unsurprisingly, the negative net income leaves Sony struggling through liquidity problems (e.g. paying the bills).  Their liquidity ratios are very concerning for each of the last four years.  For reference, most business textbooks suggest a healthy current ratio around 2.0, Sony has been running below 1.0 for four straight years.  Essentially, Sony has more bills coming due than they have cash and cash equivalents to cover the bills.  In personal parlance, Sony has been living paycheck to paycheck for a few years now and they likely can’t keep it going much longer.  Selling Sony Online Entertainment is a cash infusion that is probably necessary for Sony.

A large company also sells off assets when those assets don’t strategically fit anymore.  Sony has long straddled the line between maker of electronics and maker of content to be used on electronics (music, games, etc.).  While Sony does have a large presence in games, much of what they do is tied to the Playstation platform and MMO’s don’t seem to be as good of a fit on consoles as do other genres. 

Yes, Final Fantasy XIV, Final Fantasy XI, and DCU Online all exist on consoles but in general the PC version of each is the superior version.  MMO’s work on consoles, they just don’t work well on consoles.  Sony parting ways with SOE makes some sense, it let’s them concentrate on genres that are proven to work well on the platforms they produce.

Why Companies Acquire

To be frank, we don’t really know why ColumbusNova bought SOE and public statements issued by firm principles following an acquisition aren’t really strong signals of ultimate intent.  As simple as it sounds, the ultimate reason for the acquisition is that it made sense for ColumbusNova, the question for us is why?  There are three primary reasons why a firm buys assets from another firm.  You buy to hold, buy to grow, or buy to strip. 

Buy to hold happens when the acquired target has assets that fit your firm and make sense to your long range operations.  This is probably what’s going on with the interaction between EA’s former MMO assets and Broadsword Online Games.  Ultima Online and DAOC fit the vision and purpose of Broadsword and the resulting deal is beneficial to EA and Broadsword.

It’s really hard to see buy to hold making sense for ColumbusNova.  Their portfolio doesn’t really include entertainment, outside of Rhapsody and Rabbit.  The remaining entities are largely technology back end entities and business analytic companies.  Everquest and Planetside don’t really jump out as obvious brand fits here.  The two products in development (EQ:Next and H1Z1) are intriguing, but I’m not sure if they alone make a SOE a buy for an investment firm.  Further, buy to hold is typically not what one expects from an investment company.  The counterfactual here is that CN was involved in the acquisition of Harmonix from Viacom, so buy to hold may not be as implausible as it seems.

Buy to grow typically happens with startup acquisitions.  Here the acquiring firm sees some serious potential in the target and believes that the potential can be best realized with technology and resources available at the acquiring firm.  A good bit of the portfolio for ColumbusNova looks to fit that bill.  There aren’t any major brands in there, but there’s a lot of interesting potential in the mix of businesses they have acquired. 

Buy to grow doesn’t make a lot of sense for MMO assets and perhaps even less so for the brands at SOE.  The MMO market segment is hardly an emerging market, it’s one that’s fairly mature (15-years is forever in tech) and it’s one that is contracting and fragmenting currently.   Even if one believed that SOE was paused to explode (EQ:Next and H1Z1) if it just had the right resources and infrastructure, it’s hard to imagine how that couldn’t have been well serviced by Sony, even with financial difficulties.  Despite being financially strapped, Sony has been acquiring firms these past few years - resources are there for the right pieces.

Buy to strip happens with mature firms in mature industries.  This is the vulture capital side of venture capital.  The private equity firm buys up a bloated asset, strips the unproductive pieces out, and typically either IPO’s or sells off the final profitable assets.  It’s hard not to see MMO’s landing anywhere but here for an investment entity.

Why this deal?

The management team for ColumbusNova is a very impressive group, but it’s not a group that immediately conjures up images of running a game company.  There is a lot of investment banking and venture capital experience and plenty of financial and legal types with very impressive pedigrees. 

