{audio:0:00:00} Chong, maybe a good place to start would be to take a step back and just provide some context as to how you’ve been looking at this shift to free-to-play games?

{audio:0:00:12} What’s really interesting about the shift to free-to-play is the explosive growth and adoption of this business model. The reason it’s super interesting is because, if you were to go on Reddit or any gaming forum and you hear this group of people talking about free-to-play, it almost sounds as if it’s a negative thing. But in reality, the data and the numbers don’t lie and the majority of products that are now coming out from the gaming side, particularly for mobile – and you are now seeing a lot more of this on HD and PC products as well – is that there is some form of microtransaction or free-to-play business model, built in.

{audio:0:01:02} If you take a look back at the introduction of free-to-play or microtransaction based products, to where it’s at now, gaming is taking up anywhere from 60% to almost 70% of total revenue in the app stores today, whether it’s iOS or Android. That is eclipsing social media, lifestyle, entertainment and all these different categories. The data doesn’t lie. It just shows that, while there might be a vocal minority complaining about the woes of free-to-play, users have adopted it because there’s a key distinction. Unlike standard boxed products or any consumer products, free-to-play allows you to download and engage with that content, with no upfront commitment. It’s totally up to you to decide whether you want to stick with it or not and whether you want to provide that product with a revenue. I think that opened it up, which allowed for so many different people to come in and become gamers. To me, that’s really the key distinction that I see.

{audio:0:02:11} How would you describe the differences in the monetization features, between a mobile and PC free-to-play game?

{audio:0:02:22} If you look at a traditional PC or HD product, there is a set price point. You go to your local retailer, you pay your £60 and you have an expectation of what that experience is going to be, for your platform. While there’s a variety of different vehicles to showcase the product before you buy it, through various trailers, marketing assets, in addition to short demos, if it’s available, the consumer doesn’t really know what they’re getting, until they actually make that purchase. Assuming a purchase has been made, over time, the studio, usually on a quarterly basis, will release additional, downloadable content, what we call DLC, to supplement that initial purchase of the product. That allows that particular game to have added revenue streams and continue the longevity of that product.

{audio:0:03:24} For free-to-play products, because of the inherent nature of being free to download, free to acquire, their revenue model is completely nuanced, is very different and the velocity of that new content is changing at a rapid pace, with daily, weekly and monthly injections of new content, promos and events. By doing all of that, it affords the studios, within the mobile free-to-play or PC free-to-play side, to have more shots on goal, to potentially get users to convert, to generate revenue.

{audio:0:04:01} If you compare boxed products, on one side, with free-to-play products, on the other, both in terms of longevity and the revenue generated, the free-to-play side, whether it’s PC or mobile, it wins. The data shows that, across the board. I think that’s the key difference, in monetization.

{audio:0:04:24} How have you seen the development process evolve, for free-to-play games, versus the boxed products?

{audio:0:04:33} For boxed products or standard, traditional development, a lot of that was really driven through vision and creative aspirations. You have your producers, creative directors and these creative think tanks, coming up with ideas. They would take that creative vision and it gets distilled into all these different facets that build the production pipeline. At the end of the day, they’re focused more on providing the user with a very engaging experience. Typically, in your living room, on your big screen TV, they want that immersion. They’re almost asking you to play a movie or get so involved in creating that journey. A lot of effort in the development process is built on that total immersion.

{audio:0:05:28} For free-to-play games, whether it’s PC or mobile, it’s a little different. The appetite and the duration of play is different. If I were to take a look at a mobile product, you’re not on your mobile device for two, three, four hours at a time, playing some really deep, immersive product. You’re probably playing for five, 10, 15 minutes at a time. You can’t really get super immersed when you’re playing these snack-sized games. That’s where the development process has to change, because now, mentally, as well as team composition, you have to figure out how to get players to come back to a free-to-play product and play multiple sessions, throughout the day, while also inserting ways that I can get these users to, potentially, monetize my product.

{audio:0:06:27} On the free-to-play development side, now you have consumer psychologists, you have product managers, you have lifecycle managers that are part of the development team because you have to think through all these different ways to potentially develop value within the product that you’re making, because you’re giving it away for free. To me, that’s a really key distinction because if you look at the traditional team, versus the free-to-play team, the kind of people, the kind of stakeholders that are surrounding the free-to-play side are quite different, because of the needs of that product.

{audio:0:07:05} So the studio, effectively, becomes much closer to the players, on an ongoing basis, versus the old boxed games?

{audio:0:07:16} Yes, to some degree. Let’s take an example of a big franchise, like Call of Duty or Battlefield, on the boxed product side, they do do a good job of trying to cultivate their community, because they have the big brands and IPs, they try to create that dialogue with their players, on an ongoing basis. But if you look at the touchpoints, it’s probably infrequent. Going back to what we were talking about earlier, if a boxed product comes out and there’s this fervor of activity in the first month, there will probably be a lot of ongoing engagement between the publisher and the community. But that then dies down until three months later, they drop their first downloadable content and then you have a spike in engagement and you see that pattern repeating.

