There’s one thing that hasn’t changed, as gaming has gone from a console business to a Web business and increasingly to a mobile business: It’s always been massively hit-driven.
Like pulling the lever on the slot machine, an entrepreneur is always just one release away from a game that could make you a hundred million dollar company. (Just ask Dan Porter of OMGPOP.)
But that tantalizing promise can wreck companies too. They frantically pour more resources and ideas into the machine with that next hit perpetually staying one hit away. We tease EA for its endless Madden games and Zynga for all the ‘Villes. But what else is a game maker to do in such a relentlessly uncertain, hit-driven world?
I caught up with Nexon’s founder Jay Kim yesterday for an exclusive interview at the tail end of his vacation in the US. Americans may shrug reading that, but somewhere there is a Korean Sarah Lacy throwing her computer through a window. It’s a bit like if Steve Jobs had gone to Korea on vacation and agreed to give a small blog an exclusive sit down before heading to the airport.
Kim is notoriously media shy and is also the third richest man in Korea. Forbes estimates his net worth at some $4.3 billion, thanks to Nexon’s IPO last year. It was the second largest tech IPO of the year, after Yandex and the fifth largest since Google went public. Unlike most tech moguls, he hasn’t sold a single share of stock. And unlike most other Korean magnates — he earned his vast fortune, painstakingly building one of the world’s largest gaming empires from a dorm room. My understanding is it’s the first interview he’s ever given in the West.
Late last week, as rumors spread that little-known Nexon was in early talks to buy EA, I awaited an email canceling the sit-down. To my surprise it never came, and I found myself in a San Francisco high-rise, face to face with the soft spoken Korean billionaire who was intentionally or not causing havoc with the largest US gaming stocks. That in and of itself may mean the deal is either in very preliminary stages or a total non-starter.
Like an unassuming hero in some rescue-the-princess fantasy game, Kim didn’t come across like a mogul. He used the word “lucky” a lot. He said he’d read twenty of my articles, and he was nervous. I complimented his jacket, and he smiled shyly and told me he bought it for the meeting.
We moved on from pleasantries quickly, getting to those EA rumors. As you’d expect, he wouldn’t comment on them directly. But our hour-plus sit down gave me a surprising amount of candid insight into why the company would consider such a deal.
But first, to understand why a company that pioneered a shift away from console games would consider buying EA, you have to understand how different Nexon is from, well, any other gaming company I’ve met — new or old. The company moves at a ploddingly slow and deliberate pace. It aims for people to play its free online games for decades, as these titles slowly snake around the world, twisting and tweaking themselves to appeal to different markets.
Like water finding its way through rocks, Nexon will try various games, partnerships, platforms and tactics in each new market, failing for years before it finds success. And when success hits it hits big. After six years of failing in Japan, the country now makes up 15 percent of Nexon’s revenues. It took even longer to get launch a successful game in China, and today China makes up 37 percent of Nexon’s $1 billion in annual revenues.
The stat that analysts look at in an effort to track the health of these big immersive games is how many concurrent users they have, and Nexon has three million Chinese people playing a single game at any given time. “We’ve had painful, painful years with all of our markets,” he says.
Two of Nexon’s titles make up more than 50% of its revenues — but those titles weren’t breakouts. They have slowly and steadily grown for years. “This is not just about one time play,” Kim says. “A good title last more than ten years. We have daughters continuing to play with their mothers’ log-in in Korea.”
One thing is for sure: If Nexon were buying EA, it wouldn’t be a rash decision. The words “rash” and “Nexon” don’t belong in the same sentence.
Before my meeting, I assumed those EA rumors were false. For one thing, as many analysts noted, financially it would be a hard deal for Nexon to digest and would likely require it to raise a considerable sum of money — even for a company that ended the year with the second largest IPO in the tech universe. Pacific Crest Securities called the combination possible but “unlikely,” writing in a research note, “Our view of the value of EA, and likely the board’s view of the value of EA, is significantly higher than the current value. So, the price & premium that EA would want may surprise Nexon.”
Beyond price, much like Roger McNamee in this interview, I wondered what any online gaming company could have to gain from buying EA at this point? Why look backwards? Especially for Nexon — a company that had pioneered free-to-play online games 17 years ago and didn’t come out of a market where there was a value put on shrink-wrapped $50 games sold at Best Buy.
But Kim made a good case for why Nexon might be interested without explicitly making it.
