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Nexon is a lucky online-only video game company with five major franchises that have generated billions of dollars in revenues over the years. That’s the payback from being the first company to launch a free-to-play online game — the Kingdom of the Wilds, released on the PC in 1996.
And by the end of this year, all five of those major franchises will be available on mobile devices, Nexon CEO Owen Mahoney said in an interview with GamesBeat. After releasing stellar earnings this month, Nexon’s shares hit record highs on the Tokyo Stock Exchange. The Tokyo-based company, which has lots of its operations and staff in South Korea, has been benefiting from the habits of new and veteran gamers alike during the pandemic. And if those games are as big on mobile as they are on the PC, then Nexon will be golden.
Mahoney spoke with us at our GamesBeat Summit virtual event in April, where he said, “We’ve all gotten a lesson on what we don’t know, in the economy and science. We’re living in crazy times.” But as the second-quarter results showed, the crazy times have been financially good for big game companies. Still, it’s not easy. PC gaming cafes are a big part of Nexon’s business, and they’re still iffy physical spaces that may or may not come back as places to play games.
Even if the times take a turn for the worse, Nexon has $5 billion in cash that will help it stay the course. I caught up with Mahoney about his views of the world a few months after our last interview, and he once again said some enlightening things. And he continues to pursue the long-term goal of creating games that do well in the West as well as in Asia and the rest of the world.
Three top investment pros open up about what it takes to get your video game funded.
Here’s an edited transcript of our interview.
GamesBeat: You reported earnings. How did it go?
Owen Mahoney: We had a great quarter. We were up 20%. Our team is firing on all cylinders. We gave guidance for about 50% for Q3. It’s a very good time. The question you asked me before, last quarter, was, “Is this about COVID?” You’ll probably ask about that again. I think our answer, now more than ever, is it is part of a much larger trend that’s been going on for some time that has been made very obvious by COVID. But it’s clearly been happening for some time.
It used to be that the 20th century media and entertainment was like the industrial age. You went to a physical space to be entertained, in a theme park or a sports arena or a concert or a cruise ship. The world is becoming increasingly virtual. You still want to be connected. Through online games and virtual worlds, which are like virtual theme parks that can now be delivered to you, and to everybody in the world. There are roughly 3 billion highly game-playable workstations in people’s pockets around the world. That’s iPhone X or greater. Now we can deliver a virtual theme park, software-derived, delivered through the cloud, to everyone in the world.
That’s a revolution that is going on in the entertainment business right now. We think there are going to be some companies that win big as part of that. We think Nexon is one of them. It’s not well-covered by traditional media. If you look at the Hollywood media, the general business press, especially in the west and Japan, it’s not well-covered or well-understood, but it’s clearly going on. It’s not a COVID thing. It’s much bigger and longer-term than COVID.
GamesBeat: You want to be the virtual Disneyland?
Mahoney: Well, I think we are. MapleStory was up 151% in Korea. It was up 171% in Japan. That’s on top of the 24% growth it had a year ago. It’s growing double and triple digits. It grew 173% in North America and 217% in Europe. That’s 17 years into this product, this virtual theme park we created. Nobody’s ever done that before. It’s unprecedented. Nobody would have guessed it could happen. It’s a matter of execution, certainly, but we also think it’s a matter of a much bigger wave that’s going on in the entertainment industry. It’s revolutionary.
GamesBeat: I wrote a column that included an interesting survey from some of these folks who interviewed 13,000 people around the world about their gaming behavior. They were taking a guess at how many new players there are. They said there was a 4% net increase in new players for games. They also had this notion of where the revenue growth would settle after we’re back to normal. Those were some questions I’ve always had about where we are right now. It was interesting to see, based on a survey, what these folks thought was the reality of it. I would guess that maybe nobody’s really ready to go out on that much of a limb, though, and make those precise predictions.
