Discover the state of mobile gaming in a fireside chat with SGN’s Chris DeWolfe (interview)

SAN FRANCISCO — Chris DeWolfe has become an authority on mobile and social gaming.

He became a social media pioneer when he founded MySpace. He sold that company to News Corp. in 2005, and in 2010, he got backing from Austin Ventures to buy the social gaming platform MindJolt. In 2011, the company purchased mobile gaming firm SGN and online gaming network Hallpass Media. SGN also bought game developer Mob Science, and the company is now making a wide variety of casual puzzle games across Facebook, iOS, Android, and Amazon.

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DeWolfe, who runs the company that has been renamed SGN, has a lot to say about mobile and social gaming, from the downside of Zynga’s collapse to the upside of Candy Crush Saga maker King’s rise. He hopes to score with the next big mobile hit, but in meantime, he is watching and learning as the mobile gaming industry evolves. And he hasn’t abandoned making social games on Facebook, as he still sees it as a great proving ground for new ideas.

I moderated a chat with DeWolfe at last week’s Game Developers Conference 2014. Here’s an edited transcript of our talk.

GamesBeat: What’s your view of the state of the industry? Outside of Flappy Bird, is it true that only three games are accounting for most of the industry’s revenue right now? And if you’re not one of those three, what should your strategy be to succeed?

Chris DeWolfe: For the state of the industry, it’s great. We all went through this hangover from Zynga and their IPO, when their stock price fell down to $2 [a share]. It put a shadow across any investment, whether it was corporate M&A, venture investment, or seed investment. It hurt everyone quite a bit.

It was a bit unfounded, I think, because that blackout was more about one company than it was about the health and future of the entire industry. From my perspective, I see Supercell, which started in 2011, sell half of their company for $3.2 billion. I see amazing companies in Japan and Korea. I see King, that’s been around for 10 years, going out for a $7 billion IPO. I see Kabam. I know what our own numbers are, and they continue to double every year.

We see all these other games, too, creeping into the top 10 from time to time and entering the pop-culture zeitgeist, like Flappy Bird. What that shows you is that you don’t need to have 500 people in your company to build a top game. But it certainly helps to have some infrastructure behind you.

GamesBeat: The industry isn’t that transparent. I don’t know if people do have this impression that Clash of Clans and Puzzle & Dragons are making all of the money in the business.

DeWolfe: There’s a lot of money out there, as we all know. It’s all relative. Plenty of companies are doing $200, $300 million a year in revenue, which I think is a lot of money, growing and doubling every year. Compare that with WhatsApp. They did $20 million last year? Not a fair comparison, but —

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GamesBeat: And Facebook bought WhatsApp for $16 billion.

DeWolfe: Yeah. Or Snapchat, which isn’t doing any revenue at all. It takes a lot to do a couple hundred million. If it’s a $40, $50, $60 billion industry, and several companies are making up a big part of that, there’s still plenty to go around for everyone else. Again, I mentioned Supercell. They started in 2011. It’s never too late.

GamesBeat: Between King and Supercell, we know they have $3 billion in revenue together. But the mobile industry game estimates say that the industry is about $12 billion worldwide. So they have a good chunk of it, but they don’t dominate.

DeWolfe: Again, this is one of the things that we’re seeing in almost every part of the Internet. If you look at the evolution of games from console to Internet to mobile, and look at social networking from Web to mobile, everything is fragmenting. You went to Facebook.com three years ago for everything – to share your pictures, to check the news feed, to talk to your friends. Now you need to download four or five different apps, which has opened the door for companies like Snapchat or WhatsApp. We’re seeing the playing field level in almost every industry, including the game industry.

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GamesBeat: Was there anything interesting to you in the King IPO filing?

DeWolfe: Not a lot, other than the obvious, which is that one of their games accounts for 79 percent of their revenue, and the other two games are 17 percent. They’re fairly heavily concentrated. The other thing that jumped out at me was that they were doing approximately $60 million in revenue for the first eight years in their business, and in the ninth year they went from $60 million to $160 million, and then from 2012 to 2013, from $160 million to $1.6 billion. That’s not phony bot money. That’s $500 million in profit – not EBITDA, profit. The explosive growth, and profitable growth, was astounding. The fact that they’ve been around for so long was surprising.

