Billionaires with virtual goods? Already in Asia!

1. Who Wants to be a Billionaire?
Asia’s Best (and Worst) Practices
With Virtual Goods
Benjamin Joffe, CEO | Plus Eight Star Ltd.
Virtual Goods Forum| London, 2010.06

2. @benjaminjoffe
4 years 1 year 5 years

4. | Plus Eight Star
• “Innovation Arbitrage”
• Internet & Mobile Strategy & Research
• Best practices from China, Japan & Korea
• Published research
• Inside Cyworld (2007)
• Inside Tencent (2009)
• Clients
• Microsoft, IMVU, Mig33, DeNA, Mail.ru, Vinagame,
Nokia, Harvard Business School, etc.

5. Work With Startups
• Mogi, by Newt Games (2003)
– Mobile SNS in Japan
• 3G, GPS, avatars, virtual items
– Too early!
• Paradise Paintball, by Cmune (2010)
– First 3D FPS game on Social Networks
• “Best New Game” on MySpace (GDC 2010)
• #1 Widget on Apple.com
• > 500,000 MAU across all channels (2010.06)
– On time!

6. Plan
1. What I learned about virtual goods so far
2. What happens in Asia
3. What I think might happen soon

7. PART I
What I Learned
About Virtual Goods
So Far

8. Orientation Test
Who has a
Facebook account?

9. Orientation Test
Who has played
a game on Facebook?

10. Orientation Test
Who has paid
for Virtual Goods before?

11. Our Challenges
• We are old
• We are not local
• We are not users
• We have (lots of) cultural stereotypes
• Things have been pretty good this way so far

12. Semantic Prisons?

13. “There are plenty of semantic prisons
which do not permit us to think straight”
Aldous Huxley, The Human Situation

14. Cell 1: Virtual (Goods)

15. Virtual???
• Connotations
– Not real
– Valueless
– “Who would be stupid enough to pay for that!”
• Opposite of Real = Imaginary
• It’s Digital but it’s Real

16. Virtual Goods = Digital FMCG?
• “Virtual Goods are Consumer Products”
– Cary Rosenzweig, CEO, IMVU Inc.

17. Analog vs. Digital Experiences
World Cup! Concerts, Travels, Encounters…

18. Cell 2: (Video) Games

19. Video Games
• Connotations
– Childish
– Waste of time
• Adults don’t play games!
• Updated terminology
– Video = Digital (is this needed?)
– Games = Entertainment

20. Field Research: My Aunt
(Mountain View)

22. Field Research: Halloween
(San Francisco)

23. Field Research: Santa Con
(London)

24. To Understand Online, Look Offline
• Look at Social Behavior
• Look at Animal Behavior
• Look at Foreign Cultures

25. Sociologist
(esp. Social Psychology)
Stanley Milgram (1933-1984)
“Small world experiment” / 6 degrees (1967)
“Behavioral Study of Obedience” (1963)

26. Sociologist
(esp. Social Psychology)
Philip Zimbardo (1933)
Stanford Prison Experiment (1971)
The Lucifer Effect (2007)

27. Zoologist
Desmond Morris (1928~, North Wiltshire)
“The Naked Ape” (1967)
“The Human Zoo” (1969)

28. Anthropologist
Robin Dunbar (1947~, Liverpool)
(Dunbar Number)

29. Evolutionary Biologist
Charles Darwin (1809-1882, Shropshire)
“The Origin of Species”

30. Chilled-Out Entertainer
David Brent

31. The Situation
• Emotions & Experiences vs. Commodities
• Digital entertainment offers Super-Stimuli
– Pure mental stimulation >> Daily grind
– The largest sexual organ is the brain!
Left : Super Stimulus mimicking beak targeting the “Fixed Action Patterns” of Seagulls

32. All The World’s a Stage…

33. All The World’s a Stage…
…and all the men and
women merely Avatars
Picture courtesy of Asiana’s in-flight cartoon team

34. PART II
The Asian Situation

35. Quiz

36. Answers
World’s #3 largest
Internet company
after Google and
Amazon
#2 youngest self-
made billionaire
in the world after
Mark Zuckerberg
of Facebook
Pony Ma, CEO, Tencent Yoshikazu Tanaka, CEO, GREE

37. Where To Find Digital Goods?
1. Social networks
2. Online games
3. Virtual worlds
4. Offline?

38. Digital Goods Market for 2009
Asia $7 bln
USA $1 bln
Sources: www.plus8star.com (Asia) - Inside Virtual Goods, Oct 2009 (US)

