Global Games Investment Review 2014

Q2 Update Summary

Contact: info@digi-capital.com

© Digi-Capital 2014 www.digi-capital.com Authorised and regulated by the Financial Conduct Authority

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Disclaimer

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Contents (of full Review)

Executive summary (free download)

Sector Reviews (economics, dynamics, trends, M&A and investments 2010 – Q2 2014, public company comparables and sector indices*)

– Mobile/tablet

– Social/casual

– Massively Multiplayer Online (MMO)

– Console/PC

– Tech/gamification

– Advertising

Growth and consolidation opportunities+

About Digi-Capital

10

24

65

90

111

137

159

164

171

* As at 30th June 2014. No indices for tech/gamification or games advertising + For illustrative purposes only

BUY FULL REVIEW

Available in full Review only

4

1. Executive summary (pages 10-23)

a) Global games market economic overview

i. Major global games market economic trends

ii. Global revenue forecast by games sector (2011 - 2017F)

iii. Mobile/online games revenue forecast by region (2011 - 2017F)

b) Global games M&A and investment overview

i. Global games M&A transaction value and volume (2005 – Q2 2014)

ii. Global games investments transaction value and volume (2005 – Q2 2014)

iii. Global games IPOs by country (2005 – Q2 2014)

iv. Global games M&A summary by sector in last 12 months

v. Global games M&A summary by sector to Q2 2014

vi. Global games investments summary by sector to Q2 2014

vii. Global games public market sector indices* (2011 – Q2 2014)

c) Games industry trends/highlights

i. Games subsectors overview

ii. Games market segmentation/competition overview

iii. Games Value vs Volume markets by sector and geography

iv. Mobile apps/games usage 2013

v. Mobile apps/games revenue (2010 - 2013), including revenue split

vi. Free-to-play/communal gameplay trends/economics

vii. Trade consolidator/acquirer overview

viii. Games sector consolidation curve

Table of contents (of free download)

* As at 30th June 2014. No indices for tech/gamification or games advertising

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5

2. Mobile/tablet sector review (pages 24-64)

a) Mobile games/apps economic analysis

i. Mobile games/apps revenue forecast (2011 - 2017F)

ii. Smartphone/tablet sales forecast by OS (2013 - 2017F)

iii. Mobile broadband subscription forecast by smartphone and tablet (2011 - 2019F)

b) iOS/Android usage by app type (mobile/tablet)

c) Mobile/tablet game usage by game genre

d) Mobile game sector segmentation and highlights

e) Global mobile app download forecast (2011 - 2017F), including free vs paid split

f) Mobile app revenue forecast (2011 - 2017F) including paid, in-app purchases and advertising revenue split

g) Mobile user Lifetime Value economic analysis

h) Mobile user acquisition approach and cost analysis

i) Apple case study

j) iOS vs Android analysis

i. Apple App Store vs Google Play apps, downloads and relative monetization analysis

ii. Global Android app store analysis including downloads, apps and average download per app (Amazon, Anzhi, AppChina, D.cn, gFan, Google Play, HiAPK, Lenovo, Mobango, Opera Mobile, SlideME, SK T-Store, Tencent)

k) Mobile messaging app market share analysis, including share of domestic top 100 iPhone games (Kakao Talk, LINE, Weixin)

l) Mobile games 2012 to Q2 2014 IPO analysis (Colopl, Forgame, IGG, King, Ourpalm)

m) Public company comparables* including 2013A, 2014E, 2015E, 2016E enterprise value/sales, enterprise value/EBITDA and price/earnings multiples (Ateam, Colopl, Com2Us, Crooz, Cyberagent, DeNA, Drecom, Forgame, G5 Entertainment, Gameloft, Gamevil, Glu Mobile, Gree, GungHo, IGG, King, Klab, NHN Entertainment, Taomee, Voltage)

n) Global mobile games public company index 2011 – Q2 2014* (Ateam, Colopl, Com2Us, Crooz, Cyberagent, DeNA, Drecom, Forgame, G5 Entertainment, Gameloft, Gamevil, Glu Mobile, Gree, IGG, Klab, NHN Entertainment, Taomee, Voltage)x

o) Sector M&A transactions (2010 – Q2 2014) including target, acquirer, transaction value and revenue/EBITDA multiples (where available)

p) Sector investment transactions (2010 – Q2 2014) including target, acquirer and transaction value (where available)

q) Potential games sector investment/M&A opportunities+ by investor/acquirer type (major online/mobile games, major console games, independent games, major technology, media and telecoms, venture capital, private equity)

