Europe Meets China: In Conversation With The Atomico Gaming Team
At the launch of Europe Meets China, our new report on the games industry, our Head of Research (and the report’s author) Tom Wehmeier spoke at length to the Atomico Games Team — Mattias Ljungman, Alexis Bonte and Stephen Thorne — about their thoughts on the state of the industry, its direction, and how they see Europe and China competing and consolidating in the future…
Tom Wehmeier (TW): OK, team. Thanks for taking some time to chat games. If I may, I’d like to start with a really big picture question. What sorts of shifts are you seeing in terms of the demographics of gamers and what do you think are some of the big drivers of those trends? Alexis, why don’t you kick us off?
Alexis Bonte (AB): Sure. Well, the most obvious shift has been the huge expansion in the number of players. I think if you go all the way back, games started as a pretty niche market, particularly if you think about people who played Dungeons and Dragons-type games, then arcade games. I mean, you used to have to go to the arcade to play and then, for a long time, the big dream was, “Oh, how can I get an arcade-type experience into my living room?” and so what happened was the emergence of the living room type games. And that was either for the first computers or the first consoles, the Ataris and then the Nintendos that evolved into the xBox and PlayStation and all the other platforms of the 90s.
These were all games, though, that were — for the most part — targeted to a very specific audience of the young, male teenagers. And so during that period games while there was a growing market, it was very much perceived as something for male teens. Of course, there was a small subset of games which were also seen as having potential appeal to female players, and this started to increase a little bit with music games, dance games, and that sort of thing, but it these were never a very big part of the industry.
When games went online, especially with the advent of browser games, initially that trend continued, but the demographic profile of gamers started to expand a little bit. I think there are a few things that changed it; one of those was the advent of free-to-play. We need to remember that before this, in order to play a game you had to spend a few hundred dollars on a console, or if it was on a PC a few thousand dollars, and on top of that you had to pay 50–60 dollars for the game…which kind of limited the audience.
But when games became free online, a lot more people started playing. Because if you wanted to play games for free beforehand, you had to commit acts of piracy, and piracy again is something that only teenagers that really want to play would do. So I think that was the first thing that helped expand the number of players. Some of these popular browser games, like Stardoll, for example, were aimed at women, and there were also some games that weren’t really being marketed as games at all, they were sold more as a mix of social network and games for children. For example, Club Penguin, which recently closed its browser version, was once really big and actually ended up being acquired by Disney; you also had Moshi Monsters, that was also quite big — and all were browser games.
All these games had tens of millions of players, but none of them had hundreds of millions of players. The floor of the market, where most of the money was, was still young, male, adults. This all started to change with mobile games. Once everyone started having a phone in their pockets — and especially as smartphones became ubiquitous in the developed world. You mix that with super easy distribution — you click a button and you download a game — plus the fact that the games are free…it really kind of changes things in a radical way when it comes to distribution.
Another thing that mobiles changed is the type of games that one plays…they’re no longer what I call ‘appointment gaming’. Appointment gaming is when you play a game on a console or when you play a game on your PC and you accept it’s going to take you a few hours — or days. The game is designed to make you play for a few hours; it’s something you do on a Saturday afternoon. You basically have to schedule a meeting with yourself to go and play.
Mobile games, on the other hand, had to be shorter and more ‘snackable’ — battery limitations on early mobiles, along with other technical limitations, meant we had to start designing games you could play for a few minutes or even seconds, usually in three to four minute bursts. And that meant the type of games that started appearing were completely different, and a lot less intimidating to players.
So you start having games that can be hugely mass-market and that were interesting not just for male players but also for female players, many of whom didn’t even really know they were playing a videogame. You ask a lot of people who play Candy Crush, they don’t actually even realise that they are ‘gamers’. And these are games that are played by hundreds of millions of players. That’s a radical change that came with mobiles.
TW: So, Mattias, if I can come to you next. I know you’ve been interested by some of the new mechanisms we’re seeing emerge for innovating on both gameplay and content creation. What are you seeing there?
Now that we’ve made this transition to a mobile, free to play-dominated ecosystem, you’re suddenly seeing that growth, on a global basis, has sort of stabilised. So while mobile will continue to grow at 15–20% per year, you could probably predict that it’s not going to be as disruptive as we’ve seen over the past 5 years or so.