I have a hard time seeing the various MMO brands owned by SOE making a lot of sense in what I see of the ColumbusNova portfolio.  I have a hard time seeing the MMO segment as one an investment firm would look at as a solid growth opportunity.  This looks, to me, as a likely buy to strip acquisition.  But, I don’t think it’s the brands (EQ, Planetside, etc.) that make SOE interesting within the ColumbusNova umbrella.  I think that some of the technology underneath the brands might fit better at CN.

An E-Bay of Ideas

Over the last few years, I have been impressed by some of the non-MMO technology coming out of SOE.  One of the things I find absolutely fascinating is Player Studio.  Player Studio allows customers to make and sell assets within SOE games.  Player created content has been a talking topic for a few years, but SOE staked out an interesting place allowing creators to monetize their creations.  This put SOE in the position of being the merchant in between player creators and player consumers.  Add in the voxel based creation tools of EQ:Landmark and player studio becomes even more exciting.  Tie this in with CN entities fiverr, nupsys, vArmour, Kaazing and you have an interesting possibility to be the market maker in a world of custom design.   If there is a way to convert from Landmark design to a 3D printing file format, you open the door to something pretty intriguing.

Business Training and Simulations

Another interesting technology bouncing around in SOE was SOEmote.  SOEmote allows real time capturing of facial expressions and maps those onto avatars in SOE games.  Essentially, this technology was intended to really help role playing re-emerge in MMORPG’s.  Additionally, SOE had connections and access to Namaste Entertainment's Storybricks.  This was supposed to be the backbone of the emergent AI in Everquest: Next. 

Does something like SOEmote work within the various communication companies owned by CN?  Would motion captured facial expressions work well in training and simulation software for professional development at companies like Highground and Desire2Learn?  Would storybricks AI be useful in simulation developers for research or education?  I work with a efw academics who use simulations as part of their research.  Being able to simulate a complex system in which units can have differing (and conflicting) motivations would certainly be interesting to them - and I notice several research and data visualization entities in the CN portfolio.

I don’t know the specifics of the working relationship between SOE and Namaste.  I imagine it’s likely a straightforward licensing deal but if it involved any direct investment from SOE, that would really be interesting in CN’s portfolio.  Bina, Zoomdata, BoardwalkTech, or DataKodiak?  Could you blend together several of these to position yourself for use in digital education and massively open online courses?

Own the backbone, license the brands

Over at Reddit, one of the big questions since the announcement is “what will this mean for people running emulators of SOE games?”  The likely answer is to expect a pretty firmly worded cease and desist from a group of lawyers eager to pounce on anything that might harm the revenue stream of the SOE acquisition.

But if you look at the technology backbone companies of CN, an interesting emulator market might make sense.  CN owns assets that could provide the technology backbone, security, and e-commerce for running an MMO, opening the door to licensing out commercial emulators.  The Broadsword deal with EA, in this case, could become an exemplar of privately run MMO’s renting technology backends and paying licensing use to brand-IP owners.  The only reason MMO makers are MMO providers is because it just is - a business model where the MMO maker licenses products to MMO providers certainly makes some sense.  SOE has more than a few active, in development, and dead IP’s that might have value licensing value.

Final Thoughts

Everything at this point is speculation.  Having lived and worked through some pretty large mergers and acquisitions from each side, I feel fairly safe in saying that even the SOE people are likely wondering exactly what this means.  In writing this article, I am working through ways this deal makes sense for the public face of of ColumbusNova. 

Most acquisitions fail to create value, about four of five actually lose value.  The people running CN know this, most certainly.  They go into these deals knowing many won’t work but expecting the payoff from the successful deals to more than makeup for the failures.  They see something of value here, we can be sure of that.  While I don’t think that the MMO’s have the value that would excite a company like this, there are likely a number of things within SOE that do create value. 

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Ryahl Smith / Twitter: @EorzeaReborn @TSWGuides