How China’s Perfect World plans to be a player in mobile games — and the West

Perfect World isn’t well known in the West, but in China, it is one of the powers that be among online game publishers. The company has more than 4,500 employees, making it larger than Zynga and not much smaller than Electronic Arts. It has grown huge thanks to its success with fantasy online role-playing massively multiplayer games that appeal to Chinese gamers.

But Robert Xiao, chief executive of the 15-year-old publicly traded Perfect World, isn’t content with that. And he’s making progress, with 30 percent of the company’s revenue now coming from international markets. We caught up with him at the recent Global Mobile Internet Conference in San Francisco, where he gave a speech on his heavy investments in mobile.

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In the past few years, Perfect World has gone international with the acquisitions of American Runic Games, C&C Media in Japan, and Cryptic Studios in the U.S. That has given the companies game properties that appeal to Western gamers such as NeverWinter, Torchlight II, Blacklight Retribution, and Star Trek Online.

Now Xiao is making a calculated move into mobile games.

Here’s an edited transcript of our interview with Xiao.

GamesBeat: What’s the latest on your business? How big have you become?

Robert Xiao: For the past two quarters, we’ve been growing. The potential is still there. Momentum is still there. Business is going well in the U.S. and in China. About 4,500 employees. The biggest news lately is that we’re getting into the mobile space. We’ve had initial success in China. The U.S. is coming up. Mobile is a very important initiative globally.

GamesBeat: How long ago did you start heavily investing there?

Xiao: A year and a half ago. In China, we built two games, different types of games. We tried a racing game and a lighter kind of RPG. The most successful of these was Return of the Condor Heroes, a 3D turn-based RPG. We’re building more sophisticated 3D MMO games in the mobile space. The project is getting bigger and bigger, and so far we’re seeing more success. We’ll continue to invest there.

GamesBeat: Are they starting to look similar to PC MMOs?

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Xiao: No, it’s still different, from two perspectives. First, the PC users’ time split is different from what mobile users do. I can spend an hour or two on the PC at night, but for mobile users, they’re spending much smaller chunks of time throughout the day. People spend bigger chunks at nighttime, but you still have to design the sessions to be smaller, shorter, and more intensive. Second, the user interface is totally different. Using a mouse and a keyboard is totally different compared to using a touch screen.

There are many other design issues. People’s purchasing behavior is different too. We’re developing more and more understanding of consumer behavior and building that into our design. The trend is to utilize our old IP in the online space, to revitalize those franchises, but even if the graphics are similar, the design is very different.

GamesBeat: How would you define success in the mobile market?

Xiao: Well, when we have a couple of games released and at the top of the charts, for Android and iOS, that would be one indicator. Revenue is another indicator, and the number of users, either DAU or cumulative accounts. For it’s probably the same as it is for everyone – chart ranking, revenue, and user base.

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GamesBeat: A lot of companies have had different experiences migrating into mobile. Zynga had games that would get 50 or 100 million users on Facebook, but it got smaller numbers on mobile. They couldn’t get enough money out of it to justify dedicating large teams to mobile. That’s also partly why they fell behind on mobile – they always felt like they could make more money out of a Facebook game. But now we’re seeing things like Clash of Clans doing extremely well, perhaps better than a lot of console or PC games. The question then becomes, how do you marshal your resources so that you can make mobile into a bigger business?

Xiao: It’s twofold. Number one is role models like Clash of Clans. People wouldn’t have believed that could happen until they saw Clash of Clans. They wouldn’t believe it in the age of games making, say, $100,000 in revenue per month. But if you look at what happened in China, at this time last year, a mobile game producing 5 million renminbi a month would be a big game. At the end of last year, a couple of mobile games were making 10 million RMB a month. That excited people. It showed that if you put resources into these games, they could generate real money.

Early this year, very soon after, we saw a couple of games earning up to 30 million RMB per month, and soon enough after that, they broke 50 million. That’s what you call a trend. [laughs] Luckily enough, we weren’t the earliest out there, but we weren’t too late. We started to invest gradually, because we do believe that mobile is a trend.

The same rules apply here as in any other business. If you have more people coming in, there’s always a chance to earn more money. The investment is not the key. The key is, if you invest a certain amount of money, can you attract a big enough cloud of users? If you do, then you have a way to make money from them. We see the potential for more and more people getting into the mobile space, people with disposable income. We believe there’s a lot of average revenue per paying user (ARPPU) in there. Furthermore, we believe we have the capability to build suitable games. With our technical and artistic expertise and our design capability, with our understanding of the consumer, we can build games for these people, and we can draw more people to join us.

