Will zombie and jewel games take PopCap to an IPO?

PopCap Games has been a consistent winner when it comes to making great games for casual audiences, or those who don’t consider themselves to be hardcore gamers. From Bejeweled to Plants vs Zombies, PopCap’s games are light-hearted and cartoonish, but they can be just as addictive as hardcore console titles. The difference is that they are lightweight snacks.

The beauty of PopCap’s titles is that they can be launched across a wide variety of platforms. PopCap’s Plants vs Zombies debuted on the PC and has been ported to the iPhone, iPad, and other platforms that are popular with gamers. Bejeweled Blitz, which lets you challenge a friend to a short game, has been a major hit on Facebook. PopCap has leadership positions in desktop, online, mobile and console games. As a result, it generated more than $100 million in sales last year and now has plans to go public in the second half of the year.

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Usually, game development companies don’t go public. They tend to stay small, focus on making one or two games at a time, and work with much larger publicly traded game publishers. But PopCap hopes to change that, and it still aims to focus on making “the most popular video game franchises in the world.”

As the traditional game industry gets disrupted by social network and mobile games, PopCap believes it can take advantage of the disruption, which is causing the consumption of games to go more mass market and more global. PopCap is quite comfortable monetizing its games via newfangled models such as free-to-play, micro-transactions, and freemium. And it is expanding rapidly to overseas markets such as China. Overall, the company has more than 400 employees.

We sat down recently with PopCap chief executive Dave Roberts and co-founder John Vechey. Here’s an edited transcript of the conversation.

VB: Give us an overview on PopCap.

DR: We have six big franchises that sort of define us. We are all about games first and foremost. We are starting to release some revenue numbers now. So we did more than $100 million in revenues last year. We have more than 400 people. Our mission is to sort of create the most popular game franchises in the world. We deliberately chose not to put the word “video” in front of “game.” There has been a kind of stigma around video games and we want to make that go away. It’s gotten better over the years, and people now think of video games as more accessible than they used to be. We are certainly not done yet. One example is the stock market. Video game stocks were steadily rising until the recession hit in 2008. They have been slow to recover. But as online games rose in Asia, the value of the Asian game companies has risen dramatically. The same thing has not happened here. Here, people seem to classify games as part of a larger entertainment and media business. That doesn’t take into account that the core audience is shifting from hardcore gamers, who are maybe 14 percent of the population, to everybody.

VB: Do you view the rise of the Chinese game companies and their rising stock prices as rational?

DR: Some of it is probably irrational. It’s hard to say not really knowing enough about it, but certainly it is well hyped.

VB: It makes sense that the Chinese game companies embraced free-to-play games earlier and that means they have more potential going forward. Is that right?

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DR: I think the business model makes more sense. I get the message that the free-to-play business model looks very promising compared to the slow growth business models of media companies and Western console game makers. I think the market is very hungry for a good way to invest in games. That is why some are flocking to the Chinese game companies. I don’t know if there are better alternative game investments in the U.S. Over here, the demographic is changing. You can see that the population is aging and the demographic of people playing our games is aging as well.

It’s no longer about somebody going to the game store and buying a game from the retailer and not directly dealing with the publisher. We are starting to want to have a relationship with our customers. That’s obviously a big trend. You can see we have gone from subscriptions, purchases and try-before-you-buy to new models. We have free-to-play, micro-transactions and freemium games. It’s not about picking one business model and sticking to it, but trying multiple strategies. The same game can now have many different price points across different platforms.

We have more platforms whereas we used to be very PC-centric. Now of course the world is more connected, people are playing across platforms, mobile is getting more popular. The game universe is shifting, all in a way that looks a lot more like Asia than it does the West. So if you look at this I think our equity numbers are reflecting the fact that the outlook for the Western companies has been flat, with slowing growth in PC and console games. Social and mobile are growing. At the Game Developers Conference, all we heard about was social and mobile everywhere we went.

So first what that means is the way you succeed now is starting with great game mechanics. That is still critical. Think about four years ago. How many business plans did you hear about where they were going to do iPhone before Facebook? Not very many. Now you are just tripping over them. It’s hard to predict which platform will be hot next. But if you start with great games, you can have the opportunity to take your games where you need them to be. Multi-platform strategies mean mobile, online, and social. We also think Asia is finally going to become part of the global market. It will no longer be fragmented or separated from the rest of the game market.

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VB: What do your revenues look like?

