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:
- 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.)
- The CEO Gabe Leydon has averaged about one interview a year for the past three years. Official press releases are even rarer.
- 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.
Click here for Permalink