The mobile gaming world is getting bigger and bigger. Just take a look at Japan’s Gree, which reported revenues of $1.6 billion and has set up a huge U.S. headquarters just outside of AT&T Park in San Francisco. The company has 450 employees working in the long building, which features a cafeteria on one end and a long set of desks leading to a bunch of glass offices at the far end. They are the foot soldiers in Gree’s expansion into the U.S., where the competition is fierce but the riches are waiting. To find more developers, Gree is investing $10 million in third-party games.

Source: Dean Takahashi

The view of Giants stadium from Gree’s HQ

Within the building are hundreds of mobile game developers, headed by Naoki Aoyagi (pictured above), chief executive of Gree International, the overseas subsidiary of the Japanese parent company. Some were part of acquired companies such as Funzio, maker of games like Kingdom Age, Modern War, and Crime City. Those games have been out for months but have been steadily producing revenues in the top grossing charts on the app stores. The hope is to one day have games that generate $100 million a month in revenue.

Last year, the company experimented with new games and heavy advertising. It spent heavily on user acquisition, driving up costs for its rivals. And it acquired, expanded, and then shut down the OpenFeint social mobile gaming platform. While Gree started as a social network for mobile gamers in Japan, it is now driving deep into content.

And it has set up an enticing headquarters — with sofas, arcade machines, and a fancy kitchen — to recruit more developers. The goal is to recruit and retain employees in the fiercely competitive San Francisco gaming market, which is ground zero of the digital gaming revolution. The goal is to come up with a billion-dollar game and stay ahead of rivals such as DeNA, Electronic Arts, Supercell, Rovio, Zynga, and GungHo Entertainment. Gree is moving into all sorts of game genres, including the social casino slot machine business and hardcore titles like the upcoming War of Nations.

Will the company come out on top? It’s Aoyagi’s game to win or lose. We took a tour of Gree’s headquarters recently and interviewed Aoyagi there. Here’s an edited transcript of our interview.

GamesBeat: What are your priorities?

Aoyagi: We’re working on some different games. We have the existing games from Funzio (which Gree acquired for $210 million last year) — we’re upgrading the engine – and we’re also working on new stuff. War of Nations was the game we showed at the Game Developers Conference. It’s our hardcore strategy game. I think that the hardcore gaming users in the tablet market are going to be the hot topic coming up. Everybody’s working on mid-core stuff, as well as the next Clash of Clans (Supercell’s hit game, which is generating $2.4 million a day in revenue), but what we’re doing is different from the others.

GamesBeat: By “hardcore” games, do you mean games that play for a much longer time than mid-core?

Aoyagi: We still want to capture both the mid-core and hardcore. We see a lot of potential in the iPad and the Mini. Hardcore users are going to play more games on tablet. That’s our bet. Still, for the mid-core, we have games from Funzio that are doing pretty well. We can do more with those engines.

GamesBeat: So more hardcore than what Funzio does? More hardcore than mid-core?

Aoyagi: Still mid-core to hardcore. We’re also working on some casual games, casino games. Our strength, from acquiring Funzio, was more mid-core, but now we’re trying to expand on both the hardcore side and the casual side.

GamesBeat: How many of your games are created here in San Francisco?

Aoyagi: Our titles for the western market are mostly developed here at this studio. We’re working on some titles at our Vancouver studio that we set up last year, but most of them are in development here. Our portfolio studios are mostly focused on their local markets. The Korean market’s gotten pretty big now. It makes sense to focus on those local markets.

Part of that will be working with partners who fall under our partners fund, like IUGO, the developer of Knights & Dragons. That game’s climbing up the charts. It’s around 40 or 50 right now. That was a publishing deal with IUGO. We did an investment and worked together with them on the title, introducing them to monetization techniques while they developed the game.

GamesBeat: We had our mobile summit last weekend. A lot of people were talking about the Asian mobile messaging services, like Line and Kakao. WeChat may at some point add games. A lot of people have some hope that those will take off in the U.S.

Aoyagi: Yeah. That’s an interesting topic right now. In the past, social networks became a huge market for game developers. Based on what happened in Asia, that might be the next market. But still, in the western market, we don’t see those services taking hold yet. I know Kakao is trying to expand, and so is Line.