GamesBeat: And that’s a consequence of staying at No. 1 or No. 2 on the top-grossing list for more than a year.

DeWolfe: It’s a testament to the strategy of building a game as a service, where you’re not just building a game, launching it, and thinking about the next game. You’re taking time before you build that game. You build a prototype to see if it works. You get some positive response back. Then you really go for it. Once you get the KPIs, the day one retention, the revenue per daily user that you want, then you double the size of your team, triple the size of your team. If you do all of that right, you can have a game that lasts for three, four, five, 10 years.

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GamesBeat: Flappy Bird only needed one developer working for a few weeks to create a game that became No. 1 in 100 countries. I wonder how much you need to invest in a mobile game these days, though, to stand out in front of a global audience.

DeWolfe: Flappy Bird was one of those phenomena. If we could all build one now, we would. Probably a bunch of us are trying. Those kinds of games are interesting. Rumor has it he was making $50,000 a day just from advertising, which is great, especially given the cost of living in Vietnam. But those kinds of games don’t endure for long periods of time. They don’t build the bedrock for a big company.

To answer your question a different way, if I wanted to build a game that would endure and hit the top-grossing charts, it would probably cost around $1 million, give or take. Someone could maybe do it for $400,000, and some people would say a couple million. But my guess, for King to get something launched and running takes about $1 million.

GamesBeat: So maybe 10 people working for a year?

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DeWolfe: Maybe seven months to get an initial version up. Continuously adding new content and new game mechanics is incredibly important to keeping retention up, which keeps the value of your users up and allows you to spend more money on advertising. My guess is that they got it out in seven or eight months for under a million bucks, doubled or tripled the size of the team, and then spent a lot more money since then investing.

GamesBeat: I think they said they build Candy Crush with three people. Now they have a team of 40 on it.

DeWolfe: That makes sense. That’s what you do when you have a hit game, a game that begins to hit your KPIs. You pour the gasoline on and go big as quickly as you can.

GamesBeat: There’s a million or two million apps depending on how you count them. It’s been reported that the cost of advertising a game so that you can stand out, the cost of acquiring new users, has gone up dramatically. On average it’s higher now than the amount of revenue that an average user brings in. The lifetime value might be something like $1.96 as of December, and the cost of acquiring new users is something like $2.73. Different sources of data show it varying a bit, but it’s not a good thing. How do you think mobile game companies should deal with this challenge?

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DeWolfe: That’s the No. 1 issue right now. There’s a couple different ways to answer the question. Definitely, customer acquisition has increased, but the way we look at it is, we look at it in cohorts, to break it down into groups of people. We’re maybe willing to pay $4 for a woman in Australia on an iPad who’s played a game before. We’re willing to pay 20 cents for a different profile of user.

What you need to do is make sure you find your high-value pockets, and you’re willing to pay the value that those people are worth. Then you need to make sure that the lower-value pockets, you’re paying a lot less for them. I see too many people out there just looking to buy for abundant CPM and spreading money across the table. That’s wasted money. It’s like buying television.

Another big thing is, a lot of our advertising dollars, collectively, are going to Facebook Mobile. Which is great, because it’s efficient, but it’s a supply-and-demand curve. We all see that it’s efficient, so all of us are trying to buy the same keywords. Prices are going up. We need to find other sources of users. We need to do a better job cross-promoting from our current games. We need to do a better job designing our games to make them viral, whether it’s making multiplayer games, or effectively incorporating Facebook into our games, or whatever it may be.

GamesBeat: Targeting the right person at the right time is what matters now?

DeWolfe: Targeting the right person at the right time and knowing how much money you can pay for that person. You have to match your cost per install to your LTV for a specific cohort of users. The majority of companies out there do not do that. There’s so much wasted money if you don’t figure out how to do that.

GamesBeat: The tools you need, then — you have your basic analytics but also something that can slice and dice this data, and then you have some kind of mobile marketing to target the users once you find them?

DeWolfe: How it works, you need some kind of an attribution tool on the front end. One of the biggest ones is AdEx. With AdEx, it’ll say, “You bought this user from this cohort on Facebook,” and it’ll assign a number to that person. You follow that user through the purchases they make. You can see, usually within a couple of days, how much money they spent. Certainly within a week you have a good idea whether that cohort will be a good one or a bad one, or if you need to pay more money or less money.

