1. Emerging Trends in Games-as-a-Service
Atul Bagga
Senior Research Analyst, Lazard Capital Markets

2. Agenda
• Games-­‐as-­‐a-­‐Service
– Lines
blurring
between
pla6orms;
Tablets,
Set-­‐top
boxes
– Innova=on
by
startups
• Virtual
Goods
– Perfect
Price
Discrimina=on
– Enhance
Community/Curb
Piracy
– Higher
quality
of
earning
(a)
Predictability,
(b)
Life=me
Value
• Social
Games
– Ver=cal
Games
– Mone=za=on
(a)
Conversion,
(b)
Adver=sing
– Pla6orms
dedicated
for
games
• Mobile
Games
– Rise
of
persistent
games
– Mobile
an
extension
of
other
pla6orms
– Dominated
by
a
few?

3. Agenda
• Games-­‐as-­‐a-­‐Service
– Lines
blurring
between
pla6orms;
Tablets,
Set-­‐top
boxes
– Innova=on
by
startups
• Virtual
Goods
– Perfect
Price
Discrimina=on
– Enhance
Community/Curb
Piracy
– Higher
quality
of
earning
(a)
Predictability,
(b)
Life=me
Value
• Social
Games
– Ver=cal
Games
– Mone=za=on
(a)
Conversion,
(b)
Adver=sing
– Pla6orms
dedicated
for
games
• Mobile
Games
– Rise
of
persistent
games
– Mobile
an
extension
of
other
pla6orms
– Dominated
by
a
few?

4. 4
Top
Companies
By
Revenue
CAGR
(2008-­‐2010)

5. 5
Top
Companies
By
Revenue
CAGR
(2008-­‐2010)
0%
10%
20%
30%
40%
50%
60%
70%
80%
0% 20% 40% 60%
EBIT Margin
RevenueCAGR(2008-2010)
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. 6
Enterprise
Value/Sales
MulDple
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. 7
Emergence
of
MulD-­‐Channel
Games-­‐as-­‐a-­‐Service
LCM
Research
Subscri
pDon
Upfront
Purchase
Ads
&
Others
Virtual
Goods
Console
Game
Mobile
Game
PC
Game
Mul6-­‐Channel
Games-­‐as-­‐a-­‐Service
Social
Game
Source:
LCM
Research

8. Emergence
of
Games-­‐as-­‐a-­‐Service
2010E
2015E
Games-­‐as-­‐a-­‐
Product
Games-­‐as-­‐a-­‐
Service
Source:
LCM
Research

9. 9
Video
Game
Market
Size
EsDmate
($
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. 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
EsDmate
($
Million)
Source:
LCM
Research

11. Agenda
• Games-­‐as-­‐a-­‐Service
– Lines
blurring
between
pla6orms;
Tablets,
Set-­‐top
boxes
– Innova=on
by
startups
• Virtual
Goods
– Perfect
Price
Discrimina=on
– Enhance
Community/Curb
Piracy
– Higher
quality
of
earning
(a)
Predictability,
(b)
Life=me
Value
• Social
Games
– Ver=cal
Games
– Mone=za=on
(a)
Conversion,
(b)
Adver=sing
– Pla6orms
dedicated
for
games
• Mobile
Games
– Rise
of
persistent
games
– Mobile
an
extension
of
other
pla6orms
– Dominated
by
a
few?

12. 12
Price
DiscriminaDon
Sources:
Unless
otherwise
noted,
images
on
this
and
the
following
slides
are
courtesy
of
the
respec=ve
companies’
Websites.

13. 13
Price
DiscriminaDon
Source:
Caroline
Scob;
hbp://www.explorecrete.com/gallery/album19/donkey
hbp://www.smokymountainparkarabians.com/

14. 14
Price
DiscriminaDon

15. 15
TradiDonal
Models
Represented
Lost
Economic
Value
§ Tradi=onal
gaming
models
didn’t
capitalize
on
the
full
spectrum
of
consumer
demand
§ Game
sa=sfac=on
and
status
were
gained
by
bea=ng
levels
with
skill,
not
by
personaliza=on
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
Price
Quan=ty
All
Customers
Pay
One
Price
Some
Customers
Willing
to
Pay
Higher
Prices
Consumer
Surplus
=
Lost
Revenue
$50
$
Source:
LCM
Research

16. 16
Limited
EdiDons
and
Map
Packs
Captured
More
Revenue
(1)
Pricing
is
approximate.
(2)
Source:
Microsog.
§ “Limited”
and
“Collectors”
Edi=on
games
made
headway
in
price
discrimina=on,
capturing
addi=onal
revenue
§ While
this
price
discrimina=on
resulted
in
higher
revenue,
there
were
s=ll
rela=vely
few
op=ons
available
for
hardcore
gamers
§ Further,
these
op=ons
came
at
a
higher
cost
for
publishers:
§ Halo
3
“Legendary
Edi=on”
box
included
a
large,
physical
plas=c
helmet
§ Map
pack
content
has
high
produc=on
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
Price
Quan=ty
Halo
3:
Standard
Pricing(1)
Hardcore
gamers
could
spend
incrementally
more,
if
desired
Yet
S=ll,
Lost
Revenue
$60
Halo
3:
“Limited
Edi=on”
Price(1)
$75
Halo
3:
Map
Pack
Priced
at
$15
$90
$

