Addmired Chief Executive Gabriel Leydon is a true believer in the mobile space. With more than a billion users of his games, Leydon sees big opportunity. Addmired, now known as Machine Zone, has created a number of hardcore, massively multiplayer online games, such as Original Gangstaz, iMob 2 and Global War. These are free-to-play titles that generate revenue via virtual goods, and all three of those are among the 50 top-grossing iPhone apps.

Palo Alto, Calif.-based Machine Zone announced that it had raised $8 million in a second round of funding from Menlo Ventures. Shervin Pishevar, former chief executive of SGN and partner at Menlo Ventures, is joining Machine Zone’s board. Pishevar himself said in an interview that very few mobile game companies have the chops to take the business to the next level in competition with huge companies such as Zynga and Electronic Arts, but he believes Ledydon can do so.

The company has gone through some big pivots. Addmired debuted as a Y Combinator startup in 2008 with a Hot-or-Not-style social network dating app. But it pivoted to become one of the first free-to-play mobile game companies and now has rebranded itself as a serious developer with 40 million downloads. We caught up with Leydon, who will be one of the chairpersons for the user acquisition topic of our VentureBeat Mobile Summit, for an interview. Here is an edited transcript of our conversation.

GamesBeat: It is very interesting to get Shervin Pishevar on your board as he was around at the dawn of the smartphone game business.

Gabriel Leydon: Absolutely. He was right there with us at the beginning of the iPhone. He’s the only VC in mobile gaming with more experience than us.

GamesBeat: How far did that connection go back for you?

Leydon: A long time. When we made iMob, he was busy making Mafia: Respect and Retaliation, which came out about two or three months after iMob. So we’ve been talking with each other since way back then. But we didn’t really connect until last summer.

GamesBeat: The name change, why did you do that?

Leydon: When we launched, we were a dating app. We did this big, huge dating app (AddHer) on Myspace. And nobody was ever happy with the name, because it was not about what we became. By the time we hired everybody who works here now, they all wondered, “What does that name mean? Why are we called Addmired when we’re making Original Gangstaz?” You know? We’re making all these adult-themed crime games and war simulators. We just kept it because we never did any press. We’re doing press now, so we thought, “Okay, since we’re finally coming out of develop mode, it’s our last chance to change the name to what we always wanted.” So we just did it.

GamesBeat: So Machine Zone just sounds a lot more game-like, I guess?

Leydon: Yeah.

GamesBeat: How many people do you have now?

Leydon: We are 66 people currently.

GamesBeat: And how many downloads?

Leydon: I think it’s somewhere around 40 million by now. But that’s over a very long time. We were the first free-to-play guys for a while. We were January of ’09. You know Storm8? The reason they called their game iMobsters was because we had iMob. We were there a very long time ago. A different world. When we launched iMob, I think there were less than 20 free role-playing games. None of them were online. We were the first online game.

GamesBeat: So you’ve been copied for a long time, then.

Leydon: Absolutely. We’ve been setting trends in the App Store for a really long time. Even the idea of incentivized downloads, how that works, came from iMob. We’ve been quietly innovating in the space. With the friend codes, we were the first to do invite by location. We did that three years ago. If you were near somebody else, via GPS, you could invite people to your mob. So we’ve been doing a lot of stuff for a long time. We just haven’t been taking credit for it. We were very small. And we decided last summer that it was time to go all the way.

GamesBeat: We’ve been tracking user acquisitions costs, and it looks like they dipped back down again in January.

Leydon: Well, I actually disagree. It just went back up [Editor’s note: Leydon is correct for February]. It’s higher than it’s ever been, period. What’s funny is — the question is, what happens when it goes too high? Well, that already happened like three weeks ago. It’s happening right now. It’s not a question of when it’s going to happen; it’s already happening.

GamesBeat: Holy cow.

Leydon: Yeah. It’s already happened. All the stuff everybody’s talking about — when is this going to happen? It already did. As soon as Gree and Zynga started competing with each other, that’s the moment it happened. Basically, right when Gree launched Zombie Jombie, everything changed. Because Gree has a tremendous amount of money, and they’re basically buying out everything right now. They’re bidding up everybody. That scenario, the shakeout you guys were talking about — you are watching it in real time.GamesBeat: Yeah, I noticed they said they were going to spend 50 million bucks right about now.

