Nexon CEO Owen Mahoney sees online games making permanent gains

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.

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.

Above: Owen Mahoney, CEO of Nexon

Image Credit: Nexon

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.

Above: Kart Rider is one of Nexon’s biggest titles.

Image Credit: Nexon

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.

GamesBeat: As far as things that will test this new environment, if you launch a new game, you have to think about–would I spend all the same marketing dollars on that game? Would I launch it in a different way, because everyone is still sheltered? What are some of those thoughts?

Mahoney: We’ve launched a couple of big updates, which are kind of like launching a new game. When you do a big update you do a lot of promotion around it. We’ve also launched a new game, KartRider Rush+, which is the first major mobile derivation of KartRider, the original KartRider. It’s KartRider one but on a mobile device. We launched it two days ago and it’s gone great for us. But all our marketing was online marketing.

Above: Dungeon Fighter Online debuted in 2005.

Image Credit: Nexon

GamesBeat: I can see that being much more performance-based. I don’t know how you do something that might have been more about physical marketing, brand marketing.

Mahoney: There’s a lot you can do online with that. When people collect physically in a PC cafe or at a show you put on, that’s fun for people, and it tends to generate its own level of awareness. But we can’t do that now. It’s a separate topic we probably don’t have the time to go into, but I also happen to be one of the people who thinks that all marketing is changing radically right now. This is all going to change anyway. But again, the forces were already in play. COVID is just bringing this out.

Again, I’m fascinated by this topic of stuff we knew was in play, but we just didn’t happen to acknowledge it was happening. Daniel Kahneman won a Nobel Prize for his work in behavioral economics that was in large part on this topic. You have this recency bias in that you think the world looks and works just like it’s been working and looking in the last week. It’s hard for you to conceive of a world that’s different from that. Saying goodbye to that notion is like saying goodbye to a loved one. The trick is, if you want to think about this new world, you have to go through your five stages of grief really fast so you can get to the other side, where you have a beginner’s mind and you can deal with this new world. We’re living in a new world, certainly in the media industry, but COVID is bringing some of this advertising stuff forward as well.

GamesBeat: Have you identified any of what you would already consider the old way of doing things, things that Nexon is no longer going to do?

Mahoney: Yes, but we haven’t announced them yet. Well, let me back up just for a bit on that topic. If you are of the belief that the upper right is where the world goes, or at least where is most appropriate for us, then multiplatform is just a no-brainer. We want to be where our customers are. Playing a virtual world, going to a virtual world–all these different devices, which are now on the hardware level very capable, and now we have cloud, which can potentially bring it to you if they get things going at Google and other companies–those are just windows into this virtual world that exists in the cloud. You operate the cloud, operate this virtual world, but there are many access points or windows to access that.

We’ll just use the windows that are capable and have the most users. But that’s the way we think about it. Because we’re not doing anything else, we can focus on super-serving that virtual world and opening up these new windows.

GamesBeat: Does cracking into the west get any different in this new world?

Mahoney: Not because of this new world. I’m looking forward to talking about Embark. I know you know the team, because I know you know Battlefield well. We bought the company last year. They have a very similar view of the future as we do. Our game developers would be the first to tell you that western tastes are not our forte. Triple-A games of a western style are not something our Korean or Japanese studios have understood very well. But we do know how to make a game that’s 15 years old grow like crazy, to double in size, as we did most recently with a 17-year-old game in Maple Story, and Dungeon Fighter and so on.

They said, “Wow, Maple Story.” At the time it was 15 years old. “How do we make that happen for us? Because we don’t know anybody who’s made a forever franchise. We want to learn that.” Or they looked at Dungeon Fighter and said, “It’s a $15 billion franchise life to date. That’s bigger than Star Wars.”

Above: Nexon CEO Owen Mahoney (left) and Wedbush Securities analyst Michael Pachter at GamesBeat Summit 2020.

Image Credit: GamesBeat

GamesBeat: It’s beating Star Wars even after the third trilogy?

Mahoney: I need to double-check that number. But it is bigger than Star Wars. It was quite substantially bigger than Star Wars last time I checked. Now, that’s box office. It doesn’t include lunch boxes and T-shirts and that sort of stuff. It’s not licensing. But apples to apples, gross to gross. It’s either one, two, or three among the largest video games franchises of all time. We’re not quite sure what total life-to-date is on Call of Duty or Grand Theft Auto. But it’s one of those. They looked at that and said, “I want that sort of longevity and size. How do I learn those techniques? What techniques and technology do I need?”

We saw that they knew how to build a western-focused triple-A game much better than we do. They made Battlefield, which used to be, until they left, a third of EA’s revenue. Patrick Soderlund ran EA’s studios very successfully from 2014 to 2018. Our idea is to do yin and yang. What they’re good at and what we’re good at. That’s one of the core ways that we’re addressing the opportunity in the west. None of that is COVID-related.

