Gree searches for the billion-dollar game from its swanky S.F. headquarters (interview)

The mobile gaming world is getting bigger and bigger. Just take a look at Japan’s Gree, which reported revenues of $1.6 billion and has set up a huge U.S. headquarters just outside of AT&T Park in San Francisco. The company has 450 employees working in the long building, which features a cafeteria on one end and a long set of desks leading to a bunch of glass offices at the far end. They are the foot soldiers in Gree’s expansion into the U.S., where the competition is fierce but the riches are waiting. To find more developers, Gree is investing $10 million in third-party games.

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Within the building are hundreds of mobile game developers, headed by Naoki Aoyagi (pictured above), chief executive of Gree International, the overseas subsidiary of the Japanese parent company. Some were part of acquired companies such as Funzio, maker of games like Kingdom Age, Modern War, and Crime City. Those games have been out for months but have been steadily producing revenues in the top grossing charts on the app stores. The hope is to one day have games that generate $100 million a month in revenue.

Last year, the company experimented with new games and heavy advertising. It spent heavily on user acquisition, driving up costs for its rivals. And it acquired, expanded, and then shut down the OpenFeint social mobile gaming platform. While Gree started as a social network for mobile gamers in Japan, it is now driving deep into content.

And it has set up an enticing headquarters — with sofas, arcade machines, and a fancy kitchen — to recruit more developers. The goal is to recruit and retain employees in the fiercely competitive San Francisco gaming market, which is ground zero of the digital gaming revolution. The goal is to come up with a billion-dollar game and stay ahead of rivals such as DeNA, Electronic Arts, Supercell, Rovio, Zynga, and GungHo Entertainment. Gree is moving into all sorts of game genres, including the social casino slot machine business and hardcore titles like the upcoming War of Nations.

Will the company come out on top? It’s Aoyagi’s game to win or lose. We took a tour of Gree’s headquarters recently and interviewed Aoyagi there. Here’s an edited transcript of our interview.

GamesBeat: What are your priorities?

Aoyagi: We’re working on some different games. We have the existing games from Funzio (which Gree acquired for $210 million last year) — we’re upgrading the engine – and we’re also working on new stuff. War of Nations was the game we showed at the Game Developers Conference. It’s our hardcore strategy game. I think that the hardcore gaming users in the tablet market are going to be the hot topic coming up. Everybody’s working on mid-core stuff, as well as the next Clash of Clans (Supercell’s hit game, which is generating $2.4 million a day in revenue), but what we’re doing is different from the others.

GamesBeat: By “hardcore” games, do you mean games that play for a much longer time than mid-core?

Aoyagi: We still want to capture both the mid-core and hardcore. We see a lot of potential in the iPad and the Mini. Hardcore users are going to play more games on tablet. That’s our bet. Still, for the mid-core, we have games from Funzio that are doing pretty well. We can do more with those engines.

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GamesBeat: So more hardcore than what Funzio does? More hardcore than mid-core?

Aoyagi: Still mid-core to hardcore. We’re also working on some casual games, casino games. Our strength, from acquiring Funzio, was more mid-core, but now we’re trying to expand on both the hardcore side and the casual side.

GamesBeat: How many of your games are created here in San Francisco?

Aoyagi: Our titles for the western market are mostly developed here at this studio. We’re working on some titles at our Vancouver studio that we set up last year, but most of them are in development here. Our portfolio studios are mostly focused on their local markets. The Korean market’s gotten pretty big now. It makes sense to focus on those local markets.

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Part of that will be working with partners who fall under our partners fund, like IUGO, the developer of Knights & Dragons. That game’s climbing up the charts. It’s around 40 or 50 right now. That was a publishing deal with IUGO. We did an investment and worked together with them on the title, introducing them to monetization techniques while they developed the game.

GamesBeat: We had our mobile summit last weekend. A lot of people were talking about the Asian mobile messaging services, like Line and Kakao. WeChat may at some point add games. A lot of people have some hope that those will take off in the U.S.

Aoyagi: Yeah. That’s an interesting topic right now. In the past, social networks became a huge market for game developers. Based on what happened in Asia, that might be the next market. But still, in the western market, we don’t see those services taking hold yet. I know Kakao is trying to expand, and so is Line.

The most successful case, in terms of combining a messaging app with games, is Kakao. Line is still focusing on expanding its user base. Kakao did a great job creating a market. Most of the Google Play titles are actually on Kakao’s network. That’s pretty impressive.

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GamesBeat: Yeah. The top-grossing worldwide titles are all there.

Aoyagi: Right. Puzzle & Dragons from Gung Ho, games on Kakao’s network, and WeChat, those are the three big things in Asia over the last three or six months.

GamesBeat: Those platforms seem a little heavy on the taxation, though. Half of the revenues go to the platform owner.

Aoyagi: Yeah. 30 percent to the store, and then half of the 70 percent, so the developer only gets so much. But the distribution power of Kakao is pretty strong. It still makes sense for those app developers. It might limit the potential market. In the past, NTT Docomo did a great job. They only charged 10 or 15 percent, and because of that, the market expanded to an incredible size in Japan. If Google or Apple or Kakao were to do something like that – jointly, even – it would be a great thing for the ecosystem.

