Disclosure: The organizers of ChinaJoy paid my way to Shanghai. Our coverage remains objective.
SHANGHAI — Kevin Chou is a young chief executive, but in six swift years, he has grown Kabam into a $400 million free-to-play mobile gaming company with 800 employees. Kabam has forged alliances with Hollywood studios like Lionsgate, Universal, Warner Bros., and Disney. One game from just one of those alliances, Marvel: Contest of Champions, has generated more than $100 million in revenue in just seven months.
And now it’s shifting its strategy to put more resources behind every game. It published 16 titles in 2014, but it expects to only release four in 2015. Chou has reset the strategy to make higher-quality games. He believes his job is to set a vision, hire the right people to execute that vision, and then find the money to support those goals. Last year, he raised $120 million from Alibaba to finance Kabam’s global expansions.
This year, he returned to the ChinaJoy gaming trade show to talk about an alliance with Longtu and plans to launch Marvel: Contest of Champions in the Chinese market. We talked with him in an office in a skyscraper in the midst of skyscrapers in Shanghai.
Here’s an edited transcript of our interview. We’ll have plenty of interviews like these at our GamesBeat 2015 conference on Oct. 12-13 in San Francisco.
GamesBeat: You have 800 people turning out four games a year now. Is that 200 people per project per year? It sounds like console team sizes.
Kevin Chou: We’re definitely not at 200 a team. We probably have a bit bigger finance and legal team than people would expect. We were actively pursuing an IPO a couple years ago, and we have to keep up with the maintenance required to be a public company. There’s a reasonably-sized corporate team in place. Our largest team will get close to 100 people, a bit south of 100 people.
GamesBeat: And working for how long on one project?
Chou: Under our new strategy, we try to get teams psyched to go think about a multi-year vision for a product — three, four, five years. We also have the legacy games we’re still running. We have four new projects a year, but we also have people staffed on older projects, so teams are much, much smaller than 200 people. We don’t even have a game team over 100. Our biggest is getting close to that but not over.
GamesBeat: When you look at the strategies of different companies in mobile, how would you compare yourselves to some of them — Supercell, King, EA Mobile, Glu? It seems like you bear some similarity to Glu, but I don’t know how you would describe it. The Supercell style, they keep saying, is to have teams of five people or so. 15 people are running Clash of Clans. To me, that just makes them an extreme outlier. There’s no one else like it. You’re choosing a strategy to be different from everybody on that list as well, though.
Chou: I think so. As a CEO, I have three key responsibilities. The first one that I think about, my primary objective — yesterday I called it setting a vision for the company. But vision also needs to be an understandable strategy. I think of Kabam’s strategy as — if you’re trying to become an industry leader, you can’t follow what everyone else is doing. It’s very much about predicting where the puck is going and placing bets on that.
As far as key differences for Kabam — the biggest similarity to Glu has been the focus on Hollywood IP. We do it a bit differently. Their biggest successes have been more like celebrity games. But I look at our Hollywood IP pipeline as one of the strongest in the industry. That’s because of our focus on doing a smaller number of projects, but doing as much as possible to make those projects successful.
We talked about how Marvel grossed $100 million in just seven months. That game is still growing. I’m very excited about the trajectory of that project. That leads us to Star Wars. We just announced a second Marvel game as well. It’s an incredible success leading to more projects that we’re excited about.
The second part of our strategy is thinking about China and other Asian markets a bit differently, in terms of hyper-localization of a project. A lot of western companies will take an existing game and translate it. They may work with some marketing partners and so forth, but I think we’re the only company that hyper-localizes with a team based here in China. The product design is going to be reasonably different than what you see in the west.
We have a very unique VIP system, which is a standard thing in China but relatively new in the west. When we launch Marvel here in China, that system will be in there in a way that it’s not in the western version of the project. We have a new gear system that we’ve wrapped up into the Marvel universe. In the western version of the game, it’s very much about chasing the heroes, the characters. In the Asian version of the game, there’s also going to be very interesting signature items and sets. You can get an Asgardian set, or Captain America’s shield. We’ll be incorporating some very interesting stuff into the Chinese version of the game first, and if it goes well you’ll see it in the western version over time. But we’ll take the core of what’s great about the game and add some unique aspects to the Chinese version first.
I have two of my founders out here in China now. We have an office with a dedicated team and experienced leadership to focus on bringing games to China. We’re also absolutely thinking about the hardware that’s coming out in the next year and the year after. We’ve become fairly good at predicting hardware specs. If you study the CPUs and GPUs on the way, you can project forward into the next generations of hardware.