{audio:0:08:08} For free-to-play products, you’re engaging all the time on a daily, weekly, monthly basis. You’re absolutely right in your inference of, are they closer to their community. To some degree, yes, because you have to be talking to your players on a much more frequent cadence, that you probably are closer to your community, you probably are listening to them a lot more and you have to be involved so that you know what’s happening and how to pivot your product.

{audio:0:08:36} Do you think we’re going to see an explosion of free-to-play content with maybe less capex or less capital investment, up front, to develop the game and then more iteration on ongoing development, when you get feedback from the customer? Or is there still this high capex up front, because the games are more complex? How do you look at the unit economics, from the developer side, in terms of the cost up front and the ongoing costs of producing these free-to-play games?

{audio:0:09:04} What’s really interesting is that the development of free-to-play products is not quite there, in terms of rivalling your HD, PC counterparts, but it’s not like it was five to 10 years ago. Mobile free-to-play products command a large team, in order to be successful, and that up front capital investment that you’re describing, which is pretty normal in traditional gaming, is now also happening on the mobile free-to-play side, because you only get a few shots on goal, when you take a free-to-play product and you put it out there. That’s unlike a traditional product where, let’s say, you’ve made a huge capital investment, you can project out what the sell-through is going to be at a standard retailer chain, because you have that historical data. Without consumers really knowing what that product is, you can say, we’re going to price this at £60 and it’s going to go out; you can do that.

{audio:0:10:07} With free-to-play, you’re making all this investment up front and then when you launch the product, you don’t get revenue right away; it’s a free product. The recoup windows are completely different. In terms of capital investment, I don’t think that’s going to change that much. If anything, I think bigger and smarter publishers are going to focus a lot more on up front capital investment but then set up the pipeline so that they have a better chance of success, so they can have a product, in the long run, that won’t be dead in the water after one year. On the free-to-play side, they want products that can last two, three, five years because that’s really how you recoup costs. If you build a product once and it’s able to sustain revenue for five years, the ROI on that is tremendous, versus a boxed product, like Call of Duty, where you have to come out with a new Call of Duty every single year, to remain relevant in the marketplace. A free-to-play product can launch once, constantly iterate on it, with reduced development costs, but the amount of revenue acquisition is going to be constantly going up. That’s a key difference, as well.

{audio:0:11:20} Do you think the large, traditional publishers have an advantage in producing these free-to-play games, versus indie studios, for example?

{audio:0:11:33} Let’s put them at the opposite ends of the spectrum. If we have big, large, traditional publishers, such as Activision Blizzard, the EAs of the world, the Netmarbles, the Tencents and then you have indie developers over here, I would say the advantage actually goes to mobile-first publishers; publishers who have got into the gaming industry, but they’ve only focused on mobile, as their first, primary platform. The names that come to mind are the Kabams, the Zyngas, the Scopelys, the Netmarbles. These are the companies that came out and said, hey, we are going to dominate within the mobile space. Because they did that, they don’t have any of this legacy or baggage that comes with having been in the traditional side, developing those pipelines for HD or PC.

{audio:0:12:26} The way that they think about products and the way they calibrate and adjust and develop content, is very different. I think they have the advantage. Indie developers have somewhat of an advantage, as well. Their cost centers are not the same as a traditional publisher. They have a propensity to, potentially, come up with really successful hits, with very low cost, so their ROI matrix will be a lot higher. That said, the traditional publishers are catching up, either through their own investment, over time, through strategic partnerships or through M&A. They have been able to, essentially, acquire knowledge to make up that delta. I think, in the future, the mobile-first free-to-play or the PC-first free-to-play studios will continue to evolve their skill set, but the traditional publishers are catching up really quickly.

{audio:0:13:22} Can you just elaborate on how you see the advantage of someone like Zynga, for example, versus the traditional publishers, in mobile?

{audio:0:13:32} Because of the nature of free-to-play products, you are giving your product away for free. In order to create these opportunities, so that you can, essentially, merchandise and, potentially, get your users to spend some revenue in your game, you have to have a really, really complex set of tools and data, in order to inform your opinions. Zynga has done a really good job, over the years, really building their tech stack and understanding all the behavioral patterns that are happening, within their product. Why are users engaging with this game mode? What are users buying in our game, with this currency or that currency? Why do users actually leave our product? When do they come back? They have all this telemetry that they’ve set up, over the years, across all their products, so they know when to engage, when to try to re-engage, when to throw an offer up.

{audio:0:14:38} But traditional products, because they have this idea of a £60 price point, they’re not thinking about that. They’re not thinking about all the different behavioral points that I need to track, within their product. To me, mobile-first studios or free-to-play first studios, have to have all this telemetry built in, in advance, so that they can have those opportunities. Data, at this point, is so powerful, because it really tells you what your users are doing. Even if they’re saying one thing, what they’re doing, in-game, might be completely different. That’s the key and that’s where I feel traditional publishers are not as savvy, because they haven’t had the need to invest into those types of things, at that granular level. That’s changing, as far as I can tell, but to me, that’s a really big blind spot for them, right now.