* As at 30th June 2014. + For illustrative purposes only

Table of contents (of full Review) BUY FULL REVIEW

6

3. Social/casual sector review (pages 65-89)

a) Social games economic analysis

i. Global social games revenue forecast (2010 – 2014F)

ii. Casual players vs payers male:female ratio

iii. Social player age profile (UK)

b) Sector segmentation

i. Leading Facebook social games company (>1M DAU) market share

ii. Social network average developer revenue shares (Facebook, Tencent, RenRen, Sina Weibo, Mixi)

c) Social games paying players economic analysis (average spend, share of revenue, share of paying players)

d) Social games development approach overview

e) Zynga case study

i. Bookings, revenue and EBITDA (Q1 2011 - Q3 2013)

ii. Daily Active Users (DAU), Monthly Active Users (MAU) and Monthly Unique Users (MUU) (Q1 2011 - Q3 2013)

f) Facebook user analysis for leading social games companies >1M DAU (total games portfolio DAU vs average DAU per game)

g) Social/casual games value chain analysis and sector highlights

h) Public company comparables* including 2013A, 2014E, 2015E, 2016E enterprise value/sales, enterprise value/EBITDA and price/earnings multiples (Boyaa, Electronic Arts, Real Networks, Zynga, Gamania, Neowiz, NHN Entertainment, YY)

i) Global social/casual games public company index 2011 – Q2 2014* (Boyaa, Electronic Arts, Real Networks, Zynga, Gamania, Neowiz, NHN Entertainment, YY)

j) Sector M&A transactions (2010 – Q2 2014) including target, acquirer and transaction value (where available)

k) Sector investment transactions (2010 – Q2 2014) including target, acquirer and transaction value (where available)

l) Potential games sector investment/M&A opportunities+ by investor/acquirer type (major online/mobile games, major console games, independent games, major technology, media and telecoms, venture capital, private equity)

* As at 30th June 2014 + For illustrative purposes only

Table of contents (of full Review) BUY FULL REVIEW

7

4. MMO sector review (pages 90-110)

a) MMO games market share analysis

i. By game

ii. By genre

b) Sector segmentation and highlights

c) MMO business models hierarchy

d) Nexon case study

i. Overview

ii. Revenue growth (2001 - 2013)

iii. Revenue, EBITDA and EBITDA margin (2008 - 2013)

iv. Major game franchise lifetime revenues

v. Regional revenues (China, Korea, Japan, other)

e) Tencent case study

i. Overview

ii. Revenue, EBT and EBT margin (2008 - 2013)

iii. Overall Chinese games sector market share by game typex

f) Public company comparables* including 2013A, 2014E, 2015E, 2016E enterprise value/sales, enterprise value/EBITDA and price/earnings multiples (Activision Blizzard, ActozSoft, Asiasoft, ChangYou, Electronic Arts, Giant Interactive, Joymax, Kingsoft, Khongzhong, NCSoft, Netease, Nexon, NHN Entertainment, Perfect World, Shanda Games, Tencent, The9, Webzen, WeMade, YD)

g) Global MMO games public company index 2011 – Q2 2014* (Activision Blizzard, ActozSoft, Asiasoft, ChangYou, Electronic Arts, Giant Interactive, Joymax, Kingsoft, Khongzhong, NCSoft, Netease, Nexon, NHN Entertainment, Perfect World, Shanda Games, Tencent, The9, Webzen, WeMade, YD)

h) Sector M&A transactions (2010 – Q2 2014) including target, acquirer and transaction value (where available)

i) Sector investment transactions (2010 – Q2 2014) including target, acquirer and transaction value (where available)

j) Potential games sector investment/M&A opportunities+ by investor/acquirer type (major online/mobile games, major console games, independent games, major technology, media and telecoms, venture capital, private equity)

x Overall market – not Tencent specific * As at 30th June 2014. + For illustrative purposes only