When we think about a game that we’re starting today, the question is, what can we do to push the boundaries of the hardware that will be there when we launch that game in 18 months? It’s a bit of a console-ish strategy. We’re pushing at the absolute edges of the hardware. And of course the next generation comes out a year after that. The mid-tier of the market becomes strong enough to support the last generation’s games.
Take a game like Contest of Champions. When we pushed it out, it didn’t run too well on tier two, tier three devices. Seven months later, though, we can support a lot more devices than we supported at launch. Generations in phones happen much faster than in console. We’re thinking about pushing new boundaries in hardware every year.
GamesBeat: Do you think some things about China just make it a very different game? If pay to win is more popular here than it is in the west, that seems to make it a completely different proposition.
Chou: Part of localizing games for China is understanding the aspirations of a Chinese consumer. It’s a bit different from the west, where there’s a much stronger concept of fairness and equality. There’s a different sense of what fairness is. In China there’s more of a sense of, “Oh, I get it. That guy paid $10,000. He’s going to be more successful than me and that’s okay.” There’s much less backlash against that.
GamesBeat: Almost more respect for that person’s status?
Chou: Or if not respect, at least acceptance. That’s just the way things are. I don’t want to attempt to explain cultural differences beyond the surface level, but definitely, in the Chinese versions of our game — the way you create a game that allows for more separation between payers and non-payers, we’re definitely pushing that further in China.
The way you push that further is you create even more things for people to aspire to and chase and collect. They become harder and harder to get, in a grindier way. We think about that from a product design perspective when localizing for the Chinese market.
If you take, for example, the VIP system I talked about — that’s standard practice here in China. The VIP systems here in China are incredibly nuanced. Not only are there VIP systems designed into the product, but the customer support has dedicated VIP support. A customer support agent in China will have 10 or 20 VIPs that they’re dedicated to. We have less of that concept in the United States.
One aspect of a VIP system that we think will work for the western market, though, is that it’s really a way to unlock content. We love the ability to add different tiers. One of the challenges for free-to-play companies is that when someone pays a lot of money, that usually means they’re chewing through a lot of content much faster than a non-payer. A VIP system allows you to put in dedicated content for people who do that. They unlock different content in a different way. We think that can work in the west.
GamesBeat: With the Longtu partnership, is there some expertise you get there, or is it more about distribution, reaching more Chinese gamers?
Chou: It’s definitely about expertise. In the western markets, our top three marketing channels are Facebook, YouTube, and Twitter. All three of those products are blocked in China. Our marketing channels are just different. Even if you were to take the Chinese versions of those products — Baidu, Renren, Weibo, all these others – they don’t have the same marketing products, the same type of targeting and media creatives.
The way you do marketing in China is much less digital. You can do some digital going through Chinese companies, but there’s a much greater concept of integrated marketing for product launches. In tier one cities, which are incredibly dense, there’s a lot more outdoor marketing, more television, more public transit marketing for example. That just doesn’t happen in the U.S. and Europe, because cities are less dense.
The expertise we’ve developed in the western markets around digital marketing is less applicable here in China, so Longtu is a great partner for us. They understand the different cities and ways to reach consumers in a unique way.
GamesBeat: How much concern does that leave you with? If you have too many partners, you have to share too much of your revenue.
Chou: We think, right now, about growing the pie as big as possible. The economics of a top 10 game are so vast compared to even a top 25 game, and certainly a top 100 game, that it’s much better to be top 10 or top 5 and top 3 and share some of the economics than it is to be top 100 and keep it all for yourself.
GamesBeat: Marvel has other partners. You almost go project to project. Your strategy seems like it should be to be their best partner, to make the most successful Marvel game.
Chou: We are doing that, certainly in terms of downloads and revenue and product reviews. We’re quantifiably the best Marvel product out there. It’s been funny. Here in China I get a lot of questions like, “Aren’t you worried that everyone will see your strategy and execute against it?” While we have great relationships with Hollywood, we’re not the first Marvel game out there. There were 15 Marvel games on mobile before Contest of Champions, but it’s been the most downloaded, highest revenue Marvel project so far. It’s not about getting the license. It’s about all the other aspects of making a quality product — the right team, the right marketing and publishing. Slapping “Marvel” on something is not enough.
