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Gree and Funzio: Inside The $210m Acquisition

Gree and Funzio: Inside The $210m Acquisition

Fri 04 May 2012 8:11am GMT / 4:11am EDT / 1:11am PDT
MobileBusinessSocial Network

Executives from both companies tell us how and why, and what the future holds

Gree, Japan's mobile social gaming giant is impressive in its size and scale, with projected sales in the range of $2.2 billion for this fiscal year and profits of over $1 billion. The company's acquisition of mobile social game company Funzio earlier this week for $210 million is an event on the level of Zynga's acquisition of OMGPOP.

GamesIndustry International talked with Anil Dharni, President and COO of Funzio, and Shanti Bergel, SVP, Business & Corporate Development, of Gree International (Gree's US subsidiary) about the acquisition, the market, and what lies ahead for Gree in the highly competitive mobile social arena.

Q: What led to this deal from Funzio's perspective?

Anil

Anil Dharni

Anil Dharni: We've been an independent social game company primarily focused on mobile, building really high-quality games, and we were creating this mid-core market for ourselves. Over the course of working on the business, we had an opportunity to start interacting with some of Gree's executives. We had multiple dinners with the CEO of Gree and the CEO of US Gree. What came out of those conversations was that mobile gaming in Japan is going gangbusters. The style of games they make, the game mechanics that they have, the monetization characteristics of the games... they have really proven that they can out-execute any game developer here.

The second thing is we felt that the Gree team is just fantastic, their vision to become the #1 mobile gaming company in the world was something that we were totally aligned with, and that this would just accelerate that growth and our ability to hit that vision. So we felt we were aligned in every single way, and decided to do the deal.

Q: What were the factors that motivated Gree to make this acquisition?

Shanti Bergel: Gree started life in Japan, and most recently has been pursuing a strategy outside of Japan of global expansion and application of lessons learned and assets created in Japan; a big piece of that is finding the right games for that strategy. As you look across the landscape of folks who make games for the mobile social experience, the Funzio team is a complete and total standout. They're unique in that they have a 100 percent hit rate; they've made three games and all of them have been hits. They come from very interesting places from an employee pedigree standpoint, they have a deep understanding of social, they have a deep understanding of mobile, and they're a world-class team in an area that's very young. As we talked to them it really became clear that they saw the world the way we did. The longer we talked about it, the more combining forces made a whole lot of sense.

"They're unique in that they have a 100 percent hit rate"

Shanti Bergel

Q: It's a big change for Funzio and a big expansion for Gree's US Offices. Is Funzio going to remain a separate studio within Gree?

Anil Dharni: From a people and employee perspective, one of the proposals that we actually brought up to the management was we wanted to go full out and integrate with Gree. There's going to be a lot of knowledge exchange that's needed, and if you really want to execute on that vision, we need their help and they need our help. It's going to be more of a hybrid, where Funzio studio - I hate to call it Funzio, I would call it a mid-core studio or just another studio that exists within Gree US - with some of the execs, folks like me going completely horizontal. So we are not part of any studio, but we are just going to help the Gree International business succeed. I think in the end it's the talent that wins, it's the culture that wins, and they see it exactly the same way.

Q: You talk about the success of Gree's games in Japan, but many of the most popular games in Japan are trading card games or dating simulations. Is the style of those games really going to work in other countries?

Anil Dharni: That's an excellent question, and something that we always talk about here internally. What we tend to focus on here is less on the style of games; we tend to focus more on the game mechanics. We try to figure out if those are successful game mechanics. At the end of the day you can break each game into those game mechanics, and figure out if those game mechanics can apply to the style of games that we do here. I can't get into more details, but we did implement a few of the game mechanics that we ended up learning while visiting Japan, and we have seen really good success in North America and Europe. We already know that the particular game mechanics are transferable, so we tend to obsess less about the style. It's not about a card game; it's about what are they doing within the card game that makes it so fun and addicting where people are actually paying a lot of money. That's why we are extremely bullish about this deal and we think we have so much more to learn from them.

