Machine Zone (MZ): A $10 Billion Dollar Unicorn in the Making

(Our suggested “moonshot” for MZ: ending urban traffic congestion via a real-time pricing platform + “connected car”)

(Our suggested new tagline for MZ: “put a price on it.”  Shoutout to Portlandia for its “put a bird on it” tagline for a hand-crafted gift store capturing its big picture strategy)

In a year when valuations of so-called Unicorns — startups valued at $1+ Billion — are being marked down by investors, we will present the case that Machine Zone, recently rebranded as MZ, is a $10 Billion Unicorn in the making.

This is audacious claim. A January 2016 Unicorn list compiled by Fortune Magazine assigned a $3 Billion valuation to Machine Zone based on a WSJ report in June 2014 of a funding round of $250 Million led by JPMorgan Chase. There was second hand confirmation of this in Pitchbook.

Machine Zone was not even listed on any Unicorn list a year ago simply because such lists required that valuations be based on reported equity financing with implied valuations of $1+ Billion. Machine Zone’s last reported funding round listed in Crunchbase was a Series B done a full four years ago when Machine Zone was just beginning.

We found Machine Zone’s absence from 2014 Unicorn lists both perverse and ironic. It was perverse in that Machine Zone didn’t need financing so it was excluded from successful startup lists. It was ironic because, unlike most other Unicorns, Machine Zone’s revenue levels and revenue trends are observable daily via app store data reported by analytics companies such as App Annie or Thinkgaming.

On July 15, 2015, Bloomberg reported that the company was in discussions with investors for an additional $200 Million in funding at an implied valuation of $6 Billion. Dean Takahashi of VentureBeat also reported rumours of this new funding round. But, he reported that Machine Zone was seeking $500 Million at an unstated valuation — not the Bloomberg figures. Takahashi’s source also said that “the pitch has met with skepticism.”

Machine Zone has refused to comment on any venture capital interest or funding. As we blogged at the time, compared to most startups who would relish disclosing funding rounds that would confer Unicorn status, Machine Zone “walks the walk, not talks the talk”.

The Evolution of Machine Zone’s Identity

Until this year, Machine Zone’s CEO Gabe Leydon averaged about two interviews a year and never talked about revenue, valuation or IPO plans. He never talked about the state of the mobile game industry. In fact, he rarely talked about Machine Zone’s two hit successes Game of War: Fire Age or Mobile Strike.

Instead, he used rare interviews to advance the theme that Machine Zone was a technology company with software platforms whose applicability and marketability extended beyond games.

In a 2013 interview, Leydon said that Machine Zone had developed a “game engine” that could be “re-skinned” to create other genres of games with the same underlying play and communications innovations. This comment was designed to counter the perception that Machine Zone was a one-hit wonder deserving less of a valuation than mobile game rival Kabam with multiple Top 10 hits at the time.

In 2016, Machine Zone has done just what Leydon predicted in 2013. It had “re-skinned” their top revenue rank Game of War: Fire Age to release another Top 5 revenue rank game Mobile Strike, published by their downtown Palo Alto studio Epic War LLC. What is remarkable to us is that there does not seem to be much cannibalization going on between the two games.

In 2014, Leydon talked about Machine Zone’s real time, crowd-sourced chat translation engine. We wrote several papers speculating that this chat translator would be a valuable addition to Slack as it would open doors to large multi-national corporations.

In a March 2015 interview with Bloomberg’s Robert Kolker, Leydon identified what he thought was the “Wow” factor of its hit game Game of War: Fire Age — the low latency of the game play.

“…Game of War accommodates about 3 million users in simultaneous play, with what the company clocked as a 0.2-second response time…. This is the largest real-time concurrent interactive application ever built. There’s nothing even close to it.”

He also hinted at the marketability of this technology outside of gaming.

Shortly after than interview, we wrote a paper speculating that Machine Zone’s game engine must be a NewSQL database. This was based on job requirements posted on its website and a Michael Stonebraker YouTube video in which Stonebraker said that database requirements for today’s massively mobile multi-user online (MMO) games are the same as modern, cloud-based online transaction processing (OLTP) databases required by banks, airline reservations, order entry systems, real-time ad auctions.

It turns out that Machine Zone’s MMO game “purpose” shaved years of the development of a modern OLTP database compared to development path taken by Google and Facebook. The original “purpose built” databases of the likes of Facebook, Google, and Yahoo were designed to be massively scalable and globally distributed. They did not have to handle transactions.

Database design involves tradeoffs. As the online world’s need for monetization increased, especially real-time ad auction exchanges, a reversal in trade-offs has occurred. In 2012, Google made the often quoted declaration that if it had to choose between a NoSQL and a “NewSQL” database to handle OLTP, it would choose the latter:

“We believe it is better to have application programmers deal with performance problems due to overuse of transactions as bottlenecks arise, rather than always coding around the lack of transactions”

So, Google has morphed its “NoSQL” BigTable into Spanner, a “NewSQL”, which it now uses for its mission-critical sell-side ad platform.

An additional signal of Machine Zone’’s intent on being a fundamental technology company was a report in Las Vegas Sun that the data center builder Switch would be expanding its Southern Nevada facility to house an additional 4,000 servers paid for and managed by Machine Zone . This announcement came in the very month in which Zynga announced that it would begin selling off its own dedicated data centers and return to Amazon AWS as a cost savings move.