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Because of all this, we believe we should invest ahead of the curve, and we’ve been doing that. We’re starting to see some return, and we’re going to invest more in hopes of a bigger return in the future.

GamesBeat: Do you foresee this becoming a certain percentage of your business, or engaging a certain percentage of your employees?

Xiao: It’s hard to say at this stage. We’re going to grow it as big as we can. Of course, we’re not blindly pouring every available dollar into this. We’re gradually investing and we’ll see what kind of returns we can get. It should reach a significant portion of our business within two years.

GamesBeat: I’ve had some interesting conversations with John Riccitiello, the former head of EA, about what brands mean in this space. A billion-dollar game in mobile is very impressive, but it doesn’t impress somebody like him, because he’s had brands under his control that made $10 billion or more over the course of a decade. The thing he would like to see mobile do is replicate the success of brands on consoles, where you have the same blockbusters come out every year and hold the number one position. He looks at Angry Birds and says that it had a good run for a few years, but it’s on the way out. You could predict that none of the games making up the top five now will still be in the top five in a year. Now, we may see something like Clash of Clans become that $10 billion brand, but that may be a long way away. I’m not sure what your perspective is on whether this will happen.

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Xiao: Either there’s a long way to go toward that, or it’s probably impossible. I see this as a different playing field. I’m always thinking about business fundamentals. The barrier to entry is a very important factor. Consoles have always had the highest barrier. Because of that, the people who got in to that market were very protected from competition by smaller entrepreneurs. It’s easier for a few giants to dominate there. The same is true for the PC. Mobile, though, presents a rare opportunity for entrepreneurs. Maybe, later on, some sort of barrier to entry will come up, but for now I don’t see that a brand a can last that long, especially the brand of a project.

The brand of a company, though, or a team or an overall producer, can become dominating. Or maybe not just one, but several. There are big brands in every field, but those brands aren’t the brands of a single project. We won’t see Clash of Clans last for 10 years. Angry Birds probably won’t last for five years. But maybe Supercell can become a big name.

To follow that, what we’re trying to do is not to build a brand for our projects, for our IP, but rather to build a brand around Perfect World. In that sense, we’re learning from a company like Disney. You know Donald Duck and Mickey Mouse and all of those characters, but the biggest brand is Disney. Disney could last for another 50 years.

GamesBeat: What about whether those brands become worldwide brands, versus regional brands? Historically, Perfect World has been a regional brand, in China. That’s been a great business. I’m sure a lot of people don’t realize you have 4,500 employees. Do you think that you can continue in that kind of business, or do you think that going for a global brand is important?

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Xiao: My focus, from day one, has been the global stage. We’re not the biggest in China, I have to admit, but we are one of the Chinese companies that’s been spearheading global branding and global networking. 4,500 is actually our global headcount. We have two offices in the bay area. We’ve heavily invested in two companies here – one in San Francisco and one in Seattle. We have offices in Japan, Seoul, Taiwan, Hong Kong, Thailand, and Malaysia.

We began spreading out a long time ago. Our goal is very simple. We want our products to reach all consumers. We don’t just want to create a brand. The baseline thing is to get our product to consumers and keep serving them. In many places – Africa, southern Asia, South America – we can’t do that yet. We’ll have to go through partners. But the number one thing is to get the product localized and to serve local consumers.

The second, then, is to build a portfolio of products and start to build a brand around that. We’ve been pretty aggressive in all the different markets I just described. That’s one reason I’m right here. We’ve been rather successful, over the last five years, as a Chinese company in the U.S. It’s time to start promoting our brand a bit more.

GamesBeat: If you observe any of the competition, do you see any lessons as far as how you should proceed? Some companies have acquired a lot of companies outside their territory in order to expand very quickly. Is that something you’ve thought about? You have made a few deals, but they’re not as large as some.

Xiao: We continue to learn different lessons, from our own experience and from our competitors. One of the biggest learnings we’ve had comes from when we started on this globalization process. We believe we have to treat every local office or local company as something local, rather than as a Perfect World company. We have to give them more autonomy. We have to use local people and local leaders. We have to empower them enough to operate in a local sense, rather than thinking that they’re just doing everything China wants them to do.

By doing that, we’re building a bunch of companies. Our U.S. company is a U.S. company that happens to be owned by a Chinese headquarters. The Japanese company is a Japanese company. It doesn’t even have the name “Perfect World” on it. That’s a philosophy we had in mind. The only way our subsidiaries can be successful is by competing with companies in their own market. We just provide them with enough resources.

