Interested in learning what's next for the gaming industry? Join gaming executives to discuss emerging parts of the industry this October at GamesBeat Summit Next. Register today.
At his core, Owen Mahoney is a business guy. But the chief executive of Asian gaming giant Nexon doesn’t talk like one. At our recent GamesBeat Summit event in Sausalito, I sat down with Mahoney for a fireside chat about the state of the mobile gaming business.
And while his business is good and growing, he wasn’t happy about the state of affairs for game developers. The artists who create games are often shouted out of the board rooms by the more eloquent business executives who are better trained when it comes to making PowerPoint presentations to boards.
Mahoney said the power relationship should be the other way around. His job, he joked, should be getting the coffee for the game developers. It was a very odd point of view for a business leader to criticize the industry’s leadership. He believes that mobile gaming is for the most part unprofitable, and it is suffering from too many me-too games. Game developers are holding themselves back from creating the games they really want to make in favor of designing games that they think will sell or get approved.
Only when developers step back and create art will they have a chance at setting themselves apart from the crowd, Mahoney said. And if they do that, then we will see the rise of a company that is more like Pixar in movies or HBO in television. It is an inspirational battle cry, voiced from an unlikely but passionate leader. Perhaps that is why Mahoney and Nexon have been able to snare so many well-known Western game developers (like John Schappert, Cliff Bleszinski, and Tim Train) as part of Nexon’s campaign to go global.
Here’s an edited transcript of our fireside chat.
GamesBeat: Can you give us a quick download on Nexon’s business?
Owen Mahoney: The brief background is we were founded in Korea about 22 years ago. We moved our headquarters to Tokyo about 12 years ago and went public about five years ago on the Tokyo stock exchange. Our business is about $1.5 billion to $1.8 billion a year in revenue. We run about 35 percent net margins. We’ve been consistently growing 20-25 percent a year through our history.
We were the first company to start microtransactions, or the free-to-play business model, many years ago. 15 or 16 years ago in Korea. Really it was an accident. We’ve been doing that ever since. It didn’t start off as a monetization strategy. We had a failing game that was going away and so we made it free.
GamesBeat: You’ve been expanding from online games in Asia to a global audience. You’ve been working with a lot of western developers like Cliff Bleszinski. But mobile has been tough and still is tough. How do you look at that?
Mahoney: Our mobile business is still a small percentage overall. About 70 percent of our business is PC. 30 percent is mobile, but it’s growing quickly in different spots around the world. We’re happy with how our mobile business is going so far.
Most people think the mobile business is very tough. From what I can tell, talking to a lot of companies in the industry who are either colleagues or partners or who we might want to buy, almost nobody makes money as far as I can tell. That’s the dirty secret of mobile right now. Mobile mostly doesn’t make money.
GamesBeat: Even some of the folks in the top-grossing ranks?
Mahoney: A lot of the companies in the top-grossing ranks of the app stores are not making money. It’s a mess. Think about what your P&L looks like. You make what you make from being in the top 20. Then you pay your platform tax, 30 percent off the top. You pay your development costs, a year or two in development. You’ve got licensing fees if you have a license. You have marketing costs, which are gigantic and rising.
Most people think that the marketing costs are going up in the games business, but it’s not really a marketing problem. It’s because most games in the app stores are very similar to each other. I’d like to be playing more games on mobile, but there aren’t enough fun different games to play. Most games and most game companies we talk to – companies we’d like to buy or partner with – are making games that are very similar to everything else around them.
We perceive the problem as being not one of marketing, but one of trying to sell a commodity. When you’re trying to sell a commodity your marketing costs are almost infinity. That’s what we see in the app stores.
GamesBeat: So the best result is survival, maybe? But not prosperity.
Mahoney: Ultimately you’ll survive if you can get cash flow positive. From what we can tell, at most companies we talk to the cash flows are not positive. We don’t think of surviving as being a good business model. We think about having positive cash flows.
We generate $500 million or so a year in cash flow. We’d like to continue generate a half billion or more. You don’t do that by having negative net margins. You do that with a positive margin business. We see this as a product problem, not a marketing problem. Survival is not that interesting to us.
GamesBeat: So your answer is going to the best game developers and getting them to make games for you?
Mahoney: Our answer — around the world, not just with western or Asian developers — is to make a game that’s fun and different. It sounds really simple, almost silly, but I personally like to play games that are really fun and really different. If they’re fun and different and they continue to be fun and different, I’ll keep playing a game for years. Most people are like that. You think you’re different from everyone else, but we’re pretty much the same.
If you think about game development, if you make game that’s really fun on the Y axis and really different on the X axis — you try to stay in the upper right corner. We’ve talked about this before. If you can do that, you’ll do well. There are precious few game developers in the world who want to do that, who are capable of doing that. Many, many of the companies we talk to are trying to make something that’s already out there, but with a slightly different twist or an IP on top of it. We don’t think that’s the way to be successful in the games business.
If you go down the last 15 years on any platform, online or offline — look at Civilization, Minecraft, Maple Story, Dungeon Fighter, Mario. All these games, the games we love, the games that got us into the games business, they’re fun and they’re different. They’re in that upper right corner.