The most successful case, in terms of combining a messaging app with games, is Kakao. Line is still focusing on expanding its user base. Kakao did a great job creating a market. Most of the Google Play titles are actually on Kakao’s network. That’s pretty impressive.

GamesBeat: Yeah. The top-grossing worldwide titles are all there.

Aoyagi: Right. Puzzle & Dragons from Gung Ho, games on Kakao’s network, and WeChat, those are the three big things in Asia over the last three or six months.

Source: Dean Takahashi

Gree HQ

GamesBeat: Those platforms seem a little heavy on the taxation, though. Half of the revenues go to the platform owner.

Aoyagi: Yeah. 30 percent to the store, and then half of the 70 percent, so the developer only gets so much. But the distribution power of Kakao is pretty strong. It still makes sense for those app developers. It might limit the potential market. In the past, NTT Docomo did a great job. They only charged 10 or 15 percent, and because of that, the market expanded to an incredible size in Japan. If Google or Apple or Kakao were to do something like that – jointly, even – it would be a great thing for the ecosystem.

GamesBeat: If Puzzle & Dragons succeeded all by itself, without the help of those networks, it might change something.

Aoyagi: At the same time, we’ve seen the power of the platforms and the networks in those games. We have some games – mid-core games and casino games – where we’re building in a lot of cross-promotion. That’s been really powerful, even with a smaller number of games. If we can form those alliances, like Kakao is doing, or like ChartBoost is trying to do, that’s powerful. It can generate a lot of traffic for free.

GamesBeat: It might be nice to have the game-focused mobile messaging networks take off in the U.S., but it will take a while.

Aoyagi: Right. Or it might never happen. This market is more competitive than the others. Europeans and Americans never got into the Asian market. Only those local Asian companies had a chance to grab market share. They’re good at that combination of social networking and games in general from back 10 years and more, like Gree, DeNA, and Tencent.

GamesBeat: I didn’t hear any games stuff in the Facebook Home announcement. Did you pay much attention to that?

Aoyagi: No, I didn’t, but I should have.

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In the London Underground, the ubiquitous warning is to “mind the gap” between the train platform and the train. Peter Warman, head of game-market analysis firm Newzoo, thinks that’s a good analogy for the growing gap between investors and opportunities in the game market.

During 2012, stocks such as Zynga’s tanked after a big initial public offering. And while mergers and acquisitions hit a record $4 billion ($3.4 billion by our own calculation at GamesBeat), game investments tumbled 57 percent, according to investment bank Digi-Capital (see chart at right).

The big difference between the acquisition values and the value of investments suggests a disconnect, where investors no longer believe they can get out-sized returns. This comes amid headlines bemoaning layoffs at traditional game companies and a fall in retail sales of titles in the U.S. But in an interview with GamesBeat (in a preview of a talk at the [a]list summit in New York on Jan. 29), Warman said the gap comes from a misperception. While traditional console releases are seeing retail sales fall, the overall game industry is still growing fast on a global basis across multiple platforms, he stated.

“There is a lot of worry about the state of the game market, which is changing enormously,” Warman said. “Zynga’s stock fell, and it had such a negative effect on investors. But there is nothing wrong with social gaming and the larger market. We want to put investors back at ease and get them to understand the market that we see.”

Warman says the big trend that has benefited gaming is the increase in the number of screens people play titles on (see picture at left). In addition to the PC and the TV, consumers are playing games on tablets and smartphones, as well as portable gaming systems.

“Five years ago, only two screens mattered, but now, all of the screens form a perfect circle around the consumer,” Warman said.

Social, mobile, and online are now growing on top of the PC and console markets. And markets in emerging territories are growing at faster rates. That is a lot more to get excited about. When you add up those numbers, you get a $68 billion industry growing at a compound-annual-growth rate of 7 percent a year. All told, Warman said gamers now number about 880 million (see chart at bottom). Mobile titles are growing 32 percent a year and are now a $9 billion market. About 33 percent of all mobile-app downloads are games, and 66 percent of all mobile-app spending is gaming related.

