How Israel’s $1B game business thrives in a cutthroat global industry

TEL AVIV — I traveled to Israel for the first time last week to get a good look at the country’s $1 billion game industry. Israel is the home of more than 200 game companies, not including a number of marketing technology companies that are critical for supporting monetization at free-to-play mobile game companies.

The Israeli gaming business is a subset of a much larger tech community that consists of 5,000 startups, according to Start-up Nation Central, a nonprofit that encourages companies to do business in Israel. The tiny nation is No. 1 in startups outside of Silicon Valley, and it ranks No. 1 among countries in per capital VC investment. It’s no surprise, then, that Israel has become a hub for game-related businesses such as ad-tech, social casino games, online gambling, kids games, and even mid-core games.

While in Tel Aviv, I moderated a panel at Geektime Conference 2015. It included former 888 Holdings CEO and angel investor Gigi Levy of NFX Guild; Leonard Frankel, head of business development at mid-core (hardcore games played in short game sessions) game maker  Plarium; and Sagi Schliesser, chief executive and cofounder of kids educational game company Tab Tale.

Here’s an edited transcript of our conversation.

GamesBeat: I’d like to have our panelists introduce themselves.

Gigi Levy-Weiss: I’m an investor and have been for quite a few years now. Games are one of my favorite areas. I’ve invested in more than 12 game studios. Some of them you may know of, like Playtika and Plarium, but I also backed companies like [Space Ape Games, Latet, and MyThings].

Leonard Frankel: I run business development at Plarium. We’re the largest hardcore game developer on Facebook. We make games that are less simple, more complex. It’s an Israeli company with our headquarters here. We have more than 1,000 employees now. My job is overseeing M&A activities, investing, acquiring smaller studios, doing licensing deals for TV shows and films, and everything in Asia that we hope to achieve in the near future.

Sagi Schliesser: I’m CEO and one of the co-founders of Tab Tale. We make kids’ games, originally, with 800 million downloads and a nicely growing population of kids playing month after month and growing up with our games. Two years ago we launched Crazy Lab, our brand for mid-core games and simulations.

GamesBeat: I’ve covered the game industry for 19 years now, and I never had to travel very much to do that job. Now I’ve been to at least a half-dozen countries this year, and I feel like I’m barely keeping up. It shows you how global the game industry has become, especially as mobile has become the dominant form of gaming. I’m curious to learn more about Israel while I’m here. I’ve been very impressed with what is here.

If there’s a certain kind of talent that grew up here in Israel, and then you start a certain kind of company, in games you wind up with a lot of similar companies, like social casino games, ad-tech, and kids games. In what ways is that a strength, and in what way is that a vulnerability?

Frankel: When you look at any field of investment, there are the first pioneers in any industry. Then, around those pioneers, you start to see companies growing around them. In the game industry, for the first five years, we had initial growth in all directions. There were attempts at triple-A, at core, at casual. Then there were three big areas that held up: kids’ games; core games or mid-core games, especially strategy; and social casino.

You look at the startups today and you see many companies in these three areas, simply because these were the three pioneers, the three large companies. People see that success, or they work there themselves and then go out there to start their own thing.

When I look into the future, when it comes to casual, mobile, mid-core, Israel is very well-positioned. I see people working a variety of new concepts and new genres where Israel can excel. The one thing I don’t see — and I can understand why this is the case — is any work on triple-A. Plarium isn’t going into console or PC. From that perspective, it’s a difficulty, because many of the concepts that made these mid-core companies successful come from triple-A principles. By not having that, that’s a bit of an issue.

At Plarium we solved that problem by bringing game developers from top companies around the world to work with us. Whenever we feel like going after a new genre, a genre that only exists on console, we bring top game designers in to work with us and help us. But for small companies that’s a problem. That’s one weakness I see.

Levy-Weiss: Four years ago the game industry here was much smaller. All the major companies that you see today didn’t exist then. There were only indies, and it was harder for indie studios to build games. But Israeli studios had the capacity and skills to create casino games, and this translated to social casino games, which are basically casino games, but not played for real money. We saw a lot of skill coming from Israel in that area. A lot of Israeli companies have been sold in the past 12 months to foreign companies, mostly social casino companies.

