After a few scorching years, China’s mobile game market is at a turning point. Jeff Lyndon, the president and cofounder of China’s iDreamSky Technology, fears that a downturn is in the works.

China is expected to hit $25 billion in gaming revenue by 2016, according to market-researcher Newzoo. Shenzhen, China-based iDreamSky, which managed to go public last year, is a big beneficiary of that trend. Like other rivals, iDreamSky specializes in taking Western games and publishing them for the Chinese market. Pretty soon, the company will introduce Chinese mobile users to a favorite: Monument Valley.

Few companies have been as nimble in adapting to change as iDreamSky, which has had more than 500 million downloads thanks to Chinese publishing rights for games such as Fruit Ninja. Growth has come easy. But it’s getting harder to acquire titles that the company needs.

We caught up with Lyndon at the Game Developers Conference in San Francisco. Here’s an edited transcript of our interview. Lyndon will also be one of our speakers at the GamesBeat Summit event on May 5 and May 6 in Sausalito, Calif.

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Ned Stark's motto: "Winter is coming."

Above: Ned Stark’s motto: “Winter is coming.”

Image Credit: HBO

GamesBeat: What’s been changing fast since we last talked in September at GamesBeat 2014?

Jeff Lyndon: This year for the Chinese market, a lot of us are predicting a cold winter. 2014 was really hot. Any developer that came out of a big company creating some sort of a hit – just a producer and a couple of friends — could come up with a valuation of around $5 million right off the bat.


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Developers could get this kind of money because publishers were lacking content. A lot of the secondary genres weren’t being filled – first-person shooters, role-playing games, and trading-card games. Publishers are on a buying spree. They’ll pay millions of dollars for even B-level games in China. Because of that, VCs were willing to fund these companies – “Here’s $2-3 million, and six months down the road, you’ll have a game that a publisher will buy, even if it’s only so-so.” And if your game created top-line revenue, A-list Chinese companies – even if they’re not involved in gaming – would come in and buy you because they need that revenue on their quarterly report.

In the past 18 months, we’ve seen a lot of these developers being acquired by public companies in China. But what happens is that these deals almost always have a three-year convertible. More and more of these companies are seeing that game companies can’t necessarily maintain that top-line revenue over three years, and so they’ve stopped buying them.

Also, the land-grab in the Chinese game market is slowing down. There are leaders in each genre now, and so publishers are much more careful about selecting product. There’s less space for new publishers to come in to a crowded market, too. No one big is coming in to publishing anymore. The amount of content is decreasing, meaning we look for quality, meaning that a lot of developers who used to be able to just crunch out B-level games can’t do that anymore. VCs are seeing that and have stopped funding them. This year we’re looking at a 70 or 80 percent failure rate for developers in China.

iDreamSky games

Above: iDreamSky games

Image Credit: iDreamSky

GamesBeat: You had this boom in China. It’s starting to look more like a bubble.

Lyndon: The question is, how is the bubble going to burst? If it bursts earlier, it’s a smaller bubble. If it bursts later, it’ll be a bigger one.

GamesBeat: In Game of Thrones, the Starks of Winterfell have a favorite saying: “Winter is coming.”

Lyndon: That’s right.

GamesBeat: It almost seemed sustainable for a while.

Lyndon: The bubble can be sustained by user growth, but we’re definitely seeing a decrease in the user growth rate. We can see that in reports from Tencent and all the major platforms.

GamesBeat: I went to their event, and it did look like they were flattening out their game lineup.

Lyndon: Right. The land grab is ending. The part that’s scary, if you drill down, is that normally when you have a decrease in user growth rate, you have another way to support a game in the average revenue per paying user [ARPPU]. In general, ARPPU and conversion rate go up. But the decrease in one and the growth in the other aren’t matching. That’s why the bubble can’t be sustained. It’s a matter of time.

GamesBeat: The interesting effect over here is that a lot of Western game developers have been counting on that Chinese money.

Lyndon: That’s a good sign, actually. A lot of Chinese money isn’t going to Chinese developers or publishers because VCs have felt like it’s better to do a deal outside of China. You get more experience and more quality, a more stable investment. If you’re looking for a company with a $10 million valuation, you can find one in the U.S. or other parts of the world with an actual track record that can give you a predictable forecast.

