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

Transcription

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 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?

3 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 ( ) 4

5 Revenue CAGR ( ) Top Companies By Revenue CAGR ( ) 80% 70% 60% 50% 40% 30% 20% 10% 0% 0% 20% 40% 60% EBIT Margin 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 5

6 Enterprise Value/Sales Multiple U.S. Video Game Companies Shares 7 ATVI 6 5 ERTS TTWO THQI Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Source: FactSet 6

7 Emergence of Multi-Channel Games-as-a-Service Mobile Game Social Game Multi-Channel Games-as-a-Service PC Game Console Game Upfront Purchase LCM Research Virtual Goods Subscri ption Ads & Others Source: LCM Research 7

8 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) 70,000 60,000 50,000 40,000 30,000 20,000 Social Online Mobile Console 10, E 2010E 2011E 2012E 2013E 2014E 2015E Source: LCM Research 9

10 Video Game Market Size Estimate ($ Million) Rest of World U.S. South Korea Japan Europe China E 2011E 2012E 2013E 2014E 2015E Source: LCM Research 10

11 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 respective companies Websites. 12

13 Price Discrimination Source: Caroline Scott;

14 Price Discrimination 14

15 Price 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 All Customers Pay One Price $50 Some Customers Willing to Pay Higher Prices $ Consumer Surplus = Lost Revenue Supply Demand Quantity Source: LCM Research 15

16 Price Limited Editions and Map Packs Captured More Revenue 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 Halo 3: Map Pack Priced at $15 Halo 3: Limited Edition Price (1) Halo 3: Standard Pricing (1) $90 $75 $60 Hardcore gamers could spend incrementally more, if desired $ Yet Still, Lost Revenue Supply Demand Quantity (1) Pricing is approximate. (2) Source: Microsoft. 16

17 Price Virtual Goods Enable Perfect Price Discrimination 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 With the true cost of virtual goods close to zero, there is effectively no supply curve goods are readily supplied at all price points Supply 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 $ Demand Quantity 17

18 Source:

19 Build Community World of Warcraft Cityville The Sims Social Angry Birds Source: Company Reports, AppData, LCM Research 19

20 Everyone pays pays PAY ARPU 1 X Monetization line Big spenders $100+ Paying Users $15 10 X Ads Sponsors Free Users $1 20 Source: Acclaim

21 Longevity & Stickiness: Average Chinese Gamer ARPPU (RMB/Qtr) Source: IDC, LCM Research 21

22 Game Spend As Percentage Of Per- Capita Income 0.35% 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% Games Spend as % of Per-Capita Income U.S. China South Korea % 0.45% 0.40% 0.35% 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% Games Spend as % of Per-Capita Income - ex-food Source: LCM Research 22

23 Players Willing To Spend More Games As % of Per Capita Income 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% U.S. South Korea China Source: National Bureau of Statistics of China, Korea Game Development Institute, EuroMonitor International 23

24 And The Vendors Are More Profitable 120% 100% 80% 60% 40% 20% 0% -20% Operating Margin ROE -40% SNDA GA PWRD NTES CYOU ERTS ATVI THQI TTWO Source: Company Reports 24

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 ~ K 25

26 Revenue ($ Million) Mir 2 Revenue s Growth After Model Change Year Source: Company Reports 26

27 ARPU RMB/Quarter And ARPPU Growth After Initial Kneejerk Estimated ARPPU Source: Company Reports, LCM Research 27

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+ 28

29 ARPU ($/Year) 70%+ Higher ARPPU Compared to WOW World of Warcraft Source: Company Reports, LCM Research ZT Online 29

30 Top Players Pay 20x of WOW ARPU $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Top 5% Players 15% Players 80% Players WOW Source: Company Reports, LCM Research 30

31 ARPu ($/Month) ARPPU Distribution Curve of ZT Online ,000 1,500 2,000 (20) Users ('000) Source: Company Reports 31

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 32

33 Virtual Goods: Global Market Size Estimate ($ Million) 25,000 20,000 15,000 10,000 Mobile Social Network Online (off-social Networks) 5, E 2011E 2012E 2013E 2014E 2015E Source: LCM Research 33