{audio:0:15:33} How do you look at the value of the intellectual property of Call of Duty, for example, and their recent launch on mobile?

{audio:0:15:43} IP is so important, for a variety of different reasons. But namely, if you have an IP as big as Call of Duty, there’s brand recognition and it allows you to reduce the amount of marketing costs, when it comes to user acquisition. Acquiring users within the free-to-play space is super competitive because there’s a lot of players within the space, trying to vie for the same eyeballs and attention. When you have a well-recognized IP that you can attach to your product, it reduces some of those costs and your organic downloads increase as well. The overall net effect is very positive, if you have an IP associated with it which is why, if you take a look at the marketplace right now, you’re see a lot of really interesting collaborations. You’re seeing traditional HD products, the Call of Dutys, the PUBGs – and even the bigger CPG companies, the consumer product companies, like Disney – they’re all attaching their label to all these different free-to-play products because they see the potential of growth there.

{audio:0:17:05} On this point of acquiring customers and the unit economics of a customer, online, how have you seen that customer acquisition cost evolve, on mobile, with the increase of free-to-play games?

{audio:0:17:21} What’s really interesting is, the cost of acquiring a user – dependent on the genre of games that you are targeting and if it is a casual game, a shooter or strategy game – the costs have been going up higher and higher. Going back to your previous question around the importance of IP, this is another reason why I think we’re seeing a lot more IPs from across the board, whether it’s gaming or other avenues of entertainment. The cost to acquire a player within the free-to-play industry is going up every single year. I think year over year, for the last five years, it has not dipped once and it’s consistently on an upwards trajectory.

{audio:0:18:12} Various studios and marketers are trying to find ways to reduce those costs. One of those strategies is to build a product around an existing IP, to potentially bring those costs down.

{audio:0:18:25} What type of IP do you think works on mobile? Clearly, COD has seen explosive growth and it took off, to some extent. Is there a certain type of game or IP that you think suits or doesn’t suit mobile?

{audio:0:18:40} It’s interesting that you say that because if you had asked me that question five years ago, I would have said that shooters was probably not a thing on mobile because traditional gamers, who are probably in their forties and fifties now, they grew up with controllers in their hands or they grew up with keyboard mouse. When you tell them to play a very cognitive, intensive product, like a shooter or a real-time strategy game, they would say there was no way they could play that on some touch device; it doesn’t make any sense.

{audio:0:19:16} Then you fast forward to where we are today and a whole generation of gamers have come out where their first gaming device was not a console or a PC; it was their smartphone. They’re dexterity on using touch glass, as a control, is super common to them. To answer your question, I would say all genres within the gaming field are open to potential adoption on mobile now. Whether you have racing games, shooting games, strategy games, platformers, I think everything goes now, because there’s a whole generation of gamers, young and old, that are so used to playing on a touch device, that the barrier to entry of, I don’t like the user experience on a smartphone, that excuse has gone and the market is proving it. Shooters, in particular, are very twitchy and you need to have fast reaction times and there needs to be some accuracy. Take a look at Free Fire, PUBG mobile, COD: Mobile and look at the download numbers on these games; it is ridiculous. It’s through the roof. So the market has spoken. They are ready and willing to play games like that.

{audio:0:20:36} You’ve also got the impact of cross-play and most games now are, typically, available to play across all different platforms and devices which, I guess, impacts the traction across different platforms?

{audio:0:20:53} I’m not super bullish yet, on mass platform cross-play. I think it’s important and, I think, sometime in the near future we are going to be able to get the products. Fortnite really led the way, when it came to cross-play, having PC, console and mobile players being able to play against each other. But at least from my own knowledge and my own research, I think they’re still segmenting mobile players from PC or console, because of certain advantages, as well as some of the gameplay mechanics that they had to water down. But is cross-platform play important? Absolutely. If you have a product on every platform available, whether you can really play together or not, the branding and the digital footprint of that product just becomes that much wider, which allows for more mindshare of players, which will then also help to reduce things like marketing and acquisition costs.

{audio:0:21:55} Surely, if you are a publisher or a developer, you’d want your game on as many platforms as possible, if you’re giving them away for free, to get scale, to then upsell the add-ons, to drive revenue?

{audio:0:22:08} 100%. For every major publisher – I would bet the farm on it – there is some division, where they’re focusing on, how do we get our games on every platform, in the marketplace today? With the way that cloud computing is going, the way that we’re able to distribute products, I do see a world where it doesn’t matter what device you’re on, anymore. All the compute is going to be done within the cloud; it’s not going to be based on the hardware that you might have. I should be able to play a 60 frame per second, very high-fidelity shooter, on my mobile device and then when I get to my home, I’m able to go and play on my PC, even if that PC is 10 years old. That reality is coming.

