Category MZ (Machine Zone)

Edge Computing Use Cases for MZ’s (Machine Zone) Platform

This is an expanded answer to a Quora question that I posted on August 6, 2017

Machine Zone (MZ) describes its new “RTplatform” as capable of “high-fanout” and “many-to-many” apps. What are the use cases for this?

I wrote a blogpost about 1 1/2 year ago valuing MZ. At the end, I suggested a few use cases that would benefit from the low latency of their platform. With the passage of time, there is a lot of talk about how the IoT requires a new computing paradigm called edge computing. I now am thinking about how MZ’s publish-subscribe, many-to-many platform could be used as a “first alert” messaging platform at the edge. Servers would be called only in cases of a need for higher order compute functions and storage.

The obvious use case for MZ’s platform would be v2x middleware for the era of autonomous cars. Another use case would be a IoT to IoT “first alert” message of a computer virus akin to what Tanium has developed.

Also, moving 400 billion or so daily events connected with RTB ad exchanges to the edge by conducting individual ad impression auctions within a Docker located on the device.

Also, many-to-many AR games placed via Bluetooth at the edge without calls to the server.

MZ’s has contracted with Switch, an innovative data center provider based in Las Vegas, to house thousands of MZ -owned servers with FPGA’s optimized for its Erlang-written publish-subscribe platforms.

Switch has recently announced  “The MOD 100…for a rapidly deployable, single user environment that can be extended to nearly any location around the globe. The MOD 100 data center can be customized to fit on premise, at the edge or in a dense urban environment on a parcel as small as 400 feet by 400 feet.”

MZ has recently entered the AdTech business with an omnichannel, demand-side stack featuring RTB for display ad impressions. We could see them leverage their relation with Switch and growing expertise in rapid-response, FPGA servers.  One way would be to enter AdTech from the supply-side via an edge CDN featuring 1,000 of MOD 100’s full of video ads and connected to auctions via MZ’s publish-subscribe platform.

Below is a picture of Switch’s SUPERNAP 8 data center outside Las Vegas:

 

 


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

 

 

 

(Original publication date: 6/7/16)

(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)

Short Postscript (12/15/17)

Google Trends confirms that the term “moonshot” peaked one week after writing this article in June 2016.  Moonshot is so 2016 we guess.

 

While our suggested moonshot for MZ of pricing congestion seemed reasonable back when we first wrote the article, it seems (sadly) downright heretical today given the current chill against open discussion of controversial tech solutions that Y Combinator head Sam Altman has blogged about recently. 

“Put a price on it” is a controversial idea for solving problems.  We hope that folks  will not be deterred by the chill and and continue to stick with it.

Back to original article written 6/7/16) 

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 an 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.

An additional signal of Machine Zone’s intent on being a fundamental technology company was a report in the Las Vegas Sun that the data center builder Switch would be expanding its Southern Nevada facility to house 4,000 dedicated servers owned and managed by MZ.  These servers likely feature FPGAs that optimize the speed of MZ’s Erlang-written, publish-subscribe messaging platforms.

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 talk about the software 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 publish-subscribe messaging platform, 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.

 

king-valuation

 

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.

supercell-valuation

 

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.

power-function-2016

 

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.

mz-valuation-april-2016

 

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

 

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.

valuation-of-mz-as-a-tech-co

Addendum 3/8/18:  Here is an article of ours on MZ’s newly branded demand side platform (DSP): “Lemons” And Antitrust: Two Forces Driving Facebook’s Work WIth MZ’s DSP Cognant 

Addendum 6/13/18: Here are several more articles of ours on the division of MZ into a game company — MZ – and a real-time crypto-economic platform called Satori® with Gabe Leydon as CEO.

Toward a P2P Market Design for a Crypto-Economy  (6/10/18)

Satori: Toward a True P2P (Post-Walrasian) Crypto-Economic Platform (6/3/18)

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. 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, WeWork, 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.


Machine Zone (MZ): 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.

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

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.


The Bancorp: Bad Moon Rising

  • The Bancorp is a Philadelphia area bank whose stock has fallen 50% in 2014 due accounting and regulatory surprises.
  • On top of that, it announced it was discontinuing its commercial lending operations and set aside a $1.2 Billion portfolio for sale with an overall 6.5% mark-to-market discount.
  • An 8-K filed on the last business day of 2014 revealed a partial sale with a mark-to-market discount of 20.2%.
  • Another 8-K filed 3 days ago revealed that the EVP of commercial loans resigned effectively immediately.
  • Until there are assurances from management as to the quality of the remaining portfolio for sale, we rate this stock a sell.