Mahoney: The precise predictions — there are two interesting things about the question you’re asking. One is, is it worth making a precise prediction? I would posit no because whatever happens in the short term is going to be overwhelmed by the long-term trend.
The second is, inherent in your question about precise prediction is the idea of reversion to the mean. That we’re going to go back to an old way of doing things. I just look at the entertainment consumption in my own family, my two boys, and their friends. Of course, we’re a gaming family. We like playing video games with each other. But they have no interest in doing the stuff I did. I stood in line to watch the original Star Wars for four hours with a blanket and some KFC with my friends because that’s what we did. I still love going to live music and things like that. I can’t wait to go back.
What do they want to do? They talk about strategy and tactics for how to play their favorite online game. They want to connect with their friends there. That was going on long before. They watch YouTube videos about it. They contribute to discussion boards. There’s this secular shift we talk about, and it’s not a COVID phenomenon. It’s a secular shift from linear, lean-back experiences to lean-forward experiences, where you’re participating in the entertainment.
That’s clear as day. You as a gamer understand that. A lot of times it’s fine to sit back and be told a story, but once you start participating and interacting and having a group of people you’re social with online, doing that in a virtual world, that’s compelling entertainment. There’s no doubt a generational shift involved in this. Whatever precise call we make now or in the next couple of quarters is overwhelmed by this trend that’s going on, a years-long trend.
Again, we see it in our business. Talking about MapleStory or Dungeon Fighter or — the really interesting thing we see in our business now is we just launched The Kingdom of the Winds on mobile in Korea. Now, you and I have never talked that much about The Kingdom of the Winds, but The Kingdom of the Winds is the first MMORPG. Most people don’t realize this. This started it all, long before World of Warcraft, before Ultima Online or any of the western MMORPGs. There was a game called Kingdom of the Winds, and it came out in 1995 or 1996.
We just launched it on mobile. If you look it up on App Annie today in Korea, or at least as of last night, it was No. 1 on iOS and No. 3 on Google. It’s been that way now for more than a week. We’ll see how it goes from here. But this is The Kingdom of the Winds. You can look at the graphics. It’s pixelated because it was created on mid-’90s technology. But people love it. It’s a great online game experience. For the people who are younger, it’s very accessible to them. For the people who are older, it reminds them of their youth. It’s a well-architected, well-made game that we’ve been able to bring to a much larger audience, i.e. everyone, because everyone has mobile.
We’ll see how it goes from here. We’re not making predictions about how it continues out. But it gives you a sense of this idea that I can have a virtual theme park. All my friends are there. We can participate in an interactive way in our experience, and we can do that any time, anywhere. We don’t have to travel down, stay at someone else’s hotel, park in the parking lot, get on the bus with 1,000 other people, so we can maybe see Goofy. We can do this anytime, anywhere. That’s super exciting and super compelling as an entertainment experience.
GamesBeat: You said that five major franchises would be on mobile by the end of the year. Is Kingdom of the Winds one of them?
Mahoney: Yes. MapleStory. KartRider. KartRider Rush+ has been doing terrific — that’s the mobile version of KartRider 1. FIFA Mobile, which is the full FIFA experience on a mobile device. Then The Kingdom of the Winds and Dungeon Fighter Mobile. With Dungeon Fighter, we’ve generated more than 60 million pre-registrations. It’ll launch in China first. We’re excited about the feedback. The excitement we’ve picked up has been terrific.
GamesBeat: Is that both iOS and Android?
Mahoney: Yes, it is.
GamesBeat: That shift to mobile, or expansion to mobile, how long in the making has that been? How many years?
Mahoney: Well, it’s been some time. We talk about how we see the video game industry in terms of four quadrants. You divide it between immersive and light. Some people would say “hardcore” instead of “immersive,” but we don’t really use that term, because it’s confusing. Similarly, some people would say “casual” instead of “light,” but you get what this is about. And then on the X-axis, offline versus online.
