All the sessions from Transform 2021 are available on-demand now. Watch now.
The pandemic has been tough on Nexon‘s core markets in South Korea and China, but the Tokyo-based online game publisher has been preparing for a permanent shift to digital entertainment for decades. Nexon CEO Owen Mahoney believes that online games will make gains during the pandemic as isolated people socialize through games, and those gains won’t evaporate when things go back to “normal.”
I spoke with Mahoney last week after the company reported its earnings for the first quarter that ended on March 31. The online game company benefited from shelter-in-place rules in late March, but it also saw its business in China drop 42%. After some initial challenges, Nexon has transitioned to work-from-home rules, and it isn’t in as bad shape as industries such as movies, which have stalled their production.
Nexon’s larger missions are still in place. Nexon started in South Korea in 1994. Its first title was Nexus: The Kingdom of the Winds, an online fantasy role-playing game. Nexon is a pioneer of online-only free-to-play games, where players can start playing for free and then purchase virtual items in the game for real money. This business model propelled it to huge success, generating billions in revenue for game like Dungeon Fighter Online (also known as Dungeon&Fighter in some territories).
In 2005, it moved its headquarters to Tokyo. Today, the company generates about $2.5 billion in revenues a year from titles like Dungeon Fighter Online, Kart Rider, and MapleStory. These franchises are as valuable as Star Wars, but most people don’t realize that.
Three top investment pros open up about what it takes to get your video game funded.
The core markets are South Korea, China, and Japan, but the company has been expanding in the West under Mahoney. In 2016, Nexon acquired Big Huge Games, maker of DomiNations. And in 2019, it bought Patrick Söderlund’s Embark Studios in Stockholm, Sweden, as part of its quest to become as well known in the West as it is in the East.
Here’s an edited transcript of our interview.
GamesBeat: If we get stuck in this situation for a while, does this change the way you think about making games?
Owen Mahoney: I don’t know if it changes the way we make games. You and I have talked about this before. My view on all this is we’re in the midst of a secular shift in the entertainment industry. This secular shift is going from the belief, although no longer accurate, that Hollywood and movies and sports and music form the center of the entertainment industry, to people realizing that it’s video games. And in particular online games. That’s the center of the center of the entertainment industry. We’re going to look back in 20 years and see this as the a-ha moment where we realized that secular shift to online games and virtual worlds. It took COVID to do that, but that’s what happened.
Did you see the movie 1917? It’s interesting. I’ve asked a couple of people if they’ve seen it and nobody seems to have seen it. I thought it was a huge blockbuster. I just downloaded it on iTunes. But it was interesting, because in the early 20th century, we knew machine guns existed, and we knew that there was this new explosive ordnance technology. Cannonballs were just giant BBs that would shoot at people. Then you had explosive ordnance that would explode on impact. All this and mustard gas. We knew this existed. But at the beginning of World War I people still started the war with swords in the air and cavalry charges. It took World War I to disabuse everyone of this idea that they could win a war that way. It took one machine gun nest to mow down a whole bunch of people.
It’s a dark way of thinking about it, but you get confronted with a situation that tests your assumptions and mode of thinking. The assumptions and mode of thinking we’ve been going through for the last 20 years is that we’re still in the 20th century in terms of entertainment. We’re not. We’ve known for a long time that video games are bigger than Hollywood, bigger than linear entertainment, in terms of gross revenue. We know it’s growing a lot faster, triple the rate. You look at the P&Ls of companies like Nexon or other big video game companies. We printed a billion dollars last year in cash flow. If you talk to Andrew [Wilson of EA] or Bobby [Kotick of Activision] or the other CEOs of big video game companies, they’re printing billions of dollars a year as well.
GamesBeat: The rest of entertainment is very different.
Mahoney: If you look at linear entertainment, it’s not growing, or barely growing. It’s getting more unprofitable every year. Netflix burned through $3 billion in cash last year. The table stakes of getting into a linear entertainment service is burning billions of dollars. That’s before you get to all the COVID stuff. There’s no cruise ship industry. There’s barely a hotel industry, barely a travel industry. All that is getting shut down. Then you say, “What’s the center of the entertainment industry?” It’s not traditional entertainment at all. It’s interactive entertainment, and in particular virtual worlds. We’re living in a virtual world today in large swathes of the economy.
I get asked sometimes if this is all going to slow down after COVID. I view this as a secular shift. It’s plain as day for everybody now what this entertainment industry has changed to. For you, with a vested interested in this industry, and for me, and for everyone involved in video games, this is the watershed moment where online games in particular step into the light and nobody will look back. I would not want to work in Hollywood. I would not want to work in linear entertainment. I would not want to be in any sort of amusement park business or live sports or anything like that. Those things are going to see significant changes.
GamesBeat: I’d agree with that world view. How do you take that world view and then map it onto something, whether it’s Nexon’s strategy or how quarterly performance is going to look in the game industry, things like that?
Mahoney: I’d say two things. First, in terms of what Nexon has been doing, over the years we have–I’m going to draw you something on a piece of paper and you’ll see it. This is a whiteboard we’ve often drawn at Nexon. If you think about the game industry in two vertices, you have offline games and online games. Then you have deep or immersive games and casual games.
Old guys like me started out in this area here. Games like Civilization and Railroad Tycoon. Those were offline games that were pretty deep. Then the internet allowed this area to happen. Companies like Nexon and other Korean companies in the early days of the internet pioneered this area. Then the iPhone and Facebook enabled casual games. EA, when I was there, had a casual games business, but it was all on PC. Facebook made the casual business explode, and then the iPhone made it explode again.
