Kixeye quietly makes big bucks on hardcore Facebook games

At first glance, Kixeye looks puny as a social gaming company on Facebook. It has only 4.6 million users compared to Zynga‘s more than 240 million monthly active users.

But the San Francisco company has become a financial juggernaut because it has the right users. Kixeye creates well-designed free-to-play games that generate a lot of revenue from sales of virtual goods. It is an example of a game company that has adapted to the new social world while remaining focused on the hardcore audience that is willing to pay real money for games. If all goes as planned, it will be the next Electronic Arts or Nexon.

“Our games monetize very well,” chief executive Will Harbin told VentureBeat. “Just having half a million users in a game is enough. And we’ve done that without making sacrifices, like offering special deals every day to our users.”

If that sounds like a jab at rivals such as Zynga or Kabam, it is. Harbin doesn’t mind talking tough when it comes to giving his honest opinion on rivals or bad games.

“It’s easy for others to lose their focus on quality,” he said. “That’s where we are laser-focused.”

One thing that Kabam and Kixeye have in common is they’ve both discovered the hardcore audience on Facebook is in the millions of users and that those users are gravitating to the platform in part because it is “hyper accessible.”

By that, Harbin means that games should be simple to pick up, even for the hardcore. You shouldn’t have to buy a disc to put in an expensive console or wait hours for a download to finish. Kixeye focuses on browser-based games that are distributed to Facebook’s 845 million users. If you think of Facebook as a casino, Kixeye targets the high rollers. And casinos make it really easy, not hard, for high rollers to play games and spend their money.

And now the company is investing heavily to create a next-generation experience on the social network. Facebook’s platform is still slow and clunky when it comes to real-time gaming and high-quality 3D graphics. To the extent that a game relies on Facebook’s services, such as pop-up screens for friend requests, it just won’t run very fast.

But technology is in the offing (such as Adobe Flash 11.2 running Unity or Unreal Engine 3 games) that will enable web-based games to take advantage of 3D hardware in computers, allowing a big mass market of PC users to enjoy Facebook games with good 3D graphics. Once that happens, Harbin believes, more gamers will opt for real-time strategy and other hardcore games rather than the simple 2D fare that Zynga offers.

Harbin doesn’t think that technology is the limiter at all anymore in terms of doing outstanding games on Facebook. At the Facebook keynote at the Game Developers Conference in San Francisco, Harbin showed a sneak peak of an animation from an upcoming Kixeye game with cool 3D graphics. The tech can run fine on a four-year old Mac.

So far, the company’s games have been big hits. Its original founders, Paul Preece and David Scott, had created games such as Desktop Tower Defense and Flash Element TD. They started making more of them when they formed Casual Collective as a web gaming firm in 2007. They changed they name to Kixeye a year ago.

Now Kixeye has launched one big hardcore hit after another: Backyard Monsters (pictured near top), Battle Pirates (pictured above), and War Commander (pictured below). Each one of them is getting prettier in terms of graphics, but the experience still falls short of a full console game experience. In these games, players make strategic choices and watch the consequences unfold.

These games exist as services, with continuous updates. And, like Zynga, Kixeye leans on the science of analytics to understand its users, and it tweaks its games constantly.

But Harbin says there is a difference between how Zynga uses analytics and how Kixeye uses them. Rather than use them to improve monetization, Kixeye focuses on how to make the user experience more fun. (Ouch, take that, Zynga).

“If users are more engaged, they naturally spend more money,” he said.

Harbin isn’t just full of bluster. At the GDC, he said the company’s audience is 97 percent male, the average session is 30 minutes, retention is seven months or more, and there are millions of player-versus-player attacks a day. Kixeye doesn’t sell decorative items as virtual goods; it sells speed-ups, which account for 85 percent of revenue.

