Gaming’s future, as viewed by the $6 billion-dollar man (interview)

Rick Thompson has had more than $6 billion in exits during his career as an investor. And much of it has been in games.

His Signia Venture Partners was an investor in China’s FunPlus, which sold its mobile gaming assets to Zhonghi Holding for $960 million earlier this year. He also invested in Funzio, which Japan’s Gree bought in 2012 for $210 million. He also had exits with Cie Games, Wild Needle, Grow Mobile, and Playdom. The latter was a social gaming company he sold to Disney for $763.2 million in 2010. There have been some flops as well. But few investors are willing to go back into game investments over and over like Thompson has. He is, after all, one of the top poker players in Silicon Valley.

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He spoke at our most recent GamesBeat 2014 conference in September, and I interviewed Thompson again on stage at the Global Mobile Internet Conference (GMIC) in San Francisco recently. Thompson is investing a new fund, and he has put money into casino platform maker Midverse and Super Evil Megacorp, the maker of the tablet-based multiplayer online battle arena (MOBA) game Vainglory. We talked about the future of mobile games, and here’s an edited transcript of our talk.

GamesBeat: What’s your view of gaming’s future?

Rick Thompson: As far as the next thing on mobile, what we at Signia think is exciting is core games. We’re going all-in on core games. We believe that’s going to be a major growth area for mobile.

GamesBeat: An example of that is Vainglory.

Thompson: That’s one good example, yes.

GamesBeat: Signia is an investor in Super Evil Megacorp. The interesting question here is, what does everyone believe to be true about mobile that you know to be false?

Thompson: That question is a tip of the hat to [billionaire investor] Peter Thiel. If you ask developers about the keys to developing a mobile app, they’ll tell you short session lengths are very important. People use mobile phones while they’re waiting at checkstands or stop lights. You need to be able to give them very short experiences. If those are multiplayer games, it has to be asynchronous, because you’re not going to get your friends on at that exact time.

I think that’s flat wrong. It ignores Moore’s Law. It fails to appreciate that what we’re dealing with now is not mobile gaming. It’s touch screen gaming. The touch screen, done right, becomes an extension of the person engaged with it. When you’re holding that screen and engaged with it and interacting with it, you become one with it. Jane McGonigal, in her book, talks about flow. That’s what gaming is all about.

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Playing those games, you lose track of time. It becomes totally immersive. The touch screen experience lends itself very well to long hardcore sessions of synchronous play.

GamesBeat: I get lost in a lot of games on consoles, but on mobile there’s this thing that keeps coming back and biting you, which is bandwidth. It takes two minutes to look up my email sometimes. Using that same network to play a game on is a little scary.

Thompson: You’re asking about the future here, where we’re going. If you play on wi-fi it’s real time. People are playing games more often from home than on the road, where there’s wi-fi available. Over the next couple of years we’ll see better bandwidth. We’ll see a new generation of screens. Apple’s not finished with its latest version of Metal.

GamesBeat: A lot of money is moving into games from all directions. What do you think about that?

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Thompson: It’s an exciting time in gaming. Console is doing well. PC gaming is growing. Mobile is looking to be a $25 billion market. What we’re seeing with the globalization of gaming is that the opportunity is there to hit the jackpot, for companies that are able to capture and grow those markets.

GamesBeat: We’re supposed to make predictions on this panel. I wonder what you think the hot investment sectors are going to be.

Thompson: As an investor, it’s hard to predict casual hits. By the time something like Flappy Bird takes off, the creator’s not looking for investment. We look for things that we think have some degree of predictability. That’s why we’re focusing on mid-core to core.

What I think is changing with the global environment, first, companies need to think globally and yet act locally. They need to make sure that their gameplay has universal appeal, that the art goes east as well as west, and that the experience has legs. At the same time you have to act locally, making sure that content is relevant to local audiences, that the community is developed where people feel like they’re playing with other people in their neighborhood. That’s all very expensive and difficult to do.

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One thing in terms of investment requirements for us is, how do you get customers without doing CPI? CPI is the last thing a company should look at for customer acquisition. How do you get leverage? How do you find your market, rather than going to the unfiltered masses through a CPI campaign? Kim Kardashian, with Kardashian Hollywood, used her large following to bring in that market without paid advertising. TinyCo and their deal with Family Guy, with that support from Fox they didn’t have to resort to paid advertising. Bringing in licensed IP that has recognition and the means to reach and audience is one successful strategy. We have an investment in a company called Midverse that’s betting its future on publishing games with licensed IP, with the understanding that it’s a way to get leverage and get out of the CPI trap.

GamesBeat: We’ve seen a flowering of indies since the app stores have opened. It seems like there are great opportunities there, but at the same time so many giants have moved into gaming. You have Amazon, Google, all the platform owners, EA, Tencent. These are such big companies that I wonder what room there is to maneuver for small companies, startups, and indies.

Thompson: You have to separate the platforms from the large developers and publishers. Apple, Google, and Amazon are there. They’re unavoidable. You have to trust them. You rely on them for promotion, payment, authentication, anti-fraud. What I think developers should be cognizant of is making sure that they don’t become overly dependent on the avoidable third parties that aren’t necessarily aligned with their business.

Thinking about this conference and what I’d be doing as a dev, I did a bit of a survey and looked at top games. How many of them use Facebook Game Center for authentication? It was interesting to see that the larger devs either use Facebook authentication throughout all their games, or they don’t use it at all. That decision was probably made years ago, when they first started making games for Facebook or mobile, and they’ve never revisited that decision. Inertia leads them to either use it or not use it.