On February 18, 2016, Machine Zone and CEO Leydon had a “coming out party”. He broke out of his pattern of infrequent print interviews to give a full blown 39 minute video interview at the important Code/Media 2016 Conference.

In our opinion, it was here that Leydon first demonstrated his charm and ease at speaking as he mixed in fond memories of 90s skateboard videos with big picture views of the state of ad-tech. The interview was convincing evidence to us that Leydon was capable of leading an IPO and being the spokesperson for a publicly-held company.

Within the first minute of the interview, Leydon articulated a more focused view of Machine Zone as “real time” technology company. However, because the audience were media and ad-tech people, Leydon did not mention its database technology at all.

Instead Leydon startled the crowd with sharp criticism of 3rd party buy-side ad-tech platforms and the state of ad-tech in general. He casually revealed that Machine Zone had developed it own ad-buy platform specifically tailored to the acquisition and retention of freemium game players aka “whale targeting and retention”.

This platform was an alternative to relying on outside platforms like Chartboost and Tapjoy, used by Machine Zone’s rival Supercell and other top mobile game companies. According to Crunchbase, Tapjoy has received a total of $2.47 Billion in VC funding over the years.

Once again, by building its own buy-side ad-tech platform, Machine Zone has set itself apart from other mobile app Unicorns. Supercell, its chief rival in the mobile game industry, uses Amazon AWS for infrastructure and Tapjoy for ad-tech. Supercell does not have any internal chat function for players to communicate.

On April 4, 2016, Machine Zone issued a press release stating that it had changed its name from Machine Zone to MZ to underscore its new identity as a “real time” technology company. It also announced that it would begin licensing its real time transactional database, branded as RTplatform™. Leyton suggested in a follow-up conversation with Venturebeat that RTplatform ™ had wide-spread applicability ”from financial service companies to connected car companies to government institutions”

Valuing MZ’s Mobile Game Business

What follows is an estimate of MZ’s current valuation based solely on its mobile game business. There are three pieces of data required: (1) App Annie revenue ranks for MZ’s games; (2) an estimate of a power function relation between annualized revenue run rate (ARR) and app store revenue rank; and (3) “market-derived” valuations of pure play mobile game companies as a multiple their ARR.

For example, Activision Blizzard recently bought King Digital for 3.08 times ARR. Using that as a comparable and an estimate of MZ’s mobile game ARR of $2.0 Billion, we would arrive at a valuation for MZ of 3.08 * $2.0 Billion = $6 Billion.

We have used this methodology to value MZ over the past 2 years: Machine Zone: The $4 Billion Unicorn that Walks the Walk ; Machine Zone and the Perversity of Unicorn Lists and Machine Zone: IPO or What? (for Seeking Alpha).

We used the same methodology in articles to value other publicly-held mobile game companies — King Digital, Zynga and GLU Mobile — and the start-up Kabam. Finally, we have used the methodology to make prescient buy recommendations for two undervalued Japanese mobile game companies — Mixi and KLAB.

Below are two “market-derived” valuations of pure play mobile game companies as a multiple of ARR. The first is a valuation of 3.08 * ARR that Activision Blizzard paid to acquire publicly-held King Digital in late 2015. Using King’s ARR, as reported in 10-Qs to the SEC as a checksum, we present below an estimate of the distribution of King’s ARR by individual game revenue and associated revenue rank as reported by App Appie.

The second is a market-derived valuation for Finland-based Supercell. While the company is not listed on a stock exchange, it is required by Finnish law to report financials once a year. In 2015, Supercell reported revenue of $2.326 Billion. We coupled that with a reported $5.5 Billion valuation that Softbank placed on Supercell when it bought an additional 22 percent stake in Supercell (bringing its ownership to 73 percent) in mid-2015.

As with the King valuation, we use Supercell’s reported 2015 revenue as a checksum when estimating the distribution of Supercell’s ARR by individual game revenue and related revenue rank.

For our valuation of MZ here, we chose the lower, more conservative, Supercell valuation of 2.36 * ARR. The higher 3.08 * ARR that Activision-Blizzard paid for King Digital was 20% higher that the market value of King at the time. Plus, most financial pundits felt that Activision-Blizzard paid too much for King.

In past valuation of MZ, we chose 2.5 * ARR based on market-derived valuations of publicly-held Japanese gaming companies. Given, the general downward drift in Unicorn valuations, the use of the lowest multiple of 2.36 * ARR seems appropriate today.

Based on the estimates above of individual game revenue associated with various iOS Apple USA revenue rank as reported by App Annie, we derive an estimate below of a 2016 power function of global ARR vs iOS USA revenue rank.

Valuation of MZ power function

We now present a current valuation of MZ based on its two hit games alone which rank #2 and #3 on the App Annie iOS USA revenue charts.

Valuation of MZ latest 42916aaa

Note: during the writing of this paper in April 2016, Supercell’s Clash Royale and MZ’s Game of War have traded #1 and #2 positions multiple times. We are being conservative in our valuation here by using the lower #2 ranking for Game of War. Had we chosen #1 for Game of War with an associated ARR of $2.1 Billion, our valuation for MZ’s game business would have come in at $7.3 Billion instead of $5.7 Billion

Using “top-line” metrics like sales or monthly active users to value Unicorns has become suspect today. Observers of the startup scene have come to the realization of the futility of growing the top line if unit margins are negative and not likely to turn positive with scale. A freemium mobile game company has zero value if the advertising costs of acquiring a new user are greater than a user’s long term value (LTV), as measured by the discounted present value of money spent. Valuations based on solid top-line data have a greater validity if they are supplemented with some rough estimates of what a Unicorn’s full P&L looks like.