17. 17
Virtual
Goods
Enable
Perfect
Price
DiscriminaDon
Supply
Demand
Price
Quan=ty
§ While
virtual
map
packs
and
Limited
Edi=on
physical
media
enable
par=al
price
discrimina=on,
virtual
goods
enable
perfect
price
discrimina=on
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
sta=on
in
Entropia
Universe)
can
generate
significant
revenue
for
their
owners,
represen=ng
more
of
an
asset
than
an
expense
§ Jus=fies
high
end
purchases
With
the
true
cost
of
virtual
goods
close
to
zero,
there
is
effec=vely
no
“supply”
curve
–
goods
are
readily
supplied
at
all
price
points
$

18. 18
Source:
hbp://www.dealbreaker.com/images/entries/Pistol%20Pirate%20Bust.jpg
hbp://socialjus=cenow.files.wordpress.com/2009/01/world-­‐connect-­‐people-­‐community-­‐interna=onal.jpg

19. 19
Build
Community
Source:
Company
Reports,
AppData,
LCM
Research
0
10
20
30
40
50
60
70
80
World
of
Warcrag
Cityville
The
Sims
Social
Angry
Birds

20. 20
Source:
Acclaim
Big
spenders
Paying
Users
Free
Users
Mone=za=on
line
$1
$15
ARPU
$100+
Everyone
pays
Everyone
pays
1
X
10
X
PAY
Ads
Sponsors

21. 21
Longevity
&
SDckiness:
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. 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. 23
Players
Willing
To
Spend
More…
Source:
Na6onal
Bureau
of
Sta6s6cs
of
China,
Korea
Game
Development
Ins6tute,
EuroMonitor
Interna6onal
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. 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. 25
Legend
of
Mir
2
• 2D
MMORPG,
Mar=al
Arts,
Adventure
• Developed
by
Wemade,
operated
by
Shanda
• Launched
in
China
in
2001
under
subscrip=on
based
model
• Converted
to
free-­‐to-­‐play
model
in
2005
• PCU
~400-­‐500K

26. 26
Mir
2
Revenue’s
Growth
A]er
Model
Change
Source:
Company
Reports
0
50
100
150
200
250
300
350
400
450
2002
2003
2004
2005
2006
2007
2008
2009
2010
Revenue
($
Million)
Year

27. 27
…And
ARPPU
Growth
A]er
IniDal
Kneejerk
Source:
Company
Reports,
LCM
Research
Es=mated
ARPPU
0
50
100
150
200
250
300
350
400
2002
2003
2004
2005
2006
2007
2008
2009
2010
ARPU
RMB/Quarter

28. 28
ZT
Online
• 2D
MMORPG,
Mar=al
Arts,
Adventure
• Developed
and
Published
by
Giant
Online
• Launched
in
2007
• Free-­‐to-­‐play,
pay
for
virtual
goods
model
• PCU:
1
million+

29. 29
70%+
Higher
ARPPU
Compared
to
WOW
0
20
40
60
80
100
120
140
160
180
World of Warcraft ZT Online
ARPU($/Year)
Source:
Company
Reports,
LCM
Research

30. 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. 31
ARPPU
DistribuDon
Curve
of
ZT
Online
(20)
-
20
40
60
80
100
120
140
160
- 500 1,000 1,500 2,000
Users ('000)
ARPu($/Month)
Source:
Company
Reports

32. 32
Examples
of
MoneDzaDon
• Game
Design
(System
for
marriage,
breeding,
paren=ng,
balance
between
males/females)
• Special
In-­‐game
Events
(Valen=ne’s
day,
New
Year’s
day,
Sports)
• In-­‐game
Promo=ons
• Treasure
Chest
– Special
Bonus
for
Opening
Most
Chests
• Chat
&
Response

33. 33
Virtual
Goods:
Global
Market
Size
EsDmate
($
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. 34
Virtual
Goods:
Global
Market
Size
EsDmate
($
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

35. Agenda
• Games-­‐as-­‐a-­‐Service
– Lines
blurring
between
pla6orms;
Tablets,
Set-­‐top
boxes
– Innova=on
by
startups
• Virtual
Goods
– Perfect
Price
Discrimina=on
– Enhance
Community/Curb
Piracy
– Higher
quality
of
earning
(a)
Predictability,
(b)
Life=me
Value
• Social
Games
– Ver=cal
Games
– Mone=za=on
(a)
Conversion,
(b)
Adver=sing
– Pla6orms
dedicated
for
games
• Mobile
Games
– Rise
of
persistent
games
– Mobile
an
extension
of
other
pla6orms
– Dominated
by
a
few?

