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Kabam's Next Wave: PS4 level graphics and $24 million launches

In April last year, Kabam CEO Kevin Chou outlined a bright future for mobile games in which the most popular titles could earn revenue in excess of $1 billion. As the value of the prize increases, though, so too must the stakes, and Chou made it clear that competing at the very top of such a marketplace would require greater resolve and tighter focus: fewer games, bigger games, and better games, to use the mantra laid out in Chou's blog post.

When we met at Casual Connect USA, Chou insisted that the process of transition isn't yet complete. Marvel: Contest of Champions, while undeniably successful, should be taken as a strong indication that the company is on the right path, rather than evidence it has already arrived at its destination. Kabam is now analysing its games in new ways, and investing larger amounts on launch products than ever before.

Q: You recently launched Marvel: Contest of Champions in China, and launched it successfully. It's done very well in a lot of different territories. Is that Kabam's most successful game to date now, in terms of lifetime revenue?

KC: Yeah. Before, the game that was the most successful for us was The Hobbit. And that game over its complete lifetime, which has been… We've done about $250 million across three and a half years. Marvel has done over $300 million, and it's been live for about 18 months.

Q: You released Star Wars: Uprising as well, which is based on another really big brand, but Marvel outperformed that one. A lot of developers feel like mobile can be a crapshoot. Are you able to look at Marvel and understand why it outperformed Star Wars?

KC: The most important thing we look at is long-term retention, above and beyond how much the IP resonates, above and beyond the CPI we see for various different titles and gameplay genres and so forth. The number one thing that we've discovered that affects if we're going to have a great business or not - something we can invest behind - is the long-term retention of the regulars.

Do we have a base of players that we call regulars? If so, how efficient are we at creating that type of gameplay? We look at it as, 'Per 1000 players, how many regulars do we have every single week?' We started by looking at games that are five, six, seven years old, then going back all the way back to day one of those games. One of the hypotheses was that the people playing the game seven years in all installed the game in the last three years, and all the people who installed on day one of the game have all gone. But it turned out that wasn't true. A very large amount of the players, a very significant majority, have played the same since basically day one of the launch.

Then we said, 'Let's look at what these players did on day one that made them still play seven days later, or seven years later.' Well, one of the things is time spent, the number of days they're playing in a month, the number of sessions, engagement. All of these things just look radically different than for a player who came in and stopped playing after a couple months. So if what really matters is having this base of players that could potentially play for years and years if we do our job right, let's just figure out what their day 7, day 14, day 30 look like.

We don't look at day 1s and day 7s the way other game companies do. We look at it specifically for this idea of regulars.

Q: I was reading through the Kabam blog, and there's a figure of $100 million attached to these seven unannounced games - an average investment of $14 million in each one. Where is that money going? What areas are you pushing? A lot of mobile games seem to be investing heavily in visuals, graphics.

KC: Sure. Listen, I think it's a little bit like baking. There's multiple ingredients for success, and my belief is you need all of these ingredients together. If a few of these ingredients are off, it's really hard to make a competitive game in today's market. We think of the graphics as one key part, but it's not sufficient. You can certainly do without the graphics, but we think we're going to make that part of what we do at Kabam; to have cutting-edge, bleeding-edge graphics. Our next few games will have graphics that are on par with the PlayStation 4 and Xbox One in terms of the visuals… We're going to fully physically based rendering, fully deferred lighting so lights will interact with objects in a material sense. That's gonna be cool. That will be a whole next generation of games that are launching at the end of this year.

That's one part. The second part is we think of the genre and the gameplay. So aside from the graphics, we think of what we call the resolution mechanic. For Marvel, it's a couple of minutes a fight. We generally think, 'How do we make that simple to pick up, hard to master, with a lot of depth in it.' Our next few games are really going to push how we differentiate. It's sort of a traditional AAA question: I'm going to make an FPS or a fighting game. How do you differentiate it from what else is out there today? You really need to do that at a gameplay level.

And then we think, most importantly, how do we have this concept of multi-year retention? And that backs out to day one of the launch. There has to be a way to play the game, I believe, for 40 hours a week.

KC: From day one. Meaning, you install the game on day one. That first seven days, you as a player can play our game for 40 hours that week and find value.

Q: That's how I play Fallout. That's how I play Skyrim. You're citing AAA console here, and that, to me, is the console culture of playing games.