Within this context, Warman acknowledged that some segments of the market are going through hype cycles. Social gaming had hype, followed by the mobile-gaming bubble. Investors touted “mid-core” social games even as Zynga’s casual offerings declined. Social casino games soared in the last year. Hype over the hot categories drives a herd mentality among investors and inevitably leaves them feeling burned when the category fails to live up to expectations.

“We’re confusing investors and giving them no clear outlook on the future,” Warman said. “The result is a decline in investments. But based on what we see, the game market will grow for another 20 years.”

Warman acknowledged that only a few game companies have maximized their value by succeeding in multiple parts of the market. Electronic Arts is beginning to see a payoff from its years of investments in digital efforts, but its stock price doesn’t reflect that yet. THQ, which dismantled in a bankruptcy auction last week, is an example of what happens when you make investments in the new categories too late.

“THQ ran out of time,” he said. “They didn’t have enough time to learn from experiments in gaming as a service. You have to learn your optimal investments in digital content. These days, you have to realize you are not investing in a team that will make a game and move on to something new. You are investing in a team that will run a game, like a service.”

By contrast, he pointed out that Kabam learned from years of experimentation on how to monetize games like Kingdoms of Camelot. When the studio took that property to mobile platforms in the past year, it was a smash hit, becoming the No. 1 grossing hit for the Apple iTunes App Store.

“The good news is that the tablet and smartphone platforms are poised for growth for a long time ahead,” Warman said. “And investing in international markets can pay off now. There is so much opportunity if you localize a game for a region like Russia or Turkey.”

Companies have to realize that their marketing budgets should spread across multiple platforms, not just a single platform, Warman said.

Warman highlighted five trends that matter. Consumers are using more screens. Games are becoming free. Games are becoming services. A good business model is a balanced one. And globalization matters.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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This story was contributed by Eric Seufert of mobile game developer Grey Area Labs.

Retention is the foundation of the free-to-play model. If retention metrics don’t hold, a free-to-play title won’t make money. Conceptually, this makes sense: Lifetime Customer Value is a function of time spent in-game (lifetime) and money spent in-game (value), and most users won’t do the latter until they’ve invested some minimum amount of time into it.

The problem with retention metrics is that they can’t be easily “fixed” through development iteration. Retention is a proxy for fun, and fun is binary: A game is either fun or it isn’t. Short of being able to quickly fix retention, a developer is well served by understanding why her game is bleeding users. This article will identify three reasons why your free-to-play users aren’t coming back.

Source: Supercell

Supercell’s Clash of Clans combines elements of real-time strategy with asynchronous player-versus-player gameplay to create a unique gaming experience.

You don’t communicate quality

Some free-to-play developers think a user’s scarcest resource is money, which is a mistake. If a user is playing your game on an iPhone, iPad, or a high-end Android device, she has disposable income to spend on entertainment. A user’s scarcest resource is her time, and if you don’t communicate to her that your product is of the highest quality and worthy of that investment from the very first game session, she’ll delete it.

Your game needs a “quality hook” — something that allows the user to immediately discern that it was professionally built and not the product of a few crates of Mountain Dew and three weekends in a basement. Most of the time, this is done through graphics that have been obsessively perfected, but it can also take other forms: realistic physics, a new gameplay format, or elements of the real world convincingly and authentically integrated into gameplay.

You don’t give the impression of deep gameplay

Back to the scarcity of time: When I download a new game, I won’t invest any time into it unless I think it’ll provide me with entertainment for months to come. If your game doesn’t give the impression of a long lifetime of rich gameplay, a user won’t take a gamble on it. Free-to-play gamers are looking for a relationship, not a one-night stand.

Players will see the potential to play a game for months or even years through a geometric pricing curve and an extensive product catalogue. The worst way to communicate deep gameplay is by not having anything but renewables or one-off upgrades. Users want to return to good games, but they want to feel that their time is being rewarded with new, ever-richer experiences. Free-to-play gamers won’t give your game the benefit of the doubt – deep gameplay must be communicated early and acutely.

Source: Kabam

Kabam’s Kingdoms of Camelot appeals specifically to hardcore players with its complicated tech trees and intensive resource-management mechanics.