So, to add weight to our $5.7 Billion dollar valuation, we present below a rough estimate of MZ’s full operating P&L. First, our estimates shows that MZ has been responsible in growing headcount consistent with revenue.

Our estimates for MZ’s contribution margin (sales — advertising cost) is a healthy positive number. It is likely that MZ has THE highest contribution margin in the mobile game industry given an estimated average annual in-app game spend of $550 per MZ game player.

It is likely that MZ currently is showing a small operating loss as measured by GAAP, but it would be positive if non-cash, stock-based compensation were backed out. The company is likely cash flow positive from operations. Because MZ as a mobile game company has no inventory or material accounts receivable, it does not need cash for working capital.

As CEO Leydon has observed, mobile games are the most efficient cash conversion operation in the history of modern business. At the Code/Media  2016 Conference, he observed that there can be a 120 second turn-around from cash out for an “call to download” ad to a new user download of a game to the first payment for in-app boosts posted to MZs cash account at the app stores.

MZ does not need cash for working capital or to cover operating losses. It has been reported that their new data center in Nevada is costing them $50 Million, and we could see them needing $100 Million per year for the next 5 years to expand data centers globally.

Use Cases for RTplatform™

We place the MZ’s valuation today at $9.1 Billion as a fundamental technology company. We think the valuation for its ad-tech platform is fair at $1.0 Billion, give that VC’s have poured over $2.7 Billion so far into Tapjoy, a comparable platform. We think the licensing value of its chat translator is fair at $400 Million, given the doors it might open for Slack. There might even be interest in the chat translator from Facebook or Microsoft, given the current interest in text messaging as a replacement for apps and mobile OS.

Admittedly, our $2.0 Billion valuation for RTplatform™ is the most speculative component as no comparable market-derived valuations are offered. One factor that caused us to value it so highly was the very fact that MZ hyped it. Here was a Unicorn company and CEO who had “walked the walk” for years and never made comparisons. Suddenly, it started “talking the talk.” as in “our specs crush your specs” and “ our new specs crush our old specs.” We believe the company can make good on the hype, given their amazing string of accomplishments.

According to the Venturebeat interview on the day of the launch, the company said its platform was “much more scalable than what is currently available in the market from rivals like Amazon or Google…” Leydon said PTplatform™ was “100 times bigger” than its current platform running Game of War.

The other factor underlying our high valuation was the use cases and market potential we were envisioning for a platform described by the company as a

  • massive platform for doing high-fanout data processing,”
  • many-to-many applications
  • an infrastructure that allows you to do some extremely large things in real time at scale.”
  • “unique ability to interconnect ‘billions’ of endpoints worldwide and transmit data at low latency”

In the Venturebeat interview, the company hinted at use cases “from financial service companies to connected car companies to government institutions”. In earlier interviews, Leydon hinted that its game engine was transactional with ultra low latency, which we speculated as meaning NewSQL. He compared it to platforms required for high frequency trading.

We present the following broad use cases for a real-time pricing or auction platform coupled with the “connected self” or the “connected car”:

  1. eliminate information asymmetry and “moral hazard” between insurers and customers;
  2. eliminate the “tragedy of the commons” like urban traffic congestion or overfishing;
  3. eliminate transactions costs causing “sticky prices” for services whose performance over time is uncertain;

A specific use case for (1) would be real time auto insurance pricing. In 2014, consumer auto insurance had been estimated to be a $190 Billion market. MZ should be targeting one of the top 4 auto insurers — State Farm, Geico, Allstate, and Progressive — as an exclusive licensee. They should aim for an announcement within the next three months, with a roll-out and initial monetization within a year.

This “early win” will shock the auto insurance industry, impress the VC investment community, and finally clue tech writers that MZ should listed along with handful of unicorns — Uber, Airbnb, Palantir and Slack — as having the greatest upside potential.

A specific use case for (2) would be a real-time auction for peak commute time on urban freeways. There is an article in Forbes citing a report which estimated the direct and indirect costs of traffic congestion at $124 Billion in 2013.

There was also something called the Millennium Project out of UC-Berkeley in the mid-2000 which used (then novel) mobile phones to gather data on drive times and traffic congestion in the Bay Area. In 2011, there was a report which presented in detail the problems in ”scaling up the Mobile Millennium traffic information system using cloud computing and the Spark cluster computing framework”.

Surely, the 2016 RTplatform™ would be a prime candidate to underpin any solution to urban traffic congestion. Needless to say, solving this problem would require government sponsorship so monetization by MZ for this use case might be a 5+ years off. But, announcing that it would be involved in a project to end urban traffic congestion would place MZ alongside only a handful of companies undertaking a “moonshot” and “make a difference in the world” type of project.

A specific use case for (3) would be dynamic pricing for sporting and entertainment events. Many Major League Baseball team are setting aside bleacher sections with individual game day tickets that vary by day of week, opponent, and weather. The National Football League is also starting to set aside individual game day tickets that vary over the course of the season by attractiveness of the matchup.

