Virtual Goods in Asia

Chinese family in Oregon during the Gold Rush Virtual Goods in Asia The US Gold Rush Begins Benjamin Joffe | CEO, Plus Eight Star Virtual Goods Summit, San Francisco | 2009.10

Benjamin Joffe 本杰明ベンジャミン 벤자민

4 years 1 year 4 years

Consulting | Startups | Community

| Plus Eight Star • “Innovation Arbitrage” • Internet & Mobile Digital strategy • Best practices from China, Japan & Korea • Published reports • Inside Cyworld (2007) • Inside Tencent (2009) • Inside Alibaba (upcoming) • Contact • www.plus8star.com

Work With Startups • Newt Games • Mobile SNS in 2003 in Japan – 3G, GPS, avatars, virtual items • Too early! • Cmune • Making the 3D Web happen – fbFund winner – First 3D FPS game on Facebook – #1 Widget on Apple.com – Virtual Goods – www.cmune.com

Mobile Monday Beijing 31 events 111 speakers 3,500 members 1,500 companies

Let’s begin

The Plan 1. Introduction 2. Virtual Worlds 3. Social Networks 4. Social Games 5. Online Games 6. Others things 7. Innovation Arbitrage 8. Questions?

Chapter 1 Introduction

Virtual Goods Big in Asia Quoted in this article

Asia’s Virtual Goods Market Estimate for 2008 5 Billion Dollars! (25 times USA!)

Internet Mobile 1.3 billion 3.3 billion Source: Morgan Stanley, 2007

Digital Population Country USA China Japan Korea Population 300 mln 1,300 mln 130 mln 50 mln Internet users 225 mln 340 mln 100 mln 35 mln Mobile users 260 mln 650 mln 100 mln 45 mln x5 Total x2 x3

IT Infrastructure 100% Avg. 7 Mbps 80% Avg. 15 Mbps 60% 3G users 40% C hi n 20% a Avg. 4 Mbps www.plus8star.com 0% 0% 20% 40% 60% 80% % of Internet connections measured above 5Mbps (Source: Akamai, 4Q08)

Comparison Hack for US Market? 1. Adjust with GDP/Capita • Japan = x1.2 | Korea = x2.4 | China ~ x10 • (Avg. income of web user in China $400/month)

Comparison Hack for US Market? 1. Adjust with GDP/Capita • Japan = x1.2 | Korea = x2.4 | China ~ x10 • (Avg. income of web user in China $400/month) 2. Adjust with Internet (or Mobile) Population • Japan = x2.5 | China = x2/3 | Korea = x5

Formulas $100M in Japan  $300M in US $100M in China  $700M in US $100M in Korea  $1.2B in US

Online Games in China $3.5 to $4 bln in 2009 3Q09 | $1 bln >40% CAGR (Most of it from virtual goods)

Quick Calculation • China • $3 to $4 bln market • 10 Chinese online game companies on NASDAQ • Tencent = $1 bln in revenue (2008) • Japan • 3 Social networks market-listed in Japan for over $1 bln • 2 are 100% mobile with >50% revenue from VG • Korea • Popularized the free-to-play model • $1 bln online gaming market, mostly VG

Sharks with Laser Beams vs. Irritated Sea Bass Asia’s Virtual Goods Market Estimate for 2009 Asia: 7 Billion Dollars! USA: $1 bln (Source: Inside Virtual Goods, Oct 2009)

Sharks with Laser Beams vs. Irritated Sea Bass Asia’s Virtual Goods Market Estimate for 2009 Asia: 7 Billion Dollars! USA: $1 bln (Source: Inside Virtual Goods, Oct 2009) US market potential 3~35 Billion Dollars?