{audio:0:23:00} The forward-thinking publishers are already putting a lot of effort into doing that, so that hardware restrictions are not going to be the thing that will prevent them from playing their gaming IP. You’re 100% right in the sense that cross-platform play is super important and I see more of that happening in the near future.

{audio:0:23:26} How have you seen the difference in monetization of free-to-play games on mobile, versus PC, for example? Maybe looking at average revenue per user, per active user per month or customer acquisition cost or just the engagement of a user.

{audio:0:23:53} Are we talking about from a traditional PC product versus a free-to-play product?

{audio:0:23:59} We can start there, but I’m also curious as to if there is any difference across both mobile free-to-play and PC free-to-play, in terms of the engagement and monetization.

{audio:0:24:11} I would say, depending on which product it is, mobile free-to-play products, mid-core products, such as strategy games and shooters, the ARPMAUs on that are pretty healthy. If you take a look at ARPU, average revenue per paying user, they can be very healthy. We’re talking upwards of $50 per paying user, if not more. Then on the PC side, for the successful free-to-play products that are out there, the numbers would, I think, be similar; maybe at a slightly lower scale, but I would think they would be similar.

{audio:0:24:52} If you take a look at the top-grossing products in the marketplace, for both PC platform and mobile platform, consistently, the same products are on the top-grossing charts, year over year over year. They’re generating upwards of a billion dollars a year, on each of their products. The monetization, the cadence of releases, the velocity of change, for free-to-play, regardless of platform, is very similar. But I would say, PC skews a little bit higher, in terms of ARPMAU and retention because, again, it’s usually a more immersive experience. But for mobile, it’s very healthy. When you can get a mobile product that is snack sized, in terms of engagement and your retention is relatively short, for them to be able to generate upwards of a billion dollars, in a single year, that just goes to show the power of free-to-play.

{audio:0:25:52} If you take a step back and look at who captures the margin from the industry, typically, it tends to be the content owners. As you said, the top-grossing games tend to be the same year on year and given the cost of developing these games and the ongoing costs of maintaining them, how do you see the market share between publishers changing? Can we see some new studios or games dislodge those big CODs or Fortnites, going forward?

{audio:0:26:47} The top-grossing charts remain pretty stagnant, for years. But what’s interesting, to the latter part of your question, can new entrants and new players come in and knock some of these incumbents off their top slot? Absolutely. Let’s say, for example, on the Match 3 gaming side, the name everyone knows is King, with their Candy Crush franchise. For years, they were at the top of the list. Consistent and quality products, that are able to generate revenue. Then, lo and behold, this company, called Playrix, came out of nowhere, took the Match 3 formula and added some interesting twists to that formula and now they’re consistently up there, in the top-grossing charts.

{audio:0:27:38} Is there a way for new studios and publishers to come in and, potentially, shake up the market? Absolutely. I think that’s what makes the industry really dynamic. I know, right now, Fortnite and PUBG and COD: Mobile are doing really well but, before them, there wasn’t a single shooter, I think, in the top 50, if not the top 100 grossing, on any of the app stores. If you think about that, we went from having almost zero shooters, to having three shooters – if not more at this point – up in the top-grossing charts. That already shows that there is a level of volatility and there’s a level of disruption, that can happen in the marketplace and I’m really encouraged by that.

{audio:0:28:23} As we were talking about earlier, gamers are now going to expect other more traditional games and genres to, potentially, come to these free-to-play platforms and I can see that list getting shaken up again.

{audio:0:28:38} How do you look at the IP of King, for example?

{audio:0:28:42} So the first part of your question was, in terms of owning that IP and the value of it, I think it’s critical at this point. There will be original IP that will come out, that will potentially shake up the top-grossing charts. But I think IP, especially when it’s coming from somewhere that is already well-recognized, it’s invaluable, at this point. Whether it’s coming from traditional or it was an IP that was originally generated for a free-to-play platform, I think having it is super, super critical, because it allows you to then franchise and break of from that IP, to do other things.

{audio:0:29:24} A really good example of this is, look at what Tencent has done. Back in 2002, Tencent went and bought some share of a company called Riot Games, the guys who made League of Legends. But then, over time, they went out and fully acquired them and so now Riot is part of Tencent. It is no surprise that, after their acquisition, or during the latter part of it, they developed what is, essentially, a League of Legends clone, on mobile, called Honor of Kings. Honor of Kings became one of the top-grossing mobile products on the planet. One can say, sure, they made a new IP, but I think we all know that Honor of Kings is, essentially, a reskin of League of Legends. It just goes to show the power of that IP and being able to leverage it.

{audio:0:30:18} On the same example, Tencent again, they went and bought a studio called Supercell and they were really famous for building games like Hay Day and Clash of Clans. Let’s look at Clash of Clans as an IP. They took that IP, cash cow, a really well-built product and they turned Clash of Clans from what is, essentially, a build and base-building battler, to a straight PvP, mobile-lite product, called Clash Royale, using the same IP, characters, art style and so on. Do I see more and more companies doing that, with IPs that they own? Absolutely. Do I see existing franchises being transformed from what they were originally, into potentially, other genres? Absolutely. We’re going to see more of that in the near future, I guarantee it.

