SharkJumping

today announced its acquisition of Addicting Games, a popular directory of casual games.  It's another signal of the coming consolidation in the casual game sector as the larger players start to separate themselves from the smaller ones through acquisitions, more sophisticated marketing techniques, product portfolio expansions and larger game investments.  Until this most recent deal, the distribution portals such as Yahoo Games, Real Arcade and AOL Games had been recently silent, primarily due to internal issues unique to each company.  That has left room for the mid-size players such as PopCap, BigFish, and PlayFirst to drive forward, raising venture capital rounds, purchasing smaller companies and improving their sites.  I think the larger players will overcome their problems and begin expanding again by Spring, as ASW has just done.

What is partially driving this consolidation is that the growth rate of the "traditional" $20 pay per download games is slowing in the sector (although no one will publicly admit it), but fast growth is continuing in the ad-supported, subscription and virtual item businesses, such as what we're seeing at Puzzle Pirates.  In addition, larger US and non-US game companies are entering the casual game market, and venture firms are starting to fund additional players (e.g. Big Top Games).  In order to continue to grow, the smaller firms must invest in more sophisticated customer acquisition techniques so that they can control some of their own destiny/revenue, and they must be able to hold onto their IP rights so that they can exploit their successes across multiple platforms, such as mobile.  This increased competition is beginning to hit the smaller companies who will have to expand or change their business models in order to survive, as I posted months ago - or realistically, many of them should sell now while they still have good businesses.

The good news is that we will come out of this upcoming period with a small group of diverse, well capitalized, professionally managed casual game companies, a couple of which will hopefully be able to go public by the end of 2006 if they're not sold to a traditional media company.  The bad news is that there will be a lot of pain involved for those who don't make it, unless they're happy with a lifestyle business.