Emerging Trends in Games-as-a-Service Atul Bagga Senior Research Analyst, Lazard Capital Markets Agenda • Games-as-a-Service – Lines blurring between platforms; Tablets, Set-top boxes – Innovation by startups • Virtual Goods – Perfect Price Discrimination – Enhance Community/Curb Piracy – Higher quality of earning (a) Predictability, (b) Lifetime Value • Social Games – Vertical Games – Monetization (a) Conversion, (b) Advertising – Platforms dedicated for games • Mobile Games – Rise of persistent games – Mobile an extension of other platforms – Dominated by a few? Agenda • Games-as-a-Service – Lines blurring between platforms; Tablets, Set-top boxes – Innovation by startups • Virtual Goods – Perfect Price Discrimination – Enhance Community/Curb Piracy – Higher quality of earning (a) Predictability, (b) Lifetime Value • Social Games – Vertical Games – Monetization (a) Conversion, (b) Advertising – Platforms dedicated for games • Mobile Games – Rise of persistent games – Mobile an extension of other platforms – Dominated by a few? Top Companies By Revenue CAGR (2008-2010)
4 Top Companies By Revenue CAGR (2008-2010)
80% Gree Inc. 70% DeNA Co. Ltd. Zoo Entertainment Inc. 60% Gamevil Inc. Perfect World Co. Ltd. 50% mixi Inc. 40% NHN Corp. NetDragon Websoft Inc. 30% Tencent Holdings Ltd.
20% Neowiz Games Corp.
Revenue CAGR (2008-2010) CAGR Revenue NCsoft Corp. 10% Netease.com Inc. ADS Changyou.com Ltd. 0% Kingsoft Corp. Ltd. 0% 20% 40% 60% Gameloft S.A. EBIT Margin
Source: FactSet
5 Enterprise Value/Sales Multiple U.S. Video Game Companies Shares
7 ATVI 6 ERTS TTWO 5 THQI
4
3
2
1
0 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Source: FactSet
6 Emergence of Multi-Channel Games-as-a-Service
Mobile Game Social Game
Multi-Channel Games-as-a-Service
PC Game Console Game
Upfront Virtual Subscri Ads & Purchase LCM Research Goods ption Others
Source: LCM Research 7 Emergence of Games-as-a-Service
2010E 2015E
Games-as-a- Product
Games-as-a- Service
Source: LCM Research Video Game Market Size Estimate ($ Million)
70,000
60,000
50,000 Social 40,000 Online 30,000 Mobile Console 20,000
10,000
- 2009E 2010E 2011E 2012E 2013E 2014E 2015E Source: LCM Research
9 Video Game Market Size Estimate ($ Million)
60000
50000 Rest of World 40000 U.S. South Korea 30000 Japan 20000 Europe China 10000
0 2010E 2011E 2012E 2013E 2014E 2015E
Source: LCM Research
10 Agenda
• Games-as-a-Service – Lines blurring between platforms; Tablets, Set-top boxes – Innovation by startups • Virtual Goods – Perfect Price Discrimination – Enhance Community/Curb Piracy – Higher quality of earning (a) Predictability, (b) Lifetime Value • Social Games – Vertical Games – Monetization (a) Conversion, (b) Advertising – Platforms dedicated for games • Mobile Games – Rise of persistent games – Mobile an extension of other platforms – Dominated by a few? Price Discrimination
Sources: Unless otherwise noted, images on this and the following slides are courtesy of the respective companies’ Websites.
12 Price Discrimination
Source: Caroline Scott; http://www.explorecrete.com/gallery/album19/donkey http://www.smokymountainparkarabians.com/
13 Price Discrimination
14 Traditional Models Represented Lost Economic Value
. Traditional gaming models didn’t Some Customers Willing capitalize on the full spectrum of to Pay Higher Prices consumer demand Consumer Surplus = . Game satisfaction and status were Lost Revenue gained by beating levels with skill, not by personalization and Supply purchased status symbols All Customers Pay One Price . Consumers who were willing to spend more on games weren’t able to, outside of peripherals and $50 merchandise
. Consumer surplus represented lost Price $ economic value for publishers Demand
Quantity
Source: LCM Research 15 Limited Editions and Map Packs Captured More Revenue
. “Limited” and “Collectors” Edition games Halo 3: Map Pack made headway in price discrimination, Priced at $15 capturing additional revenue Hardcore gamers could spend . While this price discrimination resulted in incrementally more, if desired higher revenue, there were still relatively few Yet Still, Lost options available for hardcore gamers Revenue Supply . Further, these options came at a higher cost Halo 3: “Limited Edition” for publishers: Price(1) . Halo 3 “Legendary Edition” box included a $90 large, physical plastic helmet $75 . Map pack content has high production cost $60 . Yet the virtual model was proven: Map packs Halo 3: were only available digitally on XBOX Live, but Standard
25% of players purchased them(2) Pricing(1) $ Price
. Map packs had PR hype equal to that of the Demand original Halo 3 release
Quantity
(1) Pricing is approximate. (2) Source: Microsoft.