{audio:0:31:12} Although we might have seen the MAUs of King decline, year on year, for the last few years, the value of the IP and the brand recognition and the core user base, still enables the IP to be developed or built on or changed, to keep driving growth, in that segment?

{audio:0:31:37} 100%. If you take a look at King’s portfolio of products, they’ve actually been implementing that strategy. They started off with Candy Crush, then it became Candy Crush Saga and there is another version, called Candy Crush Friends. They’re spinning off, slowly but surely, and having multiple titles in their portfolio, even though it’s the same IP; they’re just adding 10% change here, 10% change there and they’re migrating their enormous player base from one game to another to another. I don’t see them stopping doing that. If anything, I feel as if they are going to stretch even more horizontally and maybe even explore other avenues, outside of Match 3.

{audio:0:32:23} Just going back to the question of IP and who is going to capture the long-term profit pool in the industry. It seems as if, even though there is going to be an explosion of content and, arguably, the barriers to entry of building and launching a free-to-play game is quite low now, but the power still sits with the large publishers, with the IP. Do you think they are going to keep maintaining that? How do you look at the risks of them being dislodged?

{audio:0:33:01} It’s a really complex question. On the one side, when you can make a very interesting product with original IP, there are obviously huge advantages there. You might come up with something original, you’re not tied to anything and then you’ve developed it and you wholly own it. Going back to Supercell, look at those guys; look at that studio. Dave built original IP across the board it is considered one of the best products on the planet, when it comes to free-to-play. We have yet to see, I would say, a traditional IP coming in and really disrupting the market. The one that I would probably point to, that’s a traditional IP, is Pokémon. Pokémon, traditional IP, has been around the gaming industry since handhelds were created. That game came out and it really blew the lid off what traditional gaming IP can do. There is something to be said about that.

{audio:0:34:07} COD: Mobile is another really good one. They took the Call of Duty IP and brought it out. I think it’s a balance, to be honest. I don’t think it’s a, one size fits all or one winner take all market. Fresh, interesting and original IP can compete just as well with existing IP and there’s pros and cons on both sides. For the existing IP, the con could be, there’s a certain expectation. If you’re used to playing a particular product, on the traditional HD side, and there’s a certain expectation of what you want that game to be, but you can’t get that one to one conversion on mobile, are you going to be disappointed, even if it’s for free? Possibly. There’s a lot of juggling that needs to happen but, at the end of the day, I think both sides have an opportunity to take market share.

{audio:0:35:01} Just looking at the unit economics from developers, it does seem very difficult, as it should be, for a new game to be a big hit. It’s very, very difficult.

{audio:0:35:14} 100%. Let’s say you’re a smaller, indie publisher and you came up with some amazing IP. You have beautiful art, you have fun game mechanics, you have a really interesting core loop, all those things that you are supposed to do, to make a game fun and let’s say you nailed it. But then the challenge comes from the business aspect, as well, on actually publishing the product. How are you doing marketing? What are your marketing assets? What are the channels you can get involved with? Are you doing PR? Who is doing your user acquisition strategy? Do you have an advertising strategy, for branding purposes, but do you also have other vehicles to monetize your product? These are all the things that larger publishers, with huge liquidity, are able to throw at the various products that they have, versus an indie publisher or a small to mid-cap publisher, who just don’t have that type of competitive power or liquidity in their marketing budget, to compete.

{audio:0:36:21} More often than not, as we were talking about earlier, around marketing costs, it’s continually going up. Let’s say your marketing budget is $30 million and you’re really trying to put your game out there. But if the timing of your launch runs up against an Activision Blizzard, like when they were launching COD: Mobile and you have a shooter and they have a shooter and their marketing budget is three times yours, who do you think is going to end up getting the market share? Most likely, it’s going to be the publisher. It’s absolutely challenging to be a publisher, in today’s market.

{audio:0:36:58} You said earlier that getting into free-to-play games, potentially publishing it, the barriers of entry have been lowered. You’re absolutely right. If I’m an indie publisher right now and I have a game that I’ve coded and built out, I can go to Apple, I can go to Amazon, I can go to Google and I can self-publish, no problem; easy. But to actually scale that, is super challenging.

{audio:0:37:22} The barriers to entry are lower but the barriers to success are much higher?

{audio:0:37:27} Exactly; you’ve hit the nail on the head. The barriers to success are that much higher, because the complexity around actually running the business of that product, has become infinitely more complex.

{audio:0:37:41} What are the numbers we’re talking about, in terms of the cost of producing a game, up front, free-to-play and then ongoing, plus marketing?