We could envision MZ’s platform taking this dynamic pricing of sporting events to a “real time” level by allowing both baseball and football fans to bid on game day seats inning by inning or quarter by quarter. Obviously, this use case seems ludicrous, but it does emphasize widespread instances of “sticky prices” due to transaction costs for a steam of services with uncertain, highly variable quality.

An Alternative Business Model for Product Hunt

Product Hunt Logo

Below is a comment I first published on Medium in response to an article by Ryan Hoover called Introducing Product Hunt 2.0

It is the process of PH that is world-class and of great value, not the PH 2.0 website itself.

Seeking a wider audience by expanding PH beyond curating new software to books and sneakers suggests strongly a business model based on advertising.

While PH may have been early to sense the maker’s movement and the need to expand its site to physical products, Amazon has also been quick to sense this with their new Launchpad offering. While PH 2.0 might offer maker’s better feedback, maker’s first choice for launch will be Amazon not PH.

I would like to offer an alternative roadmap for PH. Stay focused on software to deepen the skills of the team’s, and top contributor’s, ability to evaluate and suggest improvements to developers.

What has been so exhilarating to observe is the PH process — the speed, the collaboration, the crowd-sourcing of feedback, the cloud-based team communication and project management tools, the iterative way PH does product-market fit. This is great stuff.

Instead of advertising, the business model should be to brand and sell the team and the PH 2.0 world-class process to others — start-ups and even Fortune 500 companies.

Charge the likes of AT&T or United Heathcare $1+M to apply the PH 2.0 process to all UI/UX of their consumer-facing software. Offer the PH 2.0 process pro bono to all Obamacare ACA websites. Become the first and best VAR of Slack to the enterprise.

PH should set it sights on disrupting the consulting business. At the same time, keep running PH 1.0 to sharpen team’s skills to evaluate new software offerings.

But, the work that will pay the bills will be to take share from the 20th century dinosaurs of McKinsey and Bain. There is enough revenue and profit to be had there to satisfy PH’s venture capital backers.

In short, become the McKinsey of the “Software Eats World” world not the Reddit for sneakerheads.

Machine Zone: Game Unicorn with Marketable NewSQL Database?

Summary: This paper speculates that the startup Machine Zone intends to market a NewSQL database as a service and merits a $6 Billion valuation.

Machine Zone (MZ) is a Palo Alto-based  startup with a Top 2 iOS USA app store hit called “Game of War: Fire Age.” (GoW).

MZ describes Game of War: Fire Age as:

“.. a real-time mobile massively-multiplayer online game and parallel chatspeak translation application that translates over 40 languages for its players in real-time, connecting game players around the globe at the same time in a single virtual universe.”

We have written three other articles about this startup in the past year:

Machine Zone: IPO or What?   July 6, 2014 published by SeekingAlpha

Machine Zone: The $4 Billion Unicorn that Walks the Walk  March 24, 2015 published on our own blog http://glomoinvesting.com

Machine Zone and the Perversity of Unicorn Lists  March 26, 2015 published on Medium and our own blog

The theme running through prior articles is that the MZ’s status as a multi-billion dollar “Unicorn”  is not well known. This is because:

  1. The last company-confirmed VC funding round and implied valuation was made years ago before GoW was released. (The WSJ reported in June 2014 a funding round led by J.P.Morgan Chase valuing the company at $3 Billion, but this has never been confirmed.)
  2. The CEO Gabe Leydon has averaged about one interview a year for the past three years. Official press releases are even rarer.
  3. Even in rare interviews, the CEO shuns financial and game metrics, which have to be impressive. Instead Leydon uses these occasions to assert that MZ’s technology has applicability and marketability outside of gaming.

On July 15, 2015, Bloomberg reported  that the company was in discussions with investors for an additional $200 Million in funding at an implied valuation of $6 Billion.  Bloomberg noted that new valuation, double that reported a year ago,  hinged on investors being convinced of the marketability of MZ technology beyond mobile games. The article referenced an earlier Bloomberg interview with Robert Kolker where Leydon first made public statements about the marketability of its technology.

Dean Takahashi of VentureBeat also reported rumours of a new funding round.  But, he reported that MZ was seeking $500 Million at an unstated valuation — not the Bloomberg figures.  Takahashi’s source also said that  “the pitch has met with skepticism.”  Takahashi emailed Leydon for a comment and received this response:

“We do not comment on rumors and speculation about fundraising or valuation, but [Machine Zone] does not need additional investment. We are 100 percent focused on [Game of War] and expanding on the technology that powers it.”

What struck a chord with Takahashi was Leydon’s explicit statement about no need for additional funding.  For us, it was his explicit separation of gaming from technology as two distinct areas of focus.  For us, we see Leydon suggesting that MZ’s future includes a technology business separate from a mobile games business.

What follows is our attempt to flesh out where Machine Zone is headed. It is obviously speculative given the dearth of official pronouncement from the company.  (BTW, we have had no contact, received no remuneration, no free meal, etc. from the company or anyone remotely related to MZ.)