Of course, we’ll continue to see people who’ll build new businesses, build amazing new games — like we’ve seen with Niantic’s Pokémon Go, which was like, “Okay, this is really cool,” but actually it was just another type of game on an existing platform.
So then the question that you wonder is, “where else are we seeing that type of change happening in the gaming space?” I think now it’s more widely spread out, so you’re looking at what are the mechanisms — rather than the new platforms, what are the mechanisms that you’re putting into place that allow you to have that type of hyper growth.
And I do think Pokémon is a good answer because actually it was doing something unique with location and multiplayer. Again, it was still on the mobile platform, but it was another mechanism and a really different type of game play.
Then another question is about what’s happening in terms of how you build these games. I think what’s really interesting on the sort of marketing side is that you’re getting people spending more effort getting crowdsourced content, also much more early-stage involvement in the community and utilising YouTube and Twitch and other platforms to create much more of a buzz around a game. And this doesn’t just help with content creation, but in helping people to feel really engaged with games. So it’s engagement rather than simply launching a game and users getting what they’re given… there’s the sense of a degree of collaboration, they become co-producers to a small extent, which is hugely valuable and a really interesting trend.
TW: You mentioned community. I think what’s particularly interesting in that context is how games are becoming accepted as an increasingly community-led, social pastime; why do you think this is? This is particularly fascinating given that the smartphone is really the ultimate personal device and so you might think that it would lend itself more to individual gameplay. Stephen Thorne (ST):
Yeah, it’s interesting; if you think of the history of games — games in general, throughout history, played with stones or with a ball or with cards — games and the act of play has always been inherently social, so it makes sense to try and capture some of the that magic of the way that humans have always played together.
ML: On the one hand you have board games attaining crazy degrees of popularity across the world, but on the other people are also being engaged online. I think the exploration and building craze that Minecraft started is also a new opportunity for people to congregate around gaming, and is almost another take on how you build content, which maybe might not have purpose but affords huge possibilities for discoverability and for users to build their own narratives.
ST: There was an interesting thing that Hilmar from CCP brought up when we interviewed him for the report, which was if you look at other forms of entertainment, they’re inherently passive, like watching TV, watching a movie, listening to music…but with games, you’re engaged and you’re making decisions and then you’re accountable for your decisions and that’s a very different form of spending time and passing time, which is kind of interesting, right? If you look at future directions for where interesting companies might be built, you have to play on that.
TW: So you’ve all described a number of trends that all came together in shaping the current games market. You had the smartphone, you had the new distribution model, you had new monetization models, and then you had changes in terms of game design and game play. And all of the forces all came at once in a way. And I think what’s amazing too is if you look at which region in the world has been super successful in capturing opportunities that perfect storm enabled then Europe has really been at the forefront and we’ve seen huge value being built out of Europe. Do you have a view on why particularly in the last decade Europe has been able to enjoy such success?
AB: Free to play in Europe started a little bit in the in-browser market — for example with Habbo Hotel — but very, very, very quickly, with the launch of the iPhone, moved to mobile. So I think basically Europe capitalised first and fastest on the smartphone mobile gaming opportunity.
Did it move faster than the US? It’s hard to say. If you look at the US market, right now it’s almost as big as the whole European market, so from a customer revenue perspective or a market perspective, that’s not necessarily the case. In terms of companies, though, I think if you add up all of the European mobile game companies’ revenue and compare them to the US mobile game company revenues, I think Europe is ahead. One of the reasons for that is that, although the iPhone is a US invention and Android is a US invention as well, Europe has always been a little bit at the forefront of mobile since the days of Nokia and Ericsson, and a lot of engineers and people that were very used to developing games for the previous generation of mobile phones were based out of Europe; a lot of small companies got created across Europe developing for these less powerful devices.
So when the iPhone came out it was very easy for all this European talent to start developing games for the iPhone, and they didn’t have to start totally from scratch because of all their accumulated experience for developing for dumbphones or feature phones. I think that’s one of the reasons Europe has an edge here, in terms of cost and development.
I mean, if you look at amazing studios like Supercell, a lot of the team are guys that were developing Java games that were 50k or so in size for Motorola phones or Nokia phones. Same thing for the Rovio guys — if you look at Rovio, they always say that they launched maybe 20 or 30 games before they actually did Angry Birds. What we don’t say is a lot of those games were actually for Nokia and Motorola phones, not smartphones. What this meant was that they really had the expertise around how to optimise graphics and gameplay to make titles work on mobile.