Shanti

Shanti Bergel

Shanti Bergel: If you look at the types of content that historically have been hits in Japan, a lot of that product never makes it out to the global market and there are good reasons for that. That said, there are franchises that cut through from Japan, like Resident Evil on the console side for example, Mario... all of these classics from the big Japanese console companies. There are comparatively few examples of non-Japanese content to succeed over there; Grand Theft Auto is a surprising standout. Some of our platform partners in Japan are companies like Sega and Konami, and they have franchises that historically have been successful cross-market, and we're hopeful we'll be able to partner with folks like that to try out these ideas, but to your point, yes, there are certain categories of games that don't apply everywhere.

1

Q: Funzio has been known for putting its games on both mobile platforms and social platforms. Do you see potential for Gree's games to go to non-mobile platforms?

Anil Dharni: Our focus today is mobile first and web second. I don't think that's going to change, because we feel that the race is really on for who's going to dominate mobile. The second realization we've had over the last couple of years is that cross-platform strategy is pretty important because these platforms can change at any time; they can change their rules, they can change their policies. The winners are going to be the ones that are flexible and understand each of the strengths and weaknesses of the individual specific platform. We've had that holistic view and I don't think we're going to change. Having said that, the real focus right now is on mobile. What we are most bullish about within mobile are iPads and tablets. Funzio is probably in the top three or top five iPad gaming companies today in terms of revenue, with all three of our games doing really well on the iPad.

Q: What are the demographics of your users? You said "mid-core" gamers, so is your demographic narrower than a typical Zynga game, for instance?

Anil Dharni: That's a good question. We do think that some of those other mobile game companies are focused on the casual market. Our games tend to attract more males. Our Kingdom Age game seems to attract a nice healthy mix of male and female, but our previous two games, Crime City and Modern War, you can imagine just based on those themes are much more male-centric games, which is unlike most of the players in this industry that tend to focus very much on the casual female, stay-at-home mom. We've kind of created our own market and our own niche, which was always our initial strategy.

Q: It seems like the monetization is better for that kind of demographic. Is it?

"There's going to be more smartphones than Facebook users"

Anil Dharni

Anil Dharni: We believe that not only is the monetization better, but we can keep the user far longer than these other games. You see a lot of our competitors launch games that quickly fall off the charts. What we want to do is build franchises that people are playing on their phones, on their tablets for two years to four years. That's been our charter from day one and that's how we guarantee success.

Q: There's a lot of competition in the mobile space, with DeNA and ngmoco having a very similar goal to Gree, and Zynga's going for a billion players and heading towards the mobile space. The consensus seems to be that social is slowing and mobile is where the growth is. How are you going to deal with all of that? Do you see this as a problem or an opportunity?

Shanti Bergel: It's a bit of a problem and an opportunity. On the opportunity side clearly there's a validation from a lot of smart people that the opportunity is huge. I think our own success speaks to that, as do some of our competitors. In terms of a problem, the only problem we should all be concerned about in the space is how this affects the ability of players to get access to games that they'll be rewarded by, and for developers to create them. Our approach is to try and create that ecosystem that will be rewarding for all different parts of the ecosystem.

Anil Dharni: As an independent game developer that might have looked a bit scary, even though we've had three games, three hits. Now that we're a part of Gree we know we have the resources, which means more than just money; it means talent, it means their deep understanding of this market, and they've been building games for years and years. Every subsequent game we've been able to raise the bar of our games - the quality, the animation, the game design just keeps getting better and better, and it actually shows in our metrics. Our monetization patterns, our retention patterns, they just keep improving with every subsequent launch. I think we are very uniquely placed with the combination of these two entities to be able to achieve this faster than anyone else can.

Q: You mentioned raising the bar with each successive title, but doesn't that also mean it gets more expensive?

