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Owen Mahoney was bored at the Electronic Entertainment Expo (E3) this year. As the chief financial officer of Nexon, he is immersed in digital gaming — social, mobile, and online — that is much more popular in Asia. More than a decade ago, Nexon pioneered free-to-play downloadable online games in Korea. But there was very little mention of new business models and new ways to play games at E3, from Mahoney’s point of view.
Mahoney helped steer Nexon through an initial public offering that raised $1.2 billion in 2011. His company has doubled down on the massively multiplayer online game market with a majority investment in NCsoft. And it is figuring out how to spread its success in digital games through the rest of the world.
We sat down with Mahoney this week. Here’s an edited transcript of our interview.
GamesBeat: What did you think of E3?
Owen Mahoney: I found less than I hoped that was really interesting. The whole discussion of $399 versus $499 for the consoles is sort of a non-issue. People are making a lot of noise about it, but it doesn’t seem very important to the future of the industry. Whatever mistakes or tactical errors that someone makes — if they are mistakes at all, especially on a pricing decision like that — they can always reverse them later.
What matters to me is, are there a lot of fun games to be played on these new platforms? What do the new platforms provide? I saw very little that I was excited about as a consumer. It felt a lot like it did 10 years ago. We were pushing more pixels as an industry. I don’t find that particularly interesting. When I think about the games that I’m playing and that my kids are playing, it has nothing to do with all that stuff. I see more and more people playing Minecraft on their laptops sitting in front of a turned-off 60” plasma display with a console attached to it. They’re sitting there playing an online role-playing game instead, or a mobile game. I’m not sure everyone’s clued into that. When I think about the convergence that’s happening in platforms right now, I think everything’s going to get turned upside down within a couple of years.
I remember at this point in the last console cycle, there was a lot to talk about from a technology perspective. It wasn’t all about pricing. It was about much more interesting stuff.
GamesBeat: We haven’t seen much about digital gaming from the big folks. Microsoft is defending its used-game policy, but they’re not talking about putting up a whole library of games for you to access, or somehow making use of digital in a way that’s new.
Mahoney: Yeah. [Sony’s] Gaikai and OnLive weren’t a discussion topic this year. We have this perspective at my company, which is informed by the world we live in, which we continue to believe is the future of North America. I don’t envy my former colleagues at EA trying to figure out how to get the consumer to spend $60 on a piece of entertainment software. That’s a hard job. You’re going to be in for tens of millions of dollars.
While all this noise is happening and all these billboards are all over and there’s all this TV advertising, there’s a few companies around the world that are very quietly picking up all the dollar bills lying around the industry.
Did you ever see the movie Moneyball? You remember the scene when all the scouts are spitting and chewing and talking about what they think of various players? Then there are two guys there, Billy Beane and his numbers guy, saying, “No, these are the stats you need to worry about.” It feels like one of those things where there’s a real disconnect in the industry between what matters for consumer fun, what matters for profitability and growth, and then what everybody’s talking about.
Again, I have these conversations sometimes and people say, “My God, I had no idea about your company’s growth and profitability.” Once again, last year we grew 25 percent year-on-year — more than $1 billion U.S. Our operating margin was more than 46 percent. When I was at EA, you couldn’t dream of 46 percent in the thick of a console cycle, much less at the transition. We’re not the only ones. Look at Tencent’s business. Lots of companies in Asia have our model. I’m not talking about casual games that explode and then go away. We’re talking about games that are consistently huge earners. It’s because of online connected synchronous multiplayer and free-to-play.
Another interesting stat comes from NCsoft, the Korean game company. We’re the biggest shareholder there now. Their game Lineage, which came out in 1996 I believe, just hit a new peak in the last month and a half. It’s still growing. That tells you a lot. Even Activision can’t imagine a game that old that’s still growing.
Mahoney: CrossFire’s the number one game in China, or number two at least. Dungeon Fighter, our game, which is also up there, nobody’s heard of it here. It’s interesting. Again, what are we all in business for? We’re in it to make money by delivering fun stuff. It’s a great business. But you have to do both of those things. One defines the other. We want big audiences and to be profitable and grow. Everybody in this room would like that for their company, and a few companies around the world are doing it. Somehow, though, that’s not what we’re talking about as an industry here.
GamesBeat: How do you guys take your success and use it to expand in the west?
Mahoney: We think there’s a huge opportunity that we’re pursuing, certainly over the course of the year through the next E3. We’re taking what we know about free-to-play — which is very hard to do, and very misunderstood in the west — and combining it with great IP, great physics, great graphics, and gameplay that’s popular in the west. We already have some experience of doing this and partnering this way in the east, and we’d like to make those same combinations here.
