(original publication date: 6/7/16)
(original publication date: 6/7/16)
Summary: This paper speculates that the startup Machine Zone intends to market a NewSQL database as a service and merits a $6 Billion valuation.
Written: July 25, 2015
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
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:
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 [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, our first article on MZ for Seeking Alpha 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 Fortune magazine list. 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. Can you imagine discussion if we had 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 contrast to 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. Company 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.
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. The source of MZ’s revenue growth in the past year has been the combination of organic growth in spending by dedicated players plus new downloads resulting from a $40+ Million ad campaign featuring the busty Kate Upton.
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.
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.
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.
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 headcount, 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 funding. 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, 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.