1. Please see analyst certification (Reg. AC) and other important disclosures on
slides 61-67 of this presentation.
Emerging
Trends
in
Games-‐as-‐a-‐Service
Atul
Bagga
Senior
Research
Analyst,
ThinkEquity
2. 2
London
Liverpool
Boston
New YorkChicago
Minneapolis
San Francisco
Doha
Bangalore
Mumbai
New Delhi
Geneva
Singapore
Global
Banking
&
Distribu2on
Capabili2es
Worldwide
reach
and
capabilities
of
the
Panmure
Gordon
Group
• 231
people
located
in
8
offices
in
the
US
and
Europe
• 45
investment
bankers
• 34
research
analysts
covering
over
450
companies
• Over
50
brokerage
professionals
making
markets
in
over
500
stocks
• 20
private
client
and
asset
management
professionals,
representing
$600
million
in
assets
under
advisement
• 135
affiliated
professionals
working
at
QInvest
in
the
Middle
East
• 165
affiliated
professionals
working
for
Ambit
in
India
and
Singapore
Panmure Gordon Group office locations
Panmure associations through QInvest (QInvest is a 46% shareholder in Panmure Gordon & Co.)
Panmure associations through Ambit Capital (QInvest is a 25% shareholder in Ambit)
PANMURE GORDON & CO
INTEGRITY IN INVESTMENT BANKING SINCE 1876
Quaker SecuritiesA Panmure Gordon Company
ThinkEquity LLC
A Panmure Gordon Company
3. Agenda
• Games-‐as-‐a-‐Service
– Lines
blurring
between
platforms;
Tablets,
Set-‐top
boxes
– Innovation
by
startups
• Virtual
Goods
– Perfect
Price
Discrimination
– Enhance
Community/Curb
Piracy
– Higher
quality
of
earning
(a)
Predictability,
(b)
Lifetime
Value
• Social
Games
– Vertical
Games
– Monetization
(a)
Conversion,
(b)
Advertising
– Platforms
dedicated
for
games
• Mobile
Games
– Rise
of
persistent
games
– Mobile
an
extension
of
other
platforms
– Dominated
by
a
few?
4. Agenda
• Games-‐as-‐a-‐Service
– Lines
blurring
between
platforms;
Tablets,
Set-‐top
boxes
– Innovation
by
startups
• Virtual
Goods
– Perfect
Price
Discrimination
– Enhance
Community/Curb
Piracy
– Higher
quality
of
earning
(a)
Predictability,
(b)
Lifetime
Value
• Social
Games
– Vertical
Games
– Monetization
(a)
Conversion,
(b)
Advertising
– Platforms
dedicated
for
games
• Mobile
Games
– Rise
of
persistent
games
– Mobile
an
extension
of
other
platforms
– Dominated
by
a
few?
8. 8
Emergence
of
MulE-‐Channel
Games-‐as-‐a-‐
Service
FreeFree--toto--PlayPlay
Pay to PlayPay to Play: Upfront Purchase; Subscription
Virtual
Goods
Ads
Premium
Content
Subscription
Others – App
Install,
Incentive
Marketing
PC
Gaming
Console
Gaming
Mobile
Gaming
Online
GamingSocial
Gaming
Multi-Channel Games-As-A-Service
Source: ThinkEquity LLC
9. 9
Total
Video
Game
Market:
WW
Market
Size
Es2mate
($
Million)
Source: ThinkEquity LLC estimates
0
10,000
20,000
30,000
40,000
50,000
60,000
2009E 2010E 2011E 2012E 2013E 2014E
Mobile Games
Social Games
Online - Free-to-Play
Online - Subscription
PC
Console
10. 10
Total
Video
Game
Market:
WW
Market
Size
Es2mate
($
Million)
0
10000
20000
30000
40000
50000
60000
2009E2010E2011E2012E2013E2014E
Rest of World
U.S.
South Korea
Japan
Europe
China
Source: ThinkEquity Estimates
11. Agenda
• Games-‐as-‐a-‐Service
– Lines
blurring
between
platforms;
Tablets,
Set-‐top
boxes
– Innovation
by
startups
• Virtual
Goods
– Perfect
Price
Discrimination
– Enhance
Community/Curb
Piracy
– Higher
quality
of
earning
(a)
Predictability,
(b)
Lifetime
Value
• Social
Games
– Vertical
Games
– Monetization
(a)
Conversion,
(b)
Advertising
– Platforms
dedicated
for
games
• Mobile
Games
– Rise
of
persistent
games
– Mobile
an
extension
of
other
platforms
– Dominated
by
a
few?