For example, we have a very close relationship with Valve, which we think is one of the best, if not the best, western developers. We had a viewpoint several years ago as to how to makes Counter-Strike into a free-to-play game. We created Counter-Strike Online. They essentially allowed us to use the assets – the technology, the art – and make a free-to-play game out of it. It worked beautifully. It’s one of our biggest games in Korea and Japan.
We’ve picked up the FIFA Online relationship with Electronic Arts. That game originally was created with another company in Korea, where EA provided the FIFA engine while their other partner provided the front-end and handled free-to-play. The lead developer in that company was actually a former Nexon employee who’s come back to us. He started a company that we’re an investor in. It worked beautifully. Now Nexon is the publisher of that game in Korea. We want to do more of that and do it here as well. There’s a lot of great IP in the west.
The challenge for us is, great developers like Valve and EA and Crytek and so on, with their physics engines and graphics engines and so on, they’ve spent a lot of time and effort and money to develop these great games. That’s a great strength. It beats a lot of what you see in Asia. It’s not that Asia has bad graphics, but they’ve got things that work well in the west, that are very advanced. What we have is the knowledge of free-to-play.
There’s a massive misunderstanding of what free-to-play is. You play a lot of free-to-play games, especially the casual type on Facebook, they’re not free-to-play at all. They’re pay-to-play in the guise of free-to-play. What we’ve learned from experience from more than a decade ago is that if you make it impossible to progress in a game without paying, it’s not a free-to-play game at all. You alienate your users and you lose them over time. You have no longevity in the end. We have 10-year-old games that continue to grow.
Mahoney: There’s a lot of games like that. All the casual games that have that sort of effect, they look incredibly successful right up until the point that it stops. Then they fail badly. We’ve seen this several times in the past. You know the names.
Put it another way — your success in free-to-play, the metrics that really matter, there’s four of them. First, monthly active users, pay rate, and average revenue per paying user per month. You multiply those together to get your revenue marker. It’s easy to do. The fourth metric that matters is your longevity, your average lifetime per user, versus churn. It’s how long a person sticks around.
If you do something that alienates a user — Like, if we’re sitting here and a woman comes and offers us a double espresso and we say thanks, we’re not going to expect to see her back here for another 15 minutes. If she comes back and says, “How about something else? How about something else? You can’t actually sit here unless you’re buying something every four minutes.” They might get a little more money out of us this time, but next time you and I meet, we’re gonna sit somewhere else. A smart restaurant will say, “Hey, bug us if we need anything,” but they’re not going to bother us, so we have a good experience in their restaurant.
That’s how it works in free-to-play games as well. The mistake is — this is weird in our industry — so many game makers have gotten so fixated on monetizing rather than delivering a good game. They’re not confident in their ability to monetize. What we learned, by making that same mistake in Korea 10 years ago, is that you alienate your user base. Once you alienate your user base you have no business to monetize. It helps that we’re not really in the casual games business.
But going back to the example you raised, there’s a perfect history of casual games going like this and then dropping like this. The less you push people to monetize, the more you’re going to get out of them. That’s how it works.
GamesBeat: What are you putting a lot of emphasis on?
Mahoney: The things that matter are the free-to-play model done right — that’s the business we invented. We were the first ones to do it. We stumbled on it, we worked it for a long time, and then other people started doing it, first in the east and then in the west. That’s the best way to monetize games, when done well.
The second thing we’re focused on is immersion. We’ve done casual over the years. I’d say we’re not as good at it as some people. But we find that immersive games, games people play for years on end, are a better business. They’re also more typically the kinds of games that we want to play inside the company. We like immersive games more. Some people call it hardcore. When I think hardcore, I think hard to learn, hard to master. There are games in this industry that I love, but it took me a while to learn them. But when I think of immersive games, I think of easy to learn, hard to master. You immediately start playing and feeling like it’s easy to learn, and it progresses you very quickly in terms of your knowledge of how to play the game. We like to make immersive games, not casual games.
Mahoney: Absolutely. Immersive games are a massive market. What people talk a lot about sometimes is casual games, because there’s a whole new group of gamers who’ve never played games before. My older sister, who’s past 50 now, she plays casual games on her phone. When you get on the subway in Tokyo, you’ll see young men and women playing on their mobile devices. There’s a whole new mass of gamers.