16 Virtual Goods Enable Perfect Price Discrimination . While virtual map packs and Limited Edition physical media enable partial With the true cost of virtual price discrimination, virtual goods goods close to zero, there is enable perfect price discrimination effectively no “supply” curve – goods are readily supplied at all for social games and MMOs price points . Some “hardcore casual” gamers willing to spend $10k+/month on Supply virtual goods . There is no “price” for the game . In complex virtual economies, virtual goods (e.g. a $100k space station in Entropia Universe) can generate significant revenue for their owners, representing more of an asset than Price an expense $ . Justifies high end purchases Demand
Quantity
17 Source: http://www.dealbreaker.com/images/entries/Pistol%20Pirate%20Bust.jpg http://socialjusticenow.files.wordpress.com/2009/01/world-connect-people-community-international.jpg
18 Build Community
80 70 60 50 40 30 20 10 0 World of Cityville The Sims Angry Birds Warcraft Social
Source: Company Reports, AppData, LCM Research
19 EveryoneEveryone pays pays
PAY ARPU Monetization line Big spenders $100+ 1 X Paying Users $15
10 X Ads $1 Sponsors Free Users
20 Source: Acclaim Longevity & Stickiness: Average Chinese Gamer ARPPU (RMB/Qtr) 80
70
60
50
40
30
20
10
0 2003 2004 2005 2006 2007 2008 2009 2010
Source: IDC, LCM Research
21 Game Spend As Percentage Of Per- Capita Income
Games Spend as % of Per-Capita Income Games Spend as % of Per-Capita Income - ex-Food 0.35% 0.50% U.S. 0.30% 0.45% China 0.40% 0.25% South Korea 0.35% 0.20% 0.30% 0.25% 0.15% 0.20% 0.15% 0.10% 0.10% 0.05% 0.05% 0.00% 0.00% 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010
Source: LCM Research
22 Players Willing To Spend More… Games As % of Per Capita Income
0.30%
0.25%
0.20%
0.15%
0.10%
0.05%
0.00% U.S. South Korea China
Source: National Bureau of Statistics of China, Korea Game Development Institute, EuroMonitor International
23 …And The Vendors Are More Profitable
120% Operating Margin ROE 100%
80%
60%
40%
20%
0%
-20%
-40% SNDA GA PWRD NTES CYOU ERTS ATVI THQI TTWO
Source: Company Reports
24 Legend of Mir 2
• 2D MMORPG, Martial Arts, Adventure • Developed by Wemade, operated by Shanda • Launched in China in 2001 under subscription based model • Converted to free-to-play model in 2005 • PCU ~400-500K
25 Mir 2 Revenue’s Growth After Model Change 450
400
350
300
250
200
Revenue ($ ($ Million) Revenue 150
100
50
0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year
Source: Company Reports
26 …And ARPPU Growth After Initial Kneejerk
400
350
300
250
200
150 ARPU RMB/Quarter ARPU
100
50
0 2002 2003 2004 2005 2006 2007 2008 2009 2010
Estimated ARPPU
Source: Company Reports, LCM Research
27 ZT Online
• 2D MMORPG, Martial Arts, Adventure • Developed and Published by Giant Online • Launched in 2007 • Free-to-play, pay for virtual goods model • PCU: 1 million+
28 70%+ Higher ARPPU Compared to WOW
180 160 140 120 100 80
60 ARPU ($/Year) ARPU 40 20 0 World of Warcraft ZT Online Source: Company Reports, LCM Research
29 Top Players Pay 20x of WOW ARPU
$1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Top 5% Players 15% Players 80% Players WOW
Source: Company Reports, LCM Research
30 ARPPU Distribution Curve of ZT Online
160
140
120
100
80
60
ARPu ($/Month) ARPu 40
20
- - 500 1,000 1,500 2,000 (20) Users ('000)
Source: Company Reports
31 Examples of Monetization
• Game Design (System for marriage, breeding, parenting, balance between males/females) • Special In-game Events (Valentine’s day, New Year’s day, Sports) • In-game Promotions • Treasure Chest – Special Bonus for Opening Most Chests • Chat & Response
32 Virtual Goods: Global Market Size Estimate ($ Million)
25,000
20,000
15,000 Mobile Social Network 10,000 Online (off-Social Networks)
5,000
- 2010E 2011E 2012E 2013E 2014E 2015E