12. 12
Price
DiscriminaEon
Sources: Unless otherwise noted, images on this and the following slides are courtesy of the respective
companies’ Websites.
15. 15
Tradi2onal
Models
Represented
Lost
Economic
Value
Source: ThinkEquity LLC.
§ Traditional gaming models didn’t
capitalize on the full spectrum of
consumer demand
§ Game satisfaction and status
were gained by beating levels
with skill, not by personalization
and purchased status symbols
§ Consumers who were willing to
spend more on games weren’t
able to, outside of peripherals
and merchandise
§ Consumer surplus represented
lost economic value for
publishers
Supply
Demand
Price
Quantity
All Customers
Pay One Price
Some Customers
Willing to Pay Higher
Prices
Consumer Surplus
= Lost Revenue
$50
$
16. 16
Limited
Edi2ons
and
Map
Packs
Captured
More
Revenue
(1) Pricing is approximate.
(2) Source: Microsoft.
§ “Limited” and “Collectors” Edition
games made headway in price
discrimination, capturing additional
revenue
§ While this price discrimination resulted
in higher revenue, there were still
relatively few options available for
hardcore gamers
§ Further, these options came at a higher
cost for publishers:
§ Halo 3 “Legendary Edition” box included a
large, physical plastic helmet
§ Map pack content has high production cost
§ Yet the virtual model was proven: Map
packs were only available digitally on
XBOX Live, but 25% of players
purchased them(2)
§ Map packs had PR hype equal to that of
the original Halo 3 release
Supply
Demand
Price
Quantity
Halo 3:
Standard
Pricing(1)
Hardcore gamers could
spend incrementally
more, if desired
Yet Still, Lost
Revenue
$60
Halo 3: “Limited
Edition” Price(1)
$75
Halo 3: Map Pack
Priced at $15
$90
$
17. 17
Virtual
Goods
Enable
Perfect
Price
Discrimina2on
Supply
DemandPrice
Quantity
§ While virtual map packs and
Limited Edition physical media
enable partial price
discrimination, virtual goods
enable perfect price
discrimination for social games
and MMOs
§ Some “hardcore casual” gamers
willing to spend $10k+/month on
virtual goods
§ There is no “price” for the game
§ In complex virtual economies,
virtual goods (e.g. a $100k space
station in Entropia Universe) can
generate significant revenue for
their owners, representing more
of an asset than an expense
§ Justifies high end purchases
$23.99
With the true cost of virtual
goods close to zero, there is
effectively no “supply”
curve – goods are readily
supplied at all price points
5 Fortune Points
$0.99
One family spent
$35,000 on virtual
goods in Outspark
games
$35,000
$4.99
200 Fortune Points
$39.99
$
Source: ThinkEquity LLC
22. 22
Game
Spend
As
Percentage
Of
Per-‐
Capita
Income
Games Spend as %of Per-Capita Income
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
2003 2004 2005 2006 2007 2008 2009 2010E
U.S.
China
Games Spend as %of Per-Capita Income (ex. Food)
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
0.45%
0.50%
2003 2004 2005 2006 2007 2008 2009 2010
Source: ThinkEquity LLC
23. 23
Players
Willing
To
Spend
More…
0.08%
0.09%
0.10%
0.11%
0.12%
0.13%
0.14%
Games as % of Per Capita Income
U.S.