Table of contents (of full Review) BUY FULL REVIEW

8

5. Console sector review (pages 111-136)

a) Console games sector overview

b) Global console games hardware and software revenue forecast (2011 - 2017F)

c) 8th console generation analysis (Sony PS4 vs Microsoft Xbox One)

d) Console games economics

i. Development costs vs sales analysis

ii. Major console games franchise sales summary

iii. Console publisher economic analysis

iv. Game development financing model overview

e) Console games sector value chain analysis

f) Sector segmentation and highlights

g) Public company comparables* including 2013A and 2014E, 2015E, 2016E enterprise value/sales, enterprise value/EBITDA and price/earnings multiples (Activision Blizzard, Electronic Arts, Game Digital Gamestop, Take Two Interactive, Capcom, Konami, Namco Bandai, Nintendo, Sega Sammy, Square Enix, Gameloft, Ubisoft)

h) Global MMO games public company index 2011 – Q2 2014* (Activision Blizzard, Electronic Arts, Gamestop, Take Two Interactive, Capcom, Konami, Namco Bandai, Nintendo, Sega Sammy, Square Enix, Gameloft, Ubisoft)

i) Sector M&A transactions (2010 – Q2 2014) including target, acquirer and transaction value (where available)

j) Sector investment transactions (2010 – Q2 2014) including target, acquirer and transaction value (where available)

k) Potential games sector investment/M&A opportunities+ by investor/acquirer type (major online/mobile games, major console games, independent games, major technology, media and telecoms, venture capital, private equity)

* As at 30th June 2014. + For illustrative purposes only

Table of contents (of full Review) BUY FULL REVIEW

9

6. Games tech/gamification sector review (pages 137-158)

a) Games technology value chain analysis

b) Gamification industry subsectors overview

c) Sector M&A transactions (2010 – Q2 2014) including target, acquirer and transaction value (where available)

d) Sector investment transactions (2010 – Q2 2014) including target, acquirer and transaction value (where available)

e) Potential games sector investment/M&A opportunities* by investor/acquirer type (major online/mobile games, major console games, independent games, major technology, media and telecoms, venture capital, private equity)

7. Games advertising sector review (pages 159-163)

a) Games advertising sector overview

b) Games advertising revenue forecast (2011 - 2017F)

c) Sector M&A transactions (2010 – Q2 2014+) including target, acquirer and deal value (where available)

d) Sector investment transactions (2010 – Q2 2014) including target, acquirer and deal value (where available)

e) Potential games sector investment/M&A opportunities* by investor/acquirer type (major online/mobile games, major console games, independent games, major technology, media and telecoms, venture capital, private equity)

8. Growth and consolidation opportunities* (pages 164-170)

a) By investor/acquirer type (major online/mobile games, major console games, independent games, major technology, media and telecoms, venture capital, private equity)

b) By sector (mobile/tablet, social/casual, MMO, console/PC, enabling tech/gamification, advertising)

Note: no public company comparables or indices for games tech/gamification or games advertising * For illustrative purposes only

Table of contents (of full Review) BUY FULL REVIEW

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Executive summary

11

Mobile driving revenue to $100B, $12.5B M&A in last 12 months

Mobile could drive total games software industry revenue to $100B by 2017 Mobile/online games could grow to ~$60B revenue (23.7% CAGR 11-17F) Mobile/online games could take 60% games software market share by 2017 Total global games software revenue could grow to ~$100B revenue by 2017

Mobile, MMO and tech drove games to record $12.5B M&A in last 12 months, with record $6.6B M&A in first half of 2014 Record $12.5B games M&A in last 12 months, dominated by large transactions Record $6.6B games M&A in first half of 2014, at >2x the rate of M&A compared to previous record $5.6B M&A for full year 2013

Mobile, tech and MMO dominated games M&A in the first half 2014

Asia the biggest growth driver of economic value in mobile/online games Asia and Europe could take >80% combined revenue share for mobile and online games 9 of the top 10 games M&As of 2013 had Asian buyers, up from 8 out of 10 in 2012 Global and pan-regional M&A deals significant in 2013 and 2014 – pan-regional relationships remain critical for trade exits

