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Pivoting into mobile gaming just a year ago was a brave move, as it’s late in the game. Companies like Machine Zone, Supercell, and King dominate mobile games. But Young and his cofounder Bob Stevenson have a long history in games.
Young spent a lot of years at Electronic Arts making games such as The Lord of the Rings and The Sims series. With members of the N3twork team, he also started Ngmoco in 2008. That startup was a pioneering iPhone game company that built 15 No. 1 apps. It was acquired for $400 million by Japan’s DeNA in 2010. They stayed at DeNA for two years and then moved on to start N3twork.
Now they’re trying again. Mike Vorhaus, president of Magid Advisors and a longtime gaming expert, interviewed Young in a fireside chat at our GamesBeat Summit 2016 event last week. Young isn’t talking much about what he is doing yet. But he did share a lot of opinions about the current state of mobile games.
Three top investment pros open up about what it takes to get your video game funded.
Here’s an edited transcript of their interview.
GamesBeat: Neil and I got the chance to get to know each other in the early days of Lord of the Rings in Redwood Shores. Neil’s had a great run at EA, a variety of other jobs in the industry. You actually did this before a lot of people — you jumped from the mothership and went to a startup pretty early in the mobile startup world. A lot of people came after you. You had a fabulous exit at Ngmoco. I guess your non-compete came to an end and you’re back in the mobile development world.
We’d love to hear about what drove you to Ngmoco, what made you want to create the company. And does the name mean anything at all?
Neil Young: Ngmoco stood for Next Generation MObile COmpany. When we started, my co-founder Bob [[Stevenson] and I were basically in my dining room trying to find a name that wasn’t taken. That was it. The abbreviation stuck. We stuck a smiley face at the end and took a lot of shit for that later on. But it worked out.
The motivation to start Ngmoco — and I think this is true for a lot of things I’ve seen succeed — is that it just seemed fucking obvious. It wasn’t obvious to the people I worked with at EA at the time. They thought I was crazy. But if you’ve made video games for a long time — in my case for my entire adult life and a lot of the non-adult life — you get good at looking at hardware and figuring out if it will be good for games.
When I got my first iPhone, in the first 30 seconds I knew it had the capability to be a great gaming device. But there was no vehicle to reach consumers. When Apple announced the App Store and the SDK, I called my best friend Bob and said, “We have to do something here. It’s going to be a killer platform.”
The original vision for Ngmoco was three ideas. One, we wanted to feel like first party for mobile devices. We didn’t think Apple or Google would be making games themselves. We wanted to build a network that connected our games together. And we wanted to make that network available to third parties.
We accomplished that, although we never intended to be a free-to-play company. Our original vision was just “Nintendo-quality games for $9.99.” But at some point the supply of apps outstripped demand. Priced forced us down to a control point at the time, which was 99 cents in the paid App Store. That forced us to think differently about how to build a company of consequence in the space.
GamesBeat: Did you publish any paid premium games?
Young: Rolando was the first. We started the company in the end of June 2008. We shipped our first games in October 2008. That first Christmas, Rolando came out at $9.99, and it was the number two-grossing game on the App Store. We developed that in partnership with Simon Oliver at HandCircus. It was our first big hit.
From the outside everything looked amazing. “Holy shit, this came out of nowhere.” Inside the company we’re like, “Fuck. This is not a big business.” That was an interesting lesson for us.
GamesBeat: Some people say that premium games oversold, as they say on Wall Street, and that they’ll come back. Do you have an opinion about that?
Young: I don’t think they’re coming back on mobile. Mobile is a unique platform. I don’t think people give mobile due credit. People are constantly trying to drive console experiences into mobile. That denigrates both console quality and mobile quality. The games you build for mobile are fundamentally different, as a human experience, from the things you build for console or PC or VR. Because of that and because of the ecosystem that’s evolved, true premium gaming is not going to be a big business in mobile.
GamesBeat: How did you decide when was the right time to sell Ngmoco? And why DeNA, given that you surely had other suitors?