DR: We are releasing more details now, with more than $100 million in 2010. We have Bejeweled accounting for about 40 percent and about 20 percent was Plants vs Zombies.

VB: What trends are helping you? In this business, my pearl of business wisdom is that you have to be smart, lucky and good. If you miss two of those, you’re in trouble. Hopefully we’ve got all three now and then at PopCap. We are focused on great games. The smart and lucky part has been our investment in new game devices such as the iPhone. There are now tens of millions of people playing games on devices that didn’t exist three years ago. It has singularly changed what we have done. The iTunes Store makes the iPhone so much more successful as an app distribution mechanism. Google Android is still too fragmented and is not yet a good buying experience. Hopefully they will fix that. The big trend is social gaming. Zynga has done a great job with that. We are happy they have brought hundreds of millions of people in to gaming on Facebook. That makes us a lot happier because we can sell them a copy of Bejeweled.

VB: What platforms do you favor?

DR: We have four major platforms. The desktop, which is basically any unconnected game such as for a PC or Mac game. We have the online web games, which is now driven by Facebook but includes other web games. The mobile business is transitioning to smartphones and tablets. And then the console business is split between online games like pure online plays like Xbox Live Arcade and retail games such as the Nintendo DS. About 80 percent of what we do is digital distribution and the rest is retail. Five years ago, a third of our business was mobile, but on feature phones. The makeup has changed a lot now. Desktop has gone from 60 percent of our business to 38 percent. Facebook is most of our online business now, as we started monetizing Bejeweled Blitz last year. More surprising is that we used to be 1 percent to 2 percent of the PC game market. With Plants vs Zombies, we became the eighth-largest PC gaming publisher in North America. We are now ahead of Microsoft in PC gaming.

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If you look at Facebook, Zynga is huge. We are the third-largest game company on Facebook on a daily basis. We have that with two games. CrowdStar is No. 2 with 18 games. On the iPhone, Apple tells you who is the biggest revenue producer of the year. On their top ten list, we had two games. No one else had two games on that list. So we are in a leadership position with all of these categories with the same brands.

Geographically, we have 400 people including about 90 in Asia. About 25 percent of our revenue is outside North America and we are trying to see that go to 50 percent. Social and mobile are leading the way for us in Asia. The social business has been going crazy, and we have huge expectations for what we are doing in Asia. Our Java/Brew business peaked in 2009 as iOS revenues rose.

With social, we think great games finally matter on Facebook. That wasn’t the case two years ago. Our revenue has gone from zero a year ago to a million dollars a month in August to $2.5 million in March. Bejeweled Blitz is played 2.5 billion times a month. More than three-quarters of the orders we get are people who have bought from us before on social. We are not tricking them to buy once. They are actually coming back to buy stuff. That’s exciting for us.

If you profile the top ten games on Facebook this year and compare that to last year, those games lost 36 percent of their daily active users. Bejeweled Blitz gained 33 percent. Bejeweled Blitz is No. 11 on monthly unique users on Facebook and on a daily basis it is No. 5. That ratio tells you how many of your users come back every day. Bejeweled basically got a third of its users to come back every day. That is the best measure of engagement. It’s really remarkable when you think about how the game mechanic of FarmVille is to get users to come back every day. Our game mechanic is just plain fun.

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VB: What are you doing in Asia?

DR: We have been in China for four years. We have scores of employees there. It isn’t just about getting cheap labor. We let the local studio control what they do there. Almost no one else has succeeded in the Chinese market, as a Western company. Plants vs Zombies is a runaway hit there. There’s a sitcom around it. It’s crazy. There is an opportunity there to turn popular games into popular brands. We were told that zombies wouldn’t fly in China. But it did. We have four tent pole projects in Asia. We are in the PC online space, working with NCSoft in Korea on PopCap World. That will launch this year in Korea and if it works we will take it to other territories. We have two social networking games, a Plants vs Zombies game with an unannouncd partner and then a Zuma Blitz game with another unannounced partner. Those will come out this year. The fourth is a mobile social game with Taito and Gree in Japan.

VB: It looks like you are still going at a slower pace in Asia. If you were Zynga, you might do six games a year with 90 people there.

JV: We are the tortoise wherever we compete.

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DR: No one ever accused us of being fast.

VB: That strategy will work for you in Asia?