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GamesBeat: If Puzzle & Dragons succeeded all by itself, without the help of those networks, it might change something.

Aoyagi: At the same time, we’ve seen the power of the platforms and the networks in those games. We have some games – mid-core games and casino games – where we’re building in a lot of cross-promotion. That’s been really powerful, even with a smaller number of games. If we can form those alliances, like Kakao is doing, or like ChartBoost is trying to do, that’s powerful. It can generate a lot of traffic for free.

GamesBeat: It might be nice to have the game-focused mobile messaging networks take off in the U.S., but it will take a while.

Aoyagi: Right. Or it might never happen. This market is more competitive than the others. Europeans and Americans never got into the Asian market. Only those local Asian companies had a chance to grab market share. They’re good at that combination of social networking and games in general from back 10 years and more, like Gree, DeNA, and Tencent.

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GamesBeat: I didn’t hear any games stuff in the Facebook Home announcement. Did you pay much attention to that?

Aoyagi: No, I didn’t, but I should have.

GamesBeat: It seems like a way to get something that happens — a notification — in front of the user on a full screen pretty easily. If that’s a notification from a game, maybe that’s good for games.

Aoyagi: Yeah, that makes sense. That might be powerful. Facebook, Twitter, those social notifications are one good source of our user acquisition and engagement.

GamesBeat: But they didn’t talk about that much. I sent a message out to everybody that I know, spammed everybody saying, “What do you think of Facebook Home?” I only heard from maybe three people, and they all said, “Yeah, it could be good.” The message didn’t really target game developers or publishers.

Aoyagi: They don’t talk about games much, no. We’re still working with them, though. We’re trying Facebook ads. The benefit is the notification and the targeting. Those features on Facebook are still really valuable. They’re trying. With Home, I think it’s the Facebook approach — start with something small and then see what works. If it works, we can take advantage of it.

GamesBeat: You guys had a setback with the shutdown of OpenFeint. It made a lot of developers angry. What’s your thinking on platforms?

Aoyagi: We still have a mission to build a platform in the mid-term, but now we’ve decided to step back and focus on making games, at least in the United States. In Japan, we’re still working on platform stuff, but the approach might be a bit different. We’ve seen that the messaging app is evolving. Instead of making a comprehensive gaming network platform, we can try other approaches. We still have an ambition there, but we’ve decided to focus on other things. With this U.S. studio, we’re working on games.

Since we made that transition over the last year, we’ve enjoyed growing revenues. We’re going to disclose a new forecast in May, in a month or so.

GamesBeat: Third parties and first-party, what sort of mix are you using there?

Aoyagi: First-party is growing. Of course, third-party is growing, but the growth on the first-party side is much faster. I’m happy with that.

GamesBeat: Did the absence of the platform impact the third-party side?

Aoyagi: Actually, no. Not for all the third-party games, but some games, we’re sending traffic from our first-party games. They’re getting users from that direction. Instead of making a comprehensive platform, we’re focusing on the cross-promotion among those top-grossing games. That’s been effective.

GamesBeat: What’s working well now? You had a whole list of all those monetization options, Chartboost, and whatever. What helps you the most when you’re trying to cross-promote and trying to make money? NativeX, W3i, they announced what they call a NativeAd, which is more of an in-game ad, with 65 percent of it created by the developer and 35 percent created by the advertiser. It’s more like part of the game.

Aoyagi: In-app purchases and in-app billing are actually the biggest part of our revenue. The ads are not so significant yet. On the monetization side and the user acquisition side, we don’t rely on anyone else. We’re working with a number of people and we’re trying to optimize that, but we don’t look at one channel or another and say, “Yes, this is working.” I don’t see that in any of them.

The most successful thing we did in the last year is actually picking up all the monetization stuff with Funzio. Modern War, Kingdom Age, Crime City, those titles are coming back on the top-grossing charts. What we’re doing is, of course, user acquisition, but we’re also introducing new monetization techniques, live ops, and more staff. That made that increase in revenue happen. Modern War made it to number two in January and number three in February and March. Of course, there are still two games up there — Clash of Clans and Candy Crush Saga.

GamesBeat: Have they set a new standard, do you think?

Aoyagi: In 2012, we could make it to the number one spot. Now, those top two games are making a lot of money. A billion-dollar annual revenue title could be there. Puzzle & Dragons is close to that as well. Their growth in the western markets and the rest of the world is pretty big. The Japanese market, at some point your growth is capped there. But I think we’ll see a billion-dollar title pretty soon. Next year at the latest.

GamesBeat: Rovio’s revenues are interesting to look at as well. They’re getting so much more profit from licensing, plush toys, and all that.

Aoyagi: That strategy games sense given that they have so much audience, so many daily active users. It’s good to have those other ways to monetize. It’s an advantage to making those strong IPs and characters. You look at Disney, they’re doing pretty well in the game space with Marvel and all those other titles.

GamesBeat: Toys might be the next big business.