KC: Right. And only a small fraction of our player base will play it that much. Much like if you look at Skyrim players or Halo players, only a small fraction will play it 40 hours a week... But you need a compelling design. You're grinding a lot of different areas of the game, but you have to feel like you're making progress on multiple fronts, and to be able to play for 40 hours. From a free-to-play mobile standpoint, you have to have that level of engagement possible on day one at launch.

Q: So this $100 million across seven games, is it a better to think about that as money that would have been spent over a longer period, but you're now bringing it more up front so you have all that content ready to go?

KC: Absolutely. An FPS or RPG on consoles is a good way to think about this now. We do have linear content, and we want players to have a fun experience for many hours. They're not going to sit there and consume linear content for 40 hours a week, week after week. Even if they are, you can't lay that much content into a game fast enough for that type of player. So you need replayable aspects where they make progress, try to have mastery of a level and so forth. But we ship that on day one.

We're going to push the graphics bar quite a bit on our next games, plus having 40 hours-plus of gameplay a week in our game for many, many weeks on launch. We think of that as absolutely core for our games, which is why our production budgets have gone up so much. It's a Kabam strategy, so I shouldn't say every game is going to be like this. Just the games that we launch.

Q: Is it fair to say that the budgets are going up in general, and not just at Kabam?

KC: We generally think the budgets are getting bigger. I think these days there are a few things that push production budgets. One is how much content you're going to put into the game at launch versus how much you're going to continue laying after the game is live.

The other vector is we're pushing 3D. We're pushing things from a lighting perspective. We're trying to hit 30 fps, but we're pushing it out at really high resolutions from a pixel standpoint. So we're doing all these things on the art side and the tech side that are really pushing up budgets as well. In the console world, the move to 3D generally made budgets about three times more expensive.

Q: It very much did. And that generally leads to greater spend on marketing.

KC: Well, let's say three years ago, for our production budgets as well as a lot of other game companies, $3 million dollars was considered a pretty full budget for a mobile game. Maybe $5 million if you're really trying to be ambitious, right?

KC: And that makes sense in a 2D world. But today as we ship 3D games, what we're also doing is making sure that from an art perspective, from a gameplay and graphics perspective, it's going to be competitive - maybe not in 2017, but definitely by 2018 - we'll be competitive with the current generation of consoles.

Now, people will say you're going to have PlayStation VR, PS4 Neo, you're going to have Scorpio from Xbox. I have no idea what the specs are for those things, but certainly with the current generation, we'll be competitive on a mobile device basis in 2018. That is certainly making our budgets increase. But to your point, if you're going to spend $14 million upfront - and that's a pure production budget for us - we're ready to lay down probably close to $10 million for the launch budget on the marketing side.

Q: Because that's the logic. When you spend that much money, it leads to the obvious conclusion that you need to spend more money on the other side.

KC: You want to build that awareness. It's funny, because we see it now in the data, but it's similar to what the console guys figured out. The first day you launch a game, if you do the marketing the right way you reach out to influencers… That first cohort of players that come into the game are by far your highest quality of players, by far the cheapest to bring in. What we want to try to do going forward is for what we think of as the target demographic, who know they like the gameplay, we want all the people in that circle to be aware of this game. You'll see us launch with much bigger marketing budgets.

Q: This reminds me a little of what happened with that shift to 3D on consoles, where production budgets went up, marketing budgets went up, and that was a crucial factor in middle of the console industry falling away. Console games became either very, very big and expensive, or very, very small and inexpensive. Are similar forces being brought to bear in mobile?

KC: I've spent a lot of time with people who went through that from a console perspective. I didn't go through it myself so I can't say, but I will say that the economics are trending that way, it seems. Meaning that, if production budgets go up, it's harder for a smaller developer to compete; whether it's a smaller developer trying to create their own original IP, a smaller developer doing second- or third-party development. I'm not sure what's going to happen to that part of the market.

But that plus, more importantly, the marketing budgets that are required to break through. You can certainly have the Pokemon Go kind of stuff, which I think is really exciting because it proves that, because we all have this device in our pocket, if you can break through with something really novel, the way that the Rock Band-type stuff did on console, or DDR did, or Angry Birds… I think there could be a lot more of that.

