atul bagga senior research analyst, lazard capital...

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?

4

Top Companies By Revenue CAGR (2008-2010)

5

Top Companies By Revenue CAGR (2008-2010)

0%

10%

20%

30%

40%

50%

60%

70%

80%

0% 20% 40% 60%

EBIT Margin

Reven

ue C

AG

R (

2008-2

010)

Gree Inc.

DeNA Co. Ltd.

Zoo Entertainment Inc.

Gamevil Inc.

Perfect World Co. Ltd.

mixi Inc.

NHN Corp.

NetDragon Websoft Inc.

Tencent Holdings Ltd.

Neowiz Games Corp.

NCsoft Corp.

Netease.com Inc. ADS

Changyou.com Ltd.

Kingsoft Corp. Ltd.

Gameloft S.A.

Source: FactSet

6

Enterprise Value/Sales Multiple U.S. Video Game Companies Shares

0

1

2

3

4

5

6

7

Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

ATVI

ERTS

TTWO

THQI

Source: FactSet

7

Emergence of Multi-Channel Games-as-a-Service

LCM ResearchSubscription

Upfront Purchase

Ads & Others

Virtual Goods

Console Game

Mobile Game

PC Game

Multi-Channel Games-as-a-Service

Social Game

Source: LCM Research

Emergence of Games-as-a-Service

2010E 2015E

Games-as-a-Product

Games-as-a-Service


9

Video Game Market Size Estimate ($ Million)


-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2009E 2010E 2011E 2012E 2013E 2014E 2015E

Social

Online

Mobile

Console

10

0

10000

20000

30000

40000

50000

60000

2010E 2011E 2012E 2013E 2014E 2015E

Rest of World

U.S.

South Korea

Japan

Europe

China

Video Game Market Size Estimate ($ Million)





• Virtual Goods




• Social Games

– Vertical Games



• Mobile Games




12

Price Discrimination

Sources: Unless otherwise noted, images on this and the following slides are courtesy of the respectivecompanies’ Websites.

13


Source: Caroline Scott; http://www.explorecrete.com/gallery/album19/donkey

http://www.smokymountainparkarabians.com/

http://www.explorecrete.com/gallery/album19/donkey

http://www.smokymountainparkarabians.com/

14


15

Traditional Models Represented Lost Economic Value

Traditional gaming models didn’t capitalize on the full spectrum of consumer demand

Game satisfaction and status were gained by beating levels with skill, not by personalization and purchased status symbols

Consumers who were willing to spend more on games weren’t able to, outside of peripherals and merchandise

Consumer surplus represented lost economic value for publishers

Supply

Demand

Pri

ceQuantity

All Customers Pay One Price

Some Customers Willing to Pay Higher Prices

Consumer Surplus = Lost Revenue

$50

$


16

Limited Editions and Map Packs Captured More Revenue

(1) Pricing is approximate.(2) Source: Microsoft.

“Limited” and “Collectors” Edition games made headway in price discrimination, capturing additional revenue

While this price discrimination resulted in higher revenue, there were still relatively few options available for hardcore gamers

Further, these options came at a higher cost for publishers:

Halo 3 “Legendary Edition” box included a large, physical plastic helmet

Map pack content has high production cost

Yet the virtual model was proven: Map packs were only available digitally on XBOX Live, but 25% of players purchased them(2)

Map packs had PR hype equal to that of the original Halo 3 release

Supply

Demand

Pri

ceQuantity

Halo 3: Standard Pricing(1)

Hardcore gamers could spend incrementally more, if desired

Yet Still, Lost Revenue

$60

Halo 3: “Limited Edition” Price(1)

$75

Halo 3: Map Pack Priced at $15

$90

$

17

Virtual Goods Enable Perfect Price Discrimination

Supply

DemandP

rice

Quantity

While virtual map packs and Limited Edition physical media enable partial price discrimination, virtual goods enable perfect price discrimination for social games and MMOs

