The pandemic was tough NexonMajor markets in South Korea and China, but the Tokyo-based online game publisher has been preparing for a permanent transition to digital entertainment for decades. CEO of Nexon Owen mahoney believes that online games will make gains during the pandemic while isolated people will socialize through games, and these gains will not evaporate when things return to “normal”.
I spoke to Mahoney last week after the company announced its earnings for the first quarter, which ended March 31. The online gaming company benefited from the rules of the on-site refuge at the end of March, but it also saw its activity in China drop by 42%. After some initial challenges, Nexon has moved on to the rules of working from home, and it is not as bad as industries like movies that have blocked production.
The larger Nexon missions are still in place. Nexon started in South Korea in 1994. Its first title was Nexus: The Kingdom of the Winds, a fantastic online role-playing game. Nexon is a pioneer in free online only games, where players can start playing for free and then buy in-game virtual items for real money. This business model has propelled it to huge success, generating billions of revenues for games like Dungeon Fighter online (also known as Dungeon & Fighter in some territories).
In 2005, it moved its headquarters to Tokyo. Today, the company generates about $ 2.5 billion in revenue a year from titles like Dungeon Fighter Online, Kart Rider and MapleStory. These franchises are as valuable as Star Wars, but most people don’t realize it.
The main markets are South Korea, China and Japan, but the company developed in the West under Mahoney. In 2016, Nexon acquired Big Huge Games, manufacturer of DomiNations. And in 2019, he bought the company from Patrick Söderlund Embark Studios in Stockholm, Sweden, as part of his quest to become as well known in the West as in the East.
Here is a revised transcript of our interview.
GamesBeat: If we are stuck in this situation for a while, does that change the way you think about creating games?
Owen Mahoney: I don’t know if it changes the way we make games. You and I have already talked about it. My take on all of this is that we are in the midst of an age-old change in the entertainment industry. This age-old change ranges from the belief, although no longer accurate, that Hollywood and movies and sports and music are the center of the entertainment industry, to people realizing that these are video games. And especially online games. It is the center of the entertainment industry center. We are going to look back in 20 years and see this as the a-ha moment when we made this age-old shift to online games and virtual worlds. It took COVID to do it, but that’s what happened.
Have you seen the movie 1917? It’s interesting. I asked a few people if they had seen it and no one seems to have seen it. I thought it was a huge blockbuster. I just downloaded it from iTunes. But it was interesting, because at the beginning of the 20th century, we knew that there were machine guns and we knew that there was this new technology of explosive ordnance. Cannonballs were just giant bullets that fired at people. Then you had explosive ordnance which exploded on impact. All this and mustard gas. We knew it existed. But at the start of the First World War, people started the war with swords in the air and loads of cavalry. It took World War I to disabuse everyone of the idea that they could win a war this way. It took a machine gun nest to mow down a whole bunch of people.
It is a dark way of thinking about this, but you are faced with a situation that tests your assumptions and your way of thinking. The assumptions and way of thinking that we have gone through in the past 20 years are that we are still in the 20th century in terms of entertainment. Were not. We have long known that video games are bigger than Hollywood, bigger than linear entertainment, in terms of gross revenue. We know that growth is much faster, triples the rate. You look at the P&L of companies like Nexon or other big video game companies. We printed a billion dollars last year in cash flow. If you talk to Andrew [Wilson of EA] or Bobby [Kotick of Activision] or other CEOs of big video game companies, they also print billions of dollars a year.
GamesBeat: The rest of the entertainment is very different.
Mahoney: If you look at linear entertainment, it doesn’t develop, or barely develops. It becomes less and less profitable every year. Netflix spent $ 3 billion in cash last year. The stake in entering a linear entertainment service burns billions of dollars. This is before I get to all the COVID stuff. There is no cruise ship industry. There is hardly a hotel industry, hardly a travel industry. It all stops. Then you say, “What is the center of the entertainment industry?” It is not traditional entertainment at all. It is interactive entertainment, and in particular virtual worlds. We live in a virtual world today in large parts of the economy.
I am sometimes asked if all this will slow down after COVID. I see this as an age-old change. Everyone now knows how this entertainment industry has changed. For you, with an interest in this industry, for me and for all those involved in video games, this is the decisive moment when online games in particular come into the spotlight and no one will look back. I don’t want to work in Hollywood. I would not like to work in linear entertainment. I would not want to be in some sort of amusement park or live sports activity or something like that. These things will see significant changes.
GamesBeat: I agree with this vision of the world. How do you envision this worldview and then map it to something, be it Nexon’s strategy or what will quarterly performance in the gaming industry look like, things like that?
Mahoney: I would say two things. First, in terms of what Nexon has done, over the years, we have – I’m going to draw you something on a piece of paper and you’ll see it. This is a whiteboard that we have often drawn at Nexon. If you think about the gaming industry on two summits, you have offline games and online games. Then you have deep or immersive games and casual games.
Old people like me started in this area here. Games like Civilization and Railroad Tycoon. These are quite deep offline games. Then the Internet allowed this area to happen. Companies such as Nexon and other Korean companies in the early days of the Internet were pioneers in this area. Then, the iPhone and Facebook activated casual games. EA, when I was there, had a casual gaming business, but it was all on PC. Facebook blew up the laid-back business, then the iPhone blew it up again.