I think if you're a big IP holder today, you should definitely be thinking, 'How do I look at the world of indie developers out there who are creating something really interesting and unusual, and how do I make sure that my IP and that thing they're creating can have this really nice marriage?' I think there are going to be more of those out there, but it's not like you can fill a pipeline of a dozen games, or even five games like that, credibly, as one single company.

Q: We've been talking about budgets going up, but it's also true that the more expensive AAA console games cost more than $100 million, and they rarely make $1 billion. So the economics, even if a couple of the seven games you have in production are hits, it's still a lot of money for Kabam.

KC: I think that's why I'm so excited about the market still. If you look at Clash of Clans or Game of War, these are $1 billion a year franchises, and they've been at the top of the charts for three-plus years now. So you have the ability, even if you're investing $25 million into a game for launch - what I'll call fixed costs, so if the game doesn't perform, you lose all $25 million - but if you can afford to make that type of investment and are smart about how you put it to market, you still have the ability to make several hundred million a year in revenue, and have that go for five years.

We actually think these games are going to be out for the next 10 years, and it's a great payoff, right? Marvel wasn't a full current-gen tech game for us, so it was in the many single digits of millions to produce that game, not $14 million. But it's well on track to do over $1 billion in total lifetime revenue. The math will work out just fine.

Q: As a last point, a couple of years ago there was the suggestion that maybe Kabam would IPO, and you've very clearly stated that's not on the table anymore. Is this kind of strategic planning the advantage of staying private?

KC: I think it's twofold. One is we're in the middle of a transition - there was a story in the GamesIndustry.biz newsletter today about how we made some changes in San Francisco - we're still in middle of this transition where 18 months ago we had a third-party publishing business, we were making a bunch of 2D games still, and had 15 different technology stacks we were running at the company. So a big part of what's unfortunately been a multi-year transition for us, and has been heartbreaking to go through from a people standpoint. Gosh, it would be awful to do that as a public company. It would be awful.

The other thing is, let's say we get this transition behind us and we've executed on our strategy and it's paying off from a business perspective and a product pipeline perspective, I still think it'd be tough to be a public gaming company. Right now I think companies are trying some great things, but whether you look at Zynga, or you look at Glu, or Gameloft in the past, there's still a lot of work to be done to educate a public investor base, a public market, on how the business works. And it just doesn't make sense to be a part of that and still try to run a gaming company. I don't think there's going to be another [IPO] for a while, and I think that's probably healthy.

Q: Why won't there be another IPO?

KC: Because the unique thing about gaming companies versus all the other tech companies in Silicon Valley, the nice thing is there's a lot of very profitable gaming companies.

We don't need additional financing. We've been profitable for the last four years. And some of the moves we're making fully ensure we'll run very nicely profitable, that we can weather any storm that comes, that if we see promise in this pipeline, we can really get behind and launch it in a huge way. We don't need to go public. We don't need more private capital. There's a tier of companies right now that fall into this category, and I think you're going to see them all try to execute a long-term strategic roadmap while private, because the appetite to hear about another public gaming company is not quite there yet. And it's really sad because I think that if Supercell was a standalone public company, they would have lit so much excitement and understanding of what's actually happening in the space.

And for me, King, if they just hung on - and I totally understand that King as part of Activision can really just focus on a much more narrow product portfolio - but as a standalone independent company even as large as King was, the number one question was, 'What are you going to do to replace Candy Crush?'

What's really sad to me is that...King, after the Activision deal closed, actually grew Candy Crush for the first time quarter-over-quarter. So, as a public company for two years, Candy Crush basically declined a little bit. It was still a great franchise for them, but it basically declined quarter after quarter for two years. So of course everyone's asking, 'What you're going to do to replace this because it's obviously in decline?' And then for the first time ever as a public company they grew Candy Crush, but it happened after Activision bought them. I think if they were a standalone public company when that was announced, their stock price would have soared that day. And then everyone would be saying maybe these games can last many years.

I think if we saw Riot as a public company, or Supercell, a couple of these other examples of companies that have a relatively small portfolio that manage to continue growing the games year after year… But the public markets have not seen that. They've seen Call of Duty power Activision. They've seen World of Warcraft power Blizzard as part of Vivendi. They've seen FIFA and Madden and Battlefield do it for EA. It's really those types of franchises that create huge amounts of value. But we just haven't seen that from a Glu or a Zynga.

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