Aoyagi: We’re doing that in Japan, actually. We recently introduced some character goods from our more popular titles. It’s similar to what Bandai Namco is doing. They’re pretty good at that with Gundam and the like. We have a cartoon coming out in Japan, even, based on Clinoppe. That’s one of two animation projects in the works. The games business is very iterative – we need to make new games every year – so if we have those other ways to monetize, that’s a way to stabilize our revenue and growth.

GamesBeat: It’s been interesting to see what’s happened in the traditional games business, with THQ and Atari and LucasArts all running into trouble.

Aoyagi: Square Enix, too. It’s very sad.

GamesBeat: The pace of the transition seems to have picked up.

Aoyagi: This year is going to be more accelerated by the arrival of the Mini with the seven-inch screen. The iPhone and the iPad are both pretty big markets already, but the revenue from the iPad is even bigger than the iPhone side. On the Android side, the tablet market still isn’t a huge market. If we see a big introduction on the Android tablet side, that’s going to be big. In the western market, including the U.S. and the U.K., the iPad is bigger than the Android tablet, so developers are still saying iOS first, even the ones making hardcore games for tablets. But if that tablet market takes off, the Android market will be pretty big. Developers will start picking Android first, instead of iOS.

GamesBeat: Are you interested much in the Android hardware devices, like Ouya or GameStick?

Aoyagi: They’re interesting for gamers, but casual, non-gaming users are still going to stick with iPhone or iPad and the like.

GamesBeat: Some people have pointed out that the TV market is kind of small. If you think of all the console gamers, there’s maybe 200 million. You have a billion mobile gamers already. What’s the motivation in trying to take over the TV audience when there’s already so much competition? For the next few months, for 2013, what are you expecting for Gree?

Aoyagi: For Gree, we’re going to have a big quarter. We’re going to have many different games launching. It’s an interesting time for us. We’re also going to distribute some new games in the Korean market.

GamesBeat: Are those going from the U.S. to Korea, or Japan to Korea?

Aoyagi: From Japan to Korea and from Korea to Korea. We’re expanding globally. The western market is first, and then the Korean market.

GamesBeat: Is that going on Kakao?

Aoyagi: Yeah, both Kakao and also [some proper names – 25:42]. We’re going to try both, but I’m pretty interested in working with Kakao. So that’s what’s interesting with Gree this quarter. We’ll have some games from this studio as well, from casual to mid-core and hardcore.

GamesBeat: So social casino gaming is still a good business to be in, even though there’s a hundred companies in it?

Aoyagi: Some companies had the early-mover advantage in casino games. Now that we’re entering the market, we need to break that by introducing higher-quality games. We’re also going to leverage our existing user base. We introduced Jackpot Slots on iOS and Android and it’s been doing pretty well. The Android side is in the top 20. The iOS version just launched and it’s climbing up the charts.

With that market, everybody thought it was already crowded, but they introduced very basic casino games. Now we’re trying to introduce some more interesting monetization and live ops techniques. The retention rate has been a bit higher, and that allows us to spend more money on the marketing side to generate bigger revenue out of those games. That’s our high-level strategy with casino. We’ll be making more games there.

GamesBeat: Do you think the startups are going to keep on appearing and becoming successful? Supercell is something you might not have expected at this stage, when there are so many big companies that have moved into mobile. It’s surprising to me that something could start small and then boom.

Aoyagi: We’ve seen that in many regions. Puzzle & Dragons was a good case. GungHo was an online gaming company that suddenly made a move into mobile games and made it work. Companies that are coming from Facebook and online gaming have a lot of potential.

The gaming industry is very hard, but the veterans in other areas still think there’s some space for those new companies. I’m optimistic that we’re going to see more of those new companies coming into the market. But the overall market situation, I agree, is getting tough for everybody. It’s why we set up the Partners Fund, so we can support some companies like this. As long as you make great games, you’re going to find users, whether it’s by featuring from Apple or Google or creating user networks. What we need to do is focus on is making great games.

GamesBeat: Kabam set up their $50 million fund for Japan. We’ll see if they give that out.

Aoyagi: [laughs] I heard about that. Kevin Chou is going to be traveling to Asia. I’m going to meet him in Japan in a couple of weeks. They have an office in China. Actually, a Chinese studio developed their mobile version of Kingdoms of Camelot.

GamesBeat: If they’re doing anything, I think they’re diversifying so they can eventually go public. Zynga tried that, though, and the Japan part didn’t work so well for them.

Aoyagi: Right now I think they’re trying to pursue other revenue sources. They only have Kingdoms of Camelot and The Hobbit. I understand what they’re looking for. A lot of Japanese game developers have an ambition to go global.

GamesBeat: It was interesting that this year, it was the mobile companies that were the ones throwing the big parties. Kixeye and Chartboost. Wargaming is kind of moving into mobile.

Aoyagi: Yeah. Kixeye is going into mobile too. That’s an interesting move.

GamesBeat: We wrote a story that Square Enix was selling off their free-to-play games to a private equity company in Los Angeles. I don’t know how much money they paid for them. But it’s like they’re throwing the oars out of the lifeboat. I thought free-to-play was what was supposed to save the console guys.

Aoyagi: Some of them, maybe.