GamesBeat: So the Western investments go up because they look better compared to what’s available in China?

Lyndon: A lot of Chinese conglomerates are seeing that. One thing I’ve observed for a while, and now I’m confident in saying that it’s the right time — in the past decade or two, China has grown from a market no one cared about in gaming to a market that’s considered a cash cow. But the content here isn’t appreciated outside of China. No publisher in China is able to become a true global publisher.

With recent hits in the SLG [city-builder simulation] and RPG genres, though – some of them are Chinese-made, some are heavily borrowing from Chinese hardcore and midcore game mechanics – the time for Chinese companies to step into the global arena is here. Not just making money in the Chinese market, but moving toward exports. I see quite a few signs that this could be doable.

Heroes Charge is totally a Chinese game. Or if you look at Fire Age, those are very Chinese SLG mechanics with a Western skin. We see games like Dark Summoner from Korea also closely following Chinese monetization mechanics.

iDreamSky booth at ChinaJoy

Above: iDreamSky booth at ChinaJoy

Image Credit: Dean Takahashi

GamesBeat: So, China is influencing game design in other markets.

Lyndon: Right. It’s only a matter of time until a Chinese publisher cracks the U.S. market. That’s something to look out for.

A lot of Western developers who come to China fail to realize that the games Chinese users like, especially once you get past the casual genre — it’s all in the metagame. If you compare the metagame experience in a Western game to a Chinese game, it’s lagging behind. At this GDC, we’ve been talking about this a lot. If you want to take your game to China, beyond just the art direction and the technical specifications that everyone knows about, it’s about your metagame. Do you have the metagame to support Chinese users’ behavior? If you just have a good core mechanic, they’ll burn it out 10 times faster than Western gamers.

iDreamSky's Temple Run 2 promo

Above: iDreamSky’s Temple Run 2 promo

Image Credit: iDreamSky

GamesBeat: Game Show Network’s Steve Meretzky told me that was something they’d tried with their casino games at GSN. Before they’d just had a collection of games without a metagame. Now they’ve launched a new version where they concentrated on making the metagame stronger. It ties in to retention and loyalty.

Lyndon: That’s going to be the key. It gives you the content to keep your game alive. A core game mechanic isn’t enough to sustain you.

Another thing we’ve recently found about the difference between Chinese gamers and Western gamers is that Western gamers will usually have multiple genres of interest, maybe two or three. It’s rare to find a gamer who’ll only play FPS. But in China, the way Chinese users are growing is very awkward. They have a very clear preference. “I’m an RPG gamer. I only play RPGs.” A Western RPG gamer will usually be interested in, say, FPS and TCG as well, because they identify generally as a hardcore gamer. Chinese hardcore gamers are divided up into a bunch of subsets – hardcore RPG gamers, hardcore FPS gamers – who only play their genre of choice.

With that kind of growth, it makes the market even more singular and even more competitive. A lot of Western gamers aren’t capable of competing there. I’m finding a lot of developers outside the Chinese market having trouble with that.

GamesBeat: I heard from someone at a top game company in mobile – I can’t say who – that they believe everything is just locked up now in mobile gaming. He was referring to the West primarily. In console, Call of Duty comes out every year and makes a billion dollars. It’s hard to knock Call of Duty out of No. 1. The charts don’t change from year to year. He was saying that the same thing is happening with Clash of Clans and Game of War and Candy Crush in mobile. That chart doesn’t change because those guys have enough ad-buying power to drive cost per installs (CPIs) to a point where nobody else can break in. Only a viral game can make it to the top, like Trivia Crack. Nothing breaks into the top-grossing list because when those guys see something coming, they just buy up all the inventory.

It seems very anticompetitive, but maybe it creates opportunities as well. Maybe they’re overconfident. And advertising revenue is now becoming a better opportunity for smaller game companies. They’re creating something that can sustain their competitors by driving up ad rates. I don’t know what you think, but it almost seems like the U.S. is all wrapped up at the moment.

Lyndon: I can see that happening in the U.S. because the U.S. has just the two platforms, Android and iOS. On iOS, I can see that happening in China, but it would be harder to do. On the Android side, you have so many platforms that it’s much, much harder. If you dominate even one platform, it’s because you have a close relationship with that platform, and that pushes you away from other platforms. Not many games on Android in China have been consistently high in the ranks across multiple platforms, other than very casual games like Temple Run or Subway Surfer. When you look at the high-ARPPU stuff, it tends to be big in only one platform ecosystem.

