KGC 2005: The Revolution will NOT be Televised, Bill Roper

Here’s my rough notes on Bill’s keynote. I think that many of the Korean audience were nodding “ho-hum, we know all this already” as he spoke.

The Revolution will NOT be televised: it’s HERE and it’s ONLINE.

This is my first time ever using a Powerpoint.

Some intro on Flagship… if I don’t mention our CFO, my trip would not be reimbursed.

What is the Revolution?
A dynamic shift in the game market. Major pc developers around the world are moving from box product to online gaming with online distribution through broadband. Revenue streams are shifting as well, to subcriptions and beyond to account based Real Money Trades (RMTs).

Sure, the traditional PC market is shrinking…

but 3 of the top console publishers are getting into PC: THQ, Namco, Midway

but the top 3 PC genres are growing in market share: action, RPG, strategy

PC players are moving away from boxes and going online and spending more money than before

Online games are $3.78b industry, and 85% of that market is PC based. There is double digit growth year over year — one of the fastest growing sectors in the whole gaming industry. Gamers spend more time online now. There’s 2 blurry categories: serious online games, core, AAA, like the persistent games; and casual games. Gamers will pay for a compelling experience

NetEase just announced their Q3 results: total revenue had an 11% increase, 82.6% Year on year. Revenues on online had 119% year on year growth. Online ads grew by 37.3% quarter on quarter and 43% year on year. Gross margins for online declined “slightly” to 89.7%. That was down from 90.2% because of bandwidth costs. I know a lot of publishers would love to have that decline.

Revolutionary Thoughts:

new revenue streams

the return of ads

the Net has not peaked

New revenue streams:

subscriptions

RMT

digital distribution

Start with subs: a typical console game has 20-40 hrs of play, but an average MMO player spends 22 hrs a week. You can be profitable with only 60k subs. They can be profitable with low sales numbers compared to typical box product — which mean new genres and experiments can be done.

Put this in perspective with numbers: South Korea game revenues were $551m in 2004. Online games came to $298m in 2004 in China — expected to quadruple by 2009. Online games in china will be 1.3b in 2009. Morgan Staney says even more, $1.5 billion!

For perspective, Korea only has a 50m population. They make $551.4m in revenues. North America is is 6 times bigger, but only makes $750m. Big gap there.

RMT:
It was an unintended consequence of the industry, originally gray market but now gaining worldwide acceptance. SOE announced at AGC an MMO that is RMT, and acknowledged that this was based on the Asian business model. Also they took a big step with Station Exchange.

RMT is about $880m in revenue per year. There are several players in the Western markets: Station Exchange, IGE, XBox Live 360…

Digital distribution:
A paradigm shift for the value chain of the pc industry. It’s a difficult time overall — cost is increasing rapidly, everyone is talking about how frightening it is. A lot of that is because of current distribution models.

In the US, the current model is that a developer (indie or not) develops a game for a publisher. The publisher makes disks either in-house or with a 3rd party. There is no 1st party like in console, the 3rd party manufacturers know this, and push up prices. Publishers also get hit when retailers force higher wholesale price since they control the shelf space. Mid- to small-size publishers get squeezed out because they cannot afford all this.

A digital distribution pipeline allows indies to release and distribute worldwide, reduces the role of retailers and manufacturers. The risk is loss of traditional marketing exposure, but the benefit is greater margins for publishers and developers.

The return of ads:

contextual and not cost per click

product placement

advertisers producing games

Context is King. The ads that work are contextual, not demographic. We know more about our audiences than TV or radio do — we know the game system, when and what they play, their attention span… we know we have an interactive minded audience.

Examples: product placement–racing titles and sports are a good example–nice context, doesn’t violate game. /pizza in EQ2. Kart Rider has sponsorships for virtual cars.

Advertisers making games — they have very similar goals to developers. They are producing net-based shows, just like they used to make soap operas (that’s where the name came from). Pepsi Smash for example. They are already making casual games for ad outreach. It’s called advergaming–not all of them are that great… but there is an opportunity there. Ad-based minigames in larger scale games… The industry is growing up.

The Internet Has Not Yet Peaked

There are 1 billion Net users. That’s 130m more than last year. There’s a lot of growth left for online games. More, that growth number has been steady for the last few years.