But, it is clear to us that there is concrete evidence of these intentions — pitch decks, written strategic plans, lists of customer inquiries, etc.  After all,  VC investors must have seen something beyond gaming to value the company at a reportedly $6 Billion in 2015 and $3 billion in 2014 versus what we think are our methodical valuations for their gaming business alone of $2.75 Billion in 2015 and $2 Billion in 2014.

We start our effort to flesh out where MZ is headed with Leydon’s March 2015 Bloomberg interview.  Here is quote in which he identifies the “Wow”  factor of their hit game  — its the low latency.

“…Game of War accommodates about 3 million users in simultaneous play, with what the company clocked as a 0.2-second response time…. This is the largest real-time concurrent interactive application ever built. There’s nothing even close to it.”

Later, the Bloomberg interviewer relays Leydon’s comments on the marketability of MZ’s technology outside of gaming:

“Leydon, meanwhile, intends to focus on what his new networking technology can accomplish outside the gaming world. He says dozens of companies have asked to license Machine Zone’s translation engine. Its applications, he says, span beyond gaming and into finance, logistics, social networking, and data analysis.”

In our prior 2015 papers, we focused on the marketability of MZ’s real time chat translator. We identified two well known, highly successful companies where chat is core — Facebook’s WhatsApp and Slack, the fastest growing SaaS startup of all time.  We mentioned that both companies would benefit greatly by adding real time translation to their chat.  But, we offered no insight then as to the business model MZ might adopt.

The market for a chat translator is a vertical market limited to a handful of social / business communication companies like Facebook and Slack, and come to think of it, Microsoft.  Given the limited list of potential customers and the fact that MZ doesn’t need cash, a SaaS model doesn’t seem right. What feels right is that MZ should offer a single exclusive perpetual license in return for stock.

In an earlier article, we “slapped” an addition $1.25 Billion valuation for the chat translator business on top of a methodical estimate of $2.75 Billion for the gaming business to arrive at a nice round valuation of $4 Billion for MZ in mid-2015.

Facebook could pay this amount. Slack probably cannot afford the dilution at this time. But, the more intriguing choice would be Slack because MZ’s history is a inversion of Slack’s.

Slack started out as Tiny Speck, a startup attempting to build a massive multiplayer online (MMO) game. The game was never completed, but a better way for a team to communicate became the motivation to start Slack as a side project.

MZ produced the hit MMO game that Slack could not complete. As a side-project, MZ built a chat translation engine that would make Slack invaluable as a communication platform for multinational companies. You could argue that MZ is a doppelgänger of Slack and so a union (reunion?) between these doppelgängers would be intriguing to say the least.

We now turn our attention to fleshing out the rest of Leydon’s comment about the  marketability of MZ’s technology outside of gaming.

Unlike us, it would be obvious to most software engineers what marketable technology MZ might have considering the description of their game: a real-time mobile massively-multiplayer online game accommodating about 3 million users in simultaneous play with 0.2-second response time.

It would have to be a cloud-based DATABASE.

And, unlike us, those familiar with databases and real-time MMO games would know instantly that it would have to be a particular type of database, as MMO games essentially are about transactions, defined as logical operations on structured data.

Making that connection only occurred to us after viewing a Michael Stonebraker YouTube video when he mentioned that the database requirements for real time MMO games are the same as modern, cloud-based online transaction processing (OLTP) databases required by banks, airline reservations, order entry systems, etc.

What MZ has is what banks, airlines reservations systems and real-time ad auction exchanges require in a database today.  Behind a game with annoying Kate Upton ads is a state-of the-art scalable, globally distributed online transaction processing (OLTP) database.

The rest of the database development world is coming around to what MZ set out to do from day one.

The original “purpose built” databases of the likes of Facebook, Google, and Yahoo were designed to be massively scalable and globally distributed. They did not have to handle transactions.  Requirements were relaxed for structure and consistency, defined as “all nodes see the same data at the same time”.

As a result, semi-structured “NoSQL” databases like Yahoo’s Hadoop, and Google’s BigTable, now open-sourced as HBase, became state-of the art.  Startups like MongoHQ and now publicly traded Hortonworks arose to offer NoSQL databases as a service (DBaaS).  IBM bought Cloudant and Apple bought FoundationDB to gain access to NoSQL technology.

Database design involves tradeoffs. As the online world’s need for monetization increased, especially real-time ad auction exchanges, a reversal in trade-offs has occurred.

The database world follows Google.   In 2012, Google made the now often quoted declaration that if it had to choose between a NoSQL and a “NewSQL” database to handle OLTP, it would choose the latter:

“We believe it is better to have application programmers deal with performance problems due to overuse of transactions as bottlenecks arise, rather than always coding around the lack of transactions”

So, Google has scrapped its “NoSQL” BigTable in favor of a “NewSQL” Spanner, which it now uses for its mission-critical Ad platform.

MZ’s focus has been “NewSQL” from day one.  It didn’t waste 4-5 year before coming around to what Google finally concluded in 2012.  Obviously, there are questions about the specifics of MZ’s stack and the degree of ACID compliancy.

We can only offer a non-scientific sample of job requirements posted on its website: a combination of MySQL, HBase, Hadoop and Vertica where Verica is now a Hewlett-Packard piece of software allowing SQL-like queries of NoSQL databases like Cloudera’s Impala.

Other than hiring and retaining world class database talent, the DBaaS industry has low barriers to entry.  The basic software components — MySQL, HBase, etc. —  are open sourced.  The computer power needed to scale this service offering can be incrementally purchased from Amazon’s AWS.