13 out of 15 games IPOs in 2011-2013 were by Chinese, Japanese or South Korean companies, King IPO impact to be determined

6% decline in games investment in first half of 2014 versus 2013 run rate, historic high early stage investment gap $472M games investments in first half 2014 (excluding King and Game Digital IPOs, and Asian games fund commitments) 6% decline in game investments in first half of 2014 versus 2013 run rate, with early stage investment gap at highest historic level

Mobile games dominated investment in first half of 2014

Games dominate mobile app usage and revenue – messaging apps a new disruption Games took 32% of 2013 mobile app usage (blended iOS/Android tablet/smartphone) - 67% of tablet usage Games took ~74% of 2013 mobile app revenue and ~40% of mobile app downloads Asian messaging platforms disrupting mobile games in domestic markets – Kakao Talk, WeChat and LINE taking significant share

8th generation console cycle beginning to address decline, but questions remain 8th console generation (PS4, Xbox One, Wii U) beginning to address long term decline Questions about potential new installed bases, transition from 7th generation and mobile cannibalization

Sources: See sources and details by section

0

20

40

60

80

100

120

2011 2012 2013 2014F 2015F 2016F 2017F

Dedicated hardware Console software Online Mobile PC Advertising

0

10

20

30

40

50

60

2011 2012 2013 2014F 2015F 2016F 2017F

Asia Pacific EMEA North America Latin America

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Mobile to take games software to $100B – Asia the growth engine

Sources: PWC, Gartner, AppAnnie, Digi-Capital, Companies † Note: Online includes MMO, casual and social games * Note: Console excludes MMO ** Average Revenue per User

Mobile and online† games could

grow to ~$60B revenue (23.7%

CAGR 11-17F), take 60% games

software market share and

grow the games software

market to ~$100B revenue. The

console* sector is important

but ex-growth

Asia and Europe could take

>80% combined revenue

share for mobile and online

games. North America remains

an important mobile and

online market Regional Mobile/Online Games Revenue ($B)

Global Video Games Sector Revenue ($B)

Chinese, Japanese and South

Korean domestic strength has

produced high volume, low

ARPU**, cost efficient games

businesses with up to 50%+

operating margins, enabling

significant investment in

foreign markets

© Digi-Capital 2014

© Digi-Capital 2014

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Record $12.5B M&A in last 12 months, 2014 M&A >2x 2013 rate

Record $12.5B M&A in last 12 months, with $6.6B M&A to Q2 2014

Record $12.5B games M&A in last 12 months, dominated by large transactions

Record $6.6 B games M&A to Q2 2014, >2x 2013 M&A run rate H1 2014 M&A volume down by 14% from 2013 rate to 38 transactions Average H1 2014 M&A deal size grew 172% from 2013 to $173.8M Mobile, tech and MMO dominated games M&A by value to Q2 2014

6% decline in games investment to Q2 2014 vs 2013 run rate

$472M games investments to Q2 2014 (excluding King and Game Digital IPOs and Asian games fund commitments)

H1 2014 investment value down by 16% from 2013 run rate H1 2014 investment volume down by 49% from 2013 run rate Early stage games investment gap at highest historic level to Q2 2014 Mobile games dominating investment to Q2 2014

Asian IPOs continued to deliver exits for investors

Games IPOs in the last decade have been a largely Chinese, Japanese and South Korean phenomenon

13 out of 15 games IPOs in 2011-2013 were by Asian companies Impact of King IPO in Q1 2014 to be determined, Chukong IPO postponed

Asia increased its domination of games M&A again in 2013

9 of the top 10 games M&As in 2013 had Asian acquirers 8 of the top 10 games M&As in 2012 had Chinese, Japanese or South

Korean acquirers Global and pan-regional M&A deals significant in last 12 months: pan-

regional relationships remain critical for trade exits Large domestic deals in China, Japan and South Korea a major factor

Global video games M&A/investment (ex-IPOs) ($M)

Games IPOs (number by country of origin)

Sources: See sources and details by sector Note: Funds raised/transaction value includes only disclosed or estimated amounts, including announced earn outs where applicable. Activision-Blizzard/Vivendi deal not included in charts on this page

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40

60

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120

140

160

180

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 To Q2 2014

Investment Value M&A Value Investment Volume M&A Volume

0

1

2

3

4

5

6

7

2005 2006 2007 2008 2009 2010 2011 2012 2013 To Q2 2014 China Japan South Korea US UK

Inve

stm

ent

ga

p

© Digi-Capital 2014

© Digi-Capital 2014

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“Consolidation Crush”: 5 drivers of $12.5B acquisitions in LTM*

* LTM = Last 12 Months to 30 June 2014

Images adapted from images copyright Bandai Namco Games Inc.

