By SHAYNDI RAICE And YUKARI IWATANI KANE
Original article: http://on.wsj.com/lTa8PI
There’s an app for M&A, too.
The past several months have seen a sharp upswing in mergers and acquisitions among makers of smartphone games, tools and other software as buyers seek scale, talent and access to mobile-phone users.
The trend is starting to change the app ecosystem. With more than 500,000 mobile apps now available through Apple Inc.’s App Store or Google Inc.’s Android Market, it has become increasingly difficult for small companies with limited resources to make a splash.
At the same time, large technology companies are seeking a bigger role in mobile as users spend more time on their smartphones.
“The incumbents all know that mobile is the big 10-year bet and they better acquire assets and talent in that space now to be able to fight the fight,” says Matt Murphy, a partner at Kleiner Perkins Caufield & Byers who runs the venture firm’s iFund for mobile apps. “Only a small minority will be big, winning standalone companies.”
In 2010, there were 66 acquisitions involving mobile-app companies, up from 46 a year earlier, according to research firm Rutberg & Co., a boutique investment bank focused on mobile and digital media. In 2011, the pace is picking up, with 38 deals in the first four months, up from 21 a year earlier. Most of the deals were for less than $100 million, but a few were valued between $100 million and $500 million.
“It’s literally 1999 all over again,” says Rajeev Chand, Rutberg’s head of research, who anticipates that over the next two years the number of deals valued above $100 million will grow materially. “The big question is will we see billion-dollar companies out of this,” he says, adding, “We believe that we will.”
Much of the activity is taking place in games, the biggest category among apps and one of the most competitive. By the count of videogame developer Electronic Arts Inc., the number of publishers in Apple’s iTunes App Store has increased to 16,700 this year from about 11,000 last year. The total number of games is up 49% to 51,518 from 34,516.
EA is combing through the market for opportunities to add games to its portfolio. Earlier this month, it acquired Australian game developer Firemint, best known for its Flight Control game. It also recently bought Mobile Post Production, which helps developers make mobile games across multiple platforms.
The moves followed its acquisition of Chillingo, the publisher of Rovio’s “Angry Birds,” for about $20 million last October and the social-games company PlayFish in 2009 for $275 million.
“As this market continues to get more and more crowded, the folks that are able to create scale are going to have advantages,” said Barry Cottle, executive vice president of EA Interactive.
In addition to EA last month, Japanese mobile social-gaming company Gree Inc. acquired OpenFeint, which runs a social-gaming network for Apple mobile devices and Android phones, for $104 million. And last October, in one of the biggest games-market deals, Japan’s Ngmoco bought DeNa for $400 million.
Zynga Inc. has been one of the most active buyers, acquiring six mobile-gaming companies since January 2010. David Ko, Zynga’s senior vice president of mobile, said in an email that offering games for smartphones and tablets is a key priority for the company, which has become successful through the games it offers through Facebook.
“The current mobile ecosystem is extremely fragmented, with many developers building apps across various platforms,” Mr. Ko says. “As the market evolves and the dust settles, we should begin to see increased consolidation.”
Google has also been actively buying small app companies, completing eight acquisitions since January 2010 and making it the leader in app M&A, according to Rutberg.
Meanwhile, smaller developers are merging with competitors or integrating vertically to bring new capabilities in-house. New York-based start-up GroupMe, which lets users create private text-messaging groups, acquired small BlackBerry app developer Sensobi earlier this month.
Meanwhile, Boulder, Colo., tech company Occipital LLC, which sold its popular bar-code-reader shopping app RedLaser to eBay Inc. in June, is in final talks to buy photography iPhone app maker Snapture Labs LLC. In addition to giving the six-person company access to more customers, the deal will bring Occipital economies of scale, says co-founder Jeff Powers.
“The bar has gotten really high,” says Mr. Powers. Developing quality apps takes more effort, and the costs have more than doubled since the days when a good app could be created for tens of thousands of dollars, he adds.
Wayne Elliot, co-founder of the sports app SportsTap, says one of the primary reasons his company was open to being acquired by Score Media last week was that it was losing 50% of its revenue to a third-party ad network. Score Media has its own in-house marketing team.
“From operations to sales teams to marketing opportunities, as a small skeletal group we were not getting out in front,” Mr. Eliott says.