Leydon: I think that was just on TV commercials, by the way. It’s not just one company. It’s many companies with billions of dollars. That’s what we’re starting to see. We’ve got Gree.  DeNA is going to come in, Zynga’s going to come in. Zynga is going to start pushing harder. That means EA is going to have to push harder. So all that stuff’s happening this year.

GamesBeat: What do you guys do, then? Are you in a sort of lucky boat where you don’t have to spend?

Leydon: No, absolutely not. We have a huge audience. We’ve been doing this longer than anybody, so we have a tremendous first-mover advantage. For the type of games that we make and the type of audience we have, we’ve been cultivating these people for over three years. If you’re brand new coming into the space — wow. It’s really hard. So we have that going for us. Also, we’re focused on a very different type of games. We have a lot of new technology. So the stuff that’s out right now is not reflective of the things that we’re building. We’re actually pretty comfortable with what’s coming up next for us. We’re not competing on the same level as others. We’re making a very different type of product.

In my opinion, the only viable strategy for someone who’s not a multibillion-dollar company is to innovate. You really have to differentiate yourself in this market. But the cool thing about mobile is that the technology ceiling is a lot higher. Nobody’s really hit it. Whereas on Facebook, everybody’s making the same games because that’s the most Adobe Flash can do.

There’s a lot of room. You see this with Draw Something, right? There’s a lot of room to make apps that fit the device differently from the type of games that work on Facebook. Whereas on Facebook, there’s only the one type of game that works.

GamesBeat: The OMGPOP folks sold out at $180 million, and some people said, “Hey, they sold out too early.”

Leydon: They did. I agree.

GamesBeat: You can say that, I guess, but if you’re worried about things like the rising cost of user acquisition, then you should sell.

Leydon: Yeah, yeah. They would be stupid not to take it. But by the same token, they had a real opportunity to take over that “With Friends” space, which is a big space. That’s what I think about that. Essentially, they were a real threat to that at Zynga.

GamesBeat: It raises that question: Is copying and cloning a good model?

Leydon: It’s a good model if you have scale. Right? If you have cheap scale, it’s a great model. Cheap scale. If you have expensive scale, it’s a terrible model. So if you have cheap scale and a special deal with Facebook, where you get discounts on ads, then you can clone a game and you know you can scale that game cheaper than the other guy. So you say, “Oh, I don’t know what works. I don’t need to know what works, all I need to do is find out what works and have cheaper scale than them, copy it, and scale it out.” Because you don’t have to take any risk. If your scale is cheaper, you want to avoid risk, right? If you just want to scale fast. If you want to scale fast and you have the ability to do it cheaply, you just clone. Does that make sense?

GamesBeat: How do you see some of these forces coming together and shaping the way the mobile game industry is going to look by the end of the year?

Leydon: I see what everyone else sees. I don’t think I see anything in a really unique way. The first-generation mobile companies are going to struggle and they’re going to have to prove that they belong there. That’s what we’re going to do. The big money guys are going to come in and throw money around, hoping that they can buy something that works. What I think we’re going to see this year is a lot of rich guys wasting a lot of cash. You’re going to see maybe some success with that, and probably a lot more failures than successes to be honest. Throwing money around in a market isn’t really a good idea. I don’t know if consolidation is the right word, because I think there will be more developers rather than less. If you look at what’s happening with Temple Run — Temple Run is a great story. It shows the power of Apple and the App Store. The App Store is so vital. It’s so important, because it creates stories like Temple Run. That doesn’t happen on Facebook anymore.

GamesBeat: The fairy tale for a developer….

Leydon: Yeah. That doesn’t happen on Facebook anymore. It used to happen on Facebook. It used to be the norm on Facebook. It happens on Apple now every month. Every month, there’s a new one. And that’s the importance of the App Store, the index, essentially. Having an index instead of having it be share-driven. It’s driven by what’s popular, right? And that’s a really good thing.

It has its problems, we’ve seen its problems, with people trying to exploit that. But the reality is, it’s better for developers than a share model, where someone just pushing analytics and trying to control all the feeds can take over. It’s driven by what’s cool and what’s new. It creates more of these fairy tale stories. Like us. It is what happened to us with iMob. iMob was the first of its kind, and it just took over. It was this huge thing — this huge game. We couldn’t have done that without the App Store. It wouldn’t have worked like that. It scaled in three days. It didn’t take months. We did zero marketing.

