GamesBeat

After big hit on iPhone, only 30 percent of Kabam’s revenue comes from Facebook (interview)

Since 2007, Kabam has been creating hardcore social games on Facebook. The social network paid the bills as the company grew to more than 200 employees and helped it raise well over $125 million in venture capital. But Kabam began a determined effort to diversify beyond the social network. They started Kabam.com and also moved to Google+, Steam, Kongregate.com, and the iPhone. Kabam scored big with its first iPhone game, Kingdoms of Camelot: Battle for the North. It has been a top-grossing hit for four months on Apple’s iTunes App Store. And last week, Kabam launched its second iPhone game, Arcane Empires, and it has been featured prominently on the App Store.

Kabam generated more than $100 million in revenues last year, and Kevin Chou, chief executive of the San Francisco company, expects this to grow 50 percent to $150 million this year. Chou’s company has also grown to more than 550 employees, many of them experienced game developers. As Zynga starts to falter in the casual games market, Kabam’s strategy of focusing on hardcore gamers who spend a lot of money on free-to-play social games is looking smart.

We caught up with Chou at the company’s headquarters recently. Here’s an edited transcript of the interview.

GamesBeat: Please bring us up to date on Kabam.

Kevin Chou: I’m looking at how we can make Kabam a little more known in our industry as well as outside. We’ve just been really heads-down in terms of building a business. We’ve grown tremendously. Unlike a lot of other [game] companies, both public and private, we’re really excited about the future. We’re hiring aggressively and expanding our business. We did over $100 million dollars in revenue last year. We’re going to do well north of that this year, well over 50 percent growth.

Unlike a lot of the companies that started on Facebook, we started to invest in a true multiplatform strategy at the beginning of last year. Today, when we take a look at the business, the big thing that I’m excited about is that less than 30 percent of our overall business is from Facebook. We’re growing our business very aggressively. Seventy percent of the overall revenue of the business is coming from Kabam.com, other gaming portals, other social networking sites, and, of course, mobile. We’ve been No. 1, No. 2, No. 3 in iOS for the last 120 days now, I believe. That is in the top-grossing list, which we think is the most meaningful. That’s in the U.S. market. Worldwide, it has been even better. We’ve been No. 1 in 26 countries.

GamesBeat: That’s just one game?

Chou: Yeah, that’s basically the sequel to Kingdoms of Camelot on Facebook. Our iOS title is Kingdoms of Camelot: Battle for the North.

GamesBeat: Has it come to Android yet?

Chou: Not yet. We’re going to be doing a worldwide simultaneous launch of our next strategy product, called Arcane Empires. It’ll be simultaneously launched on iOS and Android. We’re pretty excited. We started in mobile a little bit later than some of the pure mobile gaming companies. But when we look at the competitive field today, it’s not that many companies. TinyCo is talking about this a little bit. But most companies aren’t able to launch simultaneously on both platforms. There’s a lot of benefit that comes from that. Obviously, both Google and Apple, but especially Google, feel excited about getting content at the same time. We’re doing a lot of exciting partnerships and promotions around the Android product. And of course, making it simultaneously available on iOS as well.

GamesBeat: Is this a similar game?

Chou: It’s a pretty similar game. It’s really our first time making a more casual version of our strategy game. On mobile we do see this humongous new audience coming on and playing games for the first time. It’s a little bit like what we saw on Facebook three years ago. The game mechanics are very core to what we still do at Kabam. In terms of the theme and the narrative, it’s aimed at a different type of player, someone who isn’t into medieval fantasy. It’s kind of a steampunk, highly saturated art style, set on a series of islands. There’s an evil overlord that’s trying to take over the land.

GamesBeat: You’ve talked about how you can make more money on iOS than you can on Facebook. This is an interesting revelation.

Chou: We are one of the few companies that is seeing significantly better monetization on mobile and tablets than we were seeing on the web. We’re an industry leader from an ARPDAU (average revenue per daily active user), from a monetization standpoint, on the web. Mobile has been just as good or significantly better for us.

GamesBeat: That was because you still have 30 percent of your revenue going to Apple, or 30 percent going to Facebook, but the cost of acquisition is higher on Facebook. And there’s more game players on iOS, and a larger percentage of that audience is playing games on iOS. Is that what that means?