TW: How would you describe the investment landscape for games as an investment category today, and how has that changed in your mind?
I think the investment landscape has changed a lot for games. I think typically before, when I was raising funds for a games company in 2007, 2008, 2009, it was extremely difficult if you were a mobile or browser-focused business, because investors felt that games were a hit-driven business and they were familiar with teams of 200, 300 people, millions of SKUs shifted, millions of budget…
What we were able to demonstrate at the time was that with a few hundred thousand Euros, you could actually build games in quite a systematic way that actually had a chance to make millions or 10s of millions, at the time at least, of Euros of revenue per year over a certain time period.
So investors at that time started seeing that games could actually be almost like a software as a service-type play; these are games you play for years and years and years and the revenues grow and people stay. So at that time, when investors started seeing this and they started seeing distribution channels like Facebook emerge, and the first stories of games companies starting to reach millions of players and then 10s of millions of players, then the sector became very, very hot.
Then what happened is that a lot of investors invested a lot of money and we began to see the first wave of IPOs like Zynga; then Facebook basically pulled the plug on using their platform for viral growth, which was artificially inflating some of the game companies numbers. Then almost at the same time the market moved to mobile games, which led to the first mini-crash around investment into games. Investors said, “Oh, browser games, Facebook games, they’re over. The future is in mobile games,” so a few investors moved into investing in mobile game companies and a few others simply gave up the sector because they got their fingers burnt.
Then you had what I would call the second gold rush, when investors started seeing the first successes in mobile games and seeing that companies were starting hundreds of millions of players playing their games rather than the 10s of millions we’d seen previously. This spurred a lot of investments into the space, and mobile games almost became, from an investor’s perspective, a victim of their own success; some companies had such a powerful position and such a position of market dominance, and they started to spend so much money to protect that position that they effectively made it very hard for new entrants and other game companies to reach the same level.
So many investors who are less expert about what the games market is and how it works felt that everything has been invented now in mobile games and we have the winners — and that the winners, at least in terms of European companies, are Supercell, Rovio, and King. Funding for new game companies started to really decrease as a result, and I think now we’re at the stage that there is some consolidation happening in the industry, and now some mobile games companies are appearing who are actually doing slightly different types of games.
That’s one of the reasons investors are looking again, but it’s actually less a case of VCs actively looking at it and more strategic investors, such as large games corporates that know that there’s still a lot of growth in the market that are investing into other studios so they can acquire them or take a strategic stake. You’re even starting to see stock markets like Nasdaq First North saying, “Wow, these companies are actually high growth. They’re profitable. They’re quite stable if they have a portfolio of games,” so you’re seeing companies that aren’t very big doing successful IPOs in some stock markets.
It’s basically a very mixed investment landscape now for games. It’s no longer a VC dominated or Angel dominated landscape.
I can’t speak for the all investors everywhere, but I think in the Western world if you’re investing in games, you’re probably a contrarian. It’s not a place where you seeing the type of interest that people have for, let’s say, artificial intelligence or for other areas that are now becoming really interesting in the tech space, but actually the evolution of gaming, hasn’t stopped and isn’t stagnating. The ability to create valuable companies in a short period of time is not going away.
I just think it’s a different model. It’s a content model, and I think that makes it difficult for people to engage with it, because it’s harder. As investors, we’re obsessed with predicting what outcomes can be and I think when we’re investing now people increasingly want to see quite a lot of metrics and components of the business that gives them the belief that there’s going to be a positive outcome. Gaming doesn’t really fit with those criteria. There are so many variables which make the sector as a whole hard to quantify.
Some things that are very quantifiable, though, may not have the trajectory of something that might actually become a passion, a way of living, a way of looking at the world.
ST: There’s an inherent contrast as well in games in terms of scaling. As they find product market share, in other categories companies inherently need capital to be able to grow their business; in games, because when it’s working the money flows in the door, it’s kind of the opposite. There’s less requirement for capital, so it creates this interesting dynamic for the relationship between the founder and the investor.
TW: If capital is less of a requirement for gaming companies, can investors like Atomico help them?