We think that MZ has significant competitive advantages over other NewSQL competitors. First, is the location of its new HQ in Palo Alto which is the epicenter of U.S.’s database talent pool.   The HQ is located on Page Mill Road across the street from Stanford University in the storied Stanford Research Park that used to be Facebook’s old headquarters.  There would be little relocation friction for new MZ hires from Stanford, nearby Facebook in Palo Alto, or Google in Mountain View.

We also think it was fortuitous that MZ never considered moving to some trendy area of San Francisco city like some of the largest mobile game companies in the U.S. — Zynga,  GLU Mobile, and Kabam.  Our view is that the gentrified, more cerebral San Francisco peninsula is better suited for enterprise software developers and their families than the manic, hipster environment of the city, which is better suited for consumer and e-commerce startups.

The San Jose Business Journal reported in September 2014 that MZ had leased an estimated 140,000 square foot space for this new HQ. Furthermore, there is an adjacent 140,000 square foot space now leased short term by Nest, now owned by Google, that may be available to MZ later.  At 250 square feet / employee, this new HQ could accommodate up to 1,000 employees, plenty of room to expand considering MZ’s current headcount is reportedly only 300.

It has also been reported that MZ will  be spending $50 Million to configure a dedicated 4,000 server data center within a larger server farm complex south of Las Vegas. This investment also might set itself apart from less well-funded competitors as it will provide MZ with a dedicated server farm to experiment with various software/hardware configurations.

But, the most important advantage MZ has over other NewSQL competitors is that its database is literally “battle tested.”  Remember Leydon’s claim in the Bloomberg interview  — 3 million globally distributed users in simultaneous play with a 0.2 second response time.

MZ’s pitch deck to prospective investors now probably includes more references to Google and its Spanner AdTech platform than Supercell and Clash of Clans.

Will VCs now fork over cash at an implied $6 Billion valuation for a recognized (finally) Unicorn comfortably feeding off a $1.1 Billion game cash cow and who is positioning itself to offer a Google-like Spanner-as-a-Service?

You bet they will.

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Machine Zone and The Perversity of Unicorn Lists

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Machine Zone (MZ) is a Palo Alto-based, mobile gaming startup with a massively popular Top 2 iOS USA app store hit called “Game of War: Fire Age.” [GoW].

MZ describes Game of War: Fire Age as:

“.. a real-time mobile massively-multiplayer online game and parallel chat-speak translation application that translates over 40 languages for its players in real-time, connecting game players around the globe at the same time in a single virtual universe.”

A New York Times reviewer of Game of War’s said:

“The game’s most impressive feature is an instantaneous translation of text-based online chat. If someone writes “MDR” in French (for “mort de rire,” or “dying of laughter”), an English-speaking player sees it as “LOL.”

Game of War is MZ’s only published game to date. We have estimated (see below) MZ’s current annualized revenue run rate at $1.1 Billion based on that game alone. At a valuation multiple of 2.5x, half way between publicly held mobile game companies Glu Mobile and Zynga, we place MZ current valuation at $2.75 Billion.

This is a conservative valuation. According to its CEO Gabriel Leydon, there is third party interest in licensing it real-time chat translation engine. We believe that this technology would be a valuable addition to the likes of Facebook’s WhatsApp and/or Slack.

Yet, Machine Zone cannot be found on any so-called Unicorn lists — startups with $1+ Billion valuations like the one Fortune Magazine recently published. To qualify for such lists, a company must be mentioned in the press as receiving a round of venture capital and a whispered valuation of $1+ Billion.

No matter if the funding and valuation came with “liquidation preferences” that would limit any loss in the investment and skew the implied valuation upward.

No matter if a company like Machine Zone is so profitable early on that it does has not needed any venture capital since a Series B round years ago.

Specifically, CrunchBase reports a total of $13.3 Million in VC funding for MZ, with the last round being a Series B done a full three years ago.VentureBeat reported a total of $16 Million so there could be some $3 Million in angel money not captured by CrunchBase.

At a $2.5 Billion valuation, the VC return would be 156x. MZ’s return compares favorably to the 100x return that VC’s looks for every couple of years to make up for all of the other failed investments in their portfolios.

Machine Zone’s exclusion is not only perverse, it is ironic. Unlike other Unicorns, the public has access to mobile game company “cash register” data supplied for free by analytics companies like App Annie or Think Gaming who record “freemium” game in-app purchases bought through iOS Apple Store or Google Play. Anyone interested in tech would love access to “cash register” trend data of other Unicorns like Uber, Airbnb and Dropbox.

Machine Zone: The $4 Billion Unicorn That Walks the Walk

Machine Zone: The $4 Billion Unicorn That Walks The Walk

Machine Zone [MZ] is a Palo Alto-based, mobile gaming startup with a massively popular Top 2 iOS USA app store hit called “Game of War: Fire Age.” [GoW].

MZ describes Game of War: Fire Age as:

.. a real-time mobile massively multi-player online game and parallel chat-speak translation application that translates over 40 languages for its players in real-time, connecting game players around the globe at the same time in a single virtual universe.

