Europe Meets China: In Conversation With The Atomico Gaming Team

You can download a full copy of the report, 'Europe Meets China: How the Games Industry is Evolving' at the Atomico website

What sorts of shifts are we seeing in terms of the gamer demographics, and what do you think are some of the big drivers of those trends?  

The most obvious shift has been the huge expansion in the number of players. I think if you go all the way back, games started as a pretty niche market, particularly if you think about people who played Dungeons and Dragons-type games, then arcade games. I mean, you used to have to go to the arcade to play and then, for a long time, the big dream was, "Oh, how can I get an arcade-type experience into my living room?" and so what happened was the emergence of the living room type games. And that was either for the first computers or the first consoles, the Ataris and then the Nintendos that evolved into the xBox and PlayStation and all the other platforms of the 90s.
 
These were all games, though, that were - for the most part - targeted to a very specific audience of young, male teenagers. And so during that period games while there was a growing market, it was very much perceived as something for male teens. Of course, there was a small subset of games which were also seen as having potential appeal to female players, and this started to increase a little bit with music games, dance games, and that sort of thing, but it these were never a very big part of the industry.
 
When games went online, especially with the advent of browser games, initially that trend continued, but the demographic profile of gamers started to expand a little bit. I think there are a few things that changed it;  one of those was the advent of free-to-play. We need to remember that before this, in order to play a game you had to spend a few hundred dollars on a console, or if it was on a PC a few thousand dollars, and in addition you had to pay 50-60 dollars for the game...which kind of limited the audience.
 
But when games became free online, a lot more people started playing. Because if you wanted to play games for free beforehand, you had to commit acts of piracy, and piracy again is something that only teenagers that really want to play would bother doing. So I think that was the first thing that helped expand the number of players. Some of these popular browser games, like Stardoll, for example, were aimed at women, and there were also some games that weren't really being marketed as games at all, they were sold more as a mix of social network and games for children. For example, Club Penguin, which recently shuttered its browser version and transitioned to the mobile-only Club Penguin Island,  was once really big and actually ended up being acquired by Disney; you also had Moshi Monsters, that was also quite big - and all were browser games.
 
All these games had tens of millions of players, but none of them had hundreds of millions of players. The floor of the market, where most of the money was, was still young, male, adults. This all started to change with mobile games. Once everyone started having a phone in their pockets - and especially as smartphones became ubiquitous in the developed world. You mix that with super easy distribution - you click a button and you download a game - plus the fact that the games are free...it really kind of changes things in a radical way when it comes to distribution.
 
Another thing that mobiles changed is the type of games that one plays...they're no longer what I call ‘appointment gaming’. Appointment gaming is when you play a game on a console or when you play a game on your PC and you accept it's going to  take you a few hours - or days. The game is designed to make you play for a few hours; it's something you do on a Saturday afternoon. You basically have to schedule a meeting with yourself to go and play.
 
Mobile games, on the other hand, had to be shorter and more ‘snackable’ - battery limitations on early mobiles, along with other technical limitations, meant we had to start designing games you could play for a few  minutes or even seconds, usually in three to four minute bursts. And that meant the type of games that started appearing were completely different, and a lot less intimidating to players.
 
So you start having games that can be hugely mass-market and that were interesting not just for male players but also for female players, many of whom didn’t even really know or woud admit they were playing a videogame. You ask a lot of people who play Candy Crush, they don't actually realise that they are ‘gamers’. And these are games that are played by hundreds of millions of players. That's a radical change that came with mobiles.
 

When it comes to the games industry’s growth, we've seen huge value being built out of Europe. Do you have a view on why particularly in the last decade Europe has been able to enjoy such success?
 
Free to play in Europe started in the browser market - for example with games like Habbo Hotel or OGame - but very, very, very quickly, with the launch of the iPhone, moved to mobile (after a short parentesis on Facebook). So I think basically Europe capitalised first and fastest on the smartphone mobile gaming opportunity.
 