The game industry started in the upper left quadrant, immersive offline. We had things like SimCity and Metal Gear and Civilization. We picked these games as examples for our investor deck, by the way, because they’re some of my favorite games, and I’m usually the one drawing this on the whiteboard. Then, in the mid-’90s, the internet happened. It was clear to everyone that this was going to change the games industry.
Several companies, particularly in Korea, where broadband was very fast and very cheap very early on — you could get a megabit download in Korea in the mid-’90s for about $20 a month. We were lucky if we were on DSL at the time. Most of us were on 56K dial-up. But in Korea, they had this explosion in online game companies because everyone had what was then a very fast connection. There was a generation of game companies, first in Korea and then in China, that came up and built this business. Nexon with Kingdom of the Winds, then NCsoft with Lineage, then Neowiz and some others, these were real pioneers. It made Korea the Hollywood of online games.
A lot of western companies, and a lot of Japanese companies, looked at the Korean games and said, “Oh, that’s low resolution. It’s pixelated. It’s not 3D. Those don’t look like games.” But they were games, and they were very compelling entertainment experiences. They just looked different and played different from traditional games at the time. Then, in the early 2000s, casual happened. It was already there on PC, but it really happened with the rise of Facebook in 2008 and 2009. Mobile happened around the same time. When the App Store opened up around that time, it opened the casual market to a much broader audience.
That’s one way to think about the history of the industry. Nexon, like most every other game company, has experimented in every one of those quadrants. We’ve done casual games, offline story-driven games, story-driven RPGs. We’ve done all those things. We just realized we’re only good at one thing, and that’s deeply immersive online virtual worlds. That’s where our heart is. Heart matters a lot in the creative business.
Coincidentally, it’s also a very good time to have that be your core competency and where you want to spend your time. As I said, we’re going from about 300 million game-playable PCs around the world to more than 3 billion game-playable mobile devices, capable of playing deeply immersive online games and virtual worlds. That means a GPU and a networking layer that’s robust enough to handle the kinds of games we make. Now we have that, and so this business is very interesting.
We’re going to look back at the first half of 2020 as the point at which we say, everybody woke up to understand the trend that was really happening. Today it’s still not happening. If you read the western or the Japanese business press or entertainment press, they’re not seeing this. But you and I are going to be living in a virtual world in some form or another, in a very substantial way, in just a few years. A lot of people already do. COVID is just drawing this forward and making it more obvious.
GamesBeat: It does almost feel like the impact of mobile could be as important for Nexon as whatever gain is happening because of sheltering in place.
Mahoney: Absolutely. It explodes our total addressable market, in a good sense. It’s a lot bigger. What we realized was that casual games and story-driven games, offline experiences, are not where we bring a lot to the table. Other companies do that much better than we do. We do one thing. That was the realization, and so we decided — we have some of the biggest and best franchises in the entire entertainment industry. Let’s focus on what we’re good at, focus on our own IP for the most part, and focus on some other areas that bring that to a broad user base in a compelling way. If we do that well, we’ll have a terrific future. We don’t have to do everything else.
GamesBeat: I was curious about how big a mix there is in Asia for you as far as PC gaming café customers versus the ones playing in their homes. One is affected by the pandemic and one is not. How does that look as far as where it is in that disruption cycle?
Mahoney: We’ll see how it plays out from here. Clearly we’ve been in the PC café businesses — it’s not what it was before COVID. It depends a bit on what region you talk about, but basically it’s tough times these days. Having said that, our business is still up significantly year over year in a place like Korea, which is the home of the PC cafes. It’s not just on mobile that that’s happening. It’s also on PC.
GamesBeat: Having taken a closer look at what you report, it’s a little more transparent than the way U.S. companies have to report now. The GAAP and non-GAAP are very hard to figure out now for U.S. companies. There seems to be a good post to be written on why the accounting industry has not served the game industry that well in the U.S. You get a great deal of confusion when earnings come out.