The company has been profitable for two years. It grew revenues 11x in 2010, and will do nine figures in revenue in 2012. Harbin believes that Kixeye’s retention is five times longer than other popular social games. The average revenue per daily active user for social games is 4 cents, but Kixeye’s total is 20 times that amount. About 8 percent of the users of Battle Pirates spend money, compared to 2 – 3 percent of Zynga’s users.

The team has grown remarkably fast, from 15 people a year ago to 140 today, and no one has quit. It is adding 10 to 15 a month and may be at 300 employees by year-end. Harbin is looking at opening Kixeye’s first studio outside of San Francisco. All of that is very impressive, considering the games with outstanding graphics haven’t launched yet.

Kixeye hasn’t done as much to annoy its users as other game companies have. It doesn’t sell decorations for games and try to milk gamers for all they’re worth, and it doesn’t sell advanced weaponry that will allow rich gamers to wipe out poor gamers. But it does allow users to accelerate time in the game. Rather than wait for something to be developed, a user can pay to accelerate the build time for units.

“We don’t throw the ecosystem out of whack,” Harbin said. ” A free player who spends a lot of time in the game has as much chance as a whale who spends a lot of money.”

And there is no limit on how much a user can pay for virtual goods. The so-called whales — who spend huge sums on virtual goods — are very important to Kixeye, as they help pay for a lot of free players. But the free players are also important because the whales wouldn’t be there if there weren’t a lot of other players.

“It’s all a balance ecosystem,” Harbin said.

Over time, Kixeye will expand beyond strategy games. It has an action role-playing game in the works and has shown off the title with 3D game characters. While the games may have little in common, Harbin believes that users will play them because they know the Kixeye brand means quality gaming.

In the meantime, there is plenty of competition. San Francisco-based Kabam has more than 450 employees focused on hardcore social games and has raised $130 million, or several times more than Kixeye.

Harbin is openly critical of Kabam, saying he is disappointed that they haven’t accomplished more with their resources. He thinks Kabam spent “recklessly” on advertising to acquire users on Facebook, driving its users to 13 million monthly actives on Facebook in August before that figure collapsed to about 2 million today. And he said that one of Kabam’s games, Edgeworld, was a thinly disguised copycat of Kixeye’s Backyard Monsters.

Kabam, for its part, says it is focused on high-quality hardcore games and is putting less emphasis for future growth on Facebook. Kabam has expanded to half a dozen different game distribution platforms, while Kixeye remains entirely focused on Facebook. Kabam has spread out its risk, while Kixeye hasn’t. But Harbin doesn’t feel pressure to move faster.

“It’s totally not a race,” he said. “It’s about quality. We are building a good brand. We’ve been frugal. We started with something that was sustainable, and then we scaled it up.”

Other potential rivals include Activision Blizzard, which hasn’t been active on Facebook, and Electronic Arts, which has been. But EA’s focus in social has been in taking on Zynga with games such as The Sims Social. For hardcore games, it has released titles for the web, such as Command & Conquer: Tiberium Alliances.

Harbin says he was totally inspired by Command & Conquer in the early days of real-time strategy disc-based games. But, you guessed it, Harbin thinks EA’s modern web-based games aren’t of great quality. His company has picked up the mantle for doing real-time strategy massively multiplayer online games on Facebook.

On the other hand, Harbin admires Tencent’s Riot Games for its big hit League of Legends, a hardcore online game that has more than 35 million users. As for Facebook, Harbin says it is still the most efficient platform for acquiring users, particularly if you have a good game.

“We’re the tallest midget right now, but the whole industry has to get better,” Harbin said. “Nothing else is that compelling. You have to have the basic elements that make a game fun. It’s not about recreating the console experience. We want a fun experience in the browser that captures what makes a game fun.”

But the company has faced challenges. It had to turn off the entire territory of Vietnam because the users didn’t monetize well. If Kixeye embraced advertising, it could monetize such territories, but the ads might offend hardcore users. If the company can navigate these challenges, “this is a multibillion-dollar business,” Harbin said.