Your game is trying too hard to appeal to everyone

Gamers have distinct tastes, and there’s a big difference between a farm simulator and a shooter. Stuffing gameplay elements from every genre into your game won’t endear you to all gamers; it will merely obfuscate the value proposition to your target demographic and make your game look schizophrenic.

The best games focus on a single core gameplay mechanic and build a rich experience around that. If a player can’t quickly ascertain your game’s core experience without being distracted by multiple gimmicks, then she won’t play it again. Players need to understand what exactly they’re getting good at through progressing in your game: Are they becoming more accurate at shooting? Are they improving their timing in fighting? Are they becoming shrewder in their command of in-game resources? If this progression isn’t clear, players will have a hard time becoming engaged with your game.

Conclusion

Free-to-play gamers aren’t to be taken for granted; the fact that a title is free doesn’t mean players will tolerate bland, uninspired gameplay from it. When your game is first launched by a player, it is competing not only for her time but also with every other free-to-play game that she could download almost instantly.

Low day-one retention indicates a failure to communicate the points outlined above, but it also indicates that players, for any number of other reasons, simply don’t like your game. And short of a glowing recommendation from a close friend, that perception is almost impossible to reverse.

Eric Seufert is the head of marketing and user acquisition at Grey Area Labs, the Helsinki-based mobile developer behind Shadow Cities. He blogs regularly at ufert.se.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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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.

Pages: 1 2 3

The data reveals that Zynga’s user base of more than 265 million monthly active users are playing games almost as much as the top hardcore gaming franchises. The pie chart at left shows that Activision’s Call of Duty is the top franchise in share of time spent at 43 percent, followed by World of Warcraft at 17 percent and Microsoft’s Halo at 14 percent. But Zynga’s Ville games (FarmVille, PetVille, YoVille, FrontierVille and CityVille) games have 13 percent of time spent on games, followed by core gaming franchises at 12 percent. That means players are spending more time with Zynga’s Ville titles than they are with Assassin’s Creed, Gears of War, Mass Effect, and Grand Theft Auto.

In social games, Zynga has more than 60 percent of the overall market. While hardcore franchises such as Call of Duty and World of Warcraft are played for longer durations, Zynga’s Ville games are played four times more frequently. Zynga also takes advantage of those frequent sessions by constantly serving up marketing messages to stir up engagement, cross-promote  its other games, and handle transactions.

Since the launch of YoVille in 2008, Zynga’s Ville games have almost doubled in average session time length. Average session length is usually around 5 minutes.

In getting users to move from one Ville game to another, Zynga is doing great. Even though Zynga’s user size per game is at least five times bigger than hardcore games, it is still able to grab an equal proportion of users from game to game (see graph at right).

In total online players since 2008, Zynga’s top titles racked up three times more hours than the rest of the top 10 combined. (This was measured before the resurgence of Electronic Arts with its Sims Social title). Zynga’s share of play time was 75 percent for the top 10 social games since 2008, compared to 10 percent for EA PopCap, 5 percent for Digital Chocolate’s Millionaire City, 5 percent for Kabam’s Kingdoms of Camelot, 3 percent for Wooga’s Monster World, and 2 percent for Kixeye’s Backyard Monsters.

Raptr also found that Zynga’s user base is loyal. For its last four major games — FrontierVille, Treasure Isle, CityVille, and Empires & Allies), Zynga pulled 9o percent of the players from existing users.

As for crossover between hardcore gamers and Zynga fans, about 12 to 20 percent of Zynga’s CityVille players have also played hardcore games such as StarCraft 2, Lord of the Rings Online, and Call of Duty Black Ops. The percentage of Xbox 360 players who have played a Zynga game increased to 30 percent in 2011, up 50 percent from a year before.

As Zynga said in its SEC filing, the top 2 percent of loyal players are crucial to its success, as those players are “whales,” or the company’s biggest spenders. They play three times more than the average player. The top 2 percent play Zynga games for 120 minutes per day, compared to 40 minutes for an average player. That means that 5 million paying players are supporting Zynga’s gaming business.