People say the gold rush is over, and it’s absolutely not true. Look at Temple Run. Look at Draw Something. It’s not true. If you do make something great, the Apple platform will showcase it. So what I think we’re going to see is a lot of really rich guys throwing money at games that aren’t really that great, and they’ll waste a lot of money. But it’ll also have an effect on the smaller developers because it makes it harder for them to market. But I think the positive side is we’re actually going to see an explosion of independent developers being successful.

Yes, it’s going to be harder for the guys who are spending money to get users. But you’re also going to see more and more Temple Runs. That’s good news; that’s exciting news. The real thing that’s going to happen in mobile this year is that unique and talented developers are going to be extremely successful.GamesBeat: Will it get hard for those people who’ve gotten lucky to build a new company that grows to 100 people?

Leydon: Well, sure. Absolutely. It’s hard for anybody to do that. I would say that we’re one of the few companies that will do that. We’re an example. And there are lots of examples of people who just had one hit, and that’s all they did. But the point of it is that in mobile, having a hit from an independent developer is possible, and it’s happening on a regular basis.

And you can’t say that about any other platform at this point. You can’t say that about Facebook. I think there’s this fear that what happened to Facebook is going to happen to mobile. But people are ignoring the fact that it’s three years old and it’s accelerating, not decelerating.

GamesBeat: So, if you’re in the boat of people who have to care about user acquisition — say, you don’t have that magical hit — then how do you look back on these different events that have happened? Like Apple cracking down on Tapjoy’s pay-per-installs and the crackdown on third-party marketing services guys?

Leydon: Tapjoy was a big deal because Tapjoy worked. Apple didn’t really like it, but it was a profitable model. It really scaled. It’s scaling like crazy on Android because it works. It’s not because people don’t like it. People like it, but Apple didn’t like how it manipulated the store. But the users loved it. That’s why everybody’s been doing it; there’s a reason it works. It works because people like it. They liked being able to get courtesy for just downloading an app; that was pretty cool. They didn’t have to spend money. So you can see it on Android just scaling like nuts.

Advertising is in flux. What you’re also seeing now is Facebook’s biggest app isn’t even on Facebook. Draw Something isn’t even on Facebook, and it’s the biggest app on the platform. So that’s a first, too. Now we’re seeing the true dominance of mobile. The minute Draw Something became the biggest app on Facebook was the same day that the Facebook platform died. That’s what just happened. Draw Something killed Facebook apps because you can build a better Facebook app for cheaper off of Facebook than you can on Facebook.

That’s a really important transition that just happened. That’s a major moment in gaming — the fact that Draw Something is bigger than every game on Facebook. What I’m saying is — there you go, another example of marketing changing very fast. We had Tapjoy last year, and that’s gone. And now all of a sudden, Facebook is super important. Facebook has hit that tipping point where enough people have Facebook on their iPhone that it works. And now all of a sudden, Facebook is going to be very important moving forward for an app developer.

GamesBeat: Do you make a close connection between the success of Draw Something and Facebook on mobile?

Leydon: Yes, absolutely. That was not possible a year ago. It wasn’t possible until Draw Something came out. Because it hadn’t happened; it wasn’t happening. And all of a sudden, it’s there overnight. Facebook is suddenly the biggest marketing channel for mobile games.

GamesBeat: So is Mark Zuckerberg happy about that, or is he worried about that?

Leydon: I think he’s really happy. Look at that. He’s got the biggest app on mobile, and it’s not on his platform. He’s really happy about that. What that means is now every app developer is going to focus really hard on tightly integrating Facebook into their apps. And they should; that’s a really good idea because Draw Something hit millions of people for free. So if you look at that, and you say, “Oh, costs are rising.” Well, for whom? Who are they rising for? It depends. If you’re looking at Draw Something, they’re actually dropping like crazy.

GamesBeat: What do you think of Apple buying Chomp and this whole idea of search coming to the rescue?

Leydon: We’ll see. Mobile is a very unique and special platform. It is not set in stone yet. It changed dramatically three weeks ago, right? And this week UDID‘s going away. So it’s changing all the time.

GamesBeat: Do you have some hope that some of these social platforms will also help out, like Ngmoco?

Leydon: Twitter’s going to be a massive force on mobile. Look at it on iOS, it’s deeply integrated into iOS. I think an obvious side effect or result of that will be games that get very big because they’re tightly integrated with Twitter. All of those things are in flux. They’re going to keep changing, but I do know that what matters is a mobile-first experience. It’s the most important factor in all of this. That’s why we raised the money and that’s why we’re hiring to build next-generation mobile games.