Young: To put that into perspective, we were still a very small company. We were doing about $35 million a year in revenue. We had a portfolio of games. We had We Rule, which we’d developed with Paul and Newtoy over there. Then we had God Finger. Basically a portfolio of games and a system that allowed us to move traffic around those games. We had our Plus network, which had about 50 million registered users that sat underneath that.
We thought we were doing pretty well, but the business seemed really small. We started looking at our competitors in the U.S. and Europe, looking at what was happening in Asia, and it became clear to us that the mobile market in Japan in particular had developed five to seven years ahead of the market in the west. The lessons and learnings that could be gleaned from there could be an accelerant to our business in the west.
We decided to build the DeNA or the Gree of the west, build out that business and move our company to not just have first-party products and third-party products, but a platform that aggregated things together. As we started talking to people about raising money for that, one of the investors suggested that we should talk to one of those companies too. We spoke to both Gree and DeNA, and Tomoko Namba, the CEO and founder of DeNA — when I reached out to her she said, “I’ll be in San Francisco next week.”
She met with us and we were pitching as you do, trying to raise money — confidently, but with your cap in hand. Halfway through the pitch she said, “We have to build a business outside Japan. We’ve tried a couple of times already.” We said, “You have?” She said, “Yeah. That’s how successful we’ve been. We’d love to see if we can form a partnership with you guys.” That accelerated the conversations and brought a lot of other people to the table.
As we dug deeper with DeNA, what we realized is that the insights and the learnings from the Japanese experience are generally applicable here in the west. We felt like selling the company to DeNA was like getting access to a time machine. Having access to that knowledge would be valuable.
On the company side, the motivation side, there was that. Then, when we looked at the life cycle of the mobile business, the momentum and enthusiasm, we felt like it was a peak multiple moment. That moment would not come around for a long time. As we looked at it from a financial rationale, as well as a motivational perspective, that led us to make the decision.
GamesBeat: You missed the absolute peak by a few months. Rick Thompson created the bubble with Funzio, but you got damn close. Tell us about your new company, what’s going on there.
Young: When we left DeNA, which was the beginning of 2013 — it’s just not possible for me to sit on a beach forever. I needed to do something. We started N3twork as a company that would explore all of this knowledge, all of this insight. The first product we built was a video-based app. It was one of Apple’s top apps of the year it released.
At the point the contractual restrictions on us were lifted, though, it was a chance to ask ourselves what it is that we love, what it is we’re built to do. We were very proud of the video product and the company we were building, but it wasn’t what we loved. We re-entered the game space instead.
As we looked at the mobile game market, it continued to surprise us that all of those lessons around how you deliver high-LTV experiences — which is the only way to prosecute the mobile game market today, in my opinion — had yet to be put into practice. That’s what we’re dedicated towards today. We build products. We have a unique proprietary technology platform that those products sit on. They’re all designed to be high-LTV games.
The business rationale of a high-LTV game is that the lifetime value is higher than the cost of acquisition within some reasonable payback window. Instead of just relying on scale in order to build a business, you can rely on yield and seek hits, so that when you have an outsized hit you have a successful business. The mobile game business today is kind of like playing baseball if you could only score off a home run. We’re trying to build a company that’s capable of playing complete baseball.
GamesBeat: We’re getting to more than a handful of companies that have repeated their success.
Young: I think there’s two. We have Supercell, which has a spectacular production process and discipline and builds amazing pieces of software, and there’s Machine Zone, which has the same game framework and prosecutes ROI-positive user acquisition, depending on your definition of that.
GamesBeat: Let’s talk about discovery and user acquisition. I remember when a $2 CPI was expensive. That wasn’t very long ago. Now $30 is the norm for the top guys. Is your approach to discovery going to let you avoid that high expense?