39. Digital Goods Market Estimates for 2010
Asia $9 bln
USA $2 bln
Source: www.plus8star.com

40. 1. Social Networks

41. Asian Social Networks

42. Market Caps (May 2010)
$35.3B
$4.2B
$2.5B
$900M

43. QQ IM & QZone

44. More on Tencent
• Revenue 2009 $1.8B
• Net Profit Margin 40%
• Revenue from Digital Goods 90%
– Digital currency
– Multiple payment methods
– Purchase, rental, subscriptions…

45. 11:30
Shin Takamiya
Advertising
Gree Home Advertising &
Affiliates | 25%
Avatars & items
B2C virtual
Games goods | 75%
60% avatars
40% games

46. Mobile App Platform since Oct.09
(330 apps as of February 2010)
City Building Harvest Moon Shopkeeper Furauni
By Liveware By Liveware By Geisha Tokyo By Konami

47. 2. Online Games

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

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

50. Quiz!
What is this game?

52. Kingdom of the Wind (Nexon, 1996)

53. 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

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

55. Nexon Today
• Some famous games
– Kart Rider (200M reg. users)
– Dungeon & Fighter (200M reg. users)
– Maple Story (95M reg. users)
– Mabinogi, Combat Arms, etc.
• Revenue 2009: $561 million (+56%)
– Over half from overseas (first time!)
• Disney offering $6 billion? (rumor)
– EA’s market cap is $5.3 billion… (2010.06)

56. “Nexon has perfected the free to play model
worldwide and has applied it as a winning formula
to very outstanding games”
Daniel Kim, CEO
Nexon America

57. 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!

58. Social Games
• Stand-alone to Social Game

59. Some Data on China
(source: GAPP)
• 2009 market: $3.75B
• 105 million game users
– SNS games = 87.7% (92 mln)
– MMOs = 22.7% (24 mln)
– Single-player PC games = 36.1% (38 mln)
• Ads
– 71.3% of SNS game players see an ad when playing
– 2.2% CTR for SNS games (>>0.1% for web ads)

60. Chinese Online Games Companies
• Listed on NASDAQ
• NETEASE NTES $3.93B
• SHANDA SNDA $2.65B
• SHANDA GAMES GAME $1.56B
• PERFECT WORLD PWRD $1.20B
• CHANGYOU CYOU $1.49B
• GIANT INTERACTIVE GA $1.64B
• Listed on HKSE
• TENCENT 0700 $30.6B
• NET DRAGON 0777 $250M
• KINGSOFT 3888 $595M
Data as of: 21 June 2010

61. Revenue & Profit (2008)
80%
70%
60%
50%
Profit Margin
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

62. Tencent: Up and To The Right!

63. Total Market Cap
• And the total is…
• 8 Gaming Companies $13.3B
• TENCENT $30.6B
• TOTAL $43.9B
• Comparables
• ACTIVISION BLIZZARD $14.27B
• ELECTRONICS ARTS $5.28B
• TAKE TWO INTERACTIVE $853M
• UBISOFT $817M
• ATARI Delisted from NASDAQ
• TOTAL $21.2B
Data as of: 21 June 2010

64. More Comparables
• Korea
• NHN (Naver, Hangame) $7.6B
• NC SOFT $3.8B
• NEXON Private ($6B offer?)
• Japan
• SEGA SAMMY $4.1B
• KONAMI $2.5B
• SQUARE ENIX $2.3B
• NAMCO BANDAI $2.2B
• CAPCOM $1.2B
• (NINTENDO $44.2B)
Data as of: 21 June 2010

65. Guitar Hero
• Inspired by “Dance Dance
Revolution” (Japan)
• Japanese publishers:
“It won’t work in the West”
• US publishers:
“It won’t work in the West”
• It worked in the West.

66. Rhythm Game = Dating Game?

67. Case Study: Farm Games

69. 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

70. Answer: “It’s Complicated”
1. Five Minutes (China)
2. Slashkey (US)
3. Zynga (US)
4. Playfish (UK), Elex (China), etc.

71. The Mother of all Farming Games?
or “where is the innovation?”
• Harvest Moon (1996)
– On Super NES, by Victor Interactive
– Inspired Happy Farm
• Sim Farm (1993)
– On PC, by Maxis
• Where is the innovation?
– Not in the game concept, but in
viral & social mechanics

72. A FarmVille Button?
PHOTO: MOBILE PHONE, BEIJING, APRIL 2010
© Benjamin Joffe / Plus Eight Star Ltd.

73. There is a link to
check your QQ Farm
PHOTO: MOBILE PHONE, BEIJING, APRIL 2010
© Benjamin Joffe / Plus Eight Star Ltd.