36. 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. 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/YGrowth
$million
Source:
NPD

38. 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. 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
communica=on,
a
mean
to
express
oneself
in
virtual
environment

40. 40
Gaming
Versus
Expression
0
50
100
150
200
250
Video Game Luxury Goods
$Billion
Source:
Bain
&
Company,
PWC

41. Trends
in
Social
Games
• Focus
on
Mone=za=on
– Conversion
– Adver=sing
– Payment
mechanisms
• Pla6orm
maturing
– IPs
Maber
• Social
Games
outside
Facebook
– Using
Facebook
social
graph
– New
pla6orms
• Mobile
another
wave
of
disrup=on
– Loca=on:
convergence
of
physical
and
virtual
world
41

42. Focus
on
MoneDzaDon
–
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

43. Focus
on
MoneDzaDon
–
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

44. Focus
on
MoneDzaDon:
AdverDsing
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

45. Focus
on
MoneDzaDon:
AdverDsing
$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

46. MoneDzaDon
–
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
&
A]er
Carrier
Billing
Source:
DeNA

47. 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
• Mone=za=on
of
DeNA
vs.
Mixi
• First
itera=on
of
social
games
outside
Facebook
already
there
• Next
itera=on
of
social
games
with
deeper
integra=on/social
games
from
ground
up
– Imagine
a
social
shooter,
ac=on
game
–
trophy
save
your
real-­‐life
friend
in
virtual
environment

48. ARPU
Comparison–
Game
Centric
SNS
Vs.
Broad
SNS
Mixi
Mobage
Approximately
10x
Source:
DeNA

49. As
Plaiorm
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

50. As
Plaiorm
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. 51
Social
Game:
Global
Market
Size
EsDmate
($
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
Adver=sing
Virtual
Goods
Source:
LCM
Research

52. 52
Social
Gaming:
WW
Market
Size
EsDmate
($
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

53. Agenda
• Games-­‐as-­‐a-­‐Service
– Lines
blurring
between
pla6orms;
Tablets,
Set-­‐top
boxes
– Innova=on
by
startups
• Virtual
Goods
– Perfect
Price
Discrimina=on
– Enhance
Community/Curb
Piracy
– Higher
quality
of
earning
(a)
Predictability,
(b)
Life=me
Value
• Social
Games
– Ver=cal
Games
– Mone=za=on
(a)
Conversion,
(b)
Adver=sing
– Pla6orms
dedicated
for
games
• Mobile
Games
– Rise
of
persistent
games
– Mobile
an
extension
of
other
pla6orms
– Dominated
by
a
few?

54. Mobile:
Next
Wave
of
DisrupDon
54
Source:
Interna=onal
Telecommunica=on
Union,
NPD

55. Smartphone
Market
PotenDal
55
Source:
LCM
Research
0
50
100
150
200
250
300
350
400
450
U.S. Europe
Mobile
Subscribers
Smartphone
Users

56. Smartphone
Market
PotenDal

57. 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

58. 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

59. User
Preference
Towards
Games

60. Android
Opens
Up
Another
Opportunity

61. Tablets
Open
Up
Another
Opportunity
0
5
10
15
20
25
30
35
40
1
2
3
4
5
Millions
Quarter
Since
Launch
CumulaDve
Sales
Of
iPad
vs.
iPhone
vs.
iPod
iPad
iPhone
iPod
Source:
Apple

62. Tablets
Open
Up
Another
Opportunity
0
50
100
150
200
250
300
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
Millions
Quarter
Since
Launch
CumulaDve
Sales
Of
iPad
vs.
iPhone
vs.
iPod
iPod
iPhone
iPad
Source:
Apple

63. Skipping
The
PC
Web?
0
200
400
600
800
1000
1200
Popula=on
Internet
Users
Broadband
Users
Mobile
Subscribers
Number
of
Subscribers
in
India
(Million)
63
Source:
Telecom
Regulatory
Authority
of
India,
InternetWorldStats.com

64. No
Contract,
Android
=
$150
Source:
www.flipkart.com

65. 65
Global
Mobile
Games
Market
Size
EsDmate
($
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. 66
Global
Mobile
Games
Market
Size
EsDmate
($
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

67. Agenda
• Games-­‐as-­‐a-­‐Service
– Lines
blurring
between
pla6orms;
Tablets,
Set-­‐top
boxes
– Innova=on
by
startups
• Virtual
Goods
– Perfect
Price
Discrimina=on
– Enhance
Community/Curb
Piracy
– Higher
quality
of
earning
(a)
Predictability,
(b)
Life=me
Value
• Social
Games
– Ver=cal
Games
– Mone=za=on
(a)
Conversion,
(b)
Adver=sing
– Pla6orms
dedicated
for
games
• Mobile
Games
– Rise
of
persistent
games
– Mobile
an
extension
of
other
pla6orms
– Dominated
by
a
few?

68. 68
QUESTIONS?