34 Virtual Goods: Global Market Size Estimate ($ Million) 25,000 20,000 15,000 10,000 5,000 Rest of World U.S. South Korea Japan Europe China E 2011E 2012E 2013E 2014E 2015E Source: LCM Research 34

35 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 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% AppStore Facebook - Now Facebook- May, 09 Persistent Mid-session Source: AppData, LCM Research 36

37 $ million Y/Y Growth Console Games: U.S. Market Size 12,000 10,000 8,000 6,000 4,000 2, % 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Source: NPD 37

38 Average Game Play Hours Per Week On Console Source: The Nielsen Company 38

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 39

40 $ Billion Gaming Versus Expression Video Game Source: Bain & Company, PWC Luxury Goods 40

41 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

42 Focus on Monetization ARPU ($/MAU) Mixi DeNA Gree Giant ChangYou US Social Games Source: Company Reports, LCM Research US MMO 42

43 Focus on Monetization ARPU Adjusted for GDP Mixi DeNA Gree Giant ChangYou US Social Games Source: LCM Research US MMO 43

44 Focus on Monetization: Advertising 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 44

45 Focus on Monetization: Advertising $1.20 ARPU/DAU $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 WebMD The Knot Yahoo! Demand Media Social Games Source: comscore, Company Reports 45

46 Monetization Payment Mechanisms Mobage ARPU Before & After Carrier Billing Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 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 47

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

49 As Platform Matures; IPs Become More Important 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 49

50 As Platform Matures; IPs Become More Important Rank Game Publisher Price 1 The Sims Electronic Arts $ The Oregon Trail Gameloft $ Need for Speed: Undercover Electronic Arts $ Madden NFL 10 Electronic Arts $ Tiger Woods PGA Tour Electronic Arts $ Assassin's Creed: Altair Chronicles Gameloft $ Flight Control Firemint $ Cooking Mama Taito $ Civilization Revolution Take-Two $ Wheel of Fortune Sony $0.99 Source: Apple 50

51 Social Game: Global Market Size Estimate ($ Million) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, E 2011E 2012E 2013E 2014E 2015E Advertising Virtual Goods Source: LCM Research 51

52 Social Gaming: WW Market Size Estimate ($ Million) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, E 2011E 2012E 2013E 2014E 2015E Rest of World U.S. Japan Europe China Source: LCM Research 52

53 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?

54 Mobile: Next Wave of Disruption Source: International Telecommunication Union, NPD 54

55 Smartphone Market Potential U.S. Source: LCM Research Europe Mobile Subscribers Smartphone Users 55

56 Smartphone Market Potential

57 Smartphone Vs. Feature Phone U.S. 100% 90% 80% Featurephone Smartphone 70% 60% 50% 40% 30% 20% 10% 0% 2008 Q Q Q Q Q Q Q Q Q Q Q Q Q Q3 Source: The Nielsen Company

58 Global Smartphone Installed Base E 2011E 2012E 2013E 2014E 2015E 2016E Source: Ericson 58

59 User Preference Towards Games

60 Android Opens Up Another Opportunity

61 Millions Tablets Open Up Another Opportunity Cumulative Sales Of ipad vs. iphone vs. ipod ipad iphone ipod Quarter Since Launch Source: Apple

62 Millions Tablets Open Up Another Opportunity Cumulative Sales Of ipad vs. iphone vs. ipod ipod iphone ipad Quarter Since Launch Source: Apple

63 Skipping The PC Web? Number of Subscribers in India (Million) Population Internet Users Broadband Users Mobile Subscribers Source: Telecom Regulatory Authority of India, InternetWorldStats.com 63

64 No Contract, Android = $150 Source:

65 Global Mobile Games Market Size Estimate ($ Million) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, E 2011E 2012E 2013E 2014E 2015E Source: LCM Research Social Games Downloadable Games 65

66 Global Mobile Games Market Size Estimate ($ Million) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, E 2011E 2012E 2013E 2014E 2015E Source: LCM Research Rest of World U.S. South Korea Japan Europe China 66

67 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? 68