GamesBeat: You raised $8 million. But three or six months ago, it might have been twice that. Mobile startup valuations are dropping.

Leydon: We’ve been profitable the whole time. We raised money to work with Shervin and Menlo. It’s that simple.

GamesBeat: On the Android side, are there other changes you see?

Leydon: Yeah. CPIs are dropping like crazy on Android. They are dropping fast. The exact opposite is happening there.

GamesBeat: Because of what?

Leydon: Because of the inventory being added to the platform. There are so many new devices being added every day that there isn’t enough to fill it. The exact opposite is happening there. Like I said, mobile is like Facebook 2007. It’s going to go through a lot of changes. These are very early days.

GamesBeat: Angry Birds Space was a big event this week, too.

Leydon: Yep. Exactly. It just keeps accelerating. It shows no signs of slowing down. It’s pretty obvious that it’s going to keep doubling and tripling for a while. It’s not going to slow down, it’s going to keep going. There’s so many people who don’t have a smartphone. We’re talking about a market of seven billion human beings. Everyone is going to have a smartphone, in my opinion. One hundred percent of humanity will have smartphones, and if it doesn’t get to a hundred percent, it’ll get really close. Even in America, I think only a third of the US has a smartphone. We’ve got a long way to go.

GamesBeat: Everybody’s happy and sort of beset by change at the same time.

Leydon: Well, because they get something that works, and then it changes on them. Look back. We were on Myspace when it launched — the Myspace platform. It was the same thing. The rules kept changing every day. Facebook, too. Look back on Facebook and how different it is now. Everything kept changing. There wasn’t a model at first, then there was a model; the models would change.

There was a big uproar, remember, when Facebook wanted to change the model of distribution to the feed? Everybody was complaining about that, too. And then that’s what created Farmville. That’s what enabled games to be more viral than ever. Because they were going to turn back on invites and switch to the feed, and then the feed just blew everything up. It’s just natural. “This is working — don’t change it.”

GamesBeat: Do you foresee changes to the rate at which you’re going to be making your apps, then?

Leydon: Oh, yeah, sure. But what we’re really focusing on is mobile technology. What we’re going to be doing is making games that are very, very special and unique in the market.

GamesBeat: What do you think of the Infinity Blade strategy of investing in tech?

Leydon: Oh, it’s great. What’s cool about mobile versus Facebook is that it is closer to the console business, to be honest. A console with some web components. Because with Facebook, there’s a real technology ceiling. You’re not seeing games get much better. They look pretty much how they looked a year ago. If you look at Facebook apps right now, they look the same as they did two years ago because Flash inhibits people from innovating, essentially. Which is a nice thing for big, huge Facebook companies because if they have an engine, they can just use it forever. They have to — they have to make it compatible back to IE 7 or whatever.

That’s not the case with mobile. On mobile, there’s quad core iPad 3s now. With Retina displays. So with the mobile market, it’s going to be the best free-to-play market in the world because you’re going to get high-end awesome games like Infinity Blade. There will be Infinity Blade 4 or 6 or whatever, and it’ll be amazing. It’ll look better than any console game out there. But you’ll also see really unique free-to-play experiences like ours because the games are always connected to the internet. They’re with you all the time, which is something you can’t do on PC.

GamesBeat: Ben Cousins mentioned to me that he expects to see $50 million dollar budgets for mobile games in a couple of years.

Leydon: Yep. I agree. All of that’s going to happen. It’s like the console business. This is way closer to the console business than Facebook. A lot closer.

GamesBeat: Wow. That’s pretty staggering, I guess.Leydon: The thing about that $50 million budget — it’s fine if the console base is a billion people. Right? PlayStation 2 only got to, what, 200 million? And that was as big as it got. Mobile’s going to get to billions. So $50 million in the future will be probably average. But we’ll be talking about players in the hundreds of millions, potentially. Everything’s going to go up. The size of the audience and the size of the budget.

GamesBeat: Will the mobile game companies get into the console business?

Leydon: No. Because consoles are a waste of time. In my opinion. But that’s what I said — I think everything other than mobile is pretty much a waste of time at this point. They’re just getting good at a declining market. Practicing on making games in a declining market. Are there any more positive indicators for the console business? I don’t think there are.