Did it move faster than the US? It's hard to say. If you look at the US market, right now it’s almost as big as the whole European market, so from a customer revenue perspective or a market perspective, that's not necessarily the case. In terms of companies, though, I think if you add up all of the European mobile game companies’ revenue and compare them to the US mobile game company revenues, I think Europe is ahead. One of the reasons for that is that, although the iPhone is a US invention and Android is a US invention as well, Europe has always been a little bit at the forefront of mobile since the days of Nokia and Ericsson, and a lot of engineers and people that were very used to developing games for the previous generation of mobile phones were based out of Europe; a lot of small companies got created across Europe developing for these less powerful devices.
 
So when the iPhone came out it was very easy for all this European talent to start developing games for the iPhone, and they didn't have to start totally from scratch because of all their accumulated experience for developing for dumbphones or feature phones. I think that's one of the reasons Europe has an edge here, in terms of cost and development.
 
I mean, if you look at amazing studios like Supercell, a lot of the team are guys that were developing Java games that were 50k or so in size for Nokia phones. Same thing for the Rovio guys - if you look at Rovio, we all know that they launched maybe 20 or 30 games before they actually did Angry Birds. What we forget is a lot of those games were actually for Nokia phones, not smartphones. What this meant was that they really had the expertise around how to optimise graphics and gameplay to make titles work on mobile.

 
How would you describe the investment landscape for games as an investment category today, and how has that changed in your mind?
 
I think the investment landscape has changed a lot for games. I think typically before, when I was raising funds for a games company in 2007, 2008, 2009, it was extremely difficult if you were a mobile or browser-focused business, because investors felt that games were a hit-driven business and they were familiar with teams of 200, 300 people, millions of SKUs shifted, millions of budget…
 
What we were able to demonstrate at the time was that with a few hundred thousand Euros, you could actually build games in quite a systematic way that actually had a chance to make millions or 10s of millions, at the time at least, of Euros of revenue per year over a certain time period.
 
So investors at that time started seeing that games could actually be almost like a software as a service-type play; these are games you play for years and years and years and the revenues grow and people stay. So at that time, when investors started seeing this and they started seeing distribution channels like Facebook emerge, and the first stories of games companies starting to reach millions of players and then 10s of millions of players, then the sector became very, very hot.
 
Then what happened is that a lot of investors invested a lot of money and we began to see the first wave of IPOs like Zynga;  then Facebook basically pulled the plug on using their platform for viral growth, which was artificially inflating some of the game companies numbers. Then almost at the same time the market moved to mobile games, which led to the first mini-crash around investment into games. Investors said, "Oh, browser games, Facebook games, they’re over. The future is in mobile games," so a few investors moved into investing in mobile game companies and a few others simply gave up the sector because they got their fingers burnt.
 
Then you had what I would call the second gold rush, when investors started seeing the first successes in mobile games and seeing that companies were getting hundreds of millions of players playing their games rather than the 10s of millions we’d seen previously. This spurred a lot of investments into the space, and mobile games almost became, from an investor’s perspective, a victim of their own success; some companies had such a powerful position and such market dominance, and they started to spend so much money to protect that position that they effectively made it very hard for new entrants and other game companies to reach the same level.
 
So many investors who are less expert about what the games market is and how it works felt that everything has been invented now in mobile games and we have the winners - and that the winners, at least in terms of European companies, are Supercell, Rovio, and King. Funding for new game companies started to really decrease as a result, and I think now we're at the stage that there is some consolidation happening in the industry, and now some mobile games companies are appearing who are actually doing slightly different types of games.
 
That's one of the reasons investors are looking again, but it’s actually less a case of VCs actively looking at it and more strategic investors, such as large games corporates that know that there's still a lot of growth in the market that are investing into other studios so they can acquire them or take a strategic stake. You're even starting to see stock markets like Nasdaq First North saying, "Wow, these companies are actually high growth. They're profitable. They're quite stable if they have a portfolio of games," so you're seeing companies that aren't very big doing successful IPOs in some stock markets.
 
It's basically a very mixed investment landscape now for games. It's no longer a VC dominated or Angel dominated landscape.

What do you think are the most important future frontiers for games companies?
 