What we see now with the focus on mobile games, which are somewhat cheaper to produce than browser games were a few years ago, there’s more capacity to create other kinds of games. … We’re going to see more of that in the future.

Schliesser: A lot of growing companies in Israel are starting to go global. You can get talent from Asia and other regions flowing back and forth. Technology can come from Israel and meet up with game design from other countries. Right now, when there’s a lot of noise around certain areas, those are the places that are going to flourish.

Triple-A is a field where you have to spend a lot of money, and you’re potentially going to make a lot of money or lose a lot of money. You need considerable backing to produce a triple-A title. When I was leading a studio for the first time and went out to look for funding, we were told many times, “You have great technology, but we want to build something that Israeli VCs can invest in.” That’s one of our problem areas. The startup culture is about technology, but gaming is more about content. It’s an interesting comparison that we work with.

GamesBeat: You have 100 VC firms here in Israel. That’s pretty amazing for any one region. But many of them won’t invest in games. Is gaming starving for lack of the right kind of access to capital?

Levy-Weiss: The answer’s definitely yes. Of those 70 VCs, maybe 20 are in the highest tier, with $3 million to $5 million. Of those 20 I can think of only three that made game investments in the past three or four years. And they only made one each. The reality is that if you’re looking to raise that first million, if you’re coming with the right concept and something playable, if you’re coming with a proven team—If you don’t hit crazy numbers right away, which is becoming tougher and tougher to do, going and getting $4 million or $5 million to prove yourself with has become almost impossible.

Many of these companies could be very well-funded if they were in the United States, because their initial traction is good. They could get financed. They could get as much as $15 million. But in Israel they’re scrapping with another half a million or million here or there. They never get a real chance to go out in the market and prove their game.

GamesBeat: We have a boom going on, with games expanding worldwide like never before. There are opportunities in VR and AR. There are so many platforms to build for. But game investments in the first nine months of this year are down 35 percent from a year ago. It seems like a big disconnect.

Levy-Weiss: There is a big disconnect, in both the public and private markets. You see it in the public markets. It’s funny that games companies end up being created in multiples of movie companies, despite the fact they’re both in the content business. But games companies have a lot of technological skill, technological assets. Investors don’t understand that very well.

With time, I hope that there will be more companies that go public and show they can sustain their positions over time and become good investments. But for the time being the public markets are very afraid of games companies.

GamesBeat: Where do you see your room to maneuver in the near future? What gets you excited about what you can do and where you’re headed.

Frankel: Just to refer back to what he said, there’s a lot of growth still happening in Asia. We’re talking to Asian game companies that are doing well and we’re trying to learn from them as much as we can.

We’re also dealing with the challenge of discovery for games. You need to find ways to bring players to your games, because there’s not enough viral growth. The cost of bringing in those users is getting more and more expensive. We’re looking at ways to deal with this challenge through licensing, which is something that’s been very interesting. We’re also looking at new genres where we haven’t yet developed expertise. We’re trying to build that talent in-house or source it elsewhere to help us.

Schliesser: We have two major areas of business right now. One is the children’s business. It took us almost five years to be number one in what we’re doing. We’re the number one publisher for kids. There, we’re trying to build IP around that. Just being a game publisher is nice, but if you really want to be successful, you need to leverage the success of your games and build something new out of it. We’re doing animation series and building other kinds of content.

As many investors and other people have said, the market usually goes where the devices are. If kids are consuming content on their tablets or their iPhones, they’re going to be consuming content through YouTube. They’re going to be into animation. They’re going to come together virally. They’re going to congregate in one place and not go to other places.

With our kids’ titles, we’ve achieved substantial growth. With the Crazy Labs brand, we’re trying to expand toward mid-core games and big lifestyle simulation games. There we’re just ramping up. We have around four titles in soft launch. We’ll be learning next year how to master all the elements and build that into a more mature business. We’re confident that we have great technology that will enable us to scale up.