This is how the New York Times described the real-time chat translator embedded in GoW:

The game’s most impressive feature is an instantaneous translation of text-based online chat. If someone writes “MDR” in French (for “mort de rire,” or “dying of laughter”), an English-speaking player sees it as “LOL”

GoW is MZ’s only published game to date. We wrote first about MZ in a Seeking Alpha article eight months ago, estimating then that its annualized revenue run rate [ARR] was at $831 Million with a 2.5x valuation of $2.04 Billion. We were the first to establish MZ as a $1+ Billion startup, aka a Unicorn.

Based on Seeking Alpha supplied page view metrics, this article has become slowly over time our top viewed article among the 21 we have written for SA in the past year.

This article is a follow-up. We update our estimates of MZ’s annualized revenue run rate and valuation. We also cite a recent interview given by the CEO where he mentions interest in licensing MZ’s chat translation engine.

We have identified two well known, highly successful companies where chat is core — Facebook’s WhatsApp and Slack, the fastest growing SaaS startup of all time. Both companies would benefit greatly by adding real-time translation to their chat core.

Eight months ago, we derived a $2.04 Billion dollar valuation for MZ. Shortly thereafter, the Wall Street Journal reported that MZ was in talks with VCs for funding that would place a $3 Billion valuation on the company. Nothing materialized.

Based on increased ARR for GoW plus interest in licensing its real-time chat translation engine, we now place a $4 Billion valuation on the company.

Yet, MZ’s name still cannot be found on any Unicorn list such as the one recently featured in Fortune magazine. This is due to the perverse qualifier that the valuation must be come from a financial press article or blog post referencing a VC funding round and a whispered valuation.

No matter if that valuation came from funding with “liquidation preferences”. No matter if a startup is so profitable, as is the case with MZ, that no additional funding is required after a Series B round done years ago.

Besides the perversity of MZ being excluded from Unicorn lists, the exclusion is also ironic. Unlike other Unicorns, the public has access to mobile game company “cash register” data supplied for free by analytics companies like App Annie or Think Gaming who record “freemium” game in-app purchases bought through iOS Apple Store or Google Play. Wouldn’t you like access to “cash register” trend data of Uber, AirBnB and Drop Box?

The availability to the public of game revenue rankings has not been recognized for its place in the democratization of financial investing data. This trend was first recognized by famed fund manager Peter Lynch some 40 years ago.

The trend line goes from Lynch’s observation that anyone could see the financial implications of the L’eggs hosiery racks in grocery stores, to weekend box office receipts published by Variety, to near real time stock prices made available for free by Yahoo and Google Finance.

The line continues with real time audio of quarterly conference calls to transcriptions of these calls on SA (thank you SA!) to App Annie daily revenue ranking charts of mobile games by country.

App Annie even has revenue ranking data of games in “geo-lock” test releases in locations like Canada and New Zealand.

Freely available pre-release data of a game’s revenue potential is a step up from other well know pre-release indicators like out of town reviews of a Broadway-bound musical or reports of the reception of a test item on McDonald’s menus in Australia.

In addition to MZ’s absence from Unicorn lists, there are only a handful of published interviews with CEO Gabriel Leydon. You cannot find an interview where the CEO mentions revenue, valuation or IPO.

MZ is a rare Unicorn that walks the walk, not talks the talk.

This is in contract Kabam, the other mobile game startup identified as a Unicorn (no longer) who has talked the talk, and not walked the walk lately.

Based on our close observation of Kabam’s press over the past two years, we offer this Letterman-like list of the top 5 signs a Unicorn is talking the talk too much:

5. Still has a booth at SXSW five years after first showing

4. SVPs give more interviews than CEO

3. CEO quantifies to press revenue and money in bank

2. CEO’s company pays for naming right to football field of alma mater.

1. CEO now spikes hair with mousse for video interviews.

Now back to how we derive a current valuation for MZ.

The table below presents our derivation of a current ARR of $1.1 Billion for GoW, up from our $831 Million estimate made eight months ago.

Item $ Millions Row Source
Estimated ARR GoW – iOS USA $437 r1 Think Gaming x365
iOS Share of Global Game Revenue 63% r2 App Annie
Android Share of Global Game Revenue 37% r3 App Annie
Sum of Share 100% =r2 + r3
iOS USA share of iOS Global 70% r4 Source: our estimate
Ratio of iOS USA to iOS USA 1.00 r5
Ratio of Android to iOS USA 0.84 r6 = r3 /( r2 * r4)
Ratio of iOS Rest of World to iOS USA 0.68 r7 = (1 – r4) / (r2 * r4)
Sum — Global to iOS USA 2.52 r8 = r5 + r6 + r7
Estimated ARR — GoW Global $1,102 r9 =r1 * r8

The source of MZ’s revenue growth in the past year has been the combination of organic growth in spending by dedicated players plusnew downloads resulting from a $40+ Million ad campaign featuring the busty Kate Upton.

From this you have to subtract the loss of people disgusted by the Upton ads as evidenced by massive amounts of derisive tweeting going on in the last 4 months. The ads themselves, not the ad campaign, has been the only questionable move by MZ since inception.

Indeed, we believe that MZ and its flood of Upton ads embedded in other free mobile games was the cause of an unprecedented, simultaneous #1 ranking of the free (ad supported) and paid versions of the same game, Trivia Crack. This was due to millions of freeloading players willingly forking over $2.99 just to avoid the Upton ads.