GamesBeat: A bunch of big brands have come into the business, whether it’s Disney or Call of Duty. What’s been some of the consequence of this, and the expectation that they’ll dominate?

DeWolfe: There are two sides to IP. There’s established gaming IP that’s coming from console to mobile, which is interesting. Everything is converging a little bit toward mobile devices in the living room. On the casual side, the graphics and animation and game design and all of those variables are improving. On the other side, from the console, you’re seeing those games meet the more casual games in the middle.

From an IP perspective, you see companies like Kabam, which did the Hobbit game, finding great success. The challenge in finding IP, which I think TinyCo is betting the whole company on right now — well, maybe that’s too strong. But they’re focusing the company on building a game around IP. For them, it’s a Sims-like game with the Family Guy brand. The problem with that is you have big upfront payments, and then a rev share against that, and then you may have to do some marketing, and then you have to give 30 percent to Apple or Facebook. What’s left? There has to be enough that it makes sense to pay that up-front payment with the rev share that goes against it.

GamesBeat: You could pay out even more money to someone else if you put on something like Kakao, a mobile messaging service.

DeWolfe: Exactly. When you’re doing an IP deal with the kind of people who own entertainment rights, you need to make sure that IP is going to handle the marketing piece for you. Something like a Family Guy, they have to be expecting it’ll bring in 20 or 30 million downloads off the bat.

GamesBeat: You’re in Los Angeles. Have you thought about doing any collaborations with Hollywood, doing the brand-IP thing?

DeWolfe: We’d love to, but our conversations so far—we haven’t found the right match. We believe that if we’re going to invest in IP, we consider what we bring to the table, something that they can’t build. There’s very little game knowledge in Hollywood companies. Warner Bros. has a great knowledge base. Disney has a great knowledge base. Outside of that, though, there’s so much other IP that we could choose from. The timing needs to be right and the price needs to be right. If your margins get too low it’s just not worth it.

GamesBeat: How much do you think the console playbook is going to play out in the mobile game business? In consoles we have a Call of Duty game at No. 1 every single year. Assassin’s Creed is always on the list. These are top rankings that just don’t change much.

DeWolfe: All those games are going to be mainstays for years. I hate to say this, though, but they’re going to be more niche games. The whole term “games” was somewhat niche five years ago, 10 years ago. Now, games have been democratized. Everyone plays games. Eighty percent of our country has played a game in the last year.

Games like Call of Duty, the top-ranked games and franchises, I don’t think they’ll go away. They have such cult followings and they’re so well-done. But they’re still going to be popular with a smaller group of people that’s willing to pay a lot more money for them.

GamesBeat: What do you think of Facebook web gaming? It moved from this serious stage of rapid growth and a proliferation of companies. It’s been in more of a consolidation stage recently. Is it still a good market?

DeWolfe: A lot of people have abandoned Facebook web and are mobile-only. We disagree with that strategy. We’re big fans of the full ecosystem, making sure our games are on Facebook Canvas, in the App Store, and on Google Play. Anywhere else that may pop up that’s interesting, we’re there too.

We see a lot of users find our game on Facebook and then download it in the App Store, where we make more money. They’ll play in both places. I’d recommend you design your games for all three.

The positives for Facebook Canvas are cheaper user acquisition, it’s more viral, and there’s less competition. The negatives are that the retention is about half what it is on mobile, and the monetization is less as well.

GamesBeat: What state do you think we’re in in 2014 as far as how the investment community views games now? We’ve seen some recovery from the Zynga effect. What else are you seeing out there right now as far as whether people believe we’re in a golden age or a bubble?

DeWolfe: One or two events can have such a large impact on this industry. It’s incredible. The King IPO, everyone is watching that with an eagle eye. If they make the first two or three earnings calls, we’re smooth sailing for another six to nine months. If they stumble, it could have a disastrous effect on investment in our industry.

I’d plan on being self-sufficient as much as possible. There’s not a lot of money going into startup gaming companies. It takes a lot of money to develop a game, develop the analytics behind it, and have the marketing war chest to compete. To the degree that you can prepare yourself for fallout in case King stumbles, that’s always a good thing, to be self-sufficient. I was happy that we were self-sufficient when Zynga stumbled, because no matter how well we were doing, we couldn’t have raised money during that period of time.