Chou: There’s two things that we’re excited about for iOS. One is the growth of the audience. Between iPhone and iPad and iPod Touch, and the new [rumored] iPad mini, Apple’s growing at an extraordinary rate. It is the most valuable company in history at this point. That’s one aspect. The other aspect that we’re really excited about for mobile is the payments and the fluidity of the payments. I and a lot of other Facebook game developers, we had questions about Facebook Credits when they first rolled out, as far as the fluidity and the liquidity of the marketplace. The way that we create our product and the way we’re able to leverage Apple’s payments through iTunes enables a more frictionless experience. Google has done a tremendous job with Android as well in the last couple of years, to catch up with Apple on monetization. As we launch a product, we’d love to catch up there in the future, as far as iOS versus Android. All of our data are about iOS right now.

GamesBeat: Is that because Apple had a lot more credit cards on file? People were more used to paying that way. I guess Facebook is younger in that respect.

Chou: Yeah, that’s right.

GamesBeat: It’s a counterintuitive kind of math. Because iOS had such a late start compared to Facebook. So it is hard to believe you can make more money on iOS than on Facebook.

Chou: Well, in terms of games, yes. But the nice thing about iTunes is it’s an entertainment audience. They’ve been selling digital transactions for music and videos long before they started in-app purchases for games. Kabam built a lot of really great infrastructure technology and pricing systems. It allows us to understand how iTunes customers are different from Facebook customers. We did a lot of testing in the early days. That was a big part of us eventually becoming the number one application. Not just in games, the No. 1 application in all of iOS. It’s that understanding of testing different audiences, testing different pricing systems, testing different ways that we can bring virtual goods to market.

GamesBeat: Does it mean that more hardcore gamers use iOS than Facebook?

Chou: Yeah, we absolutely believe that. Today, if you look at the power of an iPad or the coming iPhone 5, the processing power, the graphics resolution, the true LTE for iPhone 5 — that device is as good of a computing device as a console in some cases. We’re really excited about that ability to bring a high-fidelity, fast-processing power experience to core gaming.

GamesBeat: Will this new game also go on Facebook and the other platforms too?

Chou: No. It’ll just be mobile.

GamesBeat: Are you doing a lot of parallel efforts here, or are you doing more mobile-first at this point?

Chou: We’re trying a lot of things. We certainly have a very large pipeline of games in development right now, some of which are going to be web-first, and then we expect to bring them to tablet and mobile. Some are going to be mobile-first, and then we may try to bring them to the web. We’re still experimenting with that. We’re more and more excited about a mobile-centric world.

GamesBeat: This year, have you had a big Facebook game launch?

Chou: We have not.

GamesBeat: Are you taking more time on some of these? What’s going on there? Is there a different cycle to that?

Chou: When we evaluate platforms for launch, one of the things that excites us is when partners, like Google or Apple or Amazon, are willing to work with us to make a new product launch successful. We’ve been talking to Facebook. We have had new product launches, but we haven’t brought them to Facebook yet. Realm of the Mad God is a good example of that, where we’ve been growing that game really nicely across Steam and Kongregate and Kabam.com, many platforms that are willing to give us promotion for that game. They’re investing in the partnership.

We look at Facebook, and we want to eventually bring these games to Facebook, but we want to make sure that we’re prioritizing based on how excited a partner is to work with us, and how excited we think that audience is about the content we’re bringing.

GamesBeat: Is there a mismatch there as far as their audience? Is that a reason they’re not doing that? Or do they just not do that for most…?

Chou: Facebook just historically has not done that. That’s always been a challenge.

GamesBeat: So the equivalent of featuring a game….

Chou: Exactly.

GamesBeat: If there’s one version of a game, what becomes the primary platform now? Kabam.com?

Chou: Kabam.com is certainly important for us. It’s a big part of our business now. But I would say we have a multitude of partners. Facebook is still a very important partner for us. We’re investing in that platform. Steam has become a really important partner for us. Kongregate and GameStop are very important partners for us. There are several other partners we work with. But we truly think of our games as multiplatform. Not just as Facebook and the web, through browsers, but now through any Internet-connected device.