GamesBeat: Some people worry about this other shoe dropping. With 30 million people out of work in the U.S., you don’t know how they’re going to behave. It’s hard to predict whether games can be that recession-proof.

Mahoney: I’ll give you my take. We’ve been through two major recessions in our core markets in Nexon’s history. Not long after we were founded in 1994, we had the 1998 Asian financial crisis. People here don’t remember it as all that bad. I remember it because I got married that year. It didn’t seem so bad to Americans, but it was apocalyptic in Asia. Currencies were collapsing left and right. It was ugly. Our business did well in that. Our business likewise did well in the 2008 global financial crisis, as did most other game companies.

We’re in the microtransactions business. We’re asking for a dollar here, five dollars there. Every entertainment industry has done well in downturns since the Great Depression. But I think the things that are going to be more hard for us–the higher you go up the food chain in terms of price, the less resilient you’re going to be. The more you ask of a customer in dollars for time, the harder things will be. The game industry is way ahead of every entertainment industry I know of, except maybe Netflix, but they have a cost problem. I tend to think we’re enormously resilient in the game business. We don’t ask for a lot per hour, as crazy as it seems, compared to other forms of entertainment.

GamesBeat: Do you think there’s an endgame, the way that Tim Sweeney has talked about it, where the metaverse is where we end up? Roblox seems to be architecting for that future as well. You’re in this space, but I wonder whether you think the same way about something like Ready Player One being where we’re all going.

Mahoney: Tim has probably been as eloquent as anyone in the industry, and I appreciate that he is doing that. And by the way, we think about this all the time at Nexon. We were just talking about this at our virtual strategy offsite the other night. We’re already in the virtual worlds business in many respects. We have a virtual set of politics in the virtual worlds. We have a virtual sociology, playing with friends and working with others and so on. We certainly have virtual economies. Different games have varying levels of depth in each of those components of things.

Having said all that, I don’t think what we’re doing today looks anything like what it will look like 20 years from now. I also don’t happen to believe–I thought Ready Player One was a terrific book. It was a so-so movie. I don’t think that Spielberg particularly understands games. You probably had the same impression that I did, which was, where’s the game? Where’s the challenge? Where are the limitations? It was kind of like Second Life. You could do anything with no limitations. It worked well as fiction.

In terms of the idea of contributing to a virtual world in a substantial way, I’d say absolutely. But it will look a lot different from our old metaphors. I have my own opinions on what that will look like. We’re putting resources against what the ideas of the Nexon management team say about that. They answer your question. But I guess I’d say the basic thing is that if you think you have an idea of exactly how it will look, you’re probably wrong. We’re going to iterate like crazy over the next 10 to 20 years as we do this.

Above: Nexon’s Battlejack

Image Credit: Nexon

GamesBeat: That’s your R&D, I guess?

Mahoney: That’s R&D. That’s game-making. You iterate like crazy. Just to use another metaphor to illustrate the point, esports–VR and esports, but especially esports. Let’s pick on them. I don’t think anybody’s thinking, or not many people are thinking about esports this way anymore, but as of a year ago people would talk about esports like, “Okay, I get live sports, like going to a football game, and now kids are playing video games, so now we’re going to make esports. Everybody’s going to go to these big stadiums. The finals for Overwatch were massive!” But if you actually go to an esports stadium it’s not like football at all. Unless it’s the final game that’s massively promoted, there’s 80 people in the room, and 80 percent of those people are staff who are there to stream it online. I’ve been to these events. It’s not a huge business, at least today.

What’s much more interesting is the idea of streaming related to gaming. What’s the interaction between the two? How do you improve games to make a better stream? How do you improve streaming to make a better game? Those are interesting questions. What we’re doing in the future is going to be as different from today as the original streaming of video was 20 years ago is from TikTok today. Nobody saw that coming. What happens is you’re going to iterate like crazy, and you’ll come to something a lot weirder than what we’re currently talking about.

GamesBeat: The part that seems hard to foresee is the second half of the year. Do you have any thoughts on that? For Nexon and for the industry at large, how is that going to be different from the first half?

Mahoney: For us, we’re already fully virtual, so it’s not going to be that much different at a high level. Except for the fact that we’re very excited about the year. The next big beat for us is we’re introducing Dungeon Fighter Mobile in the middle of the year, this summer. It has more than 34 million pre-registered players in China. It’s a massive number. The feedback from the beta is really good. As I said, Dungeon Fighter is already massive as a franchise. Like Maple Story mobile to Maple Story PC, we think that each will benefit the other. The whole franchise will get better. That’s what we hope to see, but we’ll have to see how that plays out.