Techno-Paleonthology The Origins of Virtual Goods – “It was invented in China” – US investor about virtual goods in SNS (2009) – “China learned from Korea” – Chinese online gaming executive (2007) – “Korea learned from the US” Peking Man – Former exec at virtual world company (2002) Researchers are Puzzled

+8* Research • Asia first place where virtual goods reached over US$1 billion • (If you except the US stock market ) • Online communities since the mid-80’s • Some services included virtual goods • Same ideas often found independently “when the time is right” • “Techno-Darwinism” vs. “The Inventor Myth”

Revenue Scale • Online games x $1,000 million x10 • Social networks x $100 million x10 • Virtual worlds x $10 million

BUT • It’s converging • Categories make less and less sense • (and “virtual” is a misnomer)

Chapter 2 Virtual Worlds

“Leading” Virtual Worlds • Japan • China – 3D… – 3D… – AMEBA PIGG – QQ PET – NICOTTO TOWN – OTHERS – POUPEE GIRL • Korea – PUPPYRED – CYWORLD 3D – NURIEN – MAPLE STORY

Internet Adventure Meet-me (by SEGA)

PS3 “Home”

25 million Xbox 360 consoles getting software upgrade?

South Korea

(60% Made in China)

Conclusions • Emerging • Pure virtual world = Not Fun?

Pigg (by Ameba)

(by SquareEnix)

Poupee Girl (by CyberAgent)

South Korea

Gaming Mainly Second virtual 2D dating Life adaptations worlds 2005 2006 2007 2008 2009 2D worlds Variety of concepts and revenue models

Conclusions • Easier than 3D • More fun, but still… • Growing

Chapter 3 Social Networks

Leading Social Networks • Japan • China – MIXI – QQ (Tencent) – GREE – RENREN (ex-XIAONEI) – MOBILE GAME TOWN (DENA) – KAIXIN001 – NANI SURU? – 51.COM • Korea – CYWORLD

Revenue vs. Profit 70% 60% 50% Profit Margin 40% 30% 20% 10% 0% 0 200 400 600 800 1,000 1,200 Million USD

South Korea

Mobile Game Town

Source: DeNA

Advertising Gree Home Advertising & Affiliates | 25% Avatars & items B2C virtual Games goods | 75% 60% avatars 40% games

Niche mobile SNS appearing Nani suru? (What are you doing?)

The Facebook Tributes “With enough marketing, the copy becomes the real”

Conclusions • Mobile making hundreds of millions! • Mobile and Web are not the same • Games, Games, Games • Lots to learn from Asia!

Chapter 4 Social Games

Quiz: Who Created the First Farming Game? • Game MAU Dev. Country • FarmVille 61.6M Zynga USA • Farm Town 18.6M Slashkey USA • Country Story 8.1M Playfish UK • Barn Buddy 6.8M TheBroth USA • Happy Farm 2.5M 5 Minutes China • Happy Harvest .6M Elex China Source: Appdata and Facebook, 2009.10.26

Answer: It’s Complicated • Current guess (comments welcome): 1. Five Minutes? (China) 2. Zynga (US) 3. Elex (China, US, EU) • Slashkey? TheBroth? PlayFish?

The Mother of all Farming Games? or “where is the innovation?” • I thought Harvest Moon was possibly the first… • By Victor Interactive (1996) On Nintendo’s Super NES • …but a reader found Sim Farm • Maxis, 1993  • Where is the innovation? • Not in the concept, but in gaming, viral and social mechanics

Social Games Going West • Facebook Developers: Low Entry Barrier! Rank Company Apps Location #7 6 Waves 104 apps Hong Kong #30 Rekoo 2 apps Beijing #36 Elex 7 apps Beijing #229 Tyler Projects 1 app Singapore • Strong in China & entering Russia, Japan, etc.

Social Games Going East Too?

Quotes from Elex • High productivity – “Anyone is able to develop social games at Playfish level” • 12 languages versions – “We can localize our game in different language versions in 1 day”

Conclusion • Aggressive teams • “Ramen Profitability” reachable • Execution >> Creativity • Can you compete? I’m loving it!

Chapter 5 Online Games

Quiz! What is this game?