Now things are substantially better. The multiples are way better than they would have been a year ago. If King does well it’s smooth sailing for a long time.

GamesBeat: What about the pace of mobile gaming growth around the world? How do you look at Asia or Europe or North America? Do you see disparities?

DeWolfe: Definite disparities. It’s hard to talk about just Asia, because as we know, the Asian countries are so different. You have China, which is very difficult to enter, and if you do enter with a game, you may get 10 cents on the dollar. Korea, you might get 30 cents.

If you enter Japan in the right way, there’s some money to be made, although it’s very competitive. The types of games are more complicated. Everything about the games are harder to understand, but they’re more interesting in some ways. They’re not built for the American psyche, and American games aren’t necessarily built for their psyche. Candy Crush is doing great there, though. Clash of Clans is doing great. There’s more money generated in the App Store in Japan than there is in the U.S. with half as many people, which is pretty shocking.

China is a growth market, but very difficult. It’s not a big bet that I would make. Korea, I would look at as found money, if you can get a good deal with a great distribution partner like KakaoTalk. I would not try to go alone. You have emerging countries like Brazil that will be interesting in a couple of years, but they’re still pennies on the dollar when you compare to the U.S., U.K., Canada, and Australia.

GamesBeat: Do you still design for a global market, or do you design for an Asian country when you think about going out there?

DeWolfe: We haven’t done that. We want to do that in Japan. We’re serious about giving Japan a shot. But we know that you can’t give it a half-assed shot. You have to be in all the way. You need the proper translation. You need characters that make sense. You need a different tutorial. The game has to change. It takes investment. It’s like creating half of a new game. All those things have to change. If we were successful with one game in Japan, we’d do another game in Japan before we went into any of the other Asian countries.

GamesBeat: The platforms are always changing as well. You can expect Facebook to go through some changes as it absorbs WhatsApp. Are there some directions you want to see them go, or are you fairly happy with the ability to do what you need to do on all of the platforms?

DeWolfe: I’m not sure why Apple hasn’t gotten more invested in the advertising business. I know they just acquired Burstly. I hope that’s a sign of further commitment to getting into the business. Right now, the majority of dollars spent in advertising for gaming is coming from Facebook. What’s interesting about the Facebook platform on mobile is that through Facebook Connect, they’re going to increase the amount of inventory that they can sell. Hopefully, with more supply and the same ability to target, the cost per acquisition will either stay constant or decrease.

I’m also enthusiastic about realtime bidding, programmatic media buying for mobile, where you can say, “Okay, I’m looking for that 40-year-old woman in Australia who’s on a gaming site. I’m willing to pay a 40-cent CPM.” I just have a computer bidding for me on all of these media placements. Through technology, I can spread my bids across hundreds of sites and apps.

GamesBeat: That expertise is in addition to being able to design games, right? How much of that expertise do you feel like you have to have in-house? How much are you happy spreading across a few dozen companies? Do you welcome something like Tapjoy or Upsight, trying to do an all-in-one service for companies?

DeWolfe: To the degree, when you’re starting out, that you can outsource, you should outsource and focus on your game. There are great tools out there that can get you enough analytics and push notification technologies that you need. However, in the long run, you need to build that all in-house, which is what we’ve done for the most part. We’re still using some external attribution technologies. Something like realtime bidding, you can certainly outsource that. We’re going to invest a lot in that this year, because that will give us a core competency that some of the bigger companies won’t have. We’ll be able to buy users more effectively.

GamesBeat: Aside from Flappy Bird, what sort of trends should game designers be thinking about if they want to be popular in the App Store?

DeWolfe: If you look at Flappy Bird, it’s sort of the past coming back. If you look at Candy Crush, it’s the past coming back. It’s an old game mechanic, a proven and tried game mechanic, with much better art, much better gameplay, a lot of times a story behind it. Looking to the past and re-imagining something that’s been popular in the past, but putting a new spin on it with better art and a new story, is the trend that we’re seeing right now.

GamesBeat: If there’s a handful of things that a game designer should know about when it comes to running the business, what are some of those things they should learn?

DeWolfe: Instrumenting your game properly from the beginning is important, especially if you have levels. You want to know the percentage of people that pass each level, how long it takes them to pass each level, which levels you’re making money on. This is all assuming that it’s a business based on in-app purchases. That allows you to tune the difficulty of your levels.