GamesBeat: Are you moving into a 3D game at some point soon?

Chou: We’re very excited about 3D. We’ll have an upcoming product launch that I can’t talk about yet. But we’re very excited about 3D. We’re also very excited about what we can do with high-fidelity 2D, though, or 2.5D.

GamesBeat: Is that tied to a technology like Flash 11.4 coming out?

Chou: Today we’re investing heavily in Flash, as well as Unity. They both have fantastic 3D support.

GamesBeat: 11.4 is really only starting right now, so it’s got to proliferate a little?

Chou: We suspect Adobe will do pretty well at making it proliferate across the web. It’s really about leading the core gaming space. We want to make sure that our products are No. 1 from a fidelity standpoint, as well as, more importantly, from a gameplay standpoint. What is the level of fidelity required to make the gameplay exciting for the players? You’re going to see us continue to innovate and make some interesting investments.

GamesBeat: What did you think of EA’s Command & Conquer announcement? Is that direct competition?

Chou: After we last talked, they came out with Command & Conquer Tiberium. I think it hasn’t done that well.

GamesBeat: I tried playing it for a while.

Chou: I grew up loving Command & Conquer….

GamesBeat: I couldn’t even understand this new one.

Chou: Exactly! I’m a huge Command & Conquer fan. Red Alert and all the way down. Their first product in the space was not good. It’s a great franchise, but I’m more excited about Kabam’s ability to build a free-to-play strategy game. One of the things that we’re really excited about is, the original Kingdoms of Camelot has just passed $100 million dollars in overall revenue. It’s coming up to its three-year anniversary. We launched in October of 2009. And then the sequel, of course, Battle for the North, which is a mobile-only product, is on its way to surpass that. We’ve been number one in iOS for a very long time, and we’re bringing it to a lot of other platforms on mobile. We’re excited about our ability to create strategy franchises that are starting to come close to some of these franchises that I grew up loving, like Command & Conquer and StarCraft. If you look at all-time strategy game franchises, the original Kingdoms of Camelot would be No. 6 on that list. If we start looking at the sequel and the original…. We’re very excited about our ability to build these franchises.

GamesBeat: Yeah, this new game looked a lot different from what they showed in the trailer. Do you think that if that game is arriving in 2013, that they’ve sort of signaled that this is where the bar is going to be set? They’re shooting for much higher quality this time, whether it’s download or not…. It’s going to be online, and an option for hardcore gamers.

Chou: Especially in the strategy genre, sometime the conversation can get steered too much towards fidelity. The underlying aspects of what makes a strategy game so great are the gameplay mechanics themselves. If you think about movies, there are certain types of movies, action movies, where fidelity and all the special effects are really exciting and a big part of the experience. There are other kinds of movies where you’re really going to watch how well the plot is put together or how the characters are developed. There’s not a lot of splashy special effects and so forth. The same applies to gaming, especially in the strategy genre. Focusing on fidelity misses the point of what a lot of strategy gamers are looking for. It helps, don’t get me wrong, in terms of getting a gamer interested and excited about trying out a game. But at Kabam, we believe in focusing on that gameplay and making that awesome, as well as increasing that level of fidelity as the market becomes more mature. And, more importantly, as these devices can handle it. We’re pretty excited about 3D, but in strategy specifically, we’re not pushing the envelope in terms of fidelity yet. I’m really excited about our first MMORPG game, Realm of the Mad God.

From a fidelity standpoint, it was actually developed as a sort of 8-bit retro-style thing. Our next generation MMORPGs will use that technology, which is so fast, supporting thousands of concurrent players already. On Steam alone, our peak has hit 5,000 simultaneous players on that MMORPG. We’re going to be investing in next-generation fidelity. We’re really going to be pushing fidelity with our MMORPGs. But in terms of fidelity in these genres… We’re very cognizant of making the gameplay awesome first, and making sure the fidelity matches the expectations tied to that type of gameplay.

GamesBeat: What do you think about all the high-profile things that are going wrong right now in the gaming business. Zynga is headed south. OnLive has imploded.