Mahoney: I think there’s a lot of truth to that. Part of the problem the games industry has, or maybe more fundamental in terms of explaining what we’re about — one of the reasons I talk so much about this fundamental shift is because, A, it’s absolutely happening, but B, it doesn’t seem like we talk about it that much in the industry. Guys, the party is over here in the video games business, and especially in online games. It’s clearly the center of the entertainment industry, both by the numbers and by everything else you’re seeing. Let’s tell that story, because that’s important.
We have a tendency to revert, as humans, to what our history has been, and wish it was like whatever it was before. But there’s clearly a fundamental shift going on in the entertainment industry. It’s not just in the news business. It’s not just in the linear entertainment business. It’s across the whole entertainment business. And yet when I talk to folks who are investors in our stock when we do road shows, or when we talk to portfolio managers — these are some of the most sophisticated, thoughtful people in the world when you talk about business models and so on. They often relate to me their frustration at not really understanding what drives the game business. They have a hard time discerning the big trends so that they can inform an investment thesis.
I’ll give an example. This was not long after the IPO. I was CFO of Nexon. One portfolio manager we met in Hong Kong threw up her hands and said, “I’m just confused, because I thought it was based on — all online games were going to Facebook. Facebook was clearly the future of online games. Now you’re telling me something different.” This would have been in 2012. I said, “No, Facebook is not going to control the online portion of the games industry in any way.” She said, “But I’ve heard nothing but that.”
People don’t remember that very well, but a lot of people thought that at the time. We’ve talked about VR and esports as these big drivers, and portfolio managers and investment analysts and so on think those things end up being the driver, because it looks more like a movie, or more like our sense of what games are. If you’re not a gamer, you have a hard time understanding what really drives usage. That’s hard for an investor to get their head around sometimes. As an industry we can do a better job of lighting up what the real drivers are.
GamesBeat: I suppose the top question you get is, “What will you do with that $5 billion in cash?”
Mahoney: We do get that question. I think nobody really knows what the world holds in the coming months and years. Everyone’s very worried about that. I personally anticipate a lot more turmoil than calm. It’s a very good time to have an all-weather balance sheet. With central banks doing everything they can to prop up prices in the equity markets, it seems like maybe an unpopular opinion, but I don’t think we’re out of the woods economically at all.
As excited as I am for online games and virtual worlds, I’m deeply worried about what’s going on in the real economy. Eventually, that will end up in a situation that could be very tough for a lot of folks. It already is. It’s already quite profound. In that situation, you want to be able to protect your business, protect your employees, protect your ability to deliver your business for your customers. Having a relatively large balance sheet is important. Also, the ability to move quickly when opportunities come around is important. That’s how we think about our balance sheet.
GamesBeat: I did write about the Nexon studio [in Orange County, California] closing. I wondered if there was any better explanation for what happened there.
Mahoney: We’ve made a variety of changes around the organization worldwide to focus on the four themes we’ve been talking about: fully online multiplayer games, multiple platforms giving multiple access points or windows into the virtual world, leveraging our substantial IP portfolio, and making selective investments when we see a good, unique IP.
Those four things are pretty straightforward in concept, but they’re hard to execute on. One of the hardest things about executing is making sure that we — in order to say yes to a few things, a few big projects, a few big ideas, we have to say no to a lot of other good projects and ideas that don’t quite hit that select few of the best. We felt the need to focus our resources. That’s how we came to that decision.
GamesBeat: How is the expansion into the west going? What are you learning about how to do that right?
Mahoney: We spent a lot of time and effort on those other three quadrants that we talked about. Our focus is entirely on that upper right-hand quadrant of deeply immersive online games and virtual worlds. We’re focused on that. That’s as true in the west, if not more so, as it is anywhere else in the world. There’s a huge opportunity there.
