Summary:  As with others in the same position, I am seduced by my quasi-outside status as a frequent visitor to Europe to write down some observations.  In this case, it is about Europe in this economic crisis and the news is this:  Not all that bad.  True, it is the worst economic situation in almost two generations but the special European “system” has demonstrated admirable resilience.  People are losing their jobs and shops are closing but the safety net has held and governments have responded with alacrity (such as it is) without the ideological war cries about socialism that are rampant in the US.  Besides, the espresso remains delicious, as does the panna cotta.

The Details.

Over the last two years I have spent about half that time (off and on) in Europe.  While I did not play the fiddle while all around me was burning, Rome itself was not on fire nor was it being sacked (but then I was not in Rome, so enough of that allusion).  Upon each return to Europe from the economic wreckage and political name-calling and Chicken Little screaming, I was mildly amazed at how well the European economy has managed this terrible crisis.

Weak Dollar, Resilient Companies. True, the weak dollar has severely crimped revenues (and jobs) of many export-based industries—the engine of the EU economy—but companies have responded by seeking other markets or simply riding out the storm.  Most of these companies are small enough and experienced enough that resilience seems to be inherent.

Fast Government Intervention. In addition, the crisis started as a credit crunch.  Without much dithering, the governments responded, usually with nationalization.  That worked.  Few cries of “socialism” were heard because people knew, and accepted, what had to be done.  Moreover, not all of the national economies included banks in serious trouble;  financial regulators in several countries had spotted the looming crisis several years before, forcing banks to suffer lesser pain then so as to avoid fatal illness later.

The Safety Net Held. EU governments invest a lot of money in their forms of social security, unemployment and—get ready—health care.  And they work.  True, public debt is high and getting higher—but, contrary to the claims of monetarists that such debt crowds out (presumably more efficient) private debt, it has not happened.

Don’t get us wrong:  We are neither for nor against public sector spending.  We’re just following the money.  Viewed that way, the safety net expenditures operate as a kind of ongoing stimulus package.  After all, people receiving this money have to spend it somewhere and they do:  on rent, food, even entertainment (today in the phone store I listened to a welfare recipient rant about problems with his government-subsidized mobile phone).  The larger public sector employment also operates as a kind of ongoing stimulus program, in much the same way.  Public employees—notoriously difficult to fire—nonetheless earn (at least some of) their money by making the trains run on time and, like welfare recipients, they spend what they earn from the taxpayers.

The same can be said of the long vacations enjoyed by most Europeans.  Five to six weeks of time off means higher, not lower, expenditures.  True, the money “bleeds” out of, say, Italy to, for example, Switzerland but it is still money spent.  GDP measurements do not differentiate among types of expenditures—just that things are made and spent.  Thus, vacation expenditures contribute to GDP.

Macro Level Productivity. Whatever the ideological knee-jerking that occurs in reference to nationalized companies, a little bit of analysis shows that they fare pretty well by all measurements—ROI, return to shareholders.  The Economist pointed out that most of the largest corporations in the world are in fact government controlled.  Moreover, European employees perform pretty well by most measurements of productivity.  Long vacations, high wages and lots of rich food do not seem to damage their output.

So What?

One can draw many conclusions from these observations (and we haven’t even gotten to the panna cotta).  We think there are many opportunities for US companies in the EU and vice versa (hey, we’re not here just for the espresso and good food).

Part Deux to come . . .

James C. Roberts III ( is the Managing Partner of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group.  He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office for Global Capital.  Mr. Roberts speaks English and French.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.

Global Capital ( counsels domestic and international clients on legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.


Summary:  The New York Times today reported yet another investment in online games, this time with an interesting structural twist. Digital Sky Technologies, from Russia, made yet another investment in the online world, after its $200 million investment earlier this year in Facebook.  They are leading a group that will invest $180 million in Zynga, purveyor of wildly popular Facebook games like Mafia Wars.  (Venture investors had already invested about $39 million in Zynga.)  This deal follows EA’s acquisition of Zynga’s competitor, Playfish, for $300 million.

Most interesting is the deal structure.  While it is similar to the deal cut with Facebook, it vastly differs from the usual venture investment.  DST bought common stock from employees and, in spite of the size of its investment, did not request a seat on the board.  In addition, we see the virtual micropayment model as something that could be applied in online “rental” of digital content—itself a potentially large market.  Once users get accustomed to paying for virtual tools, they may be willing to pay for digital content.

The Details.

Digital Sky Technologies, a Russian investment company known for its patience with its investments, has done it again.  After stunning the world with its investment in Facebook in the middle of 2009, DST has just announced that it will lead an investment team that will invest $180 million in Zynga, a recent startup that has seen explosive revenue growth from its online games such as Farmville and Mafia Wars.  Marc Andreesen’s fund, Andreesen Horowitz, and Tiger Global are part of that team.

The Deal Itself. What struck us was the deal structure.  Normally, venture investors receive preferred stock that comes with substantial controls on the future of the company.  DST plays by different rules.  They buy common and preferred stock.  Moreover, they are buying Zynga’s common stock from existing employees.  And, they have chosen not to take a seat on the board.

Such investors usually expect a return—either through an IPO or a sale of the company—in a relatively short period.  Evidently, DST differs;  they are said to be patient with their investments.  Given that DST does not have any limited partners with their own short-term needs for returns, it looks like a good move.

So What?

It looks like a prescient move by DST.  Zynga’s annual revenues were reported at $250 million, coming from the online game players purchasing virtual products with real money.  This model has been astoundingly successful elsewhere in the world, most notably China and other parts of Asia.  People playing these games seem willing to fork out a few bucks here and there to buy a virtual tractor or seeds for their online garden.  A few dollars here , a few dollars there and pretty soon you are talking real money.  $250 million and growing.

We also like Zynga’s space.  The model for these types of games has been around for a long time:  Think Sim City.  So also has the virtual economy, fueled by micropayments for virtual goods:  Think SecondLife.  The virtual micropayment model has proven to be a durable and sensible model in China for quite some time.

Sure, such games are subject to potentially fickle behavior of online users.  If Facebook loses its “cool” factor, the decline in online usage could hit Zynga.  No doubt user growth will taper off with Facebook (what is it now?  In excess of 360 million?) but it will take awhile for the user base to decline in any significant way.  Plus, those users might become accustomed to such micropayments, which behavior could then translate to increased revenue for digital content providers.  Hello, newspapers and magazines!

James C. Roberts III