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Newer developers are cognizant of the fact that they put a lot into developing their audience, into continuing to engage them, into creating a community. It’s important for them to keep control over those users. There’s definitely a cost to outsourcing your social graph to a third party. For most developers, it’s probably not a relevant social graph. My niece and my grandmother probably don’t have a lot in common as far as games they like. Pulling in those friends doesn’t make much sense. I’d rather play games with people who appreciate the games I want to play, and those can become my gaming friends. That’s a much better social graph.

GamesBeat: An interest-based graph.

Thompson: An interest graph, yeah. When you outsource your social graph unnecessarily, those users belong to someone else that profiles their data. That’s going to become part of your competition’s CPI campaign. In order to have something like Facebook integrated as your authentication, there has to be some upside. It used to be tremendous. That was the key to success in the early days of Facebook, the virality. News feeds were filled with “Come play my game!”

GamesBeat: I thought it was interesting that Super Evil Megacorp developed their own game engine. I’m curious about what that pitch was like, when they came to you and said, “We’re building something ourselves when Unity has invested a billion dollars in doing the same thing.” They’re almost boiling the ocean in order to get started.

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Thompson: It’s a big decision to do your own engine, but the fact is that any standard platform or tool is built to be generalizable, to be used across lots of different applications. If you’re building something that requires high performance, and you want to stand out, there’s nothing short of having your own engine. At Playdom I think we had eight engines built for special purposes. Yes, Unity is terrific. It does an amazing job and lots of devs know how to use it. But you’re not going to break out of the pack building on the same engine everyone else is using.

GamesBeat: Do you think this mergers and acquisitions boom in games is going to continue?

Thompson: One thing that’s interesting on the M&A front is that acquirers are looking for companies that can have franchises that endure, that have large numbers of users in a game and a genre and a theme that they can continue to improve on. The companies with the same EBITDA, the same number of users spread across a dozen games are not nearly as attractive a proposition. So while there’s some benefit to diversification of the portfolio and being able to cross-promote, it’s a negative on the M&A front.

GamesBeat: If you look at Supercell, they have maybe $1.5 billion in revenue this year, 150 employees, and Clash of Clans has been number one for maybe two years. It seems like a winner-take-all environment.

Thompson: And it’s becoming even more so. That’s the nature of globalization. You have companies that are thinking from day one about building something that can be dominant across the world. They’re investing in IP that has legs. They’re investing in management systems that can be localized. Great games appeal to Ukrainians as well as South Koreans. There’s no reason that shouldn’t continue to be the case as the infrastructure and partnerships and trends toward localization increase. We’ve always been in the hits business, but it’s on steroids now.

GamesBeat: In this worldwide poker game, which regions would you bet on?

Thompson: That’s hard. One of the great things about the business is that a hit can come from anywhere. Talented teams are building great games and thinking about the business in the long term. They can revolutionize a genre, and it doesn’t take more than a dozen or two dozen people to get to the top of the charts. I hope we have some from San Francisco. I’m sure Finland will show us some more. Obviously China and South Korea will be there.

GamesBeat: What do you think about virtual reality?

Thompson: I like it. I was very fortunate to get a presentation of the new Oculus Rift, and it was amazing. I didn’t want to leave. A wonderful experience for entertainment. I can see education. I can see lots of apps. The first content to take over the internet will also be occupying virtual reality. But right now the tactile, the input, the sense of self in that environment is lacking. It’ll be great fun to play with and it’s fun to imagine, but it’ll probably be a few years before devs invest too much.

Question: You talked earlier about not being dependent on expensive CPI. Vainglory has done a great job of growing organically through the MOBA community. Can you talk about that strategy?

Thompson: One approach, like I said, is licensed IP. The other one is, when you design a game for an existing audience – it might be a game from the ‘90s that you’re reinventing, something that was done very successfully before – the question is, how do you reach that audience?

When Riot launched League of Legends, DOTA was a very popular game. Certainly nowhere near as popular as League of Legends became, but it had a fanatical following. It had professionals who made their living commenting on DOTA, making videos, and doing events. League was able to get those professionals, who DOTA did not control, co-opted into Riot’s offices to help them design the game and legitimize it and make it authentic. Then, when they launched it, they could bring in that audience, which was ready-made for League to contact.

The problem with games that were made maybe 15 years ago, nobody knows who they are. How do you reach them? Having an addressable audience is marketing 101. When you think about games, having an addressable audience that you can reach directly through PR and through influencers is critically important.

Question: You mentioned that predicting casual hits is almost impossible, whereas it’s easier with mid-core and core games. Can you elaborate on that?

Thompson: As an investor, there are so many casual games created and launched that for me, at least, it’s hard to sift through. Maybe there are people who can say, “Hey, this one is going to be a hit,” but I think it’s hard to have that level of insight. I don’t understand casual games well enough.

Question: You talked about the relevance of different social graphs and creating a gaming social graph. I was curious if you’ve seen different iterations of that in different social networks.

Thompson: League of Legends tapped into an interest graph when they tapped into the DOTA community. Super Evil Megacorp is making a MOBA and tapping into League of Legends influencers. They hired a guy who made his living as a League of Legends star, bringing him in house and giving him some decent equity. He now makes their videos and blogs and tweets and writes and helps evangelize.

That’s probably easier said than done. But it’s critical to look outside of the CPI. CPI isn’t something you can build a business on. You can’t predict or control it. The costs keep going up. Depending on the assumptions you make on your LTV and CPI costs, you could be out of business the next day. Suddenly the costs double. We’ve seen that happen several times in the last few years.