Pixelberry has been doing well. We’ve been happy with them. MapleStory was up 171% year over year and has been doing well in the west. The next big beat we have coming up, though, is the first game from Embark. I know you’re familiar with that team and what they’re about. I wish I could talk about it more, but we have to let the marketing folks drive that conversation and the timing of that conversation. We expect to be talking about it a lot by the end of the year.
What they’re working on is very exciting. We think it’s going to change a lot of things. We’re very excited about the west, and we’re very invested in the west.
GamesBeat: At our conference, you talked a lot about uncertainty. A quarter later, do you see more reassurances? Do we know more about what’s happening in the world overall, and what the impact is on entertainment and the behavior of players?
Mahoney: I don’t think we know anything more. I’m probably more pessimistic than I was a quarter ago about the broader world. But that’s just me. I read the same news that you do. I interpret the same set of events that you do.
To go one step more precise, in the entertainment industry — we’ve already talked about this secular shift that we’re seeing in the entertainment industry. It’s not often talked about, but it’s clearly happening. To make a quick stop there, again, who was the king of all media on January 1 this year? It was clearly Disney. Clearly. Bob Iger is going to go down as one of the best CEOs in media history. Maybe the best ever, including Walt Disney himself. He’s quite an astounding role model for anybody in the entertainment industry, other than the games industry. They’ve done everything just beautifully under his leadership.
That was on January 1. What’s left of their business today? It’s in terrible shape. Cruise ships. Theme parks. Sports, which is largely based on live events. Movie theaters. Even producing movies is horrible. You can’t do live-action right now. Their business is in shambles. And they’re also subject to this secular shift we were talking about earlier, to virtual theme parks. That’s clearly what’s going on, and that’s competition for them.
That’s the broader entertainment industry. In the games industry, clearly things are terrific. I applaud more companies going out on a creative limb and trying to do something different than just doing the same old thing, aping one another. That’s maybe 90% of what happens in the games industry overall, but there are some really creative teams out there doing new and different things. By focusing on making the pie bigger, the pie gets bigger. By not over-obsessing about market share, we make the pie bigger.
As [Wedbush analyst] Michael Pachter and I were talking about last quarter, it’s easy to be negative about the broader economy, the broader world in which we’re working. There’s going to be winners and losers. But video games, and particularly immersive online games, are very much in the winner category. The big technology and media platforms are trying to figure out how to make a better transition into video games because linear entertainment is hard to do right now.
GamesBeat: I saw that unionization is happening at Nexon. There was a mention of where labor costs are higher because of employee raises. Can you talk about that? You’re one of the very few game companies with a union now.
Mahoney: It’s something that’s been happening in Korea for a little while. What we have to do, what any company has to do, is provide a compelling opportunity to get the best employees. If we do that, well then we’ll have happy employees. We have a very clear vision, and to be able to deliver on that, you have to have talented employees, talented people. You have to work hard to get those talented people. That’s what we’re working on.
GamesBeat: How are you feeling about Q2 overall?
Mahoney: About our business, I feel very good. We’re coming off a terrific quarter. We beat the high end of our guidance. We’re up 20% year over year. We’re having a terrific Q3. We gave guidance to grow Q3 by more than 50%. At the high end I think we’re at 65% or so on a constant currency basis.
We’re on the eve of launching Dungeon Fighter Mobile, and as I said, we’ve had more than 60 million pre-registrations for that game. Dungeon Fighter today is one of the largest video game franchises of all time in terms of life-to-date revenue. That’s on PC alone. We don’t quite know what the Call of Duty numbers or the Grand Theft Auto numbers are in terms of worldwide life-to-date, but we’re either one, two, or three in that category. Most people in the west don’t understand that, because it’s really a China/Korea/Asia phenomenon. But it’s a huge hit.
We’re now about to launch the mobile version of that, which has a total addressable market of somewhere around 10X. There’s a lot of excitement among the user base for that. We won’t know, for a very long time, how it will pan out. We know the early returns, but we measure these things in years and decades. But we think we’re in a terrific position for the future and where we think the future is going. We feel quite good right now.
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