{audio:0:37:54} Let me just pick a genre, so we can have a baseline to build from. Let’s say we’re building a mid-core product, a 4X game, a strategy game. The cost of developing that product can be anywhere from $3 million to $10 million, potentially. Then the ongoing costs of developing and maintaining, adding new content, marketing, it could easily be that $3 million is going into marketing spend and that’s just in the initial worldwide launch. You have $3 million to spend on your initial launch and then you will have ongoing user acquisition costs, throughout the life of that product. Typically, for a free-to-play product, you have to understand what your return on ad spend is. When is my recoup window and when I am willing to extend that window to? Are we looking at a 180-day turnaround? Are we thinking about a 365-day turnaround, although I think that’s too far to recoup your ad revenue or your ad costs? I don’t think most publishers have the liquidity to handle that.

{audio:0:39:08} It’s all these questions around ongoing support of your product, once it launches. That also becomes a huge financial burden for most indie to small to mid-cap publishers, because most of the revenue that you generate, comes well after you’ve launched the product. If you don’t have that reserve of funds, to float your product, in addition to all of the ongoing overheads, such as staff, content creation, vendors, tools, to support that on an ongoing basis and your recoup window is 180 days out, at the earliest, think about, at scale, how much liquidity you need, just to keep that product alive. That’s why it’s really hard to succeed in free-to-play, because that ongoing investment, unless you are seeing returns come back extremely quickly, it’s very difficult to sustain and weather that storm.

{audio:0:40:07} You almost need $50 million to $100 million up front, to withstand that year, two-year period, of getting to scale, even if you’re lucky? Also, the market can change very quickly.

{audio:0:40:21} That last point is absolutely spot on. If a product takes two years to build out, you don’t know what’s going to happen within those two years. By the time you launch, there might be a product that you had no idea was in market and if they beat you to market and you’re in a similar genre, then what? There’s a lot of unknown risks. There is also calculated risk that you can account for, but that’s part of building products, within this space. There’s a lot of inherent risk going into free-to-play.

{audio:0:40:52} It’s also interesting because if you look at the revenue model, for the big publishers, it shifts from the perceived hits-driven IP, big box releases every two, three, four years, to now more of a free-to-play sustainable model. Because the barriers to success, as we mentioned, are very high, it’s almost as if the big publishers have got the benefit of shifting from an on-prem to a SaaS business model, and recurring business model, whilst also getting a better competitive positioning, versus the long tail? Arguably, the IP is more valuable today, for the big publishers.

{audio:0:41:33} You’re spot on. If you take a look at HD products, traditional products in the marketplace, are you not seeing a lot more microtransactions now, bleeding into their products? Are you not seeing additional content drops that are faster than the traditional quarterly drops? Absolutely. You’re seeing it happen, right before our eyes. Every major publisher is now realizing this and so, again, their velocity, in terms of production, won’t be as fast as mobile, but you’re absolutely right in the fact that products on the traditional side are going to lean heavily into their IPs and they’re just going to add more mechanisms and vehicles to do exactly what you’re describing.

{audio:0:42:17} One of the best examples I can tell you is, look at Grand Theft Auto V, from Take-Two. If you looked at their previous history, before Grand Theft Auto V, they used to release a new Grand Theft Auto, every two to three years. When did Grand Theft Auto V come out? A long time ago, in the traditional gaming sense. Why have they not developed a GTA VI? The reason is, they crafted enough content, within that one game and they’ve been a live service on that product for the better part of a decade now. They’ve been able to generate significant revenues off a product that they have already invested in, years ago. As development costs are going down, and revenue is going up, the publishers are realizing that is the way to do it. That’s how we sustain; that’s how we reduce burn out. This is how we don’t have to constantly be in this rapid hamster wheel, constantly running in cycles. What you just mentioned is exactly what most publishers are aiming to do and I would see that landscape changing, to that model, significantly, in the next five to 10 years. I believe every major publisher will be doing that, for all their major IPs.

{audio:0:43:35} Looking at the difference in the economic model, let’s say you sell a game for $60, every two to three years, versus now you have an ongoing relationship with them and they’re spending every year. What is, typically, the average spend per gamer and the lifetime of that? How do you look at that difference in economics?

{audio:0:43:59} If I’m being super realistic, looking at the way that conversion works, when you buy a $60 product and, let’s say, the new Call of Duty comes out and 10 million units got sold, at $60, you can figure out what the net revenue on that is going to be. But when you have a free-to-play product, at the end of day, using a shooter as an example, you have anywhere from 5% to 12% of your total audience spending revenue in your product. That not 100% of people who bought your boxed product. Significantly different. The main difference is that these consumers or these payers, it’s not a one-time thing. Maybe I’m a payer, and I decide to spend $5 on a package. But then a month from now, I decide to spend $50 and maybe two months after that, I decide to spend another $5. At the end of the lifecycle of this product, maybe my total lifetime value ends up being $300.