The report was based on data collected from Raptr’s player base and it looked at data from Raptr’s launch until August 2011.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

---

It’s as good a sign of disruption in games as any. Based on the funding from such heavy-duty backers, Kabam is now one of the most valuable independent companies making games on Facebook. In terms of users, it is far outgunned by market leader Zynga (poised for a possible initial public offering), which has 247 million monthly active users on Facebook. Kabam has just 7.2 million monthly active users. Zynga has raised hundreds of millions of dollars, but Kabam is holding its own, raising $125 million to date.

People will shake their heads at the amount of money here and what it says about the likely valuation. But as we noted in a review of Kabam’s games, the investors here aren’t crazy. Kabam clearly has users who are far more valuable than the standard social game player, because Kabam’s users are willing to pay Kabam a lot of money for a hardcore game experience on Facebook. Kabam’s four active games include Dragons of Atlantis, Kingdoms of Camelot, Glory of Rome and Global Warfare (below).

They’re all hardcore role-playing games where users play for four hours at a session, compared to maybe 10 minutes for a Zynga game. About 90 percent of Kabam’s players log into their games six or seven times a week. That’s what Kevin Chou, chief executive of Kabam, calls engagement. Those gamers are running the game in the background while they’re multitasking. That allows them to have lots of time to play all day long, even as they do other work. Such gamers would never have a four-hour stretch to play a console game.

Chou says that about 80 percent of the company’s players say they play hardcore games on the consoles or the PC. And now they are spending less time with those games and more time with Kabam games. This had to happen. With nearly 700 million users, Facebook has become a mirror of society. And society includes a lot of hardcore games. Kabam is one of the few companies to realize this and to target those gamers, who are accustomed to spending a lot of money on games. Kabam blends the immersive game play of massively multiplayer online games with the social satisfaction of social networking games.

Kabam was founded in 2007 as Watercooler and funded by Betfair and Canaan Partners. It had around 20 employees for quite a while as it experimented on Facebook, making sports fan pages and sports games. It had a big hit with its first major role-playing game, Kingdoms of Camelot, which quickly pulled in millions of users. The game still has 1.5 million monthly active users 19 months after its launch. Kabam also acquired WonderHill, a San Francisco game company that developed Dragons of Atlantis, which has become Kabam’s most successful game to date.

Kabam’s games are free-to-play, where users play for free and pay real money for virtual goods such as more Centurions for the Imperial Roman Army in Glory of Rome. While many users play for free. There is a sizable percentage of users who pay money for the time-saving aspects of the game. And the funny thing about hardcore gamers is that they’re willing to pay more than $60 to get their fix. Whenever Microsoft launches a new $60 version of Halo, it often creates a $125 “legendary” version for the biggest fans.

Ken Pelowski, managing director of Pinnacle Ventures, said Kabam’s typical user numbers are similar to the number of hardcore fans for each console game hit.

“Those console fans are migrating online to free-to-play games, and that is what Kabam is seeing,” Pelowski said. “But here, you don’t have to pay $250 for a box and $50 for each game. Here, you could play the game for free. You could pay hundreds of dollars. You could pay thousands of dollars. The high growth and high value of the user base justifies a higher valuation for the company.”

Kabam’s users are as dedicated as console gamers. They’re willing to spend more than $60 sometimes, just to get a much-needed advantage that will make them look good in front of their fellow alliance members (as many as 100 players can band together in alliances). Chou has said that Kabam isn’t really going after Zynga. It’s the anti-Zynga. It’s going after Activision Blizzard and Electronic Arts instead, with the aim of disrupting their traditional business, Chou said.

This is the place in the story where traditional game company executives cackle at the audaciousness of Chou. But there are a lot of former game industry veterans working for him.

Kabam doesn’t disclose its financial results. But the tea leaves are there. With just four games and $125 million in funding, Kabam has been able to grow from 25 employees to more than 400 in the past 16 months. Chou said the team will be shipping more impressive games, including five later this year.

Console gamers may laugh at the low interactivity of Kabam’s games now, but Chou says there’s a full pipeline of games coming, and each one will reflect learnings from Kabam’s direct observation of millions of gamers. Traditional video game executives would kill to get that kind of feedback. Global Warfare, Kabam’s newest game, has minimalist, cinematic-style cut scenes (as much as Facebook can handle) and it takes the game play from Glory of Rome to a higher level. The game forces players in an alliance to be more social by requiring them to coordinate assaults on strategic resources in the game. I’ve been playing it since it debuted on May 3, and I’ve spent most of that time getting ready to do real battle. That might bore other players, but I consider it to be a fun investment of my time.