But also, there’s a group of people like you find in Korea, and it’s really changed. You talk to 20-year-old women in Korea and they’ll say, “Yeah, I play a lot of StarCraft. I grew up playing Maple Story. Now I’m playing Sudden Attack.” And they’re really into it. You talk to them about how they’re playing games and they’re serious gamers. They’re not just messing around. In the United States — I thought Jane McGonigal’s book was really good, Reality Is Broken. She talks about something we joke about internally: the rise of the global nerd. What once was nerddom, now people just think of as a synthetic or designed flow experience. It’s why people like to play golf. I like to kiteboard. I get really into it, even if it seems esoteric for a lot of people. We know that’s a massive market. We have 80 million monthly active users around the world.
The third area we’re concentrating on is online synchronous multiplayer. That’s much more fun. Asynchronous is not really interesting from a gaming perspective or as a business.
GamesBeat: As far as acquiring companies goes, the stock market has changed a lot. Your stock price isn’t rising. What is your strategy?
Mahoney: Well, our stock price has been stuck at somewhere between 1,000 and 1,300 for a little less than a year. We went out at 1,300, so we didn’t get the same shellacking as a lot of people, but clearly the public equity markets do not trust that there’s growth in the games business. No matter how much we show it, it seems that public equity investor — If you do a peg chart, and you show growth over PEs, what you find is a flat line. It should go up and to the right, but what you find is a flat line. Most of the industry, except for one or two, are right in that flat.
Zynga is out of it a little bit. They’re actually a little bit higher because their earnings just came apart. Their PE has gone up quickly. Tencent is above it, because they’re really considered a tech company meets a platform meets a search engine meets a messaging app. They’re not really considered a game companies. But game companies around the world are all in that band.
GamesBeat: EA lost its CEO over this stock trading pattern. But they seem to have done the best they could.
Mahoney: I thought that was unfair. It’s hard. But I’d say we’re all in that band. That’s the public domain. What’s interesting is that the private company valuations are many times much, much higher. It creates a conundrum for a company that’s private, that’s growing quickly, that’s been valued over one or two rounds of capital like a private company, and then it looks to a public company to acquire it to get an exit for the venture capital guys, or it looks to go do an IPO.
We were the second-largest IPO in the world in 2011. We were 80 percent of the IPO market in Japan when we went out. We were about a week ahead of Zynga when they went out, and we were bigger than their IPO. We’ve talked to everybody. I can tell you, there’s a big disconnect between what most of the venture capital community is valuing private companies and what almost all public company investors are valuing video companies. At the same time, a lot of the buyers have left the scene.
GamesBeat: Zynga’s not buying anybody anymore.
Mahoney: And guess who else isn’t buying? EA isn’t buying. There’s a few of us left of size, but there’s not a lot of well-capitalized public companies that are ready to step up to the kind of valuations that some people would expect. We’re patient and we’re well-capitalized. If you know your business and you’re not chasing after — if you’re not out to buy revenue in the near term — you can afford to be patient. We’re not a “buy revenue” type of acquirer. We’re a strategic acquirer. Our M&A track record has been all about buying companies that will continue to grow over time and getting the right price.
When we did the Gloops acquisition in Japan, we paid somewhere between five and five and a half times EBITDA. On a forward basis, it was somewhere between four and four and a half times EBITDA. That’s a different valuation than you get from a lot of private companies.
Mahoney: We’re their largest investor now. From a stock price perspective, we’re unhappy because it’s down. The financial side of the house, which is me, doesn’t like that part. But our strategic rationale remains the same as a year ago when we made the investment. They have one of the best IP benches in the world. They’re lead by one of the great creators in the world, T. J. Kim, who’s very active. He has a great team around him.
What we think is that we can really help them with the things we’re good at like free-to-play — how to do it well, how to make it sustainable, how to grow it over time, and how to bring it to international markets. They’ve had some challenges in those areas. They’ve met challenges going over to free-to-play. A lot of their revenue is still in subscriptions. They also have had less success doing international than we have. Our largest market is China, then Japan, then Korea. We have a lot going on in southeast Asia and some in North America and Europe. We’re very broadly based, while they’re still concentrated in Korea. We’re thinking of things where we can bring our strengths and theirs together.
GamesBeat: By the way, your name came up in the “potential EA CEO” sweepstakes.
Mahoney: I wish that would die, because I’m very happy at Nexon. I can’t figure out who says this. Whenever I ask, “Who’d you hear that from,” it’s just, “Well, somebody associated with EA.” It seems like it’s a lot of investment bankers. I don’t know.
GamesBeat: The other thing I wonder, is there anything to learn yet from Kakao and Line. What caught my attention were, say, five or ten Google Play games in the world. These mobile messaging networks are very hot.