74. 3. Virtual Worlds

75. Virtual Worlds
• Strengths
– Exploration
– Creativity
– Online Economy
• Weaknesses
– No social graph
– No fun!
• IMVU, Second Life “pivoting”

76. (from Web 2.0 Conference, 2010.05)
• Revenue 2009: $22 million (x2)
– Became profitable & cash flow positive
• Revenue 2010: $44 million? (x2)
• Begin pivot… Virtual World to Social Entertainment
– “From Dress Up to Level Up”
– Game Mechanics
– 2D and 3D Games

77. Japan

78. Internet
Adventure Meet-me
(by SEGA)

81. PS3 “Home”

82. 25 million Xbox 360
consoles getting
software upgrade?

83. Poupee Girl
(by CyberAgent)

84. (by SquareEnix)

85. Pigg
(by CyberAgent)

86. Pigg
(by CyberAgent)
• 1Q2010 Revenue >$7M
– 3M+ users (2010.04)
– TV ads!
• Paying Users
– 80% are 20 to 40y.o.
– 70% female
• Payment
– 68% Mobile, 20% Webmoney, 12% Credit Card

87. South Korea

93. China

97. (60% Made in China)

100. Conclusions
• Pure virtual world = Not fun enough?
• Emerging & Converging with SNS & Games

101. 4. Offline (but Digital)

102. South Korea | “Screen Golf” Mainstream!
5,000 “Golf Cafes”
US$ 500 million market
82,000 daily visits (vs. 65,000 for “real” golf)
US$ 20 / 18 holes (10 times cheaper)

103. South Korea | VR Golf Going Global?
“I almost feel like I'm actually playing on the fairway”
“Screen golf has created a unique market in our country,
where people prefer rooms for chatting and socializing”
“In view of growing demand for simulators abroad,
I believe screen golf will become a global trend”

104. Best (and Worst) Practices

105. Categories
Social
Game-related
Metrics

106. Social Best Practices
• Engaging with strangers
• Triggering emotions
• Group behaviors and social proof
• Desires of power, fame, greed, lust (“attachment”)
• Willingness to help (goodwill & cooperation)
• Community Engagement

107. Game Best Practices
• Target: Don’t leave money on the table!
• Balance vs. Conflict (cf. Zhang Ye)
• “Endorphin” feedback loop (actions, levels)
• Lottery systems (borderline gambling)

108. Metrics Best Practices
• Improve conversion ratios
– Double your revenue?
– From visitors to active to paying to high ARPPU
• Measure ROI and maximize channels
• Trigger virality (K-factor) and re-engagement

112. PART III
What Might Happen Soon

113. Proven Models Spreading
• Asian companies expanding
– Bring online & social games overseas
– Acquire IP from Japan, US, Europe?
• Huge opportunities in emerging markets
– “Tencents” of… Russia, Brazil, Vietnam, Indonesia…
• Globalization of dev & publishing abilities

114. Remaining Barriers in the West
• Semantic prisons
• Payment infrastructure
– Getting better, but still far off
• Industry legacy
– Content production & operation

115. Chinese Companies Going Abroad
• Online game companies
– Perfect World | Japan, (US)
• C&C Media | 21 million USD, March 2010
– Shanda | US
• Mochi Media | 80 million USD
– Tencent | Russia, Vietnam, India, USA…
• Social game companies
– Rekoo | Japan (#1), Korea (#1), Russia
– 5 Minutes | US, others
– 6 Waves (HK) | One of FB’s top global publishers

116. China’s Hurdles: Soft Skills
Building Selling
• Disruptive vs. • Cultural tuning
Incremental Innovation
• Design • PR
• Product/Project • Country “brand”
Management
• Quality • Partnerships

117. Cmune’s Case
• Paradise Paintball
• First FPS inside social networks
• International Team in Beijing
– Founders: Australian, French, Korean
• Launched on Facebook, MySpace, Apple.com

118. Paradise Paintball | World’s First Social FPS!
www.cmune.com
www.facebook.com/paradisepaintball

119. AWARDED
“BEST NEW
GAME”
ON MYSPACE
(GDC 2010)

120. If I did a good job, you…
• Enriched your views on virtual goods
• Understand gaming is moving to online
• Recognize that Asia has a head start

121. Thanks!

122. Thanks!
I’m here until Sunday

123. Thanks!
I’m here until Sunday
and…
go England!

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