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Why Japan’s GREE Overpaid For Mobile Social Gaming Startup OpenFeint

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Over the past year, there’s been an apparent trend taking place of Japanese gaming companies acquiring U.S. social game developers. DeNa bought social gaming company Ngmoco for $400 million last October, adding to an acquisition of mobile social gaming studio GameView in September. A little over a month ago, Japanese mobile gaming company GREE dropped $104 million on OpenFeint, a plug and play mobile social platform that allows developers to create social games on the iOS and Android platforms.

As we’ve written in the past, OpenFeint’s platform includes online game services such as leaderboards, virtual currencies and achievements running in a cloud-based Web environment. The platform first launched on the iPhone and iPad and more recently adding Android game developers to its community. In fact, the company has been growing like gangbusters on the Android platform, adding 215 Android games in the past six months.

But when you take a look at OpenFeint’s financials, the picture is not quite as rosy. In 2010, the startup made $282,500 in revenue and posted a loss of $6.6 million. So, GREE (which makes hundreds of millions in revenue each year), essentially paid nearly 400 times (368 times to be exact) OpenFeint’s yearly revenue for the platform. It’s rare for a company to pay such a high premium for a startup.

Of course, it’s important to note that the strength of the strength of the yen compared to the dollar makes it less expensive for the Japanese company. But still, even with the conversion rate factor, why did GREE overpay by so much for OpenFeint?

We recently spoke with GREE CEO Yoshikazu Tanaka about the reasoning behind the acquisition, and he revealed exactly why the purchase made sense.

New Games

When the announcement of the acquisition was made, GREE established an American entity, GREE International, which was the acquirer of OpenFeint in this transaction. At the time of the acquisition, it was unclear what this entity was for.

But Tanaka tells us that GREE will be launching a number of mobile social games using OpenFeint’s technology, the first of which will be unveiled at some point this summer. He and OpenFeint CEO Jason Citron declined to give specifics about the games but said these games will be targeted towards English-speaking users in the U.S.

Smartphones and International Reach

In February, Tanaka spoke to existing and potential third-party developers in Japan on the future strategy and goals of the company. Two of those goals included reaching 100 miliion users and moving beyond the Japanese gaming market.

Combined, the GREE and OpenFeint gaming ecosystem will reach 100 million users worldwide and Gree gets access to a piece of the American and European mobile social gaming market. And Tanaka confirms to us that the company was primarily interested in OpenFeint because of its strong foundation in the U.S. market.

Gree is planning to load up on engineering talent for OpenFeint, and plans to hire as many as 30 engineers and designers.

Tanaka has also said that ‘smartphones will be the most important platform for GREE’s social games in the future,’ and OpenFeint provides a built-in platform for GREE to create and build social games for iOS and Android.

It’s also worth noting that GREE just partnered with DCM, Tencent and KDDI to launch the A-Fund, to support early-stage Android entrepreneurs. And GREE is partnering with mobile community MIG33 and Tencent.

DeNa and Ngmoco

One of Gree’s biggest competitors in Japan, DeNa, already had a foothold in the U.S. Gree had to act quick after DeNa scooped up U.S. mobile gaming company Ngmoco for a whopping $400 million last October. DeNa and Ngmoco were quick to reveal that it had big plans in store to capture the U.S. gaming market, stating publicly at the time of the acquisition that the two companies would be expanding mobile social gaming platform Mobage to the U.S. with a number of new games.

Fast forward six months or so, and DeNa’s Mobage launch outside of Japan to U.S. and European markets is imminent. Considering that Mobage has tens of millions of users in Japan (and brings in billions), the expectation for Mobage’s reach and success outside of Japan are high.

Clearly, DeNa/Ngmoco is a formidable competitor for GREE in its expansion plans for mobile social gaming and the company had to act quick so that it could churn out its own social gaming network for smartphones.

On the financial front, GREE is keeping a close eye on OpenFeint. Tanaka tells us that the CFO of GREE will now be the CFO of OpenFeint. Reading between the lines, it seems that GREE is stepping in to see how they can turn the company around financially and help it begin to make some meaningful revenue and profits. In fact, Tanaka says that ten GREE execs and staffers will be joining the ranks of OpenFeint to “help execute and facilitate expertise.”

We still don’t know how well Japanese players like GREE or DeNa will do in the U.S. and European gaming markets. And clearly the companies are wagering big bucks on the space. Hopefully these hefty investments pay off.