Source: LCM Research
33 Virtual Goods: Global Market Size Estimate ($ Million)
25,000
20,000 Rest of World U.S. 15,000 South Korea Japan 10,000 Europe China 5,000
- 2010E 2011E 2012E 2013E 2014E 2015E
Source: LCM Research
34 Agenda
• Games-as-a-Service – Lines blurring between platforms; Tablets, Set-top boxes – Innovation by startups • Virtual Goods – Perfect Price Discrimination – Enhance Community/Curb Piracy – Higher quality of earning (a) Predictability, (b) Lifetime Value • Social Games – Vertical Games – Monetization (a) Conversion, (b) Advertising – Platforms dedicated for games • Mobile Games – Rise of persistent games – Mobile an extension of other platforms – Dominated by a few? Mid-session vs. Persistent Games
100% 90% 80% 70% 60% Persistent 50% Mid-session 40% 30% 20% 10% 0% AppStore Facebook - Facebook- Now May, 09 Source: AppData, LCM Research
36 Console Games: U.S. Market Size
12,000 40% 35% 10,000 30% 25% 8,000 20% 15% 6,000 10%
$ million $ 5% 4,000 Growth Y/Y 0%
2,000 -5% -10% 0 -15% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: NPD
37 Average Game Play Hours Per Week On Console
25.0
20.0
15.0
10.0
5.0
0.0 2006 2007 2008 2009
Source: The Nielsen Company
38 Games Going Social – What We Have Seen
• Facebook opening up a new market similar to Wii • 55% of Facebook users play games on Facebook and Games account for ~40% of page views of Facebook • Facebook games not just games but also a mean of communication, a mean to express oneself in virtual environment
39 Gaming Versus Expression
250
200
150
$ Billion $ 100
50
0 Video Game Luxury Goods Source: Bain & Company, PWC
40 Trends in Social Games
• Focus on Monetization – Conversion – Advertising – Payment mechanisms • Platform maturing – IPs Matter • Social Games outside Facebook – Using Facebook social graph – New platforms • Mobile another wave of disruption – Location: convergence of physical and virtual world
41 Focus on Monetization – ARPU ($/MAU)
14.00
12.00
10.00
8.00
6.00
4.00
2.00
- Mixi DeNA Gree Giant ChangYou US Social US MMO Games Source: Company Reports, LCM Research
42 Focus on Monetization – ARPU Adjusted for GDP
500 450 400 350 300 250 200 150 100 50 - Mixi DeNA Gree Giant ChangYou US Social US MMO Games Source: LCM Research
43 Focus on Monetization: Advertising
Virtual Goods - Virtual Goods - Advertising Indirect Payment Direct Payment Playdom 5-10% 15% 75-80% Kabam NA 10% 90% Rekoo 10% NA 90% Serious Business 10% 10% 80% Source: LCM Research
44 Focus on Monetization: Advertising
ARPU/DAU $1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00 WebMD The Knot Yahoo! Demand Media Social Games Source: comScore, Company Reports
45 Monetization – Payment Mechanisms
Mobage ARPU – Before & After Carrier Billing 1000 900 800 700 600 500 400 300 200 100 0 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Source: DeNA Social Games Outside Facebook
• Social feature no longer a proprietary of SNS • Users want to stay connected with friends – to brag, to compete, to have a fun-experience together • Monetization of DeNA vs. Mixi • First iteration of social games outside Facebook already there • Next iteration of social games with deeper integration/social games from ground up – Imagine a social shooter, action game – trophy save your real-life friend in virtual environment
47 ARPU Comparison– Game Centric SNS Vs. Broad SNS
Approximately 10x
Mixi Mobage Source: DeNA As Platform Matures; IPs Become More Important
2009 2006 Game Publisher Game Publisher 1 Battlefield 1943 Electronic Arts Geometry Wars Bizzare Creations 2 Castle Crashers The Behemoth Gauntlet Midway Games 3 Trials HD Microsoft Games Smash TV Midway Games 4 Hasbro Family Game Night Electronic Arts Bejeweled II Oberon 5 Shadow Complex Microsoft Games Zuma Oberon 6 Marvel vs. Capcom 2 Capcom Bankshot Billiards PixelStrom 7 Magic: The Gathering Wizards Of the Coast Outpost Kaloki NinjaBee 8 UNO Gameloft Mutant Storm Reloaded Microsoft Games 9 Worms Microsoft Games Joust Midway Games 10 Peggle PopCap Games Wik: Fable of Souls Reflexive Entertainment Source: IGN, Majornelson.com