GamesBeat: Do we have a user acquisition crisis right now? How should game companies deal with that?

Frankel: We’re looking at the issue in two ways. One, we’re looking at some interesting sources of existing big audiences on mobile platforms that aren’t very widely available. We’re looking at ways to collaborate with those entities and grow our audience through them.

Obviously we’re also putting a lot of emphasis on the growth we have. Right now we have more than 50 people in the company working on user acquisition full time. This is a very important department when it comes to growing the company.

Schliesser: We grew very gradually in the kids’ market, because it’s harder to target those users. Ultimately we achieved 40 million unique monthly active users. When you can get a game in the top 10 in more than 50 countries, that usually does it. Sometimes we do a little bit of user acquisition, but mainly in situations where we want to improve from, say, number 10 to number six.

On the mid-core front, with the rising cost of user acquisition, there are all sorts of new calculations around CPI and LTV. It’s a whole science. It’s very complicated and it’s changing every day. You need to keep track of that. The idea of gaming as a service is spreading to other platforms through things like Steam. On the kids’ front we’re cooperating with different stores and releasing subscription-based content. We need to find better ways to adapt the games-as-service model as it becomes a part of bigger games. That’s going to be a challenge.

Levy-Weiss: The reality is that there is a big problem with user acquisition. The main reason is that for a couple of years now, the main channel for user acquisition on mobile has been Facebook. Google has been extremely slow at adapting. Right now they’re catching up with YouTube ads and so forth, but Facebook has moved almost everything to its mobile platform and has close to a billion users globally. It’s become the go-to place for game installs.

In the beginning that was great for the game companies that moved quickly. They could get installs very cheaply in one place. At a certain point, 80 or 90 percent of installs in mobile came from Facebook. But as more and more companies started getting on top of it, and in the last year as Facebook started onboarding more brands and e-commerce companies into in-feed advertising, the prices started to go up and up.

Right now the Facebook inventory is more or less fixed. It’s about one ad for every 10 items in your feed. That’s the way it’s calibrated today. As long as they don’t decide to push more, the inventory is fixed. The number of advertisers is only growing, and so CPI has grown by more than 120 percent over the last year. There’s hopefully going to be a few things that are stopping it now. But the reality is that if it keeps going up, it’s going to be tougher for game companies to succeed, especially smaller game companies.

GamesBeat: Game companies can be very big, but everything is relative. You mentioned the platform companies like Facebook, Google, and Apple. Sometimes the game companies seem like pawns on somebody else’s chessboard. How do game companies have to think about that?

Levy-Weiss: Do you feel like pawns, guys?

Frankel: We’re having fun at what we’re doing, at least. Apple is not in the business of distributing apps. It’s in the business of distributing devices. We’re their means of distributing devices. It’s gotten to a point where we sometimes need to take into consideration what’s important for Apple in a game. If you get some love from Apple, that’s free users. So I totally understand what you’re saying.

There are other platforms in the world, though. There’s Google Play. There’s Amazon, which is growing fast. In Asia there are even more platforms as well. But Apple and Google are the main platforms and we do have to play by their rules if we want to grow in this market.

Schliesser: It’s a complex mixture. On the one side, you need to believe in what you’re doing when you push your features and content. In many cases, users don’t really care about features unless they can use them in a way that enhances their experience. It’s a big challenge. New devices, new features, sometimes you can use them in an interesting way, and sometimes you just can’t. It really depends. Sometimes you face all sorts of requirements that make sense for some kinds of apps, but they don’t go into making a good game.

Like any business, you have to work around many different influences. In the end, the companies that succeed will be the ones that listen closely and do things accordingly, but have their own kind of vision. This is the ideal we want to lead us down our path.

