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Nexon's Daniel Kim

Tue 08 Mar 2011 8:00am GMT / 3:00am EST / 12:00am PST
Online

On Euro expansion, the value of acquisitions and validating the micro-transactions business

Nexon

- Specialized in developing, publishing and servicing online games

- Games in service: 17 unique games...

company.nexon.com/en...

Growth at Nexon has been phenomenal over the past three years, to the point where double-digit growth in North America pales in comparison to the success in Korea and other Asian markets. But its European operations are marginal at best, accounting for around 1 per cent of the global business. With that in mind, Nexon has set its sights on European markets, and recently made its first steps by opening a dedicated office in Luxembourg rather than operating it from Korea, acquiring Spanish developer Boom Bang and investing in Polish team One2Tribe.

In an exclusive interview with GamesIndustry.biz, Nexon CEO Daniel Kim details the company's plans for Europe and how it's prepared to grow through acquisitions, how he sees the wider social and mobile games market expanding and influencing the business, and why we'll soon find out if current valuations in the space are realistic.

Q: Nexon always has a lot of stats about its users and content, which I always find fascinating. It's clear that you're in it for the long run with players, to keep them coming back for more...

Daniel Kim: We've really been focused on creating content that really creates a long term relationship with our users. It's really what we like to call the four Cs. Content, that wraps around competition, which typically provides fun and a sense of connection, and drives the sense of community. It's about developing bonds and relationships. We were tracking Maple Story, which has 100 million players, and during December, just in the US, there were 44 weddings per day on average. That's a lot of relationships, that's really driving our games to be successful over many number of months, weeks, days.

Our player engagement numbers are phenomenal, that's been the focus of our game services. We try to shoot for multiple digit millions of people playing, multiple digit months of engagement, multiple digit dollars in terms of average revenue per user and multiple digit percentage of paying users. We like to call ourselves the company of quadruple doubles. We're fortunate enough to have games that hit those marks and have fuelled growth over the past few years.

Q: How are you finding the expansion in the US and Europe, are there different challenges to what you've faced in other regions?

Daniel Kim: Having pioneered the micro-transaction model since 2000, it's not necessarily new challenges but it's different by market. Nexon used to service all games by subscription like other companies, but in 2000 we noticed that by making a game free-to-play and offering game enhancements in-game that people want to pay money for, it's a completely different model but it opens up the market to a broader, bigger audience who we couldn't reach before. Seeing this model adopted in the US over the last five years has been gratifying.

Some of the challenges have been... well, when we started there was no infrastructure for us to really make this model work. People don't pay up front for our games; they play our games for months and months and the majority of our players don't ever pay any money. But there's enough paying money to enhance their experience that it makes it a viable business for us.

In order for that to happen there has to be the infrastructure to convert cash into online currency and North America only had credit cards in the past for online transactions. Our audience being slight younger, our peak ages are 17-19 years olds, who are too old to ask their parents for their credit card but aren't old enough to get their own. What we did was create a whole new category of product - the pre-paid card. Retailers didn't know who we were, and were asking "why would people pay money for things that don't exist?"

That notion of paying for digital goods was completely foreign to them. The only other similar model was iTunes. That's essentially how we convinced our first retailers. But our cards weren't even in the game section, it was sitting in the music section or next to TVs when we first started. But many stores sold out in the first day and we were printing more cards.

It's been about three years and our cards are in any store you can bike or walk to. Any convenience store, 7-Eleven, drug store, supermarket, not only do you see our cards but now you see a whole rack of visual pre-paid cards. We created that market, that product category. There're 50,000 stores selling our cards. We're proud of that, of changing the behaviour of a whole nation of people that previously didn't exist before.

"Especially on the social side, it's a newly emerging market and people haven't quite figured it out. There's a little bit of hype going on... As far as valuations are concerned, time will tell."

Q: You must have also faced that barrier that others are addressing now - can a game be really good if it's free, what's the catch?

Daniel Kim: The challenge has been in terms of user perception because the quality of our games is quite good and deep. People are very sceptical - there's no free lunch as the saying goes - but even if there's the option to buy little things in-game, even though people are spending money somewhere, they weren't convinced it was enough to sustain us as a business. People were sceptical: "What are they doing in the background, what are they doing with my computer?" It was difficult to win the trust of the customer where they're not familiar with our brand or type of business model that we're trying to educate people on.

In the last couple of years Facebook and social games have really helped us with that in terms of educating users that it's okay to play a game for free and we'll figure out a way to make money somehow. With virtual goods there's a whole generation of people who grew up playing Club Penguin, so we're excited for the next couple of years when these digital natives grow up, graduate out of their simple virtual worlds and are yearning for deeper social interaction, deeper gameplay experiences that our games provide.

Q: How does the growth in US and European business compare to the growth in Asia?

Daniel Kim: We're really bullish on North America and Europe right now. Globally our business is growing at a phenomenal rate, and it's embarrassing to show up at the company meeting and as the head of North American give our multiple double-digit growth numbers, and everybody else is at 50-60 per cent. We've only scratched the surface on this market. Right now, North America revenue makes up about 10 per cent of global revenues. The majority of the revenues is really coming from China, Japan and Korea.

Q: What's the target for revenues from the US?