Anil Dharni: Yes, that is true, but the way we build our games is very engine-specific. We build a common engine, and then on top of it we tend to tweak the engine based on the genre. So while the initial cost of building the engine might be more, once you have the engine then releasing these games becomes much faster. What we've tended to do at Funzio is have a three to four month cadence; within three months of each game we launch the next one. What we've been able to prove is, and this is another thing Gree loved, we've been able to raise the bar at a speed which matches any of our competitors. That's part of the winning strategy here.

Q: What are the key strategic objectives for you to get the kind of growth you're looking for? Is it successful launch of the new platform, getting more IP together, attracting more developers, going into more countries?

Shanti Bergel: It's kind of a copout answer, but you just named them all. At a very high level, what we're trying to do is create the largest ecosystem for players and developers; in order to do that we have to do all those things you just mentioned. Those are building blocks on the way to that larger goal, which is for players we want to create the premier destination for them to find content and games that they enjoy, and for developers we're trying to provide them the premier set of tools and audience for them to build their business and grow their audience base.

Anil Dharni: That's an excellent question. New IP always works. Another thing we've not done is that all our games are only in English right now. Every day I look at my numbers and I say "I wish we were in French, German, Italian, I wish we were in all the Asian languages for Android." I think there's a lot of money, not just users, that we're leaving on the table by not having these games localized and customized for these large countries and these large populations.

That ties into our next goals; as Gree CEO Tanaka-san said, our goal is to reach a billion gamers across the world just on mobile. We can accelerate that and get to that vision once we release new IP, localize our games, and build up more studios. Right now we are focused on mid-core, which was always a beachhead strategy. We are thinking of starting new studios focused on different verticals in the gaming space. I think a combination of all of those is challenging, but that's what makes it so fun to be involved in trying to achieve that vision.

Q: So you're planning to have different studios focused on different things like casual games, roleplaying, or strategy?

Anil Dharni: Yes, that's a good way of looking at it.

"I think people's awareness of corporate brands is a function of the maturity of the space"

Shanti Bergel

Q: For the industry overall do you think the growth rate will continue for game companies in the mobile and social space?

Anil Dharni: In the mobile space things will just keep going at least for the next couple of years. There's going to be more smartphones than Facebook users. We don't see that changing at all. The second big thing we see is a lot more focus on tablets. We are hoping that Android figures out tablet at some point, so it's not just the iPad that we have substantial traffic from. You'll start seeing a lot of game companies only focus on the tablet market. I'm starting to see some right now.

I do feel with regards to social web, if you take Facebook and Google+ as an example, definitely the growth there is slowing down. Those platforms need to figure out what they need to do in order to accelerate that growth to match the mobile growth. It definitely seems to be slowing down right now.

Q: Do you see the possibility of the mobile-style games coming to the living room through the Apple TV or Google TV?

Anil Dharni: That's a great question. You're talking to the geek in me now. I don't know where Gree stands on it, but the geek in me can't wait for that to happen. I would say yes it's going to happen, and I think Apple might be the first one to figure that out, where gaming becomes actually a pretty key part of the TV experience. Whether you're playing it on the iPad or your TV or your phone, I think Apple has the best chance to enable that. Having said that, not all games are going to make sense to play on TV. It's really the developers who can figure out what genres, what style of games will work, but I think it's going to be a booming platform.

Q: While the mobile market has grown tremendously, I don't think consumers recognize any of the company brands or can tell them apart. Do you think establishing a corporate brand is going to be important in the near term, or is that more of a long-term goal?

Shanti Bergel: I think people's awareness of corporate brands is a function of the maturity of the space. As the space matures, people will become more and more aware of companies because they'll play multiple games by that company, and they'll start to realize 'Oh, that's the company that makes XYZ game'. I think that's more a commentary on the state of the market today, and not necessarily where we'll be as the market matures. Gree's intent is that as consumers become more and more aware of us as a place to find and play the games that they like, they will continue to recognize the brand and hopefully they'll look for it in the future.

Q: Final thoughts?

Shanti Bergel: We're exceptionally excited to be working with the Funzio team. We have an immense amount of respect for them and we can't wait for the next phase of the business with them.

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