49 As Platform Matures; IPs Become More Important
Rank Game Publisher Price 1 The Sims Electronic Arts $6.99 2 The Oregon Trail Gameloft $4.99 3 Need for Speed: Undercover Electronic Arts $4.99 4 Madden NFL 10 Electronic Arts $4.99 5 Tiger Woods PGA Tour Electronic Arts $0.99 6 Assassin's Creed: Altair Chronicles Gameloft $4.99 7 Flight Control Firemint $0.99 8 Cooking Mama Taito $6.99 9 Civilization Revolution Take-Two $6.99 10 Wheel of Fortune Sony $0.99 Source: Apple
50 Social Game: Global Market Size Estimate ($ Million)
9,000 8,000 7,000 6,000 5,000 Advertising 4,000 Virtual Goods 3,000 2,000 1,000 - 2010E 2011E 2012E 2013E 2014E 2015E
Source: LCM Research
51 Social Gaming: WW Market Size Estimate ($ Million)
9,000 8,000 7,000 Rest of World 6,000 U.S. 5,000 Japan 4,000 Europe 3,000 China 2,000 1,000 - 2010E 2011E 2012E 2013E 2014E 2015E
Source: LCM Research
52 Agenda • Games-as-a-Service – Lines blurring between platforms; Tablets, Set-top boxes – Innovation by startups • Virtual Goods – Perfect Price Discrimination – Enhance Community/Curb Piracy – Higher quality of earning (a) Predictability, (b) Lifetime Value • Social Games – Vertical Games – Monetization (a) Conversion, (b) Advertising – Platforms dedicated for games • Mobile Games – Rise of persistent games – Mobile an extension of other platforms – Dominated by a few? Mobile: Next Wave of Disruption
Source: International Telecommunication Union, NPD
54 Smartphone Market Potential
450 400 350 300 250 Mobile Subscribers 200 Smartphone 150 Users 100 50 0 U.S. Europe Source: LCM Research
55 Smartphone Market Potential Smartphone Vs. Feature Phone – U.S.
100% Featurephone 90% Smartphone 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Source: The Nielsen Company Global Smartphone Installed Base
5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 2010E 2011E 2012E 2013E 2014E 2015E 2016E Source: Ericson
58 User Preference Towards Games Android Opens Up Another Opportunity Tablets Open Up Another Opportunity
Cumulative Sales Of iPad vs. iPhone vs. iPod 40 35 30 25 20 iPad
Millions 15 iPhone 10 iPod 5 0 1 2 3 4 5 Quarter Since Launch Source: Apple Tablets Open Up Another Opportunity
Cumulative Sales Of iPad vs. iPhone vs. iPod
300 iPod
250 iPhone iPad 200
150 Millions 100
50
0 1 2 3 4 5 6 7 8 9 1011121314151617181920212223242526272829303132333435 Quarter Since Launch
Source: Apple Skipping The PC Web?
Number of Subscribers in India (Million)
1200 1000 800 600 400 200 0 Population Internet Users Broadband Mobile Users Subscribers
Source: Telecom Regulatory Authority of India, InternetWorldStats.com
63 No Contract, Android = $150
Source: www.flipkart.com Global Mobile Games Market Size Estimate ($ Million)
9,000 8,000 7,000 6,000 5,000 Social Games 4,000 Downloadable Games 3,000 2,000 1,000 - 2010E 2011E 2012E 2013E 2014E 2015E
Source: LCM Research
65 Global Mobile Games Market Size Estimate ($ Million)
9,000 8,000
7,000 Rest of World 6,000 U.S. 5,000 South Korea 4,000 Japan 3,000 Europe 2,000 China 1,000 - 2010E 2011E 2012E 2013E 2014E 2015E Source: LCM Research
66 Agenda • Games-as-a-Service – Lines blurring between platforms; Tablets, Set-top boxes – Innovation by startups • Virtual Goods – Perfect Price Discrimination – Enhance Community/Curb Piracy – Higher quality of earning (a) Predictability, (b) Lifetime Value • Social Games – Vertical Games – Monetization (a) Conversion, (b) Advertising – Platforms dedicated for games • Mobile Games – Rise of persistent games – Mobile an extension of other platforms – Dominated by a few? QUESTIONS?
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