Daniel Kim: The size of the North American market? It's a $14 billion industry, of which only $2.1 billion is focused on online but that is growing every year at a breakneck speed. If we look at those numbers we're hoping we can grow to become as big as some of these other regions, with 30-40 per cent of global revenues for Nexon coming from North America. That's the hope.

Q: And to paint the fuller picture, how does Europe factor into that?

Daniel Kim: Europe is a relatively new territory, we've been operating until recently out of Korea. But we've just opened an office in Luxembourg and Germany to really focus on what we've done in North America, to bring the operation in full-force, the experience and knowledge of that market to launch games as a service.

There's definitely more competition with established service providers that operate these types of games but there's huge potential there. Overall, group-wise, Europe became just big enough for us to invest in a little bit more aggressive expansion. Europe is just over 1 per cent of our global revenues. But again, global revenues are growing so fast that it will be hard for both Europe and the US to keep the pace up and running.

Q: You say you want to aggressively expand into Europe - how important are acquisitions in that respect?

Daniel Kim: Nexon has organically grown and also we've grown through mergers and acquisitions over the last five or six years, we've acquired a lot of companies. We're looking at investing in two companies in the West as well, we've just acquired BoomBang in Spain - it's doing virtual worlds online that are doing really well. Through our Nexon Initiative programme we found a company in Poland that's a really fascinating development studio that has some great ideas.

There're a lot of different levels in which we're engaging with developers in Europe, the US and other parts of the world. I think we've really focused on Korea as our development hub just because that market is so competitive and to be honest, further developed than any other part of the world. We have the most amount of technology, the most amount of experience in terms of operating these types of experiences. Games that engage people for a long time and really drive community and connection.

That's been changing with a lot of interest from companies wanting to work with us and develop these micro-transaction game services. It's been exciting to get that reaction but we've been pretty selective about who we choose to work with because as much as there's a lot of enthusiasm about this type of game development, there hasn't been a lot of companies that have actually done it successfully.

Experience and willingness to learn very quickly are important to us, but we're certainly open to a lot of either investment or acquisition with many other companies that are all over the place. There's constant deal discussions going on but we're very prudent about making commitments to long-term partnerships.

"We've been pretty selective about who we choose to work with because as much as there's a lot of enthusiasm about this type of game development, there hasn't been a lot of companies that have actually done it successfully."

Q: Are you finding it difficult to secure that talent because of the busy mergers and acquisition activity in the market at this time? Zynga has been acquiring studios at a rate of one a month...

Daniel Kim: The types of companies and the resources that we're looking for might not be in direct competition to the ones that are important to Zynga, but development resources are development resources. The market certainly has been going through a bit of inflation in the recent months and it's a healthy thing for the game industry so far.

Again, we're not looking for a short-term flip on any investments or acquisitions, we're looking for long-term partnerships, in the same way we would develop a long term partnership with our users. That's the mantra and the way we operate. We're careful to make sure there's a really good cultural fit.

I don't really see that as a big hurdle for us because we also have something very unique to offer - 16 years of concentrating on this market, this genre, this business that companies are excited to absorb and learn from. We believe these new companies will also bring some fresh ideas to the table also, and we're excited about working with this new talent all over the world.

Q: What do you think to the prices that are being paid for companies in the social, online and mobile space? Would you expect those to level out in the near future?

Daniel Kim: Certainly, we know some companies are very profitable and doing well. Others may not be up to their valuation. Time will tell. Especially on the social side, it's a newly emerging market and people haven't quite figured it out. There's a little bit of hype going on.

But certainly, the idea of these companies getting great valuation is testament to the idea of micro-transactions as the dominant business model that everybody believes is going to be the way of the future in terms of how games are serviced. We've seen that happen in Asia as we switched over from subs to micro-transactions, the 30 games that we publish and operate around the world are based on the same business model.

And we've successfully transitioned the design of the games to fit the business model really well. We have over ten years of experience and ten years of mistakes - trial and error and figuring out what works in the market and what doesn't. What's common about the type of experience that people are looking and willing to pay for, what's not going to ruin the experience for the majority of people who aren't going to pay to play the games. All those things combined have put us in a position that allows us to take advantage of new markets and new platforms that are emerging in different parts of the worlds. As far as valuations are concerned, time will tell.

Q: Do you think there's still a market for the subscription model?

Daniel Kim: Yes. Although nine out of ten games in Asia are probably based on micro-transactions, Blizzard has had phenomenal success with a subscription model. It's not necessarily this or that, both can co-exist. It's about which model and what kind of experience are people looking for? That determines how you design the game.

For us it's a long tail kind of game where we have a couple of years of time once people start playing a game for us to convince them to see value in the cash items side. It's really a hard business because we have to earn it, we can't fool them into spending money up front. We're not like the movie business were they sell in the first month and then pull it out the theatres. That sounds very familiar to the console business model.

We're like a TV show that has to live on and on, like The Simpsons or CSI. The worlds first graphic MMO that we developed, called Kingdom of the Winds, is still in service after 15 years. It still maintains a very healthy set of numbers in terms of revenues and engagement. We really see these games more as constantly evolving series of experiences.

Daniel Kim is CEO of Nexon America. Interview by Matt Martin.

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