There is some precedent for Kabam’s funding. The game industry took notice of the Kabam-style model of getting more dollars out of hardcore gamers when China’s Tencent bought the majority of Riot Games for nearly $400 million in February. Riot Games had only 1 million users playing one game, but those dedicated gamers spent a lot of money. In January, Kabam raised eyebrows and fears of a “bubble” in social gaming when it raised $30 million.

EA, for its part, has its own online role-playing game Lord of Ultima online on Bigpoint.com. But there’s an opening for Kabam to get big in this niche because many of the big traditional game publishers have left the PC game market to focus on the consoles. And the traditional game publishers who have entered the Facebook market are focusing on competing with Zynga for the new demographic of casual gamers on Facebook. No one is really competing directly with Kabam, except other startups such as Kixeye.

But Kabam has to walk a delicate balance with its users. It can get the games to monetize better by making ordinary tasks take longer and longer to do, like sending scouts on a recon mission. The users may get fed up and pay Kabam some money so that it can eliminate the wait. But if the users feel like Kabam is holding them up at every turn and deliberately trying to frustrate them, then they will move on to another free-to-play game that doesn’t treat them that way.

There are some risks for Kabam. The company can stage some massive battles where users send reinforcements to stop attackers from looting a city. But it takes a lot of computing power to make sure that the game doesn’t crash or make the wrong calculation in this kind of scenario. And overall, Kabam needs more servers because its users are online so much. Kabam has to make sure that it doesn’t hit a wall with Facebook’s infrastructure, which wasn’t really built for real-time engagement.

Over time, the social network platform will become better at running online games. And then Kabam will likely try to create games that include the animations and 3D graphics that hardcore gamers want. Chou says the company will also expand into new markets such as Asia, where there is a lot of potential among hardcore gamers. Pelowski acknowledges that there is still a gap where the best console games have a higher quality bar, but Kabam is starting to close that gap. And in the meantime, the company is still monetizing its current games very well.

All of that adds up to a lot of  value, says Pelowski. As to whether Kabam is part of a giant social gaming and social networking bubble, Pelowski says the underlying metrics of the business justify the investment.

Existing investors Intel Capital, Redpoint Ventures, and Canaan Partners also participated in the deal.

We’ll be exploring the most disruptive game technologies and business models at our third annual GamesBeat 2011 conference, on July 12-13 at the Palace Hotel in San Francisco. It will focus on the disruptive trends in the mobile games market. GamesBeat is co-located with our MobileBeat 2011 conference this year. To register, click on this link. Sponsors can message us at sponsors@venturebeat.com. To pitch a startup at the Who’s Got Game contest at GamesBeat 2011, click here.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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Kabam makes massively multiplayer strategy games for hardcore gamers who play on Facebook. Altogether, Kabam has 7.4 million monthly active users on Facebook. That’s not huge compared to Zynga’s 299 million users, but it’s a big number considering the fact that most people believe hardcore audiences don’t exist on Facebook.

The company’s ability to raise a big round from investors such as Redpoint Ventures and Intel Capital shows that social gaming is still hot as a start-up investment, even though many of its biggest winners, such as Zynga, are consolidating their hold on the market. But now the investments are moving into market niches where there is less competition from the big players.

“Our vision is to create massively multiplayer social games,” said Kevin Chou (pictured above and right), co-founder and chief executive of Kabam, in an interview. “We cater to hardcore gamers who are trying out Facebook and want to play games with their friends on it. This funding round is a validation of our strategy to stand out.”

Redwood City, Calif.-based Kabam has grown to 250 employees by focusing on the hardcore niche for strategy game fans. Its top game is Kingdoms of Camelot (pictured below), an Arthurian legend game where you build a medieval fortress and an army. You marshal your forces, launch alliances with other players, and then go to war. Thousands of players can be involved in epic alliance battles. It’s a lot like a real-time strategy game on the PC, but it moves slower and the graphics aren’t as outstanding. That’s a basic limitation of Facebook’s platform.