Some “hardcore casual” gamers willing to spend $10k+/month on 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 an expense

Justifies high end purchases

With the true cost of virtual goods close to zero, there is effectively no “supply” curve –goods are readily supplied at all price points

$

18

Source: http://www.dealbreaker.com/images/entries/Pistol%20Pirate%20Bust.jpg

http://socialjusticenow.files.wordpress.com/2009/01/world-connect-people-community-international.jpg

http://www.dealbreaker.com/images/entries/Pistol Pirate Bust.jpg










19

Build Community

Source: Company Reports, AppData, LCM Research

0

10

20

30

40

50

60

70

80

World of Warcraft

Cityville The Sims Social

Angry Birds

20

Source: Acclaim

Big spenders

Paying Users

Free Users

Monetization line

$1

$15

ARPU

$100+

Everyone paysEveryone pays

1 X

10 X

PAY

AdsSponsors

21

Longevity & Stickiness: Average Chinese Gamer ARPPU (RMB/Qtr)

Source: IDC, LCM Research

0

10

20

30

40

50

60

70

80

2003 2004 2005 2006 2007 2008 2009 2010

22

Game Spend As Percentage Of Per-Capita Income


0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

2003 2004 2005 2006 2007 2008 2009 2010

Games Spend as % of Per-Capita Income

U.S.

China

South Korea

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

0.50%

2003 2004 2005 2006 2007 2008 2009 2010

Games Spend as % of Per-Capita Income - ex-Food

23

Players Willing To Spend More…

Source: National Bureau of Statistics of China, Korea Game Development Institute, EuroMonitorInternational

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

U.S. South Korea China

Games As % of Per Capita Income

24

…And The Vendors Are More Profitable

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

SNDA GA PWRD NTES CYOU ERTS ATVI THQI TTWO

Operating Margin ROE

Source: Company Reports

25

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

26

Mir 2 Revenue’s Growth After Model Change


0

50

100

150

200

250

300

350

400

450

2002 2003 2004 2005 2006 2007 2008 2009 2010

Re

ven

ue

($

Mill

ion

)

Year

27

…And ARPPU Growth After Initial Kneejerk

Source: Company Reports, LCM Research

Estimated ARPPU

0

50

100

150

200

250

300

350

400

2002 2003 2004 2005 2006 2007 2008 2009 2010

AR

PU

RM

B/Q

uar

ter

28

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+

29

70%+ Higher ARPPU Compared to WOW

0

20

40

60

80

100

120

140

160

180

World of Warcraft ZT Online

AR

PU

($

/Ye

ar)


30

Top Players Pay 20x of WOW ARPU

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Top 5% Players 15% Players 80% Players WOW


31

ARPPU Distribution Curve of ZT Online

(20)

-

20

40

60

80

100

120

140

160

- 500 1,000 1,500 2,000

Users ('000)

AR

Pu

($/M

on

th)


32

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

33

Virtual Goods: Global Market Size Estimate ($ Million)

-

5,000

10,000

15,000

20,000

25,000

2010E 2011E 2012E 2013E 2014E 2015E

Mobile

Social Network

Online (off-Social Networks)


34

Virtual Goods: Global Market Size Estimate ($ Million)

-

5,000

10,000

15,000

20,000

25,000

2010E 2011E 2012E 2013E 2014E 2015E

Rest of World

U.S.