DR: There are different beliefs about the pace of introduction of games. Over there, they tend to pump the games out faster. Or they are refugees of Western game companies, which have done a terrible job dealing with Chinese developers and stripped them of their creativity. Some of the work is unlearning bad habits. We are patient. We tell them this is their game. You control the quality of it. We don’t want them to listen to a drone in Seattle. They want to do a good job. We’ll have more multiplayer gaming with PopCap World. NCSoft has been great to work with. In Japan, we will connect our Java/Brew games with social features on Gree’s network on feature phones, which are the dominant platform in Japan now. We are pretty excited about that. Zuma Blitz is a much more direct translation of what we have on Facebook.

VB: So the 4th and Battery label got a lot of attention. What was the thinking behind it?

JV: 4th and Battery is just a creative outlet for our studio. If you think about it from the studio perspective, we have a problem. If you say in order to release a game, it must be as good as Plants vs Zombies, we’re kind of f*****. When you look at the success of one of the great companies of our time, Pixar, they have short films. They can make short films as a creative outlet. They may release them with the movies. That is their proving ground. We don’t have anything like that at PopCap. That is what 4th and Battery (named after an intersection in Seattle) will be. There is no business plan. I don’t know why we did a press release on it. We blew it up into too much. Our team needs a way to have a creative outlet and release games to customers, even if it’s just a cool idea and not a full-featured game.

VB: Is that a part of PopCap that could issue a lot more games?

JV: We could. It’s a creative solution to one of our creative problems of trying to do prototypes for experimental game play. So three or four times a year, the studio can do projects and then shut down for a bit and do these experimental things. They can try to get prototypes out.

VB: And if you are like Disney and you own the Miramax label, you have (or had, as Disney sold off Miramax) a way to get R-rated movies to the public?

JV: Exactly. That’s a really good analogy. It’s not like we’re going to do a lot of violent games. Maybe we’ll do niche games for a particular audience. We are just releasing games that we feel are cool and fun and don’t quite fit into our major label.

VB: So 4th & Battery isn’t releasing major new intellectual properties for PopCap?

JV: We are literally just releasing games on platforms like iOS because we feel they are cool and fun. They won’t fit into more of our traditional game styles. It’s not really more complicated than that. We don’t want it to have the same expectations as PopCap does.

VB: Apple didn’t approve the [Unpleasant Horse] game. You won’t have that problem if you went to Android.

JV: We submitted it and they didn’t approve it. Your horse or another horse goes into the meat grinder. They didn’t like that. It was really just a 24-hour game jam idea that was turned into a game.

VB: It’s cute.

JV: Up until the meat grinder. Cute but a little violent.

VB: Don’t you want to take it across a bunch of platforms?

JV: No. It’s just to get a creative outlet. It’s not going to be a business. For that, iOS was fine.

DR: If it were the next Angry Birds, we would treat it differently. We only announced it because we figured if people found out about it, they would think we’re trying to hide something because it was mature-rated.

VB: What is your plan for going public?

DR: We want to go out before the window closes in 2010. It’s like in December, no one goes public because the markets shut down. If you are not out by November, you don’t want to go out. There are strategies for going public.

VB: Do you want to have a regular cadence of releases?

DR: No, we are never going to do that. When I talk to investors, I tell them that our revenues are not fueled by new releases. They look at us like a manufacturing organization with a pipeline of new products We don’t look at our business that way at all. We are ten-year-old company with six franchises. We have been very good at predicting our quarterly revenues for five years. We are not about blockbuster projects. We have a lot of games in the works at once. The studio is 220 people working on 30 projects. All of them will move around in the schedule. No single project changes the whole company. Plants vs. Zombies was one of our most successful franchises ever. But in its first year, it was a small part of our business. Over time, it is not about hitting a ship date on a big title. It is about building out a franchise over time. That is the thing that takes the longest to explain to investors. They get it, but it takes time.

VB: Why is it a good time to go public?

DR: One of the good reasons to go out right now is that investors are dying for something around Facebook, something around mobile. They cant find the vehicles to put, if you want to invest in those sectors, money to work. There is really nothing. Everything is private. We are an outlet for big public funds that want to be in those markets.

VB: How do you reduce the risks for investors?

DR: We have portfolio diversification. You take your games across a matrix of platforms, products, and geographies. You then find that no single product accounts for a huge part of your revenues. It’s like a balanced stock portfolio. Sometimes we invest in winners and sometimes in losers. But over time, we are good at beating the market. We start with great games. The iPhone and Facebook were not part of the business plan four years ago. We were in early on the iPhone and later on Facebook.

VB: Do you need to own your distribution?