(click to enlarge)

Below is a table of calculated price-sales ratios, specifically market valuation / annualized run rates, for the three pure play mobile game companies with substantial sales in the USA: Glu Mobile (NYSEMKT:GLU), King Digital (NYSE:KING), and Zynga (NASDAQ:ZNGA). The range is from a low of 1.83 for GLU to a high of 3.19 for ZNGA.

Glu Mobile King Digital Zynga
$ Millions $ Millions $ Millions
Market Value 3-20-15 534 4,760 2,460
ARR = 4 * 4Q14 Sales 291 2,219 770
Price / Sales Ratio 3-20-15 1.83 2.14 3.19

It should be noted that both KING and ZNGA sported 6+ price-sales ratios at the time of their IPOs.

We think that the midpoint of the figures above — 2.5x current ARR — is the appropriate figure to use in valuing MZ. This would place its current valuation at $1.1 Billion * 2.5 = $2.75 Billion.

But MZ has value beyond the ARR of a single game. MZ is not a one hit wonder.

First, MZ is amazingly “lean” in terms of its operations as measured by ARR / employee. This translates into profitability, something rare among Unicorns.

Below is a table that compares MZ’s head count with two big mobile game companies based in San Francisco — the troubled dog of a company, Zynga, and the stumbling startup Kabam.

Both Zynga and Kabam had a string of failed game releases in 2014. Unless the fortunes of these companies change in 2015, there could 1,000+ unemployed mobile game people walking the streets of San Francisco this fall.

While we are on the subject of head count, the San Jose Business Journal reported that MZ has leased an estimated 140,000 square foot space on Page Mill Road in Palo Alto that used to be Facebook’s old headquarters.

Furthermore, there is an adjacent 140,000 square foot space now leased short term to Nest and Google that may be available to MZ later.

At 250 square feet / employee, this new MZ facility could accommodate an additional 560 employees now with another 560 employees being housed in the adjacent space once Google completes its futuristic new HQ in the Shoreline area of Mountain View.

The other metric of MZ that is amazing is its ratio of current valuation to total VC finding. CrunchBase reports a total of $13.3 Million in VC funding with the last round being a Series B done a full three years ago.VentureBeat reported a total of $16 Million so there could be some $3 Million in angel money not captured by CrunchBase.

At a $2.5 Billion valuation, the VC return would be 156x. At a $4 Billion valuation (see below), the VC return would be 250x. MZ’s return compares favorably to the 100x return that VC’s looks for every couple of years to make up for all of the other failed investments in their portfolios.

We now turn to the case that MZ has value beyond the ARR generated by a single published game.

CEO Gabriel Leydon recently gave a revealing interview to Robert Kolker of Bloomberg Business Week. For us, this was the first interview of any substance that Leydon has given since GoW was released for iOS two years ago.

Leydon may have been asked about revenue, scale, venture capital, and IPO, but evidently he declined to comment. He also did not talk much about the specifics of GoW itself.

Basically, Leydon relishes talking about two things: (1) how hardcore GoW’s fans are; (2) how hardcore MZ’s engineering is.

A Leydon supplied metric on the hardcore GoW fan:

The average player…plays for two hours per day, in 12-minute sessions, 10 a day.

A Leydon supplied metric on MZ’s engineering prowess:

…Game of War accommodates about 3 million users in simultaneous play, with what the company clocked as a 0.2-second response time…. This is the largest real-time concurrent interactive application ever built. There’s nothing even close to it.

For us, the most interesting section of the interview was Leydon’s belief that the MZ’s chat translation technology would be of value to the likes of Facebook (NASDAQ:FB). (specifically,we presume Facebook’s $19 Billion acquisition WhatsApp)

From the interview,

It’s closer to a social network than it is a video game,” Leydon says. “Facebook has pokes and messages and things like that. In Game of War, you have attacks and friends and chats.” Leydon argues that Game of War’s social interplay is far more complex; among other things, Facebook interactions across language borders are limited.

He goes on

Leydon, meanwhile, intends to focus on what his new networking technology can accomplish outside the gaming world. He says dozens of companies have asked to license Machine Zone’s translation engine. Its applications, he says, span beyond gaming and into finance, logistics, social networking, and data analysis.

A more intriguing partner for MZ than WhatsApp would be Slack, the fast-growing collaboration and chat startup.

MZ’s history is a inversion of Slack’s. MZ completes what Slack starts. You could argue that MZ is a doppelgänger of Slack.

Slack started out as Tiny Speck, a startup attempting to build a massive multi-player game. The game was never completed, but a side-project piece of software developed for collaboration morphed into the fastest growing SaaS in history.

MZ produced the hit game that Slack could not complete. As a side-project, MZ built a chat translation engine that fills in critical gaps in Slack’s wild success.

Slack has already invaded software R&D and content creation departments, both requiring close digital collaboration. Slack is now moving horizontally throughout enterprises where these departments are core.

By adding a real time chat translation engine to its offering, Slack could make in roads into globally distributed enterprises that service other globally distributed enterprises.

For example, this might include global insurance companies like AXA and Zurich Insurance that handle insurance needs globally of a company like Exxon Mobil. It might include global banks like Citibank and Deutsche Bank that handle the banking globally for a company like GE or Siemens.

MZ’s chat translation engine could be a global enterprise door-opener for Slack.