GamesBeat: Your conversations with these developers, like Tim Train at Big Huge Games, how are they going?
Mahoney: We talk to Tim and Cliff and John Schappert, guys like that — that group of people that we’ve partnered with, especially in the last two years, they feel very strongly about our approach. We just saw the team from QC Games yesterday. They feel very strongly about this vision. They think it’s the right thing to do from a consumer perspective. They think it’s the right artistic thing to do. We’re in the art business, whether we realize it or not. They want to do that, but they also think it’s the right business decision.
If you insist on making a commodity, you’ll probably end up with commodity profits. From a business perspective, if you make something highly differentiated, you’ll end up with highly differentiated products. The question we get a lot of the time — people say, “Isn’t that a risky strategy?” Making a junk product or a product that’s similar to everything else is much more risky. In fact in a way it’s not risky, because you know it won’t be successful.
Looking at analogies in adjacent forms of media, consider what’s happened with TV in the last 15 years. 15 or 20 years ago, if you looked at TV, most people would agree there was a lot of junk. Then you had the Sopranos. You had Lost, 24, The Wire, and now Game of Thrones. There’s this incredible wave of fantastic art on television. TV is now a great place to see great art. It’s revolutionized the industry. It’s made a lot of companies very successful. You can absolutely make an analogy to the games business. The same problem and the same solution.
GamesBeat: You could say the same thing about Pixar in the movies.
Mahoney: Pixar is a perfect example. Before Pixar, there was this terrible desert for animated content. A few people insisted on making good animation, your Studio Ghiblis and a few others, but in the west there wasn’t much at all. Then a few people — John Lassiter, Ed Catmull, Steve Jobs — insisted on making a great movie with animation. It revolutionized that area.
GamesBeat: This isn’t about creative professionals learning to be businesspeople, right? You mentioned the conversation you have is to extract the biggest stream you can out of….
Mahoney: It’s artists insisting on their art and believing in it. I came from the business side. I’m not an artist. I can’t create a game. But I do know, having looked at hundreds or thousands of companies over the years, that the great game developers tend to also be the successful ones. At Nexon we want to be a home for those.
You wrote an article a month or two ago about how venture capital is abandoning games, and how M&A has basically gone away in the games business. That’s all with good reason. So many games are the same, and therefore the margins are out. Anybody like us who looks at a game company with an eye toward buying it — we’ll have long discussions about revenues going high and to the right, or rankings on the app store, and then when we ask the cash flow question people say, “That’ll come next.” We don’t want that.
When we talk to people who say, “Here’s a game we really want to make,” they tend to have a vision. Whether or not they can execute on that game is another story. Whether or not that game ends up finding an audience is another story. But that’s the prerequisite, the table stakes. That’s what you need to be successful in this business.
GamesBeat: What value do businesspeople bring to the conversation? You’re a businessperson, but you’ve been fairly successful in the current games business, at talking creators into doing what you want them to do. You’re bringing some value there. What do you think it is?
Mahoney: The job of the people who aren’t making the art is to support the people who are. Those of us who come from the business side — we need to find and give voice to game creators. That sounds like PR-speak, but it’s not.
We have a game studio based in Korea called Neople. They have done so well with our game Dungeon Fighter. It’s our number one game and it keeps getting bigger every year. It’s the number two or number three game in China and it’s been that way for seven or eight years. When I meet with them, I joke that my job is just to bring them coffee. The last thing I should do is give them advice on how to make a great game that’ll be successful in China.
But what I want to do is provide them with the environment in which they can do the work that they do well. I make sure they have the space they need. If they want to take a risk on a new game, it’s my job to provide the funding for that, to make sure we’re managing the store and taking all the non-creative work off their plate. It’s the same for an external developer in the west, or if we want to make an internal studio elsewhere in the world. A lot of work goes into making a game that’s not about the game itself. The job of the non-game-makers is to take that away from the game-makers and make sure they’ve got their space.
When they’ve created something they’re really proud of, then we help bring that to market and help it grow over time. Most people who are great artists, they also like to have a big audience. They don’t just want to play jazz to four people in a restaurant. They want to play to a large crowd. Games are like that as well.
GamesBeat: For a developer, why Nexon? If they’re a hot company they may be getting competing offers from a number of publishers – EA, Activision Blizzard, Disney.
Mahoney: First, I wish there were more companies in the world that — everybody will say games are art, but I wish there were more companies, especially publicly held companies, that acted that way. The companies you mention are all doing that, and we have enormous respect for them. That’s why we’re partnered with some of these companies. But there’s not enough of them. I believe a lot of companies will just throw money down, or funding sources that will throw money down, and they expect a return right away. That’s particularly true in the venture capital community. That’s been tough for a lot of the developers we talk to.
One thing Nexon has found out over the years is that it’s not enough to just create a great game. You have to make it grow over time. Our biggest games have grown for five or 10 years and continue to grow around the world. In online games, that’s what you do. You don’t expect that a game will be around for a year. You develop with an expectation that it’ll be here five years from now, 10 years from now. You need to think long and hard about what your server stack looks like, how you do in-game events, how you grow a community over time, how you manage the economy to limit inflation, how you manage sociology so everyone works together.