I actually think that, for the next four to five years, most of the revenue and most of the usage and most of the growth in absolute terms and most of the players will be in what we today call the ‘traditional mobile games experience’.  Games which are designed for anything between a few seconds and a few hours in terms of play sessions. I think VR is interesting, but at least for now is still in the category of ‘appointment gaming’ category. Even mobile VR, the reason being that the way the hardware is right now, if you're going to play a VR game it's not something that you're going to do for a few minutes, it's something that you're gonna have to invest a little more time in because just installing the gear and all that takes a few minutes. I think because of that it's going to stay niche for a while. It doesn't mean it will be very small, I think some companies will do well, but it will be niche compared to the mobile games market.
 
Whether in 10 years time you'll have amazing, immersive VR game worlds that are incredible, that's the first step that companies such as CCP Games are working on and it could happen that they become very big but I don't think think this is two or three years away. I don't even think this is four or five years away. I think this is much further away before it becomes so big it competes in terms of market size with traditional mobile games.
 
In terms of augmented reality, there's a lot of hype around the success of Pokémon Go as a mobile game that includes an AR component. What people forget is that Pokémon Go is more a location-based game that basically uses the fact that your mobile phone knows where you are, and much less of an augmented reality game. Most power users of Pokémon Go turn off the augmented reality feature because it consumes too much battery - the AR was a hook, sure, but it’s not a core gameplay feature.
 
I do think augmented reality has more imminent potential in terms of the size of the market if you mix it with location tracking and all of that, but...there will be some really interesting games created in the next two to three years around AR, and some of them might be hits, but I don't actually see it as a completely separate category yet. 
 
In terms of PC gaming, I think it's going to continue to grow at a much slower rate than mobile gaming, but it will continue to grow and be important.
 
Esports in particular will have a huge effect on this; what we're seeing is that most esports success stories, other than Clash Royale, are PC/ console-based. There will be some other ones that will succeed on mobile (Honor of Kings a mobile eSports game from Tencent is rumoured to be making over 400 million $ / month in revenues just in China for example), and whilst I know CCP and others are working on VR esports games, I see the biggest success for the foreseeable future will be PC and mobile, not augmented reality or VR.

What do you see as the opportunities and challenges for European game studios in terms of the Chinese market?
 
I think there are two points to make. If you 'just' want to be a large games studio, you can actually ignore the Chinese market; but if you want to be a world leading games studio you cannot ignore the Chinese market. I think it depends on your level of ambition for your studio. I mean, there are 600 million gamers in China. That's twice the population of the United States. That's why it's such a big market. It's just huge by its size.
 
The thing is I think you need to know when to go into the Chinese market, because it's a very, very difficult market for a non-Chinese company to enter. It's also extremely competitive. There's a lot of competition in China, a lot of local companies already competing with each other. Unless you are very strong and you bring something new to the market, something special to the market, be it IP or gameplay or knowhow or something, it's going to be very, very hard for you to do well in China.
 
I think it's probably one of the most difficult markets to enter into. But it's a market that you cannot afford to ignore if you want to be a world leader.
 
What do you think the future role of Asian gaming giants is going to be in the world wide games industry outside of China?
 
I think they’re going to be acquisitive. As you say, they've built their businesses in China for the most part, which is a market that still has a lot of growth, but it's equally a market that's extremely competitive for them. So for them to continue and accelerate that growth, it makes a lot of sense to try to expand across other markets, most notably the European and US markets, but we are seeing many of the same problems befalling Chinese companies seeking to enter these markets that European and American companies trying to enter a Chinese market have faced. 
 
You have a lot of Asian games that are major hits in Asia that are failing to become major hits in Europe and the US. There's a lot of reasons for that - culture, localisation, all that sort of stuff, but I think the multiples that they're getting on revenues on the Asian and Chinese stock markets are infinitely higher than the multiples that European and American companies that are public are getting, or the ones that are private that want to sell are getting.

A full version of this interview, featuring the whole Atomico games team, can be read on the Atomico website.

You can read and download the Europe Meets China report on the Atomico website here – sign up to the Atomico newsletter for monthly (ish) updates from us!