GamesBeat: Sounds like we’ve gotta start reviewing mobile games.

Leydon: Well, yeah, absolutely! That’s where all the growth is, and that’s where people are playing. That’s what they’re going to be playing.  The power is that everybody’s going to have these “consoles” — these phones. And on top of that, all the games are going to be free. All of them. They’re all going to be free, and they’re all going to be in your pocket. That’s a pretty powerful thing. And then you combine that with these app stores, internet purchases, and tremendous distribution power mixed with frictionless payment systems — the most frictionless payment systems ever created. You have a recipe for the biggest gaming market ever seen.

GamesBeat: So on your technology side, do you see a need to invest in platform technology?

Leydon: Absolutely. That’s what we’re 100 percent focused on. It’s a different platform in every way. It still works similar to PC and console, but it’s free, and it has an app store and internet purchases. I look at mobile games right now, and to me, they look like Wolfenstein 3D [from 1992].

But the kind of technology that mobile games need, it’s very different from what a console needed or — you’re talking about a persistent online game. That’s not something that’s necessary on the PC because you’re not going to be near your PC all the time. The kinds of technology that we need to make our games accessible for the type of game that we’re making is very different from what I would need to do for a console game. A console game can’t send you a push notification and get you playing at two in the morning. But I can do that. The type of technology needed for the future of mobile games is new, it’s never been done before, and we’re investing very heavily in it.

GamesBeat: Is that a little like, say, Epic investing in the Unreal engine because it knew that was the future?

Leydon: Exactly. You got it. The engine that’s going to be driving mobile free-to-play has not been created yet.

GamesBeat: And how about location-related games?

Leydon: All of it. That’s part of it, too. The key technology that’s going to be driving the future of mobile games is barely starting to be created. You can see it, too, because you report on it all the time. You’re talking about HTML 5. That’ll probably be a key component. Location-based games, persistent online games — all of those types of games have never been done before, really, and where they’re going to end up five years from now, those types of games and how they’re going to be played, the technology behind it is going to be extremely complex and powerful. And it’s going to take a long time to build. We’re really in the beginning stages. It’s just like getting a 386 computer, again. All the tech that we need to make those types of games now still needs to be built.

GamesBeat: And now Activision’s got to spend a billion dollars to move into this market?

Leydon: All those guys will spend more. They’ll spend more than that. Don’t forget, the Chinese are coming, too. The Chinese free-to-play companies are bigger than the American companies. NetEase is bigger than Activision, and nobody even knows who they are. You’ve got NetEase, NetDragon, Giant, Shanda, and all of those. These are free-to-play professionals. They’re the best free-to-play developers in the world.

Gree monetizes better per year than Zynga by ten times, and look how big Gree is in the stock market. They’re all going to come over to this market because they’re good at it. We’re going to see a real shakeup. I don’t think Americans realize that the biggest game companies in the world are no longer in the United States. They’re mainly in China. When those people come over here, they’re not bad developers. They didn’t get to that size because they’re bad. They’re really good. And I think developers here are going to be blown away with the technologies and the techniques that they have and that we don’t have.

GamesBeat: So do you think the social, mobile, and online guys are going to take over E3?

Leydon: Hey, that’s a good question. Last year, it was amazing. I went there last year and we saw World of Tanks everywhere. I was blown away because that was the first real proof that free-to-play was coming to America. World of Tanks took over the whole entrance to E3.

So I would say about 25 percent of E3 last year was free-to-play. Which is unbelievable, especially if you’re an American game developer, and I’ve been doing this since 1999. That’s just unbelievable. The fact that free-to-play has that big of a presence, and pretty much in one year. They went from zero to 25 percent. So I think this year we’ll see half or more. Next year it’ll be a hundred percent, pretty much. So mobile will grow, too. That would be another shocking moment: When I walk in and the entire entrance is owned by Gree or somebody like that. I think it’s going to happen. Actually, if you want me to make a bet, I’ll bet that it won’t happen this year. But it’s not far off.

So we’re seeing the end of it, and it’s all about free-to-play. Free-to-play is it. The old stuff is over. Just forget it. It’s over. The cool thing about mobile is that mobile is the best free-to-play platform. That’s why we’re raising money, and that’s why we’re hiring — because that’s the most exciting platform. There’s a simple rule with free to play: You can’t make money if they’re not playing. If they’re not playing, you can’t monetize them. And with mobile, you have access to the player 24 hours a day.

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