{audio:0:45:13} If you then model that against a standard HD product, which came out, you got your $60 from me, it takes another three years for another product to come out and so three years later and four years in total, you have maybe got $120 out of me. But with a free-to-play live service model, across those three years, maybe you get five times that, maybe you get 10 times that. You will find a lot of data points on this. You will find players who have engaged with the product and, on an annual spend, it’s upwards of $10,000, if not $100,000. When you take a look at those kind of numbers, what’s the better advantage? Where do you want to put your development dollars?

{audio:0:45:59} What would you say the median paying customer spends, per year, on one of these AAA IPs?

{audio:0:46:11} If you’re asking me across all people who have installed the product – this is going to vary wildly, by genre – I would say, if we take a mid-core product, the average spend, per user, will be something like close to $2.

{audio:0:46:34} That’s an average of all those 5% to 12% that are paying?

{audio:0:46:39} No; I’m saying that’s for all users.

{audio:0:46:42} What about the actual paying users?

{audio:0:46:45} For paying users, it’s very hard to put a number on it, but the range can be anywhere from $5 all the way up to several hundred dollars or several thousand dollars. If you take a look at a game like MZ, Machine Zone, when they launched their 4X product, I believe they were saying something like their paying users, on average, were spending somewhere upwards of several hundred dollars. If you look at that and compare, that product was built with X amount of revenue or X amount of budget and because they’ve continued that service, on that particular product, for years, all that development cost was recouped and then whatever ongoing overheads that they have, which is a lot more minimal as time goes on, and they’re able to generate even more profit.

{audio:0:47:39} Look at the pure ROI on that, versus the standard HD product and the scale and the time. The scales of the economy are in favor of free-to-play. Regardless of platform, it’s just going to be something that’s going to be proliferated, everywhere.

{audio:0:47:57} I assume that you think that the total lifetime value of all the customers, in free-to-play, is going to be far higher than it would be on a boxed product?

{audio:0:48:08} On a per unit basis, on a per user basis, probably not, because when someone purchases an HD product, you get that exact value. But if you take a look at mobile products, and I’ll use COD: Mobile as an example again, that product has already surpassed over 100 million downloads. If you take the average of that and say, of a 100 million players, the average spend is $2, look at the revenue that you have already generated. $200 million off the 100 million that you’ve been able to generate, on average. To me, like the investment versus the amount of revenue generated, the scales of the economy are so much more in favor of mobile free-to-play.

{audio:0:48:54} But the big thing that I think we’re not talking about is, you have to be successful. You have to have scale. You have to be able to have the download numbers and a retentive model, in order to get to those kind of numbers. Assuming that you can hit that, the ongoing revenue generation is massive. The potential is just massive.

{audio:0:49:13} That’s back to this discussion we had around the fact that the value of the IP of the large publishers is so much higher in this world.

{audio:0:49:22} Yes; because as more and more people are becoming gamers and I’ll speak to latent gamers, for example, people who just don’t have time to sit in their living rooms and play these more immersive games. They’re mums and dads and uncles. You don’t have time to sit in front of your TV in your living room, playing these games, for two to three hours a day. But you want that same IP, that same experience, that same expectation, on a device that you carry around with you, everywhere. As time goes on, recognition, brand equity, the IP is going to be super valuable, which is why we’re going to see more and more often, in the near future, a lot more of these traditional, well-beloved IPs, coming to free-to-play. It’s already happening.

{audio:0:50:16} How do you look at the sports IPs, for the franchises? The EAs, Take-Two's 2K NBA?

{audio:0:50:23} I think EA has probably done the best job, when it comes to free-to-play sports franchises. FIFA, NFL, NBA, they have free-to-play offerings on all three of those sports and they do extremely well. Two or three years ago, Take-Two also released their first NBA product on mobile. Do I see them continuing that trend? Absolutely. In recent years – I think just this last year – there are some new studios that have been created to tackle that side of the business, so that we can get different types of NBA and NFL products that come out. That’s not even talking about other sports products that people don’t really consider until they really look at the market and determine that they are doing really well.

{audio:0:51:23} An example of that would be the studio that created Golf Clash. They created a really entertaining golf game that you play against other players and they’re doing extremely well. I believe Warner Bros acquired them not too long ago. There’s another one now, I think, that’s similar to Golf Clash, but it’s based on tennis. Do I see the sports genre coming into free-to-play and expanding on that model? Absolutely.

{audio:0:51:51} Let’s say you’re running Take-Tw or Activision and this shift to free-to-play has, effectively, made your intellectual property much more valuable. What are you worried about, as a traditional publisher? What would you see as the biggest risk? What would keep you up at night, if you owned some of this IP?

{audio:0:52:20} I would just see it as potential opportunity lost. If you’re a traditional publisher, you’re probably sitting on some great IP. Look at Take-Two, for example. Arguably, Take-Two has some of the greatest gaming IPs on the marketplace. They have Bioshock, they have Civilization, they have X-Com, NBA; they have all these really interesting IPs. But one would argue, why haven’t they leveraged that IP and brought it to free-to-play? Some of those products that I just mentioned, they seem as if they are perfect candidates for the free-to-play market. It makes me wonder why they are not leveraging.