Young: It’s difficult to avoid. The way to solve that problem is to build games that have a higher LTV than the cost of acquisition. That’s the number one focus for our company. Having said that, most people still prosecute the mobile game space in the same way as in 2012. There are some incredible new channels that you can access. Certainly part of our platform that we use for our products — and parts of it today are being tested with other people — take advantage of those channels.
When you have people with large-scale audiences and a high degree of affinity with those audiences, and you have a preconception among advertisers that those audiences may be something like teenagers when they’re not, there’s a tremendous opportunity. We intend to execute on that.
GamesBeat: Do you see meaningful changes in the free-to-play space over the next few years, or do you think we’ll all be developing and competing in an environment that looks a lot like today?
Young: It’s changing and it’s going to get to a place that’s similar to what you see in Japan. In Japan, 44 of the top 50-grossing mobile games are advertised on television. There are some unique factors in the Japanese market for sure, but even when you take those aside, that’s basically enabled by the fact that most of those games are what we think of as high-LTV games that can be driven to the biggest audience possible by deploying capital. That’s going to happen here in the west.
What that means is that in the west, we’ll see the mobile games business grow to five to eight times its current size on a dollar basis. There’s not going to be more people playing games on smartphones. That ship has sailed. But what will change radically is the average revenue per user. That will require us as game-makers to figure out how to take engagement and monetization systems and put them in pieces of software that can be as broadly compelling as possible, so we can drive big businesses based on software people love.
GamesBeat: When you talk about high LTV, is that more about a long lifetime or a high ARPPU? It could be both, but I have a sense that you’re saying something about the longevity of games.
Young: It has to be all of the above. The per-user yield has to be as high as possible, and the length at which you retain paying customers has to be as long as possible. In that model, where you have an LTV that’s higher than the cost of acquisition — let’s say for the sake of argument that it pays back in 180 days. Some of your paying customers are retained longer than 180 days, so you compound recurring revenue over time. It starts, from a business standpoint, looking like an MMO business versus a download business.
GamesBeat: Give us your 30 seconds on esports.
Young: Completely different than every other gaming paradigm so far. More like live music in terms of monetization models, and also dangerous waters for people who think they can take their traditional gaming business and move it in there. Each of these segments of our industry are unique. You have to understand those unique properties. If you don’t build your business to take advantage of those properties, it’s unlikely that you can take your business and shift it over.
GamesBeat: What about 30 seconds on the future of console gaming?
Young: Medium term, long term, it’s all about VR.
GamesBeat: What about VR, then?
Young: Love it. Not ready for prime time just now. There will be some short-term train wrecks as far as companies that have committed themselves hoping that there will be a big business in the next 18 months. That won’t materialize. Medium and long term, amazing.
Question: Can you talk more about where that eight times growth in the mobile game business comes from? Are people spending more money or time on the consumer side, or is it just better games?
Young: It’s more money being spent on a per-user basis. If you take Japan as a proxy, at the point that Japan reached the same type of device penetration as we did here in the west, with devices that provided essentially the same human benefit as our smartphones today, if you looked at the growth in ARPPU over that same period, it was about 10 times. It was not driven by device adoption. It was driven by developers building systems that changed the nature of monetization and consumers being comfortable with that monetization. Those things go hand in hand. It’s really the nature of ARPPU that’s changing.
Question: Why don’t you think Japanese mobile games have ported as well to the west?
Young: There are huge cultural differences, cultural and artistic differences. You have to take those into account. What I’ve experienced is—what mobile games are really about, they’re exercises in human behavior. The culture, the artistic tendencies in Japan, they’re different from those in the west. But there are humans in Japan. Those humans react to those exercises in human behavior in much the same way as people do in the west. Those systems have to be repackaged in a way that western humans can accept and enjoy.
GamesBeat: It seems like the differences between Japan and the west are much stronger than the differences between other Asian countries and the west.
Young: Oh, I don’t know. Japan is certainly unique, but in the console world we’ve loved Japanese games for a long time. That’s much more because they’re exercises in game design versus necessarily exercises in human behavior. That’s the thing that has to be repackaged correctly.
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