The Bancorp (NASDAQ:TBBK) is a Philadelphia area bank founded in 2000 by the pioneering banker and lawyer Betsy Z. Cohen. A few bullet points from her resume:

  • Second female law professor on the East Coast after Ruth Bader Ginsberg
  • Founded Jefferson Bank in 1974; Sold it in 1999 for $370M
  • Instrumental in financing Philly’s Walnut Street downtown revival
  • Board Member – Aetna US Healthcare, Philadelphia Museum of Art, Bryn Mawr

Since inception, the bank’s Chairman has been her son, Daniel G. Cohen. A few bullet points from his resume:

  • CEO of three publicly-held companies whose market values crashed due to CDO investments
  • CEO, IFMI, 2010-12 when market value crashed 91%
  • CEO, Alesco Financial Trust 2007-10, when market value crashed 87%
  • CEO, RAIT Financial Trust, 2006-9 when market value crashed 98%

2014 was a bad year for The Bancorp as the bank was rocked by a series of surprise accounting and regulatory disclosures resulting in a 50% drop in its stock price.

TBBK Chart

TBBK data by YCharts

First there was an April 18, 2014 8-K disclosure in conjunction with the release of its 1Q14 results that “newly identified adverse classified loans”, caused a one-time addition to its loan loss reserve of $11.8 Million. The next trading day the stock dropped 14.9% from $18.60 to $15.84.

Then there was a June 10, 2014 8-K disclosure that the FDIC found that bank was in violation of the Bank Secrecy Act — namely that reloadable prepaid cards issued by The Bancorp were being used for extensive money laundering. The next trading day the stock dropped 30.3% from $16.36 to $11.40.

On December 1, 2014, there was 8-K disclosure that CEO Betsy Z. Cohen, 72, would be retiring at the end of the year.

Her son, Daniel G. Cohen, 42, remains Chairman of the Board. Four other Board members are Board members of other companies that Daniel G. Cohen has at one time controlled.

We see a “bad moon rising” for The Bancorp in 2015. We see “trouble on the way”.

In its 3Q14 10-Q, the bank announced that was discontinuing it commercial lending operations. Based on an independent third party review, it marked down the portfolio by an additional $38.9M to a fair market carrying value of $1.2 Billion:

” In addition to $44 million in the allowance for loan losses which was net against those loans, an additional $38.9 million expense resulted from the valuation to estimated sales price, which was also net against those loans. “

Here is a 3Q14 conference call exchange, as transcribed by SA, confirming the view of $82.9M as the difference between the outstanding principal and the fair market carrying value of the portfolio at that time.

Paul Frenkiel– Chief Financial Officer

Sure. Yes, those actually are separate, so maybe the easiest, I think the way you are trying to look at it was that at the end of the second quarter we had a reserve of about $46 million. We had some activity during the quarter, so we ended up with the reserve about $44 million and $38 million was basically in addition to that.

Matthew Kelley– Sterne Agee

Got you. So we can really think about it as an $82 million write-down or 7% or 8% of the unpaid principal balance. Is that the right way to think about it?

Paul Frenkiel – Chief Financial Officer

By 38 in addition to the 44 that had accumulated over a period of many years.”

On the next to the last business day of the year, December 30, 2014, the bank issued an 8-K stating that it had sold a portion of its $1.2 Billion commercial loan portfolio:

“The sold loan portfolio had an outstanding principal balance of approximately $267.6 million, which had been adjusted on the books of the Bank to estimated fair market value in the third quarter of 2014 upon the classification of the Bank’s related commercial lending operation as a discontinued operation and the transfer of the related portfolio to “held for sale” status. As a result of the estimated fair market value adjustment, the carrying value of the portfolio, as of September 30, 2014, was $213.5 million.”

Several things about this first sale caught our eye. The first thing was the mark-to-market discount associated with this relatively small piece of the portfolio:

(267.6 – 213.5) / 267.6 = 54.1 / 267.6 = 20.2%

This was way out of line with the overall average discount of 6.5% established just two months earlier.

Second, the sale was not for cash nor to an established third-party. It was for note receivables issued by a newly created LLC with the bank itself as 49% minority partner.

We ask ourselves, “How toxic can the full portfolio really be if this is what the bank had to do to sell just a portion of it?”

Maybe, they planned on an asymmetric sequence of sales, with the very toxic piece cut out first and sold to a related party at a steep discount.

Then they would sell the remaining clean piece with a mark-to-market discount of only 3% to an established third party willing to pay cash for a clean bundle.

But if this were so, why did The Bancorp not include an explicit statement in the late December 8-K of the planned asymmetric sale sequence?

Another 8-K has been just filed by The Bancorp on January 9, 2015 reporting that Arthur Birenbaum, EVP, commercial loans has resigned, effective January 8, 2015.

Investors need to get straight answers to the following questions now or during the bank’s 4Q14 earning conference call:

  • What is the overall mark-to-market discount on the remaining $900M commercial loan portfolio?
  • Can the bank give assurances that the remaining portfolio is fairly valued in light of the 20% mark-to-market discount associated with the piece just sold?

Below is a spreadsheet summarizing our view of the accounting of the two transactions to set aside the commercial loan portfolio in 3Q14 and then to sell the first piece on December 30, 2014.

It also includes a “what if analysis?” as to future mark-downs of the remaining portfolio for sale

Bancorp Sale of Loan Portfolio

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.