Kingdom of the Wind (Nexon, 1996)

Business Model Evolutions • First wave: Packaged Software • First issue: Piracy

Business Model Evolutions • First wave: Packaged Software • First issue: Piracy • Second wave: Online + Subscriptions • Second issue: Competition / Game as a Service

Business Model Evolutions • First wave: Packaged Software • First issue: Piracy • Second wave: Online + Subscriptions • Second issue: Competition / Game as a Service • Third wave: Virtual Goods • Third issue: User Acquisition / Balancing Economy

Third Wave: Korea • Online + Virtual Goods SuperMarioKart Kart Rider

Business Model Evolutions • First wave: Packaged Software • First issue: Piracy • Second wave: Online + Subscriptions • Second issue: Competition / Game as a Service • Third wave: Virtual Goods • Third issue: User Acquisition / Balancing Economy • Fourth wave: Social Games • Fourth issue: Competition again!

Social Games • Stand-alone to Social Game

Chinese Online Games Companies • Listed on NASDAQ • NETEASE NTES $4.82B • SHANDA SNDA $3.11B • SHANDA GAMES GAME $2.75B • PERFECT WORLD PWRD $2.25B • CHANGYOU CYOU $1.65B • GIANT INTERACTIVE GA $1.71B • Listed on HKSE • TENCENT 3888 $34.3B • NET DRAGON 0777 $0.34B • KINGSOFT 0700 $1.07B

Total Market Cap • And the total is… • 8 Gaming Companies $17.7 B • Tencent $34.3B • TOTAL $52.0B • Comparables • Activision Blizzard $14.1B • Electronic Arts $6.05B • Ubisoft $1.56B • Take Two $0.94B • TOTAL $22.6B

Tencent Up and To The Right!

Revenue & Profit 80% 70% 60% Profit Margin 50% 40% 30% 20% 10% +8* | www.plus8star.com 0% 0 50 100 150 200 250 Revenue (mln USD) Bubble size = Net Profit (mln USD) Note: The net margin/profit value used for Tencent game and NetEase is the one of the whole company, 2008

Remaining Barriers in the West • Payment infra – Getting better • Legacy industry (packaged software) – In transition • Electronic Arts – Revenue 1.2 billion USD – Profit margin (-30%)

Battlefield by Electronic Arts

When we started two years ago, there was a real question mark: Can the free- to-play model work as it did in Asia? The answer is an emphatic yes. Ben Cousins General manager Battlefield Heroes team Electronic Arts

Better hurry! Asian Online Games Going West

Conclusions Are we so Different?

Conclusions It’s going to change FAST Get on the bus!

Chapter 6 One More Thing!

Mobile Open Platforms Mixi: Oct 27, 2009 – 39 mobile applications released – mostly games City Building Harvest Moon Shopkeeper Furauni By Liveware By Liveware By Geisha Tokyo By Konami

Virtual Currencies in any Online Media • HoopChina PORTAL ONLINE STORE – Basket-Ball vertical – 90% UGC – E-commerce – Virtual currency “CA” (for “calorie”) WEB GAMES earned via activity – Web games

Evolutions 3D Social Games? Cross-Platform Games? Artist’s view of 3D Farming Game

Most Advanced 3D Game on FB Paradise Paintball by Cmune http://apps.facebook.com/paradisepaintball/ Disclosure: I am an investor & partner of Cmune

Chapter 7 Innovation Arbitrage

When was it invented?

Europe Gutemberg | ~1450 Korea Metal | ~1230 China Wooden | ~1040

Who came first?

Principle • Identifying best practices • Cross-market & Cross-cultural analysis • Adaptation to client market

References EUROPE USA ASIA

Stimulus Package For All VGS Attendees until Nov 10! • 25% off our research on Tencent & Cyworld! • Inside Tencent (2009) – 280 pages – US$5,000 US$3,750 • Inside Cyworld (2007) – 180 pages – US$2,000 US$1,500

Chapter 8 Questions?

Thanks! More about “Innovation Arbitrage” www.plus8star.com benjamin@plus8star.com +81 | Japan benjamin0123 +82 | Korea +86 | China http://twitter.com/plus8star Telecom & Internet www.linkedin.com/in/benjaminjoffe + Added Value * High quality www.slideshare.net/plus8star

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Virtual Goods in Asia

by Benjamin Joffe on Oct 30, 2009

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