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Tuesday, January 27, 2004 - Page updated at 12:04 A.M.

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RealNetworks offer wins it GameHouse

By Kim Peterson
Seattle Times technology reporter

Garr Godfrey, chief exec, will remain with GameHouse.
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RealNetworks has agreed to acquire Seattle-based GameHouse, one of the biggest developers of downloadable computer games, in a move that expands the digital-media company's growing online game business.

The deal, expected to close next month, is a milestone of sorts for RealNetworks because it turns the company into a developer of content. Up to now, the Seattle company distributed games, songs and video clips created by others.

RealNetworks has agreed to buy GameHouse for $36.2 million, or $14.6 million in cash and 3.3 million shares of stock, which, based on the company's closing share price yesterday, are valued at $21.6 million. GameHouse is expected to add a penny per share to RealNetworks' earnings in 2004.

In a deal to keep GameHouse's key developers from jumping ship, RealNetworks will pay about $18.3 million of the purchase price over the next four years on the condition that GameHouse's principal officers remain with the company.

GameHouse will continue operating out of offices near Pioneer Square, and none of its 25 employees is expected to be laid off as a result of the acquisition. The company, to be called GameHouse Studios, will become a division of RealNetworks.

GameHouse Chief Executive Garr Godfrey said he broke the news to employees yesterday afternoon, and they celebrated with a small office party.

RealNetworks "will really let us grow the business," said Godfrey, who will become general manager of GameHouse Studios. "It will be a big benefit to really maintain market leadership."

The Seattle area is thought to be at the center of this industry. Some of the largest online game developers, including GameHouse, WildTangent and PopCap, are based here, and the area is home to a growing number of new studios.

GameHouse, creator of some of the Internet's most popular downloadable games, started in 1998 and last year pulled in $10 million in revenue. Of that amount, the company said, $5.5 million was profit — a margin few Internet businesses have.

Analysts said yesterday that the deal makes sense precisely because of the industry's profit potential. IDC estimates that sales of downloadable Internet games hit $52.7 million in 2003 and are projected to grow to $762.6 million by 2007.

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"This has been one of the quiet success stories of RealNetworks," said Phil Leigh, who covers the company for Inside Digital Media. "The game business for them has been a consistently growing business and a profitable business, and it's one they haven't talked about very much."

On its arcade site, RealNetworks already offers about 190 games, many by GameHouse. About 185,000 trial versions of games are downloaded daily from the site, although only a fraction turns into sales of full versions.

Some of the RealNetworks' biggest competitors, including Microsoft and Yahoo!, also offer GameHouse downloads on their online game sites. Some in the industry wondered yesterday if those companies would continue to do so once RealNetworks owns GameHouse.

"It may not be the opinion of all of GameHouse's (business) partners that they would want to do business with Real," said Alex St. John, chief executive of Redmond-based WildTangent. Still, St. John said the deal was a smart move.

Microsoft said it will still work with GameHouse when it becomes part of RealNetworks.

"GameHouse has been one of our most valued partners to date, and we look forward to continuing our strong relationship with them," said Don Ryan, studio manager at MSN's Zone.com gaming site.

RealNetworks Chief Strategic Officer Richard Brownrigg said the company decided to keep GameHouse in its current office space in hopes that the studio will preserve some independence and maintain its relationships with other companies. The company adopted the same strategy when it acquired San Francisco-based Listen.com, which created the Rhapsody subscription music service.

One competitor called GameHouse the top developer in the business. The acquisition "is a pretty strategic move for RealNetworks," said Paul Thelen, president of Seattle-based Big Fish Games, which also creates downloadable titles. "They're putting a pretty good emphasis on games now, which is great for the industry." Thelen spent six years at RealNetworks and co-founded its arcade business.

The games area is not a huge part of RealNetworks' business, but it's growing nicely and is profitable, said Alan Davis, an analyst with McAdams Wright Ragen.

"I think they've been moderately surprised by how well it's done," he said.

Kim Peterson: 206-464-2360 or kpeterson@seattletimes.com

Copyright © 2004 The Seattle Times Company

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