Taking it up to a higher level, you need KPIs, some kind of variables and metrics by which you judge the health of your business. One thing I’ve learned is that it’s easy to fall in love with your own game. Building a fun game is the most important thing, but from there, letting the data guide you in the right direction is a good way to go. If you don’t have that data, you’re at a loss.

For us, that includes our day one retention – of all the people who signed up yesterday, who came back today? Of the ones who signed up seven days ago, who came back today? 28-day retention, as well as our average revenue per daily user, our percentage of paying users, all of those metrics dictate the lifetime value of our user, and they allow us to spend more or less money on users.

GamesBeat: You’ve launched a lot of successful games. Is there a recipe to what you’re doing each time around now?

DeWolfe: For us, we bought a company called Mindjolt, which was a San Francisco publisher of really simple puzzle games and word games. They had more than 200 games, none of which they developed. There’s been probably 90 million installs on Facebook. What that site’s done is give us an insight into the popularity of certain game mechanics. It gives us a road map of what mechanics might work. We know those games aren’t good enough to make it long-term on mobile, but we know that people enjoy the mechanics, so what can we do with them to make them more interesting?

We’ll build a quick prototype over a month or two. We’ll have everyone in the office, 100 people across the company, play it. We’ll get more feedback and bring more people in to play it. Then, if we think it’s a fun game, we’ll spend six to seven months of development cycle to build and launch a game. It’s somewhat formulaic, but I feel like we have some of the most creative people in the world, from a game design and an art perspective. We take a lot of pride in our game design.

GamesBeat: Is there some condition under which you might try a Hail Mary play, like Machine Zone did with Game of War? They built a game over 19 months and had 80 of their 95 people working on it. They raised money in order to finish it as well.

DeWolfe: I don’t have the stomach for that. I respect companies that do have the stomach for it, but I don’t. It’s one of the reasons why we did a rollup. I didn’t just raise money to create one game. I would rather be able to create three or four games in a year and be able to reasonably say that, to use a baseball analogy, all of those games are going to at least hit a double, and one’s going to score a home run. I like the ability to cross-promote from one game to another.

For every one of the companies that you just mentioned, there are two dozen that fall beside the road. They’re beautiful, gorgeous games. But I don’t know how many opportunities you have in your life to start a new company and create a game. You have to ask yourself that question.

GamesBeat: External developers are coming to you and saying, “Hey, will you buy my company or finance my game?” What’s your preferred way to do something like that?

DeWolfe: It would be more to buy the company. Either buy the company or collaborate with a third party before we make the game, because we like to have input before a game’s made on day one. We don’t subscribe to the notion that a third party would build the game and we’d throw it out into the wild and cross-promote into it and expect it to be a big hit. Zynga tried that for five minutes. None of these publishing models have worked that well.

I feel like there has to be a real collaboration, and that collaboration needs to start at the beginning of the game, or at least very early on in the process. That’s the way we look at it.

GamesBeat: You’ve been immersed in gaming for a while here, but you also came from social media. You have a broader perspective on things like entertainment. I’m wondering whether you think gaming is going to be bigger than social media, or if it’s maybe as big as it’s going to get. Is it always going to be a subset? What do you think of gaming’s place in entertainment?

DeWolfe: It’s an overused term, but again, mobile has democratized games. It’s so easy to play great games on your iPhone or whatever Android device you have. They’re everywhere. There’s a lot of great games to choose from. There’s a game for everyone.

To a certain degree, I consider a lot of games micro-social networks. In that way it’s a subset of social networking. Social networking in general is being fragmented. I’m not sure what social networking means anymore. There’s messaging, photo-sharing, social gaming, a lot of elements to the broad base where people are creating separate apps. But to be very clear, I expect mobile gaming to grow in a huge way and continue to grow.

Question: What advice would you have for Asian game companies and game developers hoping to bring their games to the western market?

DeWolfe: If we’re talking generally about games and bringing them from, say, Japan to the U.S., they have to be dumbed down for us. We’re very impatient people here. We don’t understand games as well as the Japanese do. Everything from the tutorial to the levels has to be simplified for those games to be successful here.