{audio:0:53:08} If I was a CEO of that studio, I would be thinking, how do I leverage my IP, so that I can expand it on as many platforms as possible? That would keep me up at night, because we’re not taking advantage of that opportunity.

{audio:0:53:22} What is the challenge for Take-Two, in this example?

{audio:0:53:26} I can’t speak for that organization, per se, but I think there are a lot of challenges when it comes to perception, the optics and the expertise that is required to do free-to-play. As we talked about earlier, the barriers of entry of getting into free-to-play are really low now. But the barriers to success are super high. If you are a publicly-traded company, like a Take-Two, you’re not just going to experiment your way into free-to-play and, potentially, have failures. You want to be set up for success. That’s a super savvy organization and there are super smart people there; I’m sure they’re trying to figure out and plan for, how do we do that?

{audio:0:54:12} They must be looking into getting expertise. In their acquisition of Social Point, which was a free-to-play studio, I think they are doing what their counterparts in the industry have been doing. You’ve got the Activision Blizzards, you have the EAs of the world, that are literally going and acquiring studios with that expertise. I see Take-Two doing that, as well. I think they’re trying to build up their expertise and then take their IPs and then release it. But their timing, their speed, has been relatively slow.

{audio:0:54:46} How do you think about this nuclear risk of another Fortnite coming along and capturing part of the market?

{audio:0:54:54} It’s a great question but, at the same time, I think it’s kind of exciting. I think when disruption, like that, happens, it might be scary because they are taking a mindshare away from players that might have been playing your product. At the same time, I think it opens up a whole new set of categories that you may not have been thinking about.

{audio:0:55:14} Fortnite is a really great example because PUBG, Fortnite, are really at the forefront of bring Battle Royale as a major genre – one could argue that it was H1Z1, which I think it was, and DayZ – but regardless, they brought it to the forefront and they brought it to mobile. Now everyone is scrambling and they are nervous about this new entrant. At the same time, those traditional studios are thinking, hey, they were able to actually bring a shooter onto a free-to-play platform and it’s working; why don’t we do that? We have IP on that; let’s go do that. I think it’s both nervousness and excitement, at the same time, which is how the industry thrives.

{audio:0:55:59} What’s your explanation as to why Fortnite was such a big success?

{audio:0:56:04} Fortnite’s success is a lesson in serendipity and timing, as well as execution. The Battle Royale game that we know and love today, is not how that game started out. The Battle Royale mode was just a separate game mode. Then what they found, with PUBG, and the proliferation of the popularity of Battle Royale, was that they needed to pivot. This is where I give Epic a lot of credit. They realized where the market was going and they threw everything at the market; everything at the Battle Royale side of it and they built an amazing pipeline. They tapped into pop culture. No other product in the marketplace today, at least in my opinion, is able to blend the ecosystem and the world that they created within Fortnite, in addition to things that are actually happening in the real world. For example, with the dancing emotes, they really started the popularity of that. Being able to do concerts within their world. It’s like the first original IP ecosystem playground, that blends real world with fantasy, within their product. No one else has been able to do it the way that they’ve been doing it, which is why I think it is a phenomenon.

{audio:0:57:30} It’s more than a game now. It’s a place to hang out; it’s a place to watch a concert; it’s a place to socialize with friends. By the way, there’s a Battle Royale game that you can play, as well. To me, that’s why they’ve just blown up. Will we see something like that again? Who knows? I’m really hopeful but I think they captured something in the moment, that no one else has been able to do. Their original IP allowed them to do that. If you’re a Call of Duty, you’re not going to be able to do what they’ve been able to do. Remember when Fortnite came up with Marvel and the whole Avengers with Thanos. If you’re a Call of Duty, how can you have Thanos in the Avengers in your product? You can’t. But Fortnite was able to because they don’t have legacy restrictions. They don’t have brand timeline that they have to follow.

{audio:0:58:20} Again, this becomes a really interesting discussion around value of traditional IP, versus new IP and what you can do.

{audio:0:58:27} It’s almost like a different type of IP. It’s almost as if the IP of Fortnite is to have no IP and have no characters, which is massively counterintuitive.

The Value of Gaming Intellectual Property

Why mobile-first companies like Zynga have an advantage in a free-to-play world

How the traditional publishers can adapt intellectual property for mobile free-to-play

How the barriers to entry are lower but barriers to success higher for free-to-play games

The comparison of Fortnite and PUBG intellectual property versus traditional publishers

How the Chinese work with Western publishers and risks of West losing power in the gaming industry

The Value of Gaming Intellectual Property

Former Senior Director at NCSOFT and Take-Two Interactive Software

inpractise.com/articles/value-of-gaming-ip-ttwo

Why is this interview interesting?

Executive Bio

Chong Ahn

Former Senior Director at NCSOFT and Take-Two Interactive Software

Interview Transcript

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Audio

The Value of Gaming Intellectual Property(July 3, 2020)

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