ML: In some ways, it’s awesome, because it has nothing to do with capital, and so the conversation is really about ‘can you give me something that helps fuel my growth other than capital?’. I think that’s the question that we try to solve in terms of helping them out; we can assist with recruiting, positioning, market definition and expansion, corporate structure and logistics, competitor landscape analysis, advice on listing…if you bake that all in, there’s a lot to take on. There’s a lot of scope for people like Atomico to add huge value to games companies.
TW: The games industry has been built on waves of new technologies, and now we see AR and VR emerging as new enabling technologies. We are see new formats emerging and how games are being consumed evolving through esports, and also some blurring of the lines between industries as games companies look at other areas of the entertainment and media landscape and vice versa. So my question is, in your head what do you think are the most important future frontiers for games companies?
I actually think that, for the next four to five years, most of the revenue and most of the usage and most of the growth in absolute terms and most of the players will be in what we today call the ‘traditional mobile games experience’. Games which are designed for anything between a few seconds and a few minutes in terms of play sessions (amounting to several hours over multiple sessions). I think VR is interesting, but at least for now is still in the category of ‘appointment gaming’ category. Even mobile VR, the reason being that the way the hardware is right now, if you’re going to play a VR game it’s not something that you’re going to do for a few minutes, it’s something that you’re gonna have to invest a little more time in because just installing the gear and all that takes a few minutes. I think because of that it’s going to stay niche for a while. It doesn’t mean it will be very small, I think some companies will do well, but it will be niche compared to the mobile games market.
Whether in 10 years time you’ll have amazing, immersive VR game worlds that are incredible, that’s the first step that companies such as CCP Games are working on and it could happen that they become very big but I don’t think think this is two or three years away. I don’t even think this is four or five years away. I think this is much further away before it becomes so big it competes in terms of market with traditional mobile games.
In terms of augmented reality, there’s a lot of hype around the success of Pokémon Go as a mobile game that includes an AR component. What people forget is that Pokémon Go is more a location-based game that basically uses the fact that your mobile phone knows where you are, and much less of an augmented reality game. Most power users of Pokémon Go turn off the augmented reality feature because it consumes too much battery — the AR was a hook, sure, but it’s not a core gameplay feature.
I do think augmented reality has more imminent potential in terms of the size of the market if you mix it with location tracking and all of that, but…there will be some really interesting games created in the next two to three years around AR, and some of them might be hits, but I don’t actually see it as a completely separate category yet.
In terms of PC gaming, I think it’s going to continue to grow at a much slower rate than mobile gaming, but it will continue to grow and be important. Esports in particular will have a huge effect on this; what we’re seeing is that most esports success stories, other than Clash Royale, are PC/ console-based. There will be some other ones which will succeed on mobile (Honor of Kings a mobile eSports game from Tencent is rumoured to be making over 400 million $ / month in revenues just in China for example), and whilst I know CCP and others are working on VR esports games, I see the biggest success for the foreseeable future will be PC and mobile, not augmented reality or VR.
I think esports has a real position in the market; I think again it’s an area where venture capitalists are wondering “how do you engage in this and how do we extract value that makes sense?” It’s quite an unusual thing to be involved in a sporting activity as an investor, right? It’s thinking about the models of how that would work. I also think there’s going to be new sets of tools and understanding and knowledge around how you get products out to market more quickly get products out there using deep technology.
Then the other side is how do you get great growth from the business without spending massive dollar amounts? How do you create something where you have the engagement from users and co-creators, and how do you harness them to be the drivers of that growth; this is about developing a different type of relationship between the developer and the players, and utilising new tools of marketing that maybe are now becoming more traditional but maybe weren’t traditional in the past but will become commonplace. There will be new areas that will be even more trailblazing in terms of the marketing side.
TW: The other big transformation that’s happened has been the rise of China, to the extent where China is now the world’s most valuable games market in terms of end user spend. It’s a notoriously localised market, though, in the sense that the vast majority of spend here is on Chinese-developed games. Clearly it’s a market that is too big to ignore — what do you see as the opportunities and challenges for European game studios in terms of the Chinese market? AB:
I think there are two points to make. If you want to be a large games studio you can actually ignore the Chinese market; but if you want to be a world leading games studio you cannot ignore the Chinese market. I think it depends on your level of ambition for your studio. I mean, there are 600 million gamers in China. That’s twice the population of the United States. That’s why it’s such a big market. It’s just huge by its size.