Chou: FunCom just laid off some people…

GamesBeat: Yeah. Star Wars is not going the way they thought. There almost seems to be no haven. But you guys are doing well. I guess there are parts of the game industry that are still in good shape?

Chou: Looking at the overall gaming ecosystem… The pace of change, which is one of the topics that I’m talking about today, is just phenomenal. It’s very exciting for companies that can embrace it. We’re seeing this in the transition to digital music, for video, for companies like Netflix, which I’m a long-time customer of. The changes that happen in those industries move really fast. Looking at the gaming industry today, there are parts of it, like mobile, that are just moving so fast. Social is moving fast as well. Unfortunately, social is moving sort of quickly in the wrong direction… The next generation of consoles is going to be very challenging, from both a hardware sales perspective and software sales. That would be a fun debate to have at that panel. The way that Kabam thinks about it is, we have a very unique business model in free-to-play, which we’re incredibly good at. When EA and a lot of these other companies talk about the digital business, they talk about putting a billion dollars in digital, the free-to-play part of their revenues is still really small. In fact, they don’t even break it out because it’s so small.

GamesBeat: DLC is really the main thing.

Chou: Yeah, it’s the main part of their digital business. We take free-to-play for granted sometimes, but it’s going to be the model for the future. Really, there’s not that many companies who are really good at free-to-play. Certainly the traditional game companies are still learning. That’s an area where Kabam… That’s our bread and butter, our core competency. Designing free-to-play games. Strategy and now MMORPGs. That’s a key part of where gaming is going, the whole industry, is free-to-play. Not just digital, but the free-to-play business model. What we embrace is a true multiplatform approach. I think we’re the only company in the space that has a diversification of platforms the way that we do. No single platform is over 30 percent of our revenue at this point. Our original platform, Facebook, is less than 30 percent already. Each platform that we launch on, with Kabam.com, Steam, Kongregate, iOS, Android, Amazon… We’re really excited with this ability to connect with consumers across a multitude of platforms. That’s something that’s really different. We’re leading the market in how we do that.

GamesBeat: And your object is finding the hardcore gamers on whatever platform they’re on.

Chou: Exactly. Some of these hardcore gamers have played on Facebook. We, as well as a few other companies, have been successful there. We started finding hardcore gamers on iOS when people were still talking about mobile being a more casual experience than Facebook. We’ve proven that wrong as a company. We’re going to do it for Android and tablets going forward. Our focus is that core gamer segment. Core gamers and free-to-play… That segment of gaming is growing very rapidly. Whether you’re talking about casual or DLC or social or other areas, there are some challenges in those other areas.

GamesBeat: Some companies have said that they hadn’t quite figured out mobile yet… Mark Pincus said at our conference that he’s still looking for some kind of triggered event, so they can do something like investing more than a couple million… Maybe invest $10 million in a game and expect to get back a return of $15 million on a consistent basis. Get to 10 million users in 90 days or whatever like they can do on Facebook. So there’s that line of thinking, that something still has to happen to make mobile a real game market. The opposite of that was Naoki Aoyagi at Gree, who was saying that within 18 months, this whole market share battle in mobile is going to be over. Which means that they’re spending all this money right now to try to race into mobile as fast as possible. What do you think of those two positions?

Chou: I have a third view, which is… Consumers are playing games on any internet-connected device. Mobile, over time, is going to be an artificial delineation. More and more people these days have laptops or tablets that are 3G- and 4G-connected. I really think about it as a multiplatform approach to any internet-connected device. If you’re just talking about iOS, yes, the market share… I would probably agree more with Naoki that the market share battle is not going to be five years long. It’ll be two years. I think over the next four years, whether it’s what Ouya is doing in the living room with bringing an open-source Android box in… Or, more importantly, what Apple and Google are doing in the living room. Or what Samsung and some other companies are doing.

The living room is going to be another battleground for free-to-play games. And, of course, the next generation of consoles. My prediction is that the next generation of consoles is going to enable free-to-play. It’s just too big for the console guys to ignore. You’re going to have Google and Apple with smart connected devices that can enable gameplay. The console guys, Microsoft and Sony and Nintendo, battling for the living room as well. And maybe a startup like Ouya doing some exciting stuff. The marketplace continues to evolve. Saying that the battleground is going to be on just the one hill is focusing too much on the battle and not looking at the war. It’s really the transition of gaming from physical retail packaged goods to free-to-play across internet-connected devices. That’s where Kabam is headed as a company.