In terms of where Nexon is focused, we’ve tried things in each of these areas. We did some RPG-style story-driven games in Japan. We did a bunch of casual stuff, varying levels of online and offline in casual. But we realized we stink at all that stuff. This is the area where our heart really is: deeply immersive online virtual worlds. Last year we got really serious about cutting off everything else and getting into this area. We think, also, this is where the growth is. If you think about what’s going on with the iPhone X and the consoles and cloud, it’s putting devices that can play deep, immersive online games in the hands of billions of people.
This market used to be only addressable by PCs, of which about 300 million are gaming-capable PCs. The types of PCs that you or I would have. But there are 3 billion-ish and rising iPhone X or better mobile devices, either iOS or Android. It’s an increase of about 10X. The full Maple Story experience is on a mobile phone, and we’re not the only ones. Now this is with you at all times.
So what is a deep online virtual world? It’s like a virtual amusement park. The best analogy we can come up with if we have to think about this world of virtual worlds, it’s like a Disneyland, a theme park. Now you don’t have to get on a plane and go stay in a hotel and deal with their depressing parking garage and take a train and pay a bunch of money at the door and deal with all the stuff you have to do at Disneyland. You pull it out of your pocket, and in five seconds you’re playing in this virtual world. In a lot of ways it’s a lot better.
To get back to your question, that’s our departure point, our view of the future. All we want to do is make sure we execute on this part of the world really well. The first step is getting out of the other stuff, because other people do it better than we do. We don’t think that’s the future.
GamesBeat: As far as what we should start seeing quarter by quarter, you just had the quarterly results come in. Was this mirrored in the last two weeks of the quarter in some way? The whole notion that people are locked inside, can’t do anything else, so they’re going to play games?
Mahoney: We had a strong quarter, especially in Korea, but the trends were already in place. This didn’t start in March or February. It was going on in January and well before. Maple Story was up 137 percent year over year in Korea. On mobile it was up 185 percent. I’ll have to double-check those numbers, but it was just a phenomenal quarter. That was on top of Maple Story being up 69 percent the year before. The quarter before was way up. The trends were already in place for what we’ve been seeing. It’s hard to piece together what’s COVID.
GamesBeat: There is that piece where the internet cafes vaporized.
Mahoney: Yeah, but that’s only a small part of our business. Some people asked about what’s happening with PC cafes, but that’s never been a big part of our business. It’s a bigger part of the Korea business, and our Korea business has been, as I said, in phenomenal shape. PC cafes are part of it, but we can go around the PC cafes and direct to people’s homes, especially as we get more and more mobile going.
GamesBeat: If we saw a certain pattern in the first quarter, the second quarter is going to be much different. It’s the full shelter in place.
Mahoney: For us, it affected us pretty early in the quarter. Here’s another interesting thing. When you think about us versus linear entertainment–we saw this front and center at Nexon. We’ve been talking about the demand side. Are people consuming more games? What’s happening with the demand side of things? Well, let’s look at the supply side. We don’t have a supply shock in the game industry, at least not at Nexon. I have thousands of employees who, as we speak, are creating content in their pajamas. They’re in T-shirts. They’ve got their kids there. They’re not missing a beat. We’ve been focused on this pretty heavily to make sure we don’t lose productivity. You worry about productivity in situations like this. You also worry about security. But those are solvable problems. They’re not easy problems, but they’re solvable.
Angelina Jolie is unemployed today. She may be writing, but she’s not filming anything. All of Broadway is unemployed. Everybody who works for a theme park is unemployed. Athletes, any live actor, they can’t make stuff. They’re stuck. Even Netflix is talking about this now. But that’s not a problem in the game industry. Some people talk about mocap and stuff like that, but we haven’t seen this at all. Not only do we not have a demand shock — if anything we have a demand benefit — but we’re not having supply shock either.
GamesBeat: Because you’re Asia-focused, there’s a different pattern there versus the western companies. If the Chinese are back to work and South Korea is also back to work, does the consumption of games start to change at all? Does it go back to where it was before COVID? Or is it lingering in some ways? Are they sticking with more gameplay?
Mahoney: Two answers to that question. One, we haven’t seen any changes. It’s harder to pick this apart, is the larger meta-point. It’s hard to pull apart what’s COVID and what’s not. But as I said, all these trends were well in place long before COVID happened, at least in our business, which is the only thing we can speak to. We gave earnings guidance that we think is going to be quite good, and it’s not because of COVID. It’s just because business is going well.
The second meta-point that I would make is, I do think we’ve turned a corner or passed a milestone where people think about games differently than they used to. We’ve certainly acquired new users. We’ve acquired different play styles. One of the other things about the kinds of games we make is they’re microtransactions, not macro. You get a lot more bang for your buck in terms of hours played for video games, and in particular online games of the type we make. As more people adjust to this and associate this with their entertainment, it’s hard to want to do–it’s going to be different when they go back. They’ll have a different viewpoint about how they do entertainment.
It’s a bit like–I don’t know how old your kids are, but my kids are now 16 and 14. I ask them a lot about what it’s like doing school on Zoom. They say, “I miss seeing my friends,” but kids are flexible. They’ll roll with the punches a lot of the time. As long as they have the routine, they learn as easily as they did with a big campus. I wonder what happens to the education industry in the long term, when we realize that we can send our kids to a Harvard that doesn’t require Harvard. Education could probably use its own Uber moment. But certainly in the game industry we’ve turned a corner and gone to a different place than we were before.