There were 57m broadband users in 2003, and at the end of 2005, there will be 209 million. Korea can thank the highest broadband penetration for their games culture — 75%.

US has 29% by households (?) [[ thought it was higher]]. Forrester: 62% broadband by 2010 in US.

In recently announced financials, VUG made 150m euros for Vivendi. That was a 151% increase for them. 1st nine months was 88% of same time last year. Can you guessed what WoWed the analysts?

Broadband users have more money and spend more time online, and it’s especially true in the US. I wish we had the PC baangs in the USA… PC and console gaming happened because we couldn’t find people to play with. But over the last handful of years, we got the best of both worlds. PC baangs completes the circle for me–play on the cool system but also have some community. Many baangs are changing to have food and Coke and boardgames and cards…

TV in the US is getting scared– they are losing viewers, so are films–people are going online. Gaming is a huge part of that now. Innovations in biz models and technology show the potential–Skype and Kart Rider…

This is not a localized phenomenon. In Bangalore cybercafes are trying to improve revenue by 20% by adding gaming. The market there is growing very fast. Reliance Webworld has 240 cybercafe locations in India now, and now 40% of revenues is (recently added) gaming.

I don’t know if the PS3 and 360 are really going to be the convergence of PC and console and online. It is encouraging to see MS announce 1m customers for Live–but really, for a lot of online games happens in the first few hours.

Speaking of markets–there are still 1 billion more people in China who are not online yet. There’s a huge amount who are online but not gaming, because we have not met their requirements.

When we grew up we all played games–everyone we knew played. A lot of people fell out of it as they aged. But there’s a lot of people who didn’t, and there is a seed of desire, or need, within humans to play; that joy, excitement, competitiveness, exploration, done with an atmosphere for fun, that will never leave. There a hurdle, that games are seen as being for kids. But I think I will be found dead playing a game at a PC. Probably not winning it, but still playing, because I love games.

People are used to going online now, getting content. The easier it is to deliver that experience the better off we are.

The numbers of female gamers increasing, for example, as games that suit them (casual, less time, etc) appear. More niche games is also a way to go–flight sims for example. They don’t get made anymore because they “only” sell a few hundred thousand. But if margins rise, digital distribution, etc, 200k would be great, and good money. So game types that have fallen by the wayside may return. Worldwide there are surely a few 100k who want an oldschool adventure game.

…but the publishers demand millions of units sold. To say that 100k is a failure is stupid. When we were working on Diablo, Davidson was PUSHING it to sell 200k. Today, publishers would laugh at you to propose that.

I don’t know if anyone will make the 150m game. But 300m games of 300k each is wonderful too. 3-5 people working out of an apartment… refining craft and keeping that spirit of creation alive… So for me the revolution isn’t just money It’s about how we get more different games to people, touch as many people as possible, and bring something for current gamers and for nongamers or lapsed gamers.

Q&A
Oh wait, I am not getting translation, so I won’t understand the questions.

How many copies do pubs want to sell to consider a game? Varies by publisher. If it’s traditional single player box copy model, it’s drastically higher. Tied to dev costs. For 10m they want 1m, 1.25m copies… it gets difficult for the bigger pubs. But digitally distributed games can be lower… or subs-based games. Most pubs are saying 500k or more, depending on cost.

What about point systems, people buying islands, revenue beyond the $3-5 a month?
Sure, Project Entropia… the sub or min fee is just a starting point [[goes on to describe a game more like Second Life, though]]. The exciting thing is that there are a lot of models available.

[[gets handed a wireless earphone — “oh good, now I can understand Korean” but the next q is in english anyway]]

What about publicity? It’s hard–say Second Life for example. Yes, hard. Gaming press loves big sexy stories but I’d love to see them really looking at the other types of games and getting that msg out. It bugs me that Entertainent Weekly does not have 2 pages for games, though they do for everything else. And gaming magazine subs are down bc of the Net… but the press could help by putting a focus on the smaller games. I found this indie game that was very collaborative and cool, and I pitched it to the gaming media, and they weren’t interested in the story. It will take some press visionary to go forth and really see the potential of the indie scene and start covering them. Tough task in Western media. For that matter, the Korean numbers do not get reported in the US either… It’s so nice to come here to Korea and not be fending off lawmakers like in the US because gaming is supported… smaller bands and film do get covered, so we need that for smaller games.