Blowing Bubbles

So who is exposed to this kind of risk? Electronic Arts, as mentioned, has a $300 million investment in PlayFish. It's no stranger to large acquisitions in this space - it paid out $680 million for mobile publisher JAMDAT back in 2005, although that's not a deal it may particularly want to be reminded of, given that it later had to knock around 50% off its valuation of the asset. Crucially, EA is also linked to the billion-dollar PopCap deal that's said to be on the table, although it's hard to say how credible that is. EA's financial position wouldn't allow it to make an acquisition on that scale easily - it could be done, of course, but it will be an immense risk for the company to swallow.

Disney has committed itself even more heavily to the space than EA, but its Playdom acquisition has been criticised on many fronts for under performing - and although the company has redoubled its commitment to a future in the social games space, it's yet to turn that commitment into any kind of leadership position. However, Disney actually isn't terribly exposed to a social gaming "bubble"; it may have paid above the odds for its investments, but it's an enormous company which can afford to swallow those losses, and the investment bubble shouldn't disguise the fact that social gaming itself is still a market with growing audience and revenues, one which a firm like Disney can ill-afford to ignore.

Whoever ends up buying PopCap will own a social gaming developer whose success is almost unrivalled and whose skills and experience can potentially unlock vast swathes of the marketplace.

Beyond those two firms, others do have significant involvement in mobile gaming - Ubisoft, through GameLoft, being a great example - but have mostly avoided getting caught up in the bubble. Indeed, GameLoft CFO Alexandre de Rochefort was one of the main voices to warn of this emerging situation, earlier this year.

Instead, the investment has come heavily from VCs, and from Asia - and sometimes from both. Asian companies, both Chinese and Japanese, are very keen to invest in this market, and the Japanese firms in particular have been both spurred by the need to keep abreast of the smartphone growth that's displacing the huge "featurephone" market in their native territory, and emboldened by the historic strength of the Yen which allows overseas acquisitions to be made on the cheap, at least relatively speaking.

What happens to those companies when the confidence leaks out of the market and the bubble collapses? It's therein, I think, that the really interesting question about what this bubble actually means to the games industry starts to find some answers.

Nobody - be they a corporation or a private individual - wants to end up holding an asset that's worth far less than they paid for it, but that doesn't tell the entire story. As mentioned above, the ludicrous prices flying around in this sector disguise an underlying story that's arguably much more important - a story of immense growth in both audience and revenue, growth which doesn't justify those prices but which does certainly justify much of the interest being taken in this market.

For companies in Asia seeking to build their presence in the West, or for Western media firms determined to stay on top of developments in their sector, one could argue that social and mobile gaming acquisitions aren't really an "investment" in sense of asset growth. Yes, it would be lovely to buy an asset and watch its value swell on your balance sheet - but what's more important to these firms is to buy into a market, expanding their global or demographic presence and, crucially, denying their rivals an opportunity to do likewise.

Even once the bubble bursts, DeNA - to pick an example - will own a leading mobile developer with fantastic insight and experience in the western market. Whoever ends up buying PopCap will own a social gaming developer whose success is almost unrivalled and whose skills and experience can potentially unlock vast swathes of the marketplace. Their asset values may implode, and the markets aren't likely to like that very much, but the core reasons for the acquisitions will remain.

In other words, if you've got the money to buy, and if your business strategy requires or benefits from this kind of acquisition - then the bubble in the mobile and social markets only matters to you because it'll make it harder to make back the money you spend, but you're in this for the long term and the acquisition may still make sense. Where it matters more is to those companies and investors who are just hopping on the bandwagon because everyone else is doing it, throwing millions at companies with little IP to their name or incredibly risky business plans. Moreover, it definitely matters to companies who really don't have the money for this kind of investment, and will seriously suffer if its value collapses.

A bubble market is by no means a good thing, but equally, it's not a sign that everyone should cower and wait for the sky to fall. It simply means that companies need to be much more wary about their investments, and accept that the gambling stakes are much, much higher than usual. Mobile and social gaming is here to stay - but these valuations are not. If calm heads prevail, we can at least hope that none of the games business' great names get dragged down when the madness eventually ends.