Mahoney: I use the networks, and they are nothing new. It’s funny. I use Line all the time. I think the user experience in Line is really good. Everyone uses it in Tokyo. It is very well done. But the question is, as a game platform, how well does it work? The answer is, it works reasonably well, but I wouldn’t want to be in the platform business right now. The big secret of the platform business is that it’s a very tough business. When you think about how much the world has changed in the last 18 months, on any platform you’d think of. The big topics in Japan are Gree and DeNA, plus Android, and Apple. The big topics in Korea: you’ve got Kakao, Android, Apple, and a few others. In North America you have Android and Apple, Facebook, and then this dark horse in the form of Amazon.
A platform is like a bridge across the river. The technology business loves to talk about increasing returns and unfair monopoly — like rents that you can charge because you’ve got a network effects business — things like the fax machine or eBay, where the more people have it, the more everyone else has to have it. But it’s like a bridge over a river. If you have the only bridge over the river, then you’re a price maker. If there are five of them, you’re a price taker. When I think about how fast the topography of platforms has changed, in any territory where we do a lot of business — Japan, Korea, North America — in the last 18 months, it sends shivers down my spine to consider if we ever wanted to be a platform company. It’s not very pleasant to think about.
GamesBeat: The funny thing in the games business with that is that if you were a studio or a game maker, nobody thought you were a good investment. But if you had a platform – say, Activision, with the Skylanders platform – people would say, “Oh, you could own the world! We’re going to invest with you!”
Mahoney: That’s because we’ve all been trained by Microsoft and eBay and fax machines. They used to write about this in the Harvard Business Review. Literally, there was an article 20 years ago that I remember reading, about taxing the path on the way to the customer.
Let’s look at the Android/Apple example. Maybe 13 or 14 months ago, I had lunch in Silicon Valley three different times in the same week with three different venture capital people. You would know them. They’re very senior, very well-connected. They basically said, “My portfolio companies are giving up on Android now until they get their act together on payments. We can’t monetize on this damn platform. You might have a jillion people, but the user experience is so broken when it comes to getting a payment that it’s not worth it.” They were all stopping Android and all piling into Objective C and iOS development. They were saying, “We’re going over to Google and begging the guy who runs the payments group to work with the guy who runs the Android group.” Apparently they didn’t. This is what I’ve heard. They didn’t even like each other. But everyone wanted them to be more like Steve Jobs and fix this stupid user interface.
That was 13 or 14 months ago. How much has changed since then? They fix a few things, and now suddenly you can do a real business. You can charge somebody for something on an Android phone without giving them a bunch of broken links and a terrible user experience. Now the numbers for Android start to really matter from a payments perspective. Android is in contention.
There’s been similar war that’s gone on and a similar discussion topic all over the world in different markets. There are some of the same players and a lot of different players. I got a demonstration of the Kindle Fire about six months ago, because they were interested in setting up in Asia and their games team wanted to sign up the content. They don’t disclose, publicly or even privately, how many units they have installed, but the analysts seem to have it at 30 to 40 million units as of six months ago, probably in the United States. I thought that was fascinating. What’s the installed base of Xbox in North America now? I think it’s about 40. Cut that in half for the Gold membership, the people behind the paywall. Now you can start to do the comparison. We think of Xbox as this huge platform, but you’re going to make a lot more money off some little device like the Kindle Fire.
GamesBeat: What’s the significance of that?
Mahoney: When we bought Gloops, we compared Gloops’s MAUs, pay rates, and ARPPUs to our Japan MAUs, pay rates, and ARPPUs, because they’re mostly in Japan. Their MAUs were roughly double our Japan MAUs. No surprise, because it’s mobile. Their pay rates were the same and their ARPPUs were the same. This is a browser-based role-playing game on a small-format phone versus a fully-featured 3D MMORPG on PC. That’s amazing. It’s shocking. In other words, we can monetize a browser on a mobile phone in the same way we can a full-featured workstation-style PC that sits under your desk.
Then you apply that back to the numbers for some of these new devices or platforms, which are astonishingly big. That’s the mobile opportunity right there. That’s why we’re so excited about what we’re doing in mobile, which is immersive free-to-play role-playing games. From experience, we know we can monetize them just as well. That’s the thing the industry is missing right now.
When you apply that back to platforms, we haven’t made any announcements. We don’t know whether we’re going to support the Kindle Fire. We’ll make a lot of choices about platforms, but we’ll just have to be careful about resources. The point, though, is that’s a real platform now. You don’t hear Amazon making a lot of noise about this. They’re one of those companies that likes to quietly sew up an industry before they start to talk about it, like they did with AWS. But it’s interesting to think about the implications of all that. The platform wars are pretty ugly.