GamesBeat: It seems to me that gaming is always narrowing down and spreading out at the same time. On the narrowing-down front, we had our GamesBeat conference last week, and Machine Zone’s Gabe Leydon said that the pressures of making a global game are becoming so tough that within a couple of years, the best strategy for game companies will be to focus on just one game. You don’t, for example, see Blizzard making four World of Warcrafts and doing it well. How do you react to that notion, that game companies should think about a future where they focus on very few games?

Frankel: Games are all so data-heavy today. There’s a lot of actions players can take in a game. We take that study very seriously. We analyze a lot of that information, because we want to create an experience delivered through the game that’s almost perfectly suited to the player interacting with us.

When we launch a game, it’s a game we’ll be servicing for the next 10 years or more. You need to understand what you’re preparing for. Our first game launch was nearly five years ago and we see it generating significant revenue for many more years. Even so, we’re looking for the next successful game that we can grow. We believe that our future lies in finding newer and better experiences that will bring more players to join with us and stay with us for several years.

Schliesser: Our approach is quite different. We believe in consistency, not just trying to rely on the one big hit. We’re trying to build consistency with our third parties. In the kids’ area it was simpler, but now that we’re building mid-core games, we’re building a platform. Our vision is to have several games around it.

We think of things along the lines of the difference between movies and TV series. TV series are very successful over a long period of time, in multiple chapters. We’re taking the TV series approach. We believe that for us, with the technological abilities we have right now, that’s the right approach. I can understand companies that have it in their DNA to make something huge and keep building on that. For them that can be the right approach. But there are different approaches that can work.

Levy-Weiss: I’ve spoken to Gabe and people from Supercell and others about this. It’s very simple. Once you make it to the top three or to number one, it’s very easy to follow a strategy of focusing on just that one game. If you’re number one, you have about 10 times the leverage of number five. If you have the chance of bringing one of your games to the top three, you should definitely focus on that one. That’s going to build your company, just like King or Supercell.

The problem is that numbers one through three haven’t changed in the last three years. They trade places a bit, but those three haven’t changed for three years. Three companies have held those three places for three years and they’ll probably hold them for three more years to come, because they have so much money to spend getting even bigger. All the rest of us have to live in a world where we can’t assume we’ll ever get to be number one, two, or three. In that world, a single game is not a valid strategy.

You can’t aim at being in the top five. You can maybe aim at being in the top 25. This is what we’re doing at Plarium and Playtika. We aim for the top 25, which is great. You can build a billion-dollar business that way relatively easily, if you know how to do it. But if you’re just trying to make one game and get to number one or two, that’s incredibly difficult, if not impossible.

GamesBeat: Given the chance to spread out, what do you think of virtual reality and augmented reality?

Levy-Weiss: I’m one of the big fans of VR and AR. I’ve played a lot with the latest gear from HTC and Oculus. That’s going to change the way we play games.

This was a bit of a grim panel at the outset, I think, and for the wrong reasons. We talked about rising CPIs and how complex and how difficult things are. But there is no other industry that’s as amazing as this industry. When you start building a game, if you get it right and you managed to build something fun, there’s nothing else in the world that grows as fast. Nothing else in the world gets you customer love like that. It’s a great industry to be in, and the next big platform in it is going to be VR.

I’ve played a few VR games and it’s totally immersive. You can’t stop playing it. If I had enough of them now, I think I’d be doing that for half of my day – if I were 15 or 16 or something like that.

Schliesser: VR is fun. But I have to see it to believe it. Someone will crack it, but I can’t do it myself. I hope that someone will be able to do it and we can follow.

Frankel: I agree. It’s very immersive. Personally, whenever I put on the goggles, I still get a little nauseated. But when I look at the history of games–You had very physical platforms like the Wii and PlayStation Move, and they had their audience. But they didn’t become a lasting part of the mainstream. Also, games where you have to wear a device to play, that’s a challenge, an obstacle. Most gamers, when you look at their play style, they don’t move that much. This is something where you have to put something on your head and walk around.

It’s a great experience. But I think of Imax. That’s a great cinematic experience, but do we watch most of our movies that way? I don’t think so. It’s going to be a very exciting platform, but I don’t think it will make it into the mainstream.