That kind of lockup is going to be much harder to do in China until the platform situation stabilizes. We’re seeing a consolidation of app stores, but there’s still a good handful, 10 or 15 app stores to work with, and each of them still has the one big weapon in their arsenal. The ones that don’t have that are gone already.

GamesBeat: It almost seems like the U.S. needs more viable platforms.

Lyndon: Yes. But in the U.S., to build a new platform at this stage would be almost impossible.

GamesBeat: I wonder if companies need to think about this in how they develop their strategies. This person I talked to thought that most VC-funded startups are going to be falling short of their targets. They just can’t break in.

Lyndon: They are going to, yes.

iDreamSky Three Blade Masters promo

Above: iDreamSky’s Three Blade Masters promo

Image Credit: iDreamSky

GamesBeat: They can look for Chinese money after that, but that’ll dry up at some point as well.

Lyndon: Like I just said, I think we’ll see up to a 70 percent failure rate in China for a lot of these investments that happened in late 2013 and early 2014. These deals were just way too expensive. For companies like iDreamSky that got into the market early on, we were able to stack up money throughout this process. It’ll come down to a handful of companies.

We have two ways to go. One, we wait out the winter and then we go into a buying mode and recycle the scraps. Or we can look at doing deals outside of China. In Southeast Asia, I see a lot of things coming up. Thailand and Malaysia are showing strong growth. But it seems to present a similar situation to China – a very fragmented, multicultural, multicarrier world.

GamesBeat: What is iDreamSky’s own road map like right now?

Lyndon: We just signed Monument Valley. That’s our latest big addition for casual games. We have some big announcements coming up. We’ve started working on IP-based games, looking for the right [intellectual property] and marrying it with the right game mechanics.

One game that recently showed a lot of momentum is called Running Man. I’m not sure if you’re familiar with the Korean TV series, but it’s one of the biggest game shows in Korea. A Chinese TV broadcaster licensed it to create a Chinese version, and we licensed the IP to create the game. It’s doing very well on multiple charts, passing 10 million RMB in the first month.

We’re working on a lot of IP deals like that these days. We’re in the process of finding wWestern developers to work on this IP, helping them come into China in a more localized way. That’s one focus I have at this year’s GDC.

We’re also working with a couple of developers globally where — in earlier days, it was just about making a quality game. You could talk with the press a bit and get good word of mouth out there and you’d see revenue. But these days it’s all about having a UA war chest. We’re working with a couple of developers on funding their launch, helping them out with UA. If it works out we can continue to fund them to drive their business. We’re looking for developers who are capable of creating good games, who have their own operations capability, but just don’t have the UA war chest.

I see a lot of project financing happening these days. We’re aggressively looking to do that. It helps a lot of developers, to have their projects financed by a Chinese publisher. If you’re funded by a Western publisher, they don’t add that much beyond the money, because you can publish your game in the West yourself. If you’re funded by a Chinese or Asian publisher, it gives you that extra angle of equipping your game to be more ready for an Asian launch.

Monument Valley

Above: Monument Valley

Image Credit: Ustwo

GamesBeat: Do you find there’s more competition in this space?

Lyndon: There’s competition, but iDreamSky is one of the top publishers in China. We’re definitely in the top five. We continue to be a leading player. There’s always going to be competition, but who provides more synergy?

iDreamSky also has a very unique capability that most publishers don’t have, our development capability. Not just development capability on a smaller scale, but on a larger scale. We can come in with unique technology that we’re using in Chinese games — bandwidth compression, Unity data size compression – that we’ve spent years refining. Other publishers simply don’t have that. Also, because of our gigantic registered user base – more than 500 million now – the user behavior tracking we can do is second only to Tencent. We can tell you, scientifically, why a certain function might not work.

In terms of cash, project financing isn’t in the tens of millions. We’re looking at somewhere around $1 million or a bit above. Your million dollars is the same as my million dollars. What it really comes down to is the kind of synergies we bring in. We have a much harder edge we can provide compared to a lot of other Chinese publishers doing project financing outside of China.

iDreamSky Subway Surfers promo

Above: iDreamSky’s Subway Surfers promo

Image Credit: iDreamSky

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