South Korea

Japan

Europe

China





• Virtual Goods




• Social Games

– Vertical Games



• Mobile Games




36

Mid-session vs. Persistent Games

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

AppStore Facebook -Now

Facebook-May, 09

Persistent

Mid-session

Source: AppData, LCM Research

37

Console Games: U.S. Market Size

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

2,000

4,000

6,000

8,000

10,000

12,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Y/Y

Gro

wth

$ m

illio

n

Source: NPD

38

Average Game Play Hours Per Week On Console

0.0

5.0

10.0

15.0

20.0

25.0

2006 2007 2008 2009

Source: The Nielsen Company

39

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

40

Gaming Versus Expression

0

50

100

150

200

250

Video Game Luxury Goods

$ B

illio

n

Source: Bain & Company, PWC

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)

42


-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Mixi DeNA Gree Giant ChangYou US Social Games

US MMO

Focus on Monetization – ARPU Adjusted for GDP

43

-

50

100

150

200

250

300

350

400

450

500

Mixi DeNA Gree Giant ChangYou US Social Games

US MMO


Focus on Monetization: Advertising

44

Advertising

Virtual Goods -

Indirect Payment

Virtual Goods -

Direct Payment

Playdom 5-10% 15% 75-80%

Kabam NA 10% 90%

Rekoo 10% NA 90%

Serious Business 10% 10% 80%


Focus on Monetization: Advertising

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

WebMD The Knot Yahoo! Demand Media Social Games

ARPU/DAU

45

Source: comScore, Company Reports

Monetization – Payment Mechanisms

0

100

200

300

400

500

600

700

800

900

1000

Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11

Mobage ARPU – Before & After Carrier Billing

Source: DeNA

47

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

ARPU Comparison– Game Centric SNS Vs. Broad SNS

Mixi Mobage

Approximately 10x

Source: DeNA

As Platform Matures; IPs Become More Important

49

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

As Platform Matures; IPs Become More Important

50

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

51

Social Game: Global Market Size Estimate ($ Million)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2010E 2011E 2012E 2013E 2014E 2015E

Advertising

Virtual Goods


52

Social Gaming: WW Market Size Estimate ($ Million)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2010E 2011E 2012E 2013E 2014E 2015E

Rest of World

U.S.

Japan

Europe

China





• Virtual Goods




• Social Games

– Vertical Games



• Mobile Games




Mobile: Next Wave of Disruption

54

Source: International Telecommunication Union, NPD

Smartphone Market Potential

55


0

50

100

150

200

250

300

350

400

450

U.S. Europe

Mobile Subscribers

Smartphone Users

Smartphone Market Potential

Smartphone Vs. Feature Phone – U.S.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

2010 Q2

2010 Q3

2010 Q4

2011 Q1

2011 Q2

2011 Q3

Featurephone

Smartphone

Source: The Nielsen Company

Global Smartphone Installed Base

58

Source: Ericson

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

2010E 2011E 2012E 2013E 2014E 2015E 2016E

User Preference Towards Games

Android Opens Up Another Opportunity

Tablets Open Up Another Opportunity

0

5

10

15

20

25

30

35

40

1 2 3 4 5

Mill

ion

s

Quarter Since Launch

Cumulative Sales Of iPad vs. iPhone vs. iPod

iPad

iPhone

iPod

Source: Apple

Tablets Open Up Another Opportunity

0

50

100

150

200

250

300

1 2 3 4 5 6 7 8 9 1011121314151617181920212223242526272829303132333435

Mill

ion

s

Quarter Since Launch

Cumulative Sales Of iPad vs. iPhone vs. iPodiPod

iPhone

iPad

Source: Apple

Skipping The PC Web?

0

200

400

600

800

1000

1200

Population Internet Users Broadband Users

Mobile Subscribers

Number of Subscribers in India (Million)

63

Source: Telecom Regulatory Authority of India, InternetWorldStats.com

No Contract, Android = $150

Source: www.flipkart.com

65

Global Mobile Games Market Size Estimate ($ Million)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2010E 2011E 2012E 2013E 2014E 2015E

Social Games

Downloadable Games


66

Global Mobile Games Market Size Estimate ($ Million)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2010E 2011E 2012E 2013E 2014E 2015E

Rest of World

U.S.

South Korea

Japan

Europe

China





• Virtual Goods




• Social Games

– Vertical Games



• Mobile Games




68

QUESTIONS?

atul bagga senior research analyst, lazard capital...

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