Korea
China
Source: National Bureau of Statistics of China, Korea Game Development Institute, EuroMonitor International,
ThinkEquity LLC
24. 24
…And
The
Vendors
Are
More
Profitable
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
SNDA GA PWRD NTES CYOU ERTS ATVI THQI TTWO
Operating Margin
ROE
Source: Company Reports, ThinkEquity LLC
25. 25
Legend
of
Mir
2
• 2D
MMORPG,
Martial
Arts,
Adventure
• Developed
by
Wemade,
operated
by
Shanda
• Launched
in
China
in
2001
under
subscription
based
model
• Converted
to
free-‐to-‐play
model
in
2005
• PCU
~400-‐500K
28. 28
ZT
Online
• 2D
MMORPG,
Martial
Arts,
Adventure
• Developed
and
Published
by
Giant
Online
• Launched
in
2007
• Free-‐to-‐play,
pay
for
virtual
goods
model
• PCU:
1
million+
29. 29
70%+
Higher
ARPPU
Compared
to
WOW
0
20
40
60
80
100
120
140
160
180
ARPU($/Year)
World of Warcraft ZT Online
Source: Company Reports, ThinkEquity LLC
30. 30
Top
Players
Pay
20x
of
WOW
ARPU
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
Top 5% Players 15% Players 80% Players WOW
Source: Company Reports, ThinkEquity LLC
32. 32
Examples
of
MoneEzaEon
• Game
Design
(System
for
marriage,
breeding,
parenting,
balance
between
males/females)
• Special
In-‐game
Events
(Valentine’s
day,
New
Year’s
day,
Sports)
• In-‐game
Promotions
• Treasure
Chest
– Special
Bonus
for
Opening
Most
Chests
• Chat
&
Response
34. 34
Virtual
Goods:
WW
Market
Size
Es2mate
($
Million)
0
5000
10000
15000
20000
25000
2009E2010E2011E2012E2013E2014E
Rest of World
U.S.
South Korea
Japan
Europe
China
Source: ThinkEquity Estimates
35. Agenda
• Games-‐as-‐a-‐Service
– Lines
blurring
between
platforms;
Tablets,
Set-‐top
boxes
– Innovation
by
startups
• Virtual
Goods
– Perfect
Price
Discrimination
– Enhance
Community/Curb
Piracy
– Higher
quality
of
earning
(a)
Predictability,
(b)
Lifetime
Value
• Social
Games
– Vertical
Games
– Monetization
(a)
Conversion,
(b)
Advertising
– Platforms
dedicated
for
games
• Mobile
Games
– Rise
of
persistent
games
– Mobile
an
extension
of
other
platforms
– Dominated
by
a
few?
36. 36
Mid-‐session
vs.
Persistent
Games
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
AppStore Facebook -
Now
Facebook-
May, 09
Persistent
Mid-session
Source: ThinkEquity Estimates
38. 38
Average
Game
Play
Hours
Per
Week
On
Console
0.0
5.0
10.0
15.0
20.0
25.0
2006 2007 2008 2009
Source: Nielson
39. 39
Games
Going
Social
–
What
We
Have
Seen
• Facebook
opening
up
a
new
market
similar
to
Wii
• 55%
of
Facebook
users
play
games
on
Facebook
and
Games
account
for
~40%
of
page
views
of
Facebook
• Facebook
games
not
just
games
but
also
a
mean
of
communication,
a
mean
to
express
oneself
in
virtual
environment
40. 40
Gaming
Versus
Expression
0
50
100
150
200
250
$Billion
Video Game Luxury Goods
Source: Bain & Company, PWC
41. Trends
in
Social
Games
• Focus
on
Monetization
– Conversion
– Advertising
• Platform
maturing
– IPs
Matter
• Social
Games
outside
Facebook
– Using
Facebook
social
graph
– New
platforms
• Mobile
another
wave
of
disruption
– Location:
convergence
of
physical
and
virtual
world
41
42. Focus
on
Mone2za2on
42
ARPU/MAU Per Capita GDP MAU/GDP (bps)
($ MAU) (US $, 000)
Mixi 0.80 39.7 24
DeNA 4.51 39.7 136
Gree 2.39 39.7 72
Giant 1.27 3.8 402
ChangYou 1.38 3.8 436
US MMO 6.67 46.0 174
US Social Games 0.15-1.00 46.0 4-26
Source: Company Reports, ThinkEquity Estimates
45. Focus
on
Mone2za2on:
Adver2sing
45
Advertising
Virtual Goods -
Indirect Payment
Virtual Goods -
Direct Payment
Playdom 5-10% 15% 75-80%
Kabam NA 10% 90%
Rekoo 10% NA 90%
Serious Business 10% 10% 80%
Source: ThinkEquity LLC interviews with the CEOs of respective companies
46. Focus
on
Mone2za2on:
Adver2sing
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
WebMD The Knot Yahoo! Demand
Media
Social
Games
ARPU/DAU
46
Source: comScore, Company Reports, ThinkEquity Estimates
47. 47
Social
Games
Outside
Facebook
• Social
feature
no
longer
a
proprietary
of
SNS
• Users
want
to
stay
connected
with
friends
–
to
brag,
to
compete,
to
have
a
fun-‐experience
together
• Monetization
of
DeNA
vs.
