The Tip.It Times


Issue 199gp

Is There a "For Sale" Sign in the Near Future of Jagex?

Written by and edited by Tip.It

Recently the Wall Street Journal printed an article1 about RuneScape and Jagex. Apparently there's a lot of interest in the company. I'm not surprised.

There seems to be a corporate predator mentality out there in the Real WorldTM, a mentality that looks for new(ish) small(ish) companies with great ideas and successful products, and then buys them up. Generally this results in the company founders going away with very full pockets, the employees being absorbed into the larger corporation, and all too often the product or service either disappearing or changing beyond recognition. It's a very rare occurrence when an innovative product from a small company gets improved by being acquired by a large corporation.

Why does this happen? Why do small, often privately-owned companies sell out to the big boys? From what I've seen, there are several reasons. The primary one is money. Sometimes selling a large stake in one's company is the only way to raise the money to expand the company, develop new products, or meet increasing costs. The other main reason is boredom. The founders get bored with running a company producing a mature product – understandable, they're entrepreneurs, developers, they want to make new things, not keep on churning out the same old same old. So they sell the company to someone who can run it and take care of it and use the money to fund a new venture.

Jagex right now is certainly a very successful company. According to the Wall Street Journal: "The game has more than five million active players, 55% of whom are in the U.S. Over 850,000 of RuneScape's users pay $5 a month for access to extra playing levels and better customer support. That suggests more than $50 million in annual subscription revenue for Jagex." Sure sounds successful to me.

Jagex isn't hurting for money. Or at least shouldn't be. All the same, according to the article, a New York company, Insight Venture Partners, held a minority stake in Jagex late last year. Insight Venture Partners is a venture capital and investment company – so they must have provided capital to Jagex in return for their stake in the company. As such, they probably don't have much, if anything, to do with either game development or the day-to-day running of the company. However, even a company with a $50M annual revenue stream can sometimes need a big chunk of change which it can't lay hands on quickly enough from its normal sources. Getting money from a venture capital or investment company is the corporate version of getting a home equity line of credit or second mortgage – you borrow money against the present and future value of your company (or house) to make improvements, expand, fix things, whatever. It makes it easier to do in one session, things that you would otherwise have to do a little at a time (or put off for a long time) if you had to pay for it all upfront with your own money. Adding equipment, upgrading equipment, expanding your workforce, moving to new premises – all those sorts of things take the kind of money that you might just not have on hand.

The article also says that: "Last year, Jagex executives demonstrated the game for Barry Diller, the chief executive of IAC/InterActive Corp." IAC, for those of you who don't read the Wall Street Journal or the Financial Times on a regular basis, is a US-based conglomerate that owns an number of companies doing business on the internet, mostly in e-commerce. They own Ticketmaster, evite, and Ask.com, amongst others. Online games such as RuneScape might be a bit far out of their orbit at the moment, but it is conceivable that they could purchase a MMORPG. As it happens there was no deal.

An alternative to selling out to another company would be for Jagex to go public. Hey, Google did. The founders of Google made a lot of money by going public, and Google has itself become a purchaser, recently buying YouTube.com. However, once one is a publicly traded company rather than a private one, there are all sorts of legal issues that come up. One is also answerable to the shareholders for making a profit. This has lead many a company to change direction in order to keep the shareholders happy. I don't think that Jagex would go public. Nor do I think it's likely that it will be sold. At least not in the short term. As long as the Brothers Gower can remain in game development and have competent people they trust to handle the business side of the business, they'll be happy. Going public might make that difficult.

What they could sell would be the ideas and implementation behind RuneScape. Not the game code, not the story, but the methodology they used to make RuneScape the huge success that it is. I strongly suspect that this, more than the game itself, is what interested IAC. If Jagex can identify what it is about the way the game works that makes 850,000 people cough up $5 every month, then they could be onto something that could very well make them millions. If they could bottle the appeal of RuneScape so that it could be applied to other online products and services, then they'd certainly have something they could sell with impunity.

So, unless the Gower Brothers get bored and want to go off and do something completely different, I think it's highly unlikely that they will either sell Jagex, or turn it into a publicly traded company. And while I'd love to own shares in Runescape, I think that's a most excellent state of affairs. The way things are now, they have complete control over the content of the game and the direction in which the story lines are developed. They would be foolish to give that up for any amount of money.

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1Wingfield, Nick. "The Knights of Networking; Online Fantasy Game RuneScape Has Dull Graphics, but It's Free, Luring Millions to Play, Mingle." Wall Street Journal (Eastern Edition) (5 Oct. 2006): B.1

Do you have any thoughts or comments about what you've just read? Want to discuss this article with your fellow Runescapers? We invite you to discuss the article in this forum topic.


Do you have any thoughts or comments about this week's articles? Want to discuss these articles with your fellow RuneScapers? We invite you to discuss them in this forum topic.


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