Nexon is at the beginning of what Kim thinks will be a long journey to build a big business in the US. And as Nexon struggles to get more relevance in the US, there’s a lot of talent, brand, and title leverage it could get from EA. ”If any company has a strong title and is good in a region, we’re open to talking with them,” he said. “We don’t see Nintendo as dying, we don’t see EA as dying. We still respect what they’ve built. There are many good teachers there.”
In terms of what Nexon would do with EA, there’s the interesting precedent of Counter Strike, a console game made by Valve that Nexon adapted to the online format and has distributed in Asia. It’s Nexon’s second biggest title in China, and the seventh in the country overall, according to BarChina. “We won’t add fifty more titles like this, but we will add them one by one,” Kim says.
And tellingly, he added in a later conversation about game categories: “We don’t have much sports titles. We should have more racing titles.” That’s pretty much EA’s sweet spot. The company may not understand the console business, but you could easily see a Counter Strike-like move to bring Madden or World Cup games to Asia via the Web. EA certainly doesn’t have the expertise in Web games to pull that off. It’s no small feat to support 1 billion user accounts running around shooting things in graphic-rich immersive worlds.
I went into the interview wondering why on earth a company like Nexon would consider an EA deal, and came out convinced it would actually be a savvy strategy, even if incredibly hard to pull off financially.
But don’t expect anything like this to happen anytime soon — if at all. A deal like this would be a lot to digest, and Nexon likes to move slowly. Rather than maximizing for big hits and multi-billion-dollar deals, Nexon has three levers it tries to pull to keep growth humming at 20 percent or so per year.
Internally there are eight titles that are doing more than $100 million in revenue per year, slowly growing at a pace MapleStory did in its early days. And Nexon throws out ten to forty new titles a month — frequently these are games thrown together by a small team and put out into the market for a reaction. They’ll kill them or tweak them based on the reaction. “Sometimes we shut it down in a day,” Kim says. “We have no testers inside the company; we have testers outside.”
On top of that, there’s Nexon’s cautious acquisition strategy. It places small bets in game developers and studios around the world, a strategic investment for 10 percent of the company here, rights to market the game in China there. It monitors them and as they grow, they deepen the relationship. If the games take off, they frequently buy the titles, teams, or companies outright. It monitors hundreds and hundreds of these developing titles at any given time.
Then there’s its international footprint. A game may not do well in Korea, but it may go gangbusters in Japan. Nexon will methodically experiment with titles in different markets, tweaking colors, settings, themes to local tastes as it goes. MapleStory is in more than 70 countries, with more than a dozen different versions, including one that launched last year on Facebook.
“Each of these can grow 7 percent a year, and that’s without a big title,” he says of the internal games, small deals, and international expansion. “We don’t just have one chance to grow. If a game doesn’t do well, we can expand into another country and make up for it. We don’t have to go buy revenue.”
Nexon already has one of the most globally diversified businesses with 15 percent of its business in Japan, 37 percent in China and 33 percent in Korea with the rest spread around the world. It hasn’t had much success in the Western World yet, and wants to expand more into India, Africa, and the Middle East. When I asked how much more he could grow with 1.2 billion accounts, he said it was “only the beginning.”
“It’s only 1 billion accounts, and we have six billion people in the world and all these different games,” he says.
In fact, the only thing that freaks Kim out is when something actually works quickly. “If it grows fast, it will collapse in a day,” he says. His is a company that likes going through pain. Pain means that it is pulling off something difficult. Pain means a competitor can’t just swoop in and steal its market position.
Nexon is not only distinct from other gaming companies. And in many ways, it’s the anti-Groupon as well. It didn’t raise any venture capital. It took a comparative eternity to go public — 16 years. Despite doing the second largest tech IPO last year, Kim and the rest of the executive team did not sell a share of stock. It has one of the best international footprints of any gaming company, but it was hard fought. No easy, Samwer Brothers-like shortcuts here.
The company failed for five years or more in both Japan and China before it started succeeding, and has only had moderate success penetrating the US to date. And because it only sells virtual goods, it has delicious pre-tax margins of greater than 40 percent. “The Groupon kind of guys all left,” Kim says laughing. “We stayed private for sixteen years. There was no fast money here.”
Still, Kim insists on calling Nexon a “small company” and calling growth of 20-30 percent a year “slow growth.”
“I don’t tend to think of an $8 billion company as small,” I said towards the end of the meeting, particularly one rumored to be buying one of the largest gaming companies in the world. He smiled and said, “It’s the only way I can keep working ten more years, to believe we are still small and struggling.”
If the company pays $5 billion-plus for EA, telling himself he founded a “small gaming company” is going to get a lot harder.