Mixi
• First
iteration
of
social
games
outside
Facebook
already
there
• Next
iteration
of
social
games
with
deeper
integration/
social
games
from
ground
up
– Imagine
a
social
shooter,
action
game
–
trophy
save
your
real-‐life
friend
in
virtual
environment
48. As
PlaUorm
Matures;
IPs
Become
More
Important
48
2009 2006
Game Publisher Game Publisher
1 Battlefield 1943 Electronic Arts Geometry Wars Bizzare Creations
2 Castle Crashers The Behemoth Gauntlet Midway Games
3 Trials HD Microsoft Games Smash TV Midway Games
4 Hasbro Family Game Night Electronic Arts Bejeweled II Oberon
5 Shadow Complex Microsoft Games Zuma Oberon
6 Marvel vs. Capcom 2 Capcom Bankshot Billiards PixelStrom
7 Magic: The Gathering Wizards Of the Coast Outpost Kaloki NinjaBee
8 UNO Gameloft Mutant Storm Reloaded Microsoft Games
9 Worms Microsoft Games Joust Midway Games
10 Peggle PopCap Games Wik: Fable of Souls Reflexive Entertainment
Source: IGN, Majornelson.com
49. As
PlaUorm
Matures;
IPs
Become
More
Important
49
Rank Game Publisher Price
1 The Sims Electronic Arts $6.99
2 The Oregon Trail Gameloft $4.99
3 Need for Speed: Undercover Electronic Arts $4.99
4 Madden NFL 10 Electronic Arts $4.99
5 Tiger Woods PGA Tour Electronic Arts $0.99
6 Assassin's Creed: Altair Chronicles Gameloft $4.99
7 Flight Control Firemint $0.99
8 Cooking Mama Taito $6.99
9 Civilization Revolution Take-Two $6.99
10 Wheel of Fortune Sony $0.99
Source: Apple
51. 51
Social
Gaming:
WW
Market
Size
Es2mate
($
Million)
0
2000
4000
6000
8000
10000
12000
14000
2009E 2010E 2011E 2012E 2013E 2014E
ROW
China
Europe
U.S.
Japan
Source: ThinkEquity Estimates
52. Agenda
• Games-‐as-‐a-‐Service
– Lines
blurring
between
platforms;
Tablets,
Set-‐top
boxes
– Innovation
by
startups
• Virtual
Goods
– Perfect
Price
Discrimination
– Enhance
Community/Curb
Piracy
– Higher
quality
of
earning
(a)
Predictability,
(b)
Lifetime
Value
• Social
Games
– Vertical
Games
– Monetization
(a)
Conversion,
(b)
Advertising
– Platforms
dedicated
for
games
• Mobile
Games
– Rise
of
persistent
games
– Mobile
an
extension
of
other
platforms
– Dominated
by
a
few?
53. Mobile:
Next
Wave
of
Disrup2on
53
Source: International Telecommunication Union, NPD
54. Smartphone
Market
Poten2al
54
Source: ThinkEquity Estimates
0
50
100
150
200
250
300
350
400
450
U.S. Europe
Mobile
Subscribers
Smartphone
Users
56. Skipping
The
PC
Web?
0
200
400
600
800
1000
1200
Population Internet
Users
Broadband
Users
Mobile
Subscribers
Number of Subscribers in India (Million)
56
Source: Telecom Regulatory Authority of India, InternetWorldStats.com
60. Agenda
• Games-‐as-‐a-‐Service
– Lines
blurring
between
platforms;
Tablets,
Set-‐top
boxes
– Innovation
by
startups
• Virtual
Goods
– Perfect
Price
Discrimination
– Enhance
Community/Curb
Piracy
– Higher
quality
of
earning
(a)
Predictability,
(b)
Lifetime
Value
• Social
Games
– Vertical
Games
– Monetization
(a)
Conversion,
(b)
Advertising
– Platforms
dedicated
for
games
• Mobile
Games
– Rise
of
persistent
games
– Mobile
an
extension
of
other
platforms
– Dominated
by
a
few?
62. The linked image cannot be displayed. The file may have been moved, renamed, or deleted. Verify that the link points to the correct file and location.
