Alibaba's investment values Kabam at more than $1B

Disclosure: The organizers of ChinaJoy paid my way to Shanghai. Our coverage remains objective.

SHANGHAI — Alibaba’s $120 million investment in mobile game publisher Kabam values the U.S. company at more than $1 billion, according to Kabam chief executive Kevin Chou.

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That means that Kabam joins a rarefied group of American game companies that have grown up in the digital age and become global players in entertainment.

Speaking at the ChinaJoy expo in Shanghai, Chou said, “We are in an unprecedented time in the game industry. This is a big and comprehensive partnership.”

Under the deal, Alibaba, China’s Internet giant, will take Kabam games such as the upcoming The Lord of the Rings into the Chinese market.

Kabam has games on numerous free-to-play mobile and social games like The Hobbit: Kingdoms of Middle-earth across mobile and social platforms like iOS, Android, Facebook, and Amazon. Chou said the company expects to generate $500 million in revenue.

Back in 2009, Kabam had just 20 employees. Today, it has more than 800 employees. It launched Kingdoms of Camelot on Facebook in September 2009, and it made $2 million in revenue. It ended 2010 with $37 million in revenue. By 2011, the company raised $75 million from Google and existing investors like Warner Bros.

In 2012, Kabam made the leeap to mobile with Kingdoms of Camelot: Battle for the North. It acquired several new game studios, including Balanced World Studio in Beijing. In 2013, it partnered with NBC Universal to make Fast & Furious 6: The Game. By the time the company finished 2013, Kingdoms of Camelot had generated $200 million over its lifetime. Kabam also set up a $50 million fund to take Asian games into Western markets.

By the end of 2013, 70 percent of Kabam’s revenues were in mobile games. The Hobbit game made more than $100 million in its first 12 months.

“It’s an incredible transition for a company that had modest roots,” Chou said.

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During the past couple of years, Kabam has invested deeply in Asia.

Kabam has also gone Hollywood. Besides The Lord of the Rings, Kabam will make games based on Lionsgate’s The Hunger Games and Warner Bros.’ Mad Max.

Chou said Kabam grows through its focus on original intellectual property, Hollywood partnerships, third-party partnerships, and acquisitions.

As for the investment in China, Chou said, “We have a lot of things coming in the next months.”

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Alibaba will take a seat on Kabam’s board, helping the company get an understanding of the global market for entertainment.

“The market for gaming is truly becoming a global phenomenon,” Chou said. “The future of entertainment is games. It touches hundreds of millions of players every single day.”

He also said the free-to-play is now the dominant business model for games on a global basis.

“This is what makes gaming a truly global phenomenon,” he said. “In the past, there wasn’t a chance to build a truly global gaming company, and today there is.”

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The companies announced the deal at the ChinaJoy Expo in Shanghai, a gargantuan event where 250,000 people are gathering to celebrate gaming. Chou said that 2 billion mobile devices will ship across the world this year, and that the market will grow incredibly fast. In North America, there are 232 million mobile devices shipping in 2014, but four times more devices will ship in Asia, according to market researcher IDG.

“Western publishers are interested in Asian markets because we all see the growth,” Chou said.

But Chou said it’s been hard to take games made in the West and market them successfully in Asia, and vice versa. Western game developers are stars at making triple-A games with creative and polished gameplay on high-end platforms like the PC and consoles. They also excel at marketing and advertising, and they’re good at multiplayer games like League of Legends.

Chinese developers are good at making games fast. The engineering talent is plentiful and good. They also understand free-to-play games for very large audiences. Chinese developers have also mastered monetization systems, Chou said.

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Kabam’s original Kingdoms of Camelot game had just 2 percent of its revenues from Asia. The latest game, a card battle game called Heroes of Camelot, has 13 percent of its revenues from Asia.

Chou believes Chinese developers have a big opportunity to publish games through Kabam in the U.S. and Europe. One Asian game that Kabam published in the West has generated more than $200 million in revenues. Chou said Chinese developers who partner with Kabam can double their revenue.

“This is about bringing triple-A development and polish to mobile games,” Chou said, showing off a demo of a Marvel Comics game dubbed Marvel Contest of Champions, debuting in the fall.

Alibaba Group, the world’s largest online and mobile commerce company, plans to go public in what could be one of the biggest initial public offerings in history in the U.S. And the fact that it is investing in a San Francisco-based mobile game company shows how important gaming has become on the global stage.

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Kabam competes with rivals like Supercell, King, and GungHo Entertainment. But while it has proven adept at generating revenues and expanding quickly, it also spends a lot of money. That’s why the company is still raising money at a late stage in its history.

Alibaba will publish popular Kabam mobile games in China across Alibaba’s mobile applications, including Mobile Taobao and Laiwang.

Chou said Kabam received more than five term sheets for investments, but he said Alibaba has made a very strong commitment to getting into the game industry.

“There’s a lot we could build together,” he said. “I’m an entrepreneur at heart.”

Chou said the partnership with Alibaba does not prevent Kabam from doing deals with other companies.

In a Q&A session, Chou acknowledged that the company expanded too fast when it first moved into mobile. It hired too many people, and should have slowed down. But he said company felt a sense of urgency as the market shifted from social network games to mobile.