GamesBeat: As far as the timing goes in these different platforms and how much you invest in each one of them right now… I suppose you don’t quite yet have a universal development platform that gets you everywhere.

Chou: We’re getting to that point. Kabam’s strength is in cross-platform. Not just development but in operations. These games are run as a service now. Once players get to a certain point in the game, unless you’re delivering them new, exciting content that’s really different, they’re going to go elsewhere and find new games to play. It’s not just developing cross-platform. It’s running games on a cross-platform basis. That’s an area where Kabam and our technology is so far ahead of everyone else in the marketplace

GamesBeat: What do you find as far as how many people you need to assign to a game, when it’s in development and after it launches?

Chou: Generally speaking, we assign somewhere between 50 percent to 100 percent more people after a game launches. We have a unique, strong way of having core teams develop the basic gameplay, then we have smaller teams within that team that are developing new content. Plus another team fixing bugs and maintaining the game.

GamesBeat: Is there a number of people on an average project?

Chou: Upwards of 30.

GamesBeat: So it’s not quite getting up towards the triple-A games, where there are 100, 200 people.

Chou: No. On Facebook, as Facebook rapidly matured as a platform, the fidelity of the games increased dramatically, so you had to be able to compete against… You look at The Ville and some of the latest Zynga games, the level of polish and fidelity is just fantastic. On mobile, because of the platforms we’re able to use… Unity we’re really excited about, for example. We’re able to do 3D, we’re able to do a lot of really interesting stuff in a way that we couldn’t do on the web. The mobile development costs are actually lower than the web these days, and the fidelity can be as good, because of some of the technology that we’ve developed as well as what’s available in the marketplace. And, just as important, the computing power of these devices.

GamesBeat: It seems like it might get a little problematic if your teams become 100 people. Mark Pincus did mention that he had more than 100 people on CityVille this spring. That was well after launch.

Chou: Probably similar to Zynga, or any other gaming company really, our team size is pretty variable. When I talk about 30 being on a team, that’s really our largest team, and then we have a lot of smaller teams.

GamesBeat: Even though you are heading towards more fidelity, then, maybe there’s some efficiency here that’s stopping you from going to the full console-like teams?

Chou: I just think consumers aren’t quite looking for that yet. If you think about the tablets, the laptops, the phones, and the people who play these games on them… Developing a console-quality game, the user can’t really enjoy it anyway. It’s not that full 60-inch experience. Epic has done a great job pushing the fidelity with Infinity Blade and so forth. But I think… Don’t get me wrong, I’m a big fan. I think what they have done is incredible. But I don’t really get as much out of it as if I was sitting in the living room. It’s a very different experience from what I’m looking for on my phone. Fidelity is very important, but it’s not about creating the same level of fidelity I can get on my big-screen TV. That’s the wrong approach for a lot of free-to-play gaming companies. Going back to the gameplay… The gameplay is the most important thing. Especially for game companies that are just getting into free-to-play for the first time. Focusing on getting the gameplay right, over fidelity, is going to be the right approach.

GamesBeat: Torsten [Reil] at NaturalMotion, he was saying that he thinks there will be a shift from 2D to 3D. That’s kind of already happening. Their CSR Racing game is evidence of that. It almost seems like an ideal digital company these days might have a foot in 3D, in strategy, and in casual games. Especially something like social or casino games… [big laughs] That might cover all the bases. What’s your thinking about that kind of company?

Chou: Going back to certain types of genres… Fidelity is arguably more important in some than others. Racing is a great one. You talk about some of the great racing games like Gran Turismo, Need for Speed… The fidelity of those games is amazing. That’s part of the experience, and I think CSR did a great job of creating a category-leading racing game. I do think, overall, across all genres, fidelity is becoming more important. I just think a lot of companies, especially guys with triple-A backgrounds, they focus on that to the exclusion of creating a really great game. That’s disappointing.