62
Risks
&
Disclosures
COMPANIES MENTIONED IN THIS REPORT:
Company Exchange Symbol Price Rating
Activision Blizzard, Inc. NASDAQ ATVI $11.54 Buy
Akamai Technologies, Inc. NASDAQ AKAM $34.14 Hold
Apple Inc. NASDAQ AAPL $347.23 Buy
Changyou.com Limited NASDAQ CYOU $43.48 Buy
comScore, Inc. NASDAQ SCOR $28.40 Buy
Electronic Arts Inc. NASDAQ ERTS $22.61 Buy
Giant Interactive Group, Inc. NYSE GA $9.37 Hold
Google, Inc. NASDAQ GOOG $535.45 Buy
NetEase.com, Inc. NASDAQ NTES $45.64 Buy
63. 63
Risks
&
Disclosures
COMPANIES MENTIONED IN THIS REPORT:
Company Exchange Symbol Price Rating
NetEase.com, Inc. NASDAQ NTES $45.64 Buy
Perfect World Co., Ltd. NASDAQ PWRD $24.99 Hold
salesforce.com, Inc. NYSE CRM $134.38 Hold
Shanda Games NASDAQ GAME $7.15 Buy
Shanda Interactive Entertainment Limited NASDAQ SNDA $49.40 Hold
Take-Two Interactive Software NASDAQ TTWO $16.04 Buy
THQ, Inc. NASDAQ THQI $4.52 Hold
64. Risks
&
Disclosures
Analyst
Certification
I,
Atul
Bagga,
hereby
certify
that
all
of
the
views
expressed
in
this
research
report
accurately
reflect
my
personal
views
about
the
subject
securities
and
issuers.
I
also
certify
that
no
part
of
my
compensation
was,
is,
or
will
be
directly
or
indirectly
related
to
the
specific
recommendations
or
views
expressed
in
this
research
report.
The
analyst(s)
responsible
for
preparing
this
report
has/have
received
compensation
based
on
various
factors,
including
the
firm's
total
revenues,
a
portion
of
which
is
generated
by
investment
banking
activities.
ThinkEquity
LLC
makes
a
market
in
Akamai
Technologies,
Inc.,
Apple
Inc.,
Activision
Blizzard,
Inc.,
Changyou.com
Limited,
Electronic
Arts
Inc.,
Giant
Interactive
Group,
Inc.,
Google,
Inc.,
NetEase.com,
Inc.,
Perfect
World
Co.,
Ltd.,
salesforce.com,
Inc.,
Take-‐Two
Interactive
Software,
THQ,
Inc.,
Shanda
Interactive
Entertainment
Limited,
Shanda
Games,
and
comScore,
Inc.
securities;
and/or
associated
persons
may
sell
to
or
buy
from
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on
a
principal
basis.
65. Risks
&
Disclosures
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2009,
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Disclosures
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state
in
which
said
offer,
solicitation,
or
sale
would
be
unlawful
prior
to
registration
or
qualification
under
the
securities
laws
of
any
such
state.
This
research
report
was
originally
prepared
and
distributed
to
institutional
clients
of
ThinkEquity
LLC.
67
68. Risks
&
Disclosures
Recipients
who
are
not
market
professionals
or
institutional
clients
of
ThinkEquity
LLC
should
seek
the
advice
of
their
personal
financial
advisors
before
making
any
investment
decisions
based
on
this
report.
Stocks
mentioned
in
this
report
are
not
covered
by
ThinkEquity
LLC
unless
otherwise
mentioned.
Additional
information
on
the
securities
mentioned
is
available
on
request.
In
the
event
that
this
is
a
compendium
report
(covers
more
than
six
ThinkEquity
LLC-‐covered
subject
companies),
ThinkEquity
LLC
may
choose
to
provide
specific
disclosures
for
the
subject
companies
by
reference.
To
request
more
information
regarding
these
disclosures,
please
call:
866-‐288-‐8206,
or
write
to:
Director
of
Research,
ThinkEquity
LLC,
600
Montgomery
Street,
San
Francisco,
California,
94111.
Stocks
mentioned
in
this
report
are
not
covered
by
ThinkEquity
LLC
unless
otherwise
mentioned.
Member
of
FINRA
and
SIPC.
Copyright
2011
ThinkEquity
LLC,
A
Panmure
Gordon
Company
68