The way we think about our relationship with Marvel, as well as our other Hollywood relationships, is very different than what I think people expect. I see a lot of other companies chasing IP at this point. They think, “All I have to do is write a check, take my existing product, mix it with this IP, and get a bunch of downloads.” To be fair, that’s probably how we started, a bit, when we made The Godfather and The Hobbit and so forth. But the way our strategy and thinking about our Hollywood relationships has turned is 180 degrees different.
Now we start with the fan of an IP — a really deep Marvel fan, for instance — and think, “If they’re already a fan and they play our game, we’ll succeed if we make them an even bigger fan.” How do we make a product that adds to the IP, adds to the franchise, and delivers a ton of value to our IP partner? That, to me, is the measure of success. If we can answer that question, we’ll get all the best deals in the industry. We’ll make our partners happy, build the best relationships, and find a ton of value if we do the right deal with the right economics and the right terms.
But it starts with how we can make somebody a bigger fan of the IP after they play the game. If we can succeed at that, we’ll be successful as a company in the long term.
GamesBeat: Is it different with someone like Warner where they have their own mobile division? They’re doing five mobile games now. Eventually, if you make the mobile business this attractive, they’re going to start doing the job themselves.
Chou: Disney has its own mobile division as well. Universal doesn’t. Paramount doesn’t. Disney has a very large internal unit doing console and mobile games and so on. There is a bit of potential competitive issues, but in the end, the nice thing about these major media entertainment companies is that they already manage this for movies and television.
If you think about movies and TV production, a lot of studios team up to publish something together on one project, and then on the next project they’re competing head to head with similar movies on similar launch dates. There’s an interesting element of competition among the media companies already. They’re already set up to manage projects that are collaborative and projects that are competitive.
We have a lot of conversations with our media partners about conflicts of interest. We want to share as much information with them as possible. A lot of times those are contractual relationships. At the same time, we’re very careful from the outset to determine the boundaries of where that information goes inside the company.
GamesBeat: I remember David Haddad from Warner saying that the type of game you did for Lord of the Rings was more like your specialty. That made sense, going to you guys with that license for that game.
Chou: That’s one way we manage through that. We don’t try to compete directly on a very specific product together. With Star Wars, there’s Star Wars Commander. Even though strategy games were how we built this company up, big surprise, we’re not doing a Star Wars strategy game ourselves. Our Star Wars game is an action-RPG, totally different from their internal title.
The relationships and the success we’ve had with our projects give us deep conversations with all the right executives and decision-makers. We have very deep conversations. It’s not just, “Hey, Kabam, we’re writing you a check.” I’m a huge fan of David Haddad, actually. I’m very happy to work with Warner and I expect to continue working with them, even though they have an internal division.
GamesBeat: It seems like it’s a very complicated business, but you have plenty of options for how to do your four games a year.
Chou: The beauty of this is that we have Warner as an investor in the company. Kevin Tsujihara sat on the board [He resigned after becoming WB CEO]. They knew we were going to work with Marvel and Disney. In some ways Marvel and DC are direct competitors. But it’s been fantastic working with Disney and fantastic working with Warner. The experience of managing through that — we’ve made our share of mistakes, but we’ve learned a tremendous amount. It’s very unique that we’ve been able to work with both Warner and Marvel as closely as we’ve had.
GamesBeat: It seems like highest challenge remains those top three games on the top-grossing list. What do you think about those guys — Machine Zone, King, and Supercell?
Chou: I think of it as a big opportunity. It’s a problem, in the entertainment industry, to have uncertainty about where your next hit will come from and how long that hit will last. Those two primary questions are the key challenges for the whole industry. When it comes to the second one, it used to be that the top-grossing charts changed every month. Even if you had a hit, one or two months later you weren’t nearly as relevant anymore. The economics weren’t compelling. It only cost half a million dollars to make a top-grossing game, but it didn’t last that long and only made a few million. That’s okay, but it’s not a great business.
Great businesses are what we’re starting to see today. It costs somewhere in the mid-seven figures to make a great game, but if you’re successful, that could be a $5 billion game. My personal prediction for Clash of Clans is $5 billion over its lifetime. Those are compelling economics. The fact that you can make a game last for years and years is incredible.
I do sympathize with some of the indies out there, when they look at the top of the charts and see nothing moving there. But if you really want to build a business to eventually stand toe to toe with EA or Activision, these great gaming companies, you have to have predictability when it comes to at least the duration of a hit, of a franchise.
The next question is, where is the next hit coming from? That has a little bit more predictability these days as well. We’ve been lucky as a company. Marvel is our fifth game to cross $100 million. We don’t have a $5 billion game, but I feel like we have an interesting model at this point.