Those are hard things to do. We’ve been able to do them at our internal studios. Depending on the quarter or year, between 60 and 70 percent of our internal developers are live game developers, not new game developers. Once you start a game you want it to continue building up over time. We have a lot of expertise with that, in part because we’ve been doing it longer than anyone else in online games.
GamesBeat: If you’re an underdog company, how would you say you can work your way up in the games industry?
Mahoney: We would be talking about more deals now if we knew of more developers who had the strong desire and the ability to go out and make the games that they themselves want to play. Again, this is just anecdotal evidence, but 90 percent of the companies we talk to, at least, are trying to make a game that’s slightly different from everything else. Or it’s going to be kind of like Game X, but it’ll be a little different, or it’ll have this IP.
GamesBeat: Creators are actually holding themselves back?
Mahoney: I think so. There are lots of talented creators, and somehow — especially in mobile, especially after Facebook — they decided that the business was about making copycat games. That’s another way of saying it’s a commodity. People call it a lot of things. They call it the fast follower strategy or something. It’s a busted business model.
If we had more artists throwing people out of the room who don’t understand the art of games – that’s a lot of the business people who’ve taken over the industry – and going back to the roots of making games, we’d have more innovation, the way we used to have 20 or 30 years ago. All the games we play today, on console or PC or wherever, come from that source. I wish I could meet more people like that around the world, in the U.S. or Europe or Asia.
GamesBeat: You’re an eloquent speaker on the topic of games as art. Rami Ismail from Vlambeer is as well. Yesterday we pointed out together that he’s a business guy. There are two guys in that company and he’s the business guy, while the other guy is the programmer. You’re a business guy. It’s interesting that you’re both seeing this. You’re advocating for the creative side.
Mahoney: I’ve been in a lot of boardrooms or decision-making rooms where we’re greenlighting games. Not to overgeneralize or insult anybody in those rooms, but I find that business people tend to be trained on Powerpoint presentations and how to be eloquent in front of a room full of people. Game developers are too busy making games. They end up getting talked out of the room by the eloquent people, and that’s a disaster.
A lot of the best movie directors, if you watch them being interviewed, they’re not very eloquent people. Their art and their eloquence is on the screen. A lot of artists are like that — painters, writers. I think sometimes that when someone is very eloquent when you’re talking to them, you’re easily convinced. Maybe that has something to do with the fact that there’s not many people who are artists leading the way as much as I’d like to see.
There are exceptions. John Schappert is very eloquent on this. Cliff is very eloquent. Rob Pardo is very eloquent. Brandon and Marc from Riot. These guys are saying and doing the right things. Notch was too, when he was still making games.
GamesBeat: I stole the theme of underdogs from Malcolm Gladwell’s David and Goliath book. One of the interesting lines there is that giants are not who we think they are.
Mahoney: The underdogs in the industry are the artists who have been told that something which is not true is true. If you want to get funding you have to do something that isn’t why you got in the games business. Those are the underdogs. Those are the people we need to put back in charge of this industry. The rest of us need to support them. At Nexon that’s what we’re trying to do. We’re going straight ahead with it. My central wish is that there were more of those underdogs.
Question: I wanted to ask about streaming and esports in particular, on the business side. It feels like PC gaming and online gaming, where you guys have been very successful, went through a sort of quiet valley in the 2000s. Now it’s enjoyed a huge renaissance over the past few years.
Mahoney: In the west, yes.
Question: It feels like it’s been driven by streaming and esports, the latter of which has been huge in Korea for many years. Could that be a catalyst for mobile is it well? Or are there any other catalysts you see that could shake up the dormant state of mobile?
Mahoney: The real catalyst is people making better games, I think. It was interesting, what happened around the time of GDC. Before GDC I talked to a lot of companies who said they were going to make a Clash-like game, but a little different. After GDC everyone said they were going to make Clash Royale, but a little different, with X IP. That was really funny. The one company that’s not taking that strategy is Supercell. If you look at Supercell’s P&L, we’d all be jealous. That’s what’s going to do it for our industry.
As far as esports goes, Nexon has an arena that seats about 550 people. We have more than 350 events per year in it. If you go to Seoul, look it up. I’ll get you a ticket. It’s packed full of people watching esports and great announcers who are bonafide celebrities in Korea.
It’s a lot of fun to watch a good player play an interesting game. But if it’s the same old game, it’s not going to be fun to watch. If it’s Kart Rider or FIFA Online or Counter-Strike or League of Legends, it’s a lot of fun. So yes, it could be a catalyst, and certainly streaming is bringing that to a wider group of people.
GamesBeat's creed when covering the game industry is "where passion meets business." What does this mean? We want to tell you how the news matters to you -- not just as a decision-maker at a game studio, but also as a fan of games. Whether you read our articles, listen to our podcasts, or watch our videos, GamesBeat will help you learn about the industry and enjoy engaging with it. Learn more about membership.