Mobile growth

$33B mobile games 2017F revenue (vs $16B 2013) Acquirers buying into large, high growth market E.g. Tencent/C J Games (28%) $500M, Ourpalm/

Playcrab $285M

Mobile cannibalization

Mobile cannibalizing console, PC, MMO, social, web Acquirers stopping mobile insurgents from eating

their lunch E.g. Zynga/Natural Motion $527M

Regional realignment

Mobile/online games to $60B in 2017 Asia $38B, Europe $13B, America still important Pan-regional acquirers leveraging strength to

dominate at home and abroad E.g. Softbank/Supercell (51%) $1.5B

Legacy pivots

Disruption by new platforms pushes legacy companies to buy their way into the future

E.g. Smilegate/Sundaytoz (20%) $112M Market cycle

Public/private games valuations trending downwards $472M investment to Q2 2014 (vs $2B full year 2012) 2 UK games IPOs (King, Game Digital), Chukong IPO

reported to be postponed due to valuation concerns Acquirers taking advantage of investment cycle phase E.g. Giant Interactive take-private $1.6B

Mobile growth

Mobile

cannibalization

Market cycle

Legacy

pivots

Regional realignment

Mobile $4.6B

Tech $2.8B

MMO $4.0B

Console $1.0B

© Digi-Capital 2014

“Consolidation Crush”: $12.5B games acquisitions in last 12 months

-

500

1,000

1,500

2,000

2,500

0 2 4 6 8 10 12 14

-

50

100

150

200

250

300

350

0 2 4 6 8 10 12 14 16 18

15

Mobile, tech and MMO doubled rate of M&A to Q2 2014 vs 2013

Games sector M&A Q2 2014

MMO Mobile

Advertising Console/PC

Tech

Social/Casual

Transaction Volume

Tra

nsa

ctio

n V

alu

e ($

M)

Games sector investments Q2 2014

MMO

Mobile

Console/PC

Tech

Social/Casual

Transaction Volume

Tra

nsa

ctio

n V

alu

e ($

M)

Advertising

Sources: See sources by sector Note: Funds raised/transaction value only includes disclosed or estimated amounts, including announced earn outs where applicable. King IPO and announced Asian games investment funds not included

© Digi-Capital 2014

© Digi-Capital 2014

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Public markets driven by mobile and Asia

Global games public market sector indices (base = 100)

Sources: Factset, Bloomberg, Lazard Note: Social/Casual Games Index composition changed since prior quarter

0

50

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300

31-Dec-10 30-Apr-11 31-Aug-11 31-Dec-11 30-Apr-12 31-Aug-12 31-Dec-12 30-Apr-13 31-Aug-13 31-Dec-13 30-Apr-14

Mobile Games Index Social/Casual Games index MMO Games Index Console Games Index All Games Index

© Digi-Capital 2014

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Disruption from industry transition across all market sectors

Casual online Simple single player online/download games Played on browser or downloaded to PC Example company: Miniclip

Social online Simple multiplayer online games Played on social networks Example company: King

Mobile/tablet Single and multi-player mobile games Played on smartphones/tablets Example company: Supercell

Free-to-play MMO Millions of simultaneous player games Played on PC/browser Example company: Tencent

Messaging mobile-social Multiplayer mobile-social games Played on mobile messaging platforms Example company: Kakao Talk

Console/PC Retail/digital download console/PC games Played on PS3/4, Xbox360/One, Wii/U, 3DS, Vita, PC Example company: EA

Subscription Massively Multiplayer Online (“MMO”) Hundreds of thousands of simultaneous player games Played on PC Example company: Activision-Blizzard

Tech/gamification Games technology/gamification platforms Software as a Service B2B business model Example company: Unity

