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?
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
Source: LCM Research
9
Video Game Market Size Estimate ($ Million)
Source: LCM Research
-
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)
Source: LCM Research
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?
12
Price Discrimination
Sources: Unless otherwise noted, images on this and the following slides are courtesy of the respectivecompanies’ Websites.
13
Price Discrimination
Source: Caroline Scott; http://www.explorecrete.com/gallery/album19/donkey
http://www.smokymountainparkarabians.com/
14
Price Discrimination
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
$
Source: LCM Research
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
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
$100+
Everyone paysEveryone pays
1 X
10 X
PAY
AdsSponsors
21
Longevity & Stickiness: Average Chinese Gamer ARPPU (RMB/Qtr)
Source: IDC, LCM Research
0
10
20
30
40
50
60
70
80
2003 2004 2005 2006 2007 2008 2009 2010
22
Game Spend As Percentage Of Per-Capita Income
Source: LCM Research
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
2003 2004 2005 2006 2007 2008 2009 2010
Games Spend as % of Per-Capita Income
U.S.
China
South Korea
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
0.45%
0.50%
2003 2004 2005 2006 2007 2008 2009 2010
Games Spend as % of Per-Capita Income - ex-Food
23
Players Willing To Spend More…
Source: National Bureau of Statistics of China, Korea Game Development Institute, EuroMonitorInternational
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
U.S. South Korea China
Games As % of Per Capita Income
24
…And The Vendors Are More Profitable
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
SNDA GA PWRD NTES CYOU ERTS ATVI THQI TTWO
Operating Margin ROE
Source: Company Reports
25
Legend of Mir 2
• 2D MMORPG, Martial Arts, Adventure
• Developed by Wemade, operated by Shanda
• Launched in China in 2001 under subscription based model
• Converted to free-to-play model in 2005
• PCU ~400-500K
26
Mir 2 Revenue’s Growth After Model Change
Source: Company Reports
0
50
100
150
200
250
300
350
400
450
2002 2003 2004 2005 2006 2007 2008 2009 2010
Re
ven
ue
($
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)
Source: Company Reports, LCM Research
30
Top Players Pay 20x of WOW ARPU
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
Top 5% Players 15% Players 80% Players WOW
Source: Company Reports, LCM Research
31
ARPPU Distribution Curve of ZT Online
(20)
-
20
40
60
80
100
120
140
160
- 500 1,000 1,500 2,000
Users ('000)
AR
Pu
($/M
on
th)
Source: Company Reports
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)
Source: LCM Research
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
Source: LCM Research
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?
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
Source: Company Reports, LCM Research
-
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
Source: LCM Research
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%
Source: LCM Research
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
Source: LCM Research
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
Source: LCM Research
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
54
Source: International Telecommunication Union, NPD
Smartphone Market Potential
55
Source: LCM Research
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
Source: LCM Research
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
Source: LCM Research
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?
68
QUESTIONS?