When they’re relatively successful, as a global company we can leverage that success. We have publishing capabilities throughout the world now. If I have a strong game or a strong IP, I can license it less expensively and publish it throughout the world.

GamesBeat: There was a market analysis firm, the Corum Group, that said there are 30 companies in Asia that have at least $1 billion in cash and have already made game acquisitions. They suggested that was going to drive the trends in game acquisition for quite a while. It seems clear that Asia is going to become a lot more important games than it historically has been. Do you have any observations about that? There were times in the industry where there was a sort of geographic arbitrage that people could do. The French game companies, a long time ago, had a very high valuation. They were able to buy things like Atari and other companies that weren’t valued well. It’s an interesting phenomenon right now.

Xiao: Again, the business world is going up and down, up and down. It’s a cycle. In certain regions, valuations will be high at one point and lower at another. But I think the key, if you look at the fundamentals of all of this—You look at the major market these players are serving. If you anticipate that major market will be there, even if there are those ups and downs, the baseline will be trending up. Then the question comes back to, look at the world. Where are the emerging markets?

Major markets would be the countries or regions with the biggest populations and increasing disposable income – the U.S., Japan. There are hundreds of millions of people there. China is coming up. It’s emerging, but it’s relatively mature in many senses. Maybe India, maybe Indonesia. I recently visited Indonesia. There are hundreds of millions of people there. Once their disposable income reaches a certain level, the market will grow.

Asian companies will be a major force in the game industry for a long time to come. As far as mergers and acquisitions, it always happens. But it won’t happen in a designed way. You’ll see some companies operating well and some companies that make mistakes. If you make a big mistake, there’s the potential of being acquired. My anticipation is that, no matter what, in any given market you’ll have several big players coexisting at any given time. You might have more, but you can’t have just one or two. We could be one of those players – not only in Asia, but also globally.

We’re buying in China and the U.S., by the way. We’re shopping around the world.

GamesBeat: One interesting trend is that, with mobile messaging networks like Kakao in Korea–You could publish games on Facebook and make them go worldwide. But you might make more money just putting one game into Kakao. I wonder which way the world is going to build in that sense.

Xiao: To give you a simple answer, they’ll coexist. The populations they’re serving will be different. Or they’ll serve different needs for the same people. People sitting in front of the TV, in front of a PC, in front of a mobile device, they all have different needs. Different platforms and ways of entertainment will coexist.

My strategy is very simple. You have to look at different screens. Even the same person will be exposed to different screens, and depending on the screen they’ll have different needs. Or they may have similar entertainment needs that are segmented, that utilize different products. Also, it’s not only on the screen. TV or movies or literature or some other kind of experience might all come through the same IP or the same storyline. A book can lead to a console game and then a TV series or a movie or whatever. Content-wise, there’s always another axis to satisfy people’s different needs as well.

All this will coexist. We can’t just say, “Okay, TV’s come in, so there will be no more movies.” Just because Kakao is here, that doesn’t mean Facebook will go away. Facebook is a different way of life, and people will still use it. I don’t anticipate that consoles will go away for a long time. You can’t replicate that experience on PC or mobile. There might be a smaller number of people enjoying it, but it’s still going to be there.

GamesBeat: When you think about getting the Perfect World brand established, have you thought that maybe the quickest, but most difficult way to do that would be to make console games?

Xiao: I wouldn’t say building a console game is a quick solution. [laughs] But certainly it could be more effective. We’ll definitely think about it. Something like that requires an opportunity, a turning point where you can get in. We’re looking for that opportunity, either by acquisition or some other way. We’re looking into console game studios, to see if there are any good opportunities to invest. As I say, we believe that form of gameplay will always be there. Even if it’s very mature, if you see a good team and invest, they can build good games. It’s definitely a possibility.

GamesBeat: With Nexon, they seem to be picking very well-known game leaders for their new studios and investing in them, but for the mobile market.

Xiao: Mobile is definitely the key. It’s the future. You could say that console is the past, but it will still be there for a long time. That’s why I talk about a portfolio. You don’t just limit yourself to high risk, high return. You invest money in several formats. You maintain a balanced approach.

Back to your earlier question, building a brand is something you do over the long run. The goal is to build something sustainable. We don’t just want to take a big risk for a big return in two years. We’ve already IPO’d. We have a bunch of shareholders and customers to serve. What we want to do is gradually build the brand, and for that you have to be a sustainable business in a growth direction. Every strategy and every action we’ve taken, including building this portfolio and investing in the future and cross-platform handling of our resources, all this serves the purpose of creating sustainable growth in the years to come.