Again, I think acquisition is a great way to go. It’s great to have an established company in the U.S. that’s specifically built games for Americans. If you’re an established Japanese, Chinese, or Korean company, a countless number of those companies have money to make acquisitions. If you’re more of an independent developer in Japan, China, or Korea, I would focus on being successful in those regions first, and then focus on the U.S. That’s exactly what we’re doing here. It’s just as hard to go from the U.S. to Japan and China as it is to go from Japan and China to the U.S.

GamesBeat: I just saw a Korean game yesterday where you had four players playing synchronously in multiplayer matches, trading blows with each other. I think of trying to do that on an American mobile network, where it takes me about a minute just to get an email to show up. The speed of the networks is a big difference.

DeWolfe: We didn’t talk a lot about Android, the difference between Android and iOS. We’re super bullish about the future of Android. A couple of years ago it was more of an afterthought for us, but I’m happy that we invested in making our games available on Android. Now we’re getting as many users organically on Android as we are on iOS. That’s the upside. The downside is we’re making about a third of the revenue on Android as we are on iOS.

GamesBeat: Is that causing you to do things differently on Android?

DeWolfe: No. We’re just committed. We’re waiting for more people to get the latest and greatest Samsung devices, more tablets. We’re expecting bigger penetration in the U.S., U.K., Australia, and Canada, where a lot of the money’s coming from. They have more credit cards, too, so there’s more friction in the Google Play buying process than there is in the iOS process.

GamesBeat: There was some excitement last year about Ouya and the micro-consoles that were going to take Android into the living room, as well as other new devices using the mobile operating system. Do you see any hope or interest there?

DeWolfe: It’s super cool. Everyone’s excited and interested about it. Things like wearables or playing games on Google Glass, or for us, developing games for Xbox or Windows. All these things are interesting ideas. But no one’s really doing it yet. There’s no critical mass. We’re waiting for more devices to get out there before we devote resources to it.

If we were a huge company with a couple thousand people, maybe you devote 50 people to figuring out something like that, but we have 100 people. Our success is going to be based on focus, focus, focus.

GamesBeat: With 100 people, what do you do with an experimental team? If you had just one, what would you choose to do with it?

DeWolfe: That would be more in our creative group. They’d be coming up with new game concepts and developing prototypes.

Question: You were talking about focus. In your opinion, if you had to choose one particular niche, like King’s focus on puzzles or Supercell’s on strategy or Zynga’s on casino, what do you think you would focus on?

DeWolfe: That’s a great question, and I think it’s one that’s specific to every individual. Whatever game you’re building, you should be passionate about it. You should love that genre of games. You should be very experienced with it.

I can say from our own history at SGN, we dabbled in casino games for a while, and none of us were passionate about it. The games weren’t very good. We got really good at building puzzle games because every one of us played them every day. We know what we like and don’t like about them. We know every single bug in our games before our customers do. It’s super helpful.

So that would be my advice, to get into a space where you and your partners are passionate. The casino space, even if you’re passionate about it, is really, really crowded. I wouldn’t touch it.

GamesBeat: Everyone seems to hope that an interesting new player will come into games now and again. Samsung is rumored to be very interested in games right now, for some reason. Google is bulking up on game talent, and Amazon as well. I’m curious about what you think of these possibilities, whether we could have new platforms or whatever else they might be doing.

DeWolfe: Samsung is the company that everyone’s looking at and hoping that they could be the ones to develop a new platform. The more platforms for all of us, the better. Instead of making money in three places, we’re all making money in four, five, or six places. Samsung’s the way to do it. Google proved that with enough investment, you can build a great app store.

Amazon has fallen short. They’ve built a great app store and they have a decent tablet, but they don’t have any phones. They don’t have any penetration. Their monetization is great — the lifetime value per user is great – but there’s like nine people playing games on there. It doesn’t work. We still develop for Amazon because the monetization is great and we like them as a company, but we’re still waiting for that big push. An Amazon partnership with Samsung would be super cool, or with one of these other companies.

The new version of Unity is going to work for Facebook development, which is super exciting. What we built for cross-platform technology two and a half years ago, Unity is going to roll out for everyone as a single tool set.

GamesBeat: Yeah. Cross-platform in general is going to be much easier.

DeWolfe: Including web. What a lot of us forget is that Facebook Canvas is still important. There’s an ecosystem where people play games at the office, play on the train or the bus, and play at home.