18

As competition intensifies to capture growth

Note: selected companies

Console/PC

Mobile/Online

Casual Hardcore

Mobile and online games competition

increasing

Fewer major console games competitors into 8th generation

© Digi-Capital 2014

Value (large long-term niche)

Volume (mass market growth)

China

Japan

South Korea

India

Brazil

America

Europe

Mobile/ tablet

Mobile-social

Free-to-play MMO

Tech/gamification

Social/casual online

Console

Subscription MMO

Users: thousands to tens of millions

ARPU: $-$$$

Costs: $ millions to tens of millions

Operating profit: negative to 20%+

Growth rates: negative to <10%

Business model: unit sales, subscriptions, virtual goods

Users: thousands to hundreds of millions

ARPU: ¢ - $$

Costs: $ tens of thousands to millions

Operating profit: negative to 70%+

Growth rates: negative to 100%+

Business model: unit sales, free, virtual goods, ads

With the Big V having split games into Value and Volume markets

19

Over-the-Top

© Digi-Capital 2014

-

5

10

15

20

25

2010 2011 2012 2013

Other app categories Mobile games

Games dominate mobile app usage, downloads and revenue

iOS/Android (Mobile/Tablet) Usage

* Sources: Digi-Capital, Flurry, AppAnnie, Gartner 20

Global mobile apps/games revenue ($B)

Note: Games = 67% tablet usage

Top 5 mobile app countries (revenue)

Games monetise ~4x more effectively

than all other mobile app types

Ga

me

s =

~7

4%

re

ve

nu

e

Games 32%

Social Networking 24%

Browser 20%

Entertainment 8%

Utility 8%

News 2%

Productivity 2%

Other 6%

© D

igi-

Cap

ital

20

14

0x

2x

4x

6x

8x

10x

12x

Paying users ARPPU ARPU

Single player PvE* only PvP* only PvP and PvE

21

Free-to-play and communal gameplay changing sector dynamics

Sources: Companies, Kongregate * ARPPU = average revenue per paying user, ARPU = average revenue per user, , LTV = lifetime value, PvE = Player vs environment, PvP = Player vs player + Over-the-Top mobile messaging platform (e.g., LINE, Kakao Talk, WeChat)

Tech/Gamification

Single Player

Communal Gameplay (competitive/collaborative)

Free To

Play Paid

Subscription MMO

So

cia

l

Mobile/tablet

Casual online

Free-to-play MMO

Single player vs communal gameplay monetization comparison

1.07x

>10x

13x

OTT+

© Digi-Capital 2014

© D

igi-

Cap

ital

20

14

With a changing pyramid of potential consolidators

22

9 of the top 10 M&As in 2013 had Asian buyers

Today’s growth companies could become tomorrow’s

consolidators

Note: Companies are for illustrative purposes only

© Digi-Capital 2014

23

Online/mobile independents - exit now or invest for growth

* Note: outlier deals may occur + Over-the –Top mobile messaging platform (e.g. LINE, Kakao Talk, WeChat) x For illustrative purposes only

Consolidation Curve by Sector

Sector Launch

Sector Growth for Scale

Sector Consolidation

Sector Equilibrium

Sector Consolidation

Low

High

Medium

Advertising

Mobile/tablet

Social/Casual Online

Console/PC

Expected Deal

Activity*

- VC Investment - Some small M&A

- Limited M&A/ investment

- Cost focus - Alliances or spinoffs

- Growth equity investment - High volume, mid-market

strategic M&A

- Leveraged buyouts - Low volume, large scale

strategic M&A

Gamification

Mobile-Social

Subscription MMO

Tech

OTT+

Free-to-play MMO

© Digi-Capital 2014

24

About Digi-Capital

25

About Digi-Capital

Digi-Capital advises mobile, games and digital clients across America, Asia (China, Japan, South Korea) and Europe

Sell-side M&A Buy-side M&A Fundraising Investment

Board Advisory Strategic Consulting Industry Analysis

Selected Clients

Global Games Investment Review 2014

Q2 Update Summary

Contact: info@digi-capital.com

© Digi-Capital 2014 www.digi-capital.com Authorised and regulated by the Financial Conduct Authority