The thing is I think you need to know when to go into the Chinese market, because it’s a very, very difficult market for a non-Chinese company to enter. It’s also extremely competitive. There’s a lot of competition in China, a lot of local companies already competing with each other. Unless you are very strong and you bring something new to the market, something special to the market, be it IP or gameplay or knowhow or something, it’s going to be very, very hard for you to do well in China.
I think it’s probably one of the most difficult markets to enter into. But it’s a market that you cannot afford to ignore if you want to be a world leader.
ML: I think to succeed in gaming in the future you need to have a strong foothold in, and understanding of, China. China is not so simple that you just turn up and launch there. You have to understand the culture, you have to understand what kind of gaming mechanics are popular, you have to understand content and how consumers interact with it. You have to understand the business community.
You have to understand how quickly it moves and changes, so I think there’s a huge new area for the European gaming companies that they need to get to grips with, that they didn’t need to before. Before they could just sit in Europe and create great content that became distributed, and they focused on this finite market. Now, though, I think if you want to be a global player, you have to understand gaming in China.
TW: Let me flip the question then. If you look at the top 50 most valuable public games companies, 43 of those companies come from Asia and a large chunk of those come from China. What do you think the future role of Asian gaming giants is going to be in the world wide games industry outside of China?
I think they’re going to be acquisitive. As you say, they’ve built their businesses in China for the most part, which is a market that still has a lot of growth, but it’s equally a market that’s extremely competitive for them. So for them to continue and accelerate that growth, it makes a lot of sense to try to expand across other markets, most notably the European and US markets, but we are seeing many of the same problems befalling Chinese companies seeking to enter these markets that European and American companies trying to enter a Chinese market have faced.
You have a lot of Asian games that are major hits in Asia that are failing to become major hits in Europe and the US. There’s a lot of reasons for that — culture, localisation, all that sort of stuff, but I think the multiples that they’re getting on revenues on the Asian and Chinese stock markets are infinitely higher than the multiples that European and American companies that are public are getting, or the ones that are private that want to sell are getting.
TW: What would be your advice for someone starting a game studio in Europe who is contemplating cracking China? As you say, there are many, many barriers to success, so how can you navigate those challenges?
ML: It’s really interesting for us. If you asked the same question of people in technology and you make reference to Silicon Valley, everybody’s like, “Yeah, yeah, of course I’m going to go there and I’m going to understand what’s going on and everything.” It feels very natural, whereas there’s a reticence to engage, I think, in China, and that’s what needs to change. People need to just think, “Okay, look, now, the world has changed and actually my priorities are very different. My priorities are the Asian markets and China particularly.” It’s about building relationships, building partnerships, going there frequently, finding good reasons to understand the market. Rather than just entering into China, you actually partner with the country more deeply than ever before. Maybe you co-finance together with Chinese, so it becomes another type of relationship rather than a simple distribution model. I think these are interesting things that people I think should evaluate and think about, because I do think also just the financing of the business can become very, very different.
TW: That’s very much how Hollywood’s taking its approach to funding; there’s a lot of parallels that I think we’re seeing between games and film nowadays.
ML: I think that’s right. They’ve had a history of that and I think if you look in other markets, like Japan, there’s also been a history of it. I think now we’re learning what could work in China, which I think could create much longer-lasting relationships than we’ve ever had before and I think that will bridge the gap.
ST: There’s this huge desire in China itself to learn about what’s happening in other markets and we’re seeing this new way of internationalisation coming from big Chinese guys there partnering outside of their markets. They’re investing outside of their markets or acquiring outside their markets. How do you see that? Do you see that the big Chinese guys, they’re also wanting to engage? Is it a two way thing? Do you see also that there’s opportunities for those guys to do things in markets like Europe and the US, which although they’re now not quite as large as China, they’re still huge markets.
ML: I think there’ll be a natural progression — as they become dominant in the Chinese market, that they will need to seek new areas to operate in — they’ll have the infrastructure, the time and they could see the additional value that it can bring. The other part of the equation is how much would Chinese businesses care about expansion into other territories? I think they already do. If you look at the global ambitions that a lot of these companies have, I don’t think they’re satisfied by just being a national leader.