In terms of Nexon focus, we have tried things in each of these areas. We made some RPG type games in Japan. We did a bunch of casual stuff, different levels online and offline in casual. But we realized that we stole it all. This is the area where our heart really is: deeply immersive online virtual worlds. Last year, we really made the decision to cut everything else and get into it. We also believe that is where the growth is. If you think about what’s going on with iPhone X and consoles and the cloud, it puts devices that can play deep and immersive online games in the hands of billions of people.
This market was previously only accessible to PCs, of which around 300 million are PCs capable of playing. The types of PCs you or I would have. But there are 3 billion iPhone Xs on the rise and better quality mobile devices, iOS or Android. This is an increase of about 10 times. The full Maple Story experience is done on a mobile phone, and we are not alone. Now it’s with you at all times.
So what is a deep online virtual world? It’s like a virtual amusement park. The best analogy we can find if we have to think about this world of virtual worlds is like a Disneyland, a theme park. Now you no longer need to get on a plane and go stay in a hotel and face their depressing parking lot and take a train and pay a lot of money at the door and do whatever you have to do at Disneyland. You take it out of your pocket and, in five seconds, you play in this virtual world. In many ways, it’s much better.
To come back to your question, this is our starting point, our vision of the future. All we want to do is make sure we run this part of the world well. The first step is to get out of other things, because others do it better than we do. We don’t think this is the future.
GamesBeat: As far as what we should start seeing quarter by quarter, you just received the quarterly results. Was this reflected in any way in the last two weeks of the quarter? The idea that people are locked inside can’t do anything else, so they’re going to play games?
Mahoney: We had a solid quarter, especially in Korea, but the trends were already in place. It didn’t start in March or February. It was in January and long before. Maple Story increased 137% year over year in Korea. On mobile, it increased by 185%. I’ll have to check those numbers, but it was just a phenomenal quarter. This was in addition to the fact that Maple Story had increased by 69% the previous year. The previous quarter was up. The trends were already in place for what we saw. It is difficult to piece together what is COVID.
GamesBeat: There is this piece where the cybercafés have vaporized.
Mahoney: Yes, but this is only a small part of our business. Some people have asked what is going on with PC cafes, but that has never been a big part of our business. It’s a bigger part of the business in Korea, and our business in Korea is, as I said, phenomenal. PC cafes are one of them, but we can go around PC cafes and head directly to homes, especially since we are more and more mobile.
GamesBeat: If we saw a certain trend in the first quarter, the second quarter will be very different. It’s the full shelter in place.
Mahoney: For us, it hit us fairly early in the quarter. Here’s another interesting thing. When you think of us in relation to linear entertainment, we have seen this front and center at Nexon. We talked on the demand side. Do people consume more games? What is happening on the demand side? Well, let’s look at the offer. We have no supply shock in the gaming industry, at least not at Nexon. I have thousands of employees who, as we speak, are creating content in their pajamas. They are in T-shirts. They have their children there. They don’t miss a beat. We’ve focused on it enough to make sure we don’t lose productivity. You worry about productivity in situations like this. You also care about security. But these are solvable problems. These are not easy problems, but they are solvable.
Angelina Jolie is unemployed today. She may write, but she doesn’t film anything. Broadway is unemployed. Anyone who works for a theme park is unemployed. Athletes, any living actor, they can’t do stuff. They are stuck. Even Netflix is talking about it now. But that’s not a problem in the gaming industry. Some people talk about mocap and stuff like that, but we haven’t seen it at all. Not only do we not have a demand shock – at least we have a demand advantage – but we also do not have a supply shock.
GamesBeat: Because you are focused on Asia, there is a different pattern compared to Western societies. If the Chinese are back at work and South Korea is also back at work, is game consumption starting to change at all? Does it return to where it was before COVID? Or does it persist in certain respects? Are they staying with more gameplay?
Mahoney: Two answers to this question. First, we have seen no change. It is more difficult to distinguish this, it is the biggest meta-point. It is difficult to separate what is COVID from what is not. But as I said, all of these trends were in place long before COVID happened, at least in our business, which is the only thing we can talk about. We have given revenue forecasts that we think will be pretty good, and it’s not because of COVID. It’s just because business is going well.
The second meta point I would like to make is that I think we have reached a milestone or a milestone where people think of games differently than before. We have certainly acquired new users. We have acquired different styles of play. One of the other things about the types of games we create is that they are microtransactions, not macros. You get a lot more for your money in terms of hours played for video games, and in particular online games of the type we make. As more and more people adapt to it and associate it with their entertainment, it is hard to want to do it – it will be different when they return. They will have a different perspective on how they entertain.
It’s kind of like – I don’t know how old your children are, but my children are now 16 and 14 years old. I ask them a lot what it’s like to go to school on Zoom. They say, “I miss seeing my friends,” but the kids are flexible. They will be punched most of the time. As long as they have the routine, they learn as easily as they did with a large campus. I wonder what happens to the education industry in the long run, when we realize we can send our kids to a Harvard that doesn’t need Harvard. Education could probably use its own Uber moment. But certainly in the gaming industry, we turned a corner and went to a different place than we were before.