Late in the year we’ll talk about Embark’s first game. It’s really exciting. I wish I could talk about it now. It’s super cool. They’re changing not only–they’re introducing things that are very unusual, not just in what the gameplay is, but also about how games are made.

GamesBeat: When Call of Duty: Warzone hit, it seemed like the best of luck to come at a time when everybody was locked inside. Does that kind of opportunity make you want to accelerate anything, move something into the market faster?

Mahoney: No. This is the long game. You build a great game company by doing it over a period of years, not a period of months or quarters. We wouldn’t pull anything forward if it’s not ready. And frankly we had to learn that lesson the hard way. If you rush things out and they aren’t ready–doing something well means that if you have longevity, you’re going to do so much better over time than you will by pulling it forward. You give up so much by putting out a second-rate product. We’ve made that mistake in the past, and we’ve learned our lesson. We’ve learned to make a good product.

We don’t need to worry about the pandemic, the effects of the pandemic. Which are horrifying, but good for the game industry, probably. We don’t have to worry about that going away, because see this secular shift from other forms of entertainment to interactive entertainment, and particularly virtual worlds. That’s the main headline here. Everybody’s distracted by COVID because we’re stuck doing this from home.

Above: DomiNations

Image Credit: Nexon/Big Huge Games

GamesBeat: Is there anyone you admire out there, anybody comes to mind that’s also doing well now? Supercell came out with their 10-year anniversary look back today, and it was interesting reading. I don’t know what you look as far as where you’d like to have Nexon go.

Mahoney: That was probably the central part of the strategic offsite we had the other night, which we do on a regular basis. The challenge with the game industry is we tend to look at the thing right in front of our faces and say, “How do I chase a little revenue here? What’s the next battle royale type of game I do?” By the way, I play a lot of Call of Duty. That’s a super good game. I love Warzone. Hats off to those guys. They did great. I love Call of Duty for all sorts of reasons.

Looking back on the last 10 years, what are the big ones? League of Legends, Minecraft, Fortnite and PUBG, or PUBG and then Fortnite. Clash of Clans. Those are some that weren’t done by Nexon. Nexon was built off the first MMORPG, Kingdom of the Winds. They didn’t exist before. We invented free-to-play with QuizQuiz. Both of those were in Korea, and both of them looked like absolutely harebrained crazy ideas when we first did them. Now half the industry is based on microtransactions. All games now have an online component, but back at the traditional game companies at the time those games were launching, there was nothing like them. The people doing them looked like nerds.

One of my executives said the other night, “If we feel like we’re doing something that’s not going to make people look at us and say, ‘What the hell? That’s crazy,’ then we’re not being geeky enough. If we don’t feel like total geeks we’re probably not doing the right thing.” PUBG, it was sort of there with H1Z1. Roblox, there were some ideas from other games. But it was a long slog for the Roblox guys early on. Nobody was paying attention. You remember that. We take the same approach.

By the way, the poster boy for this topic around innovation is Xerox PARC back in the late ‘70s. You’re familiar with that story. They created the GUI and the mouse, they created ethernet, and they created OOP. Those are the three foundational technologies that drive all computing today. We would not be sitting here on Zoom today if OOP didn’t exist. It’s probably the biggest of all of them. And then Xerox famously was not able to capitalize on it and it got stolen by Apple and Microsoft and so on, as did all the people.

But what were they asking at the time? They were saying, “What is the office of the future? In 20 years, what does that look like? What are people going to be doing? They’re not just making Xerox copies and getting data from mainframe computers. It’s going to be something substantially different. What is it?” They successfully answered that question. Again, they didn’t capitalize on it. But that’s the question we have to pose to ourselves as game-makers. That’s what we’ve been pushing ourselves to do. That’s a big reason why we went after Embark. They, and a few other people, are asking that question of themselves, and of the people around them.

GamesBeat: I like what Will Wright said. “A dog-eared copy of Snow Crash is the business plan for every startup in Silicon Valley.” Taking that to today, it feels like a dog-eared copy of Ready Player One is the business plan for Roblox.

Mahoney: I don’t think it’s going to look exactly like that. But here’s what I got–honestly, I really didn’t like the movie Ready Player One. I read the book, and I thought the movie missed it entirely. But here’s one thing you did get. I took away one point. You get to the end of the movie and then you realize, and I do agree with this, that the future entertainment industry does not look anything like what it looks like today.

If you live in that world enough–even with all my skepticism and I didn’t like how they missed the whole point of the game and all that stuff, I did agree with the fundamental premise, which is that this future is totally different, and we’re going to look back on the current entertainment options and say, “That is so 20th century. That’s so ‘okay boomer.’” Right now we’re having this meeting on Zoom. Right now is the time we’re going to look back on and say, “This is where the whole entertainment industry flipped and went to interactive.”