DR: It’s less about owning distribution for us than it is about managing the publishing relationship, managing relationship with the customers. We used to be just a studio. Now we have added a publishing, or sales and marketing group, which can work with the studios to run the business based on the unpredictability of our games. If you know a game is going to ship in six months, it gets a lot easier to market that game. Software has never been predictable. Games are even more unpredictable. The business people are used to that. We don’t blame a game studio when a game slips behind schedule because we know games slip. If we control sales and marketing, then we can do a lot better job with the products. We still use partners for distribution. Wal-Mart is a great distribution partner of ours. Facebook is another. Apple is another. We are more than happy to give them their cut of the business.

VB: What do you think of the relative valuation of companies in the market. Zynga is reportedly valued at $10 billion and EA is $6 billion. Why does that make sense?

JV: We don’t get hung up on that. We are very competitive. We focus on ourselves and how to become better. Do we spend a lot of energy coming up with a calculation on what we are worth relative to Zynga? It doesn’t seem like a good exercise.

DR: One has to be careful about believing valuations based on the secondary market. I am not saying Zynga is not valuable. I think it is a very valuable company. Nobody believes that that really is an appropriate market evaluation. And likewise you have to be careful when small pieces of equity are raised by companies. If Microsoft invests $50 million in something, they don’t care about the valuation because it’s a small amount of money to them. That doesn’t mean the rest of that company is worth a lot. I don’t think we’ll ever know Zynga’s true value until it is public. The same is true for PopCap. That’s when you know what a company is worth.

VB: Why go public, given the options?

JV: Preparing to go public gives you a lot of options. You don’t have to go public. You can be acquired by someone else. There are costs. But 80 percent of those costs are beneficial, like the requirement that you have outside board members. Getting a chief financial officer is very valuable.

VB: You want your employees to be happy.

DR: That’s a consideration. We are a ten-year-old company and a lot of employees have been around for a while. You want to have some form of liquidity for them. Otherwise, it’s not fair to them. It backfires if that is the reason that employees come to work for you. If they think you will go public, they come to work for you. If you don’t, they wind up quitting.

JV: Zynga has a lot of work to do. For the valuation they are getting now, they have to grow into it as a company. From a culture standpoint and a product standpoint. They have a great runway of market and profit. They have a lot of market advantages. But they have to overcome a lot of hurdles. They have to make it a great place to work.

DR: Free food isn’t enough sometimes. Cold and rain helps.

VB: Are you as excited about mobile as many of the venture capitalists are now?

DR: We’ve always been excited about mobile. It’s a third of our business and has been that way for a long time. Not many companies can say that. We are very excited about where we are. We understand the pitfalls of it. We learned that we don’t like the word “port.” It’s a bad word. If you just port a game to a new platform, like a new phone, you end up with a suboptimal experience. That is what happened with some games that were successful on Facebook. They were ported to the iPhone and didn’t succeed. It took us a lot of years to figure out the balance between the crafting you do to preserve the original game mechanic and the notion that you want to make the best use of the platform like the Nintendo DS or the iPhone.

VB: The tablet market is also exciting?

DR: We love the tablet market. The Android market may actually work out better on that front. A lot of the new hardware is getting slammed for having high prices. There may be issues there. But we like it when multiple companies succeed and launch something that has a really capable game platform.

VB: What did you think of the IGDA’s beef with Amazon.com on pricing contracts for games?

JV: I completely agree with the IGDA. They’re not making things up. They had the option of dropping the price whenever they wanted to. That’s different from Apple, where you can set your own price.

DR: I haven’t seen the original contracts. But it’s the same problem the casual game developers had with the casual game portals in 2004. The portals wanted to use the games as loss leaders to get people to visit the portals. It was bad in the long-term for the ecosystems of the portals if developers can’t make money on the portals.

VB: Your summary message is that it is good business to be a good game maker?

DR: I think it has always been. It’s funny. There are always a lot of people chasing pots of gold. They want that easy and free path to wealth and riches. That drives a lot of people. But there is a huge chunk of people who do it out of passion and the love of games. Both of those things can happen.

We’ll be exploring the most disruptive game technologies and business models at our third annual GamesBeat 2011 conference, on July 12-13 at the Palace Hotel in San Francisco. It will focus on the disruptive trends in the mobile games market. GamesBeat is co-located with our MobileBeat 2011 conference this year. To register, click on this link. Sponsors can message us at sponsors@venturebeat.com. To participate in our Who’s Got Game? contest for the best game startup, click on this link.