Still, the game has 7.3 million monthly active users on Facebook, and Kabam has created a number of similar strategy games, including Dragons of Atlantis and Glory of Rome. The games have high engagement, where players can fight each other for hours at a time. Kabam competes with other game companies that target hardcore players, such as Electronic Arts or Blizzard Entertainment. Chou believes that his company has an edge because the games are free-to-play, where users start playing for free and pay real money in small amounts for virtual goods.

Chou said that the company has invested heavily in technology and art work to make its game a high-quality experience, even for those who are used to a full gamer PC experience. Chou believes that “synchronous games,” where players battle each other at the same time, will become more popular over time and will be more appealing than the casual, short-duration, asynchronous games that rivals such as Zynga make. With games such as Kingdoms of Camelot, it’s not easy to calculate outcomes that affect thousands of players in a split-second.

The cost of investing in these kinds of immersive games is growing above $1 million per title, Chou said. That kind of spending is still far less than the $10 million-plus budgets for console game development, but it’s also far above the investments companies used to make in Facebook games just a couple of years ago. That’s one reason Kabam has raised so much money and has hired veterans such as former Electronic Arts game creator Andrew Sheppard.

Chou, who started playing games such as Nintendo’s Legend of Zelda when he was 12, is a natural to lead the company. Chou said the company, started in 2006 as Watercooler Games, focused on making a social network. Then the company pivoted again into making sports fan pages on Facebook. The company pivoted yet again into social games a couple of years ago. But the focus was on the hardcore games that companies such as Zynga tried out but decided were not a good fit for Facebook’s users. Full told, the company has raised $39.5 million from backers that also include Betfair.

Kabam acquired WonderHill in October. Back in early 2010, Kabam had just 20 employees. Then its Kingdoms of Camelot game took off. Now it has studios in San Francisco, China, and Germany in addition to Redwood City. The company is actively hiring, and Chou says he’s proud that the company’s four founders — Chou, Michael Li, Wayne Chan, and Holly Liu — are still with Kabam.

Chou said the company has a number of new games scheduled for launch early this year. He said the latest funding round was over-subscribed and more investors wanted to get into it.

Kabam

The price wasn’t disclosed. Redwood City, Calif.-based Kabam is trying to build a high-end social game firm that could join the ranks of top companies such as Zynga, Disney-Playdom, EA-Playfish and CrowdStar. It has a ways to go in that respect, but the acquisition shows that Kabam has become a player in the space. The deal also shows that smaller developers are under pressure to get big fast as rivals such as Zynga grow bigger and bigger.

WonderHill was founded in 2008 by James Currier and Stan Chudnovsky. The company raised $7.75 million from Charles River Ventures, Shasta Ventures and Ooga Labs. The company created hit titles on MySpace such as Green Spot and it more recently moved to Facebook with titles such as Dragons of Atlantis.

WonderHill has 2 million monthly active users for its free-to-play games, where players can play for free and pay real money for virtual goods.

With the addition of 25 employees from San Francisco-based WonderHill, Kabam will now have about 200 employees, said Kaban chief executive Kevin Chou. Kabam was founded in 2007 as Watercooler. The company raised $9.5 million in two rounds of funding. Investors include Betfair and Canaan Partners.

At the beginning of the year, Kabam had just 20 employees, but it has grown quickly on the strength of games such as Kingdoms of Camelot, which has 8.2 million monthly active users across dozens of games on Facebook. The company got its start with online sports fan sites on Facebook.

WonderHill drew some attention earlier this year when CrowdStar sued it for allegedly copying the “fish mating dance” and other features of CrowdStar’s Happy Aquarium game in WonderHill’s own Aquarium Life game.

But WonderHill caught Chou’s eye because it was focused on high-quality Flash strategy games. Under the deal, WonderHill will become Kabam’s San Francisco office.

WonderHill founders Currier and Chudnovsky will stay on as advisors, and WonderHill’s the development team of approximately 25 will now work as Kabam employees. The new Kabam San Francisco will continue to build titles like Dragons of Atlantis while also creating new, yet to be announced projects that will aid in further building out Kabam’s portfolio of real social games. Kabam recently added executives with experience at Blizzard, PlayFirst and PayPal.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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