We have recently hosted a teach-in on our core Games division where we shared not only our view on current market trends and outlook, but also provided a lot of data around the structure of our gaming business, including split by platforms and regions and used various case studies to discuss profitability drivers, cohort behavior and retention. We shared our strategic vision and approach to marketing, discussed Mail.Ru Games Ventures (MRGV) track-record and talked about our pipeline with a goal to boost transparency around the division, which we see as core to Mail.ru Group and confirm our commitment and confidence around Games. In case you missed this event, please find transcript as well as MP4 replay of the webcast below as well as here, together with related slide deck.
Following the event, Games division announced rebranding under MY.GAMES, with all existing and new titles moving to single brand. As part of the launch, team made a few important announcements:
As we received a number of questions during our Games teach-in webcast, which we were unable to address during the event as well as have gotten a number of questions around MYGAMES launch, we decided to address all of them in this blog as FAQs, which you can find below.
We remain very confident in our Games division, which has >540mn in registered users (>25mn MAU), 60 active games and >150 titles in portfolio developed by 11 internal and 15 MRGV studios and sold across >190 countries with 67% of revenues coming from abroad as of 1Q19. We are among top-50 gaming companies globally, having grown ~3x faster than the market since 2015, but we do not intend to stop here, with an ambition to continue to grow above market levels and a target to double Games EBITDA in the next 4 years and achieve low to mid 20% margins through the cycle, which is part of our management KPIs. Unification under MY.GAMES serves to support our global ambitions with a target to generate 80% of gaming revenues from abroad by 2022.
Q: What is the logic behind the launch of MY.GAMES?
A: We started as a Russia/CIS PC developer and publisher under Mail.ru Group brand back in 2006. We then launched international rollout under My.com in 2013, with 67% of our total gaming revenues coming from abroad as of 1Q19 vs 46% in 2015 and with 90% of our mobile players located outside Russia. MY.GAMES serves to bring our gaming portfolio under one brand, using the success of our individual brands in order to further grow and succeed internationally, which is our key strategic goal – to have 80%+ of international gaming revenues by 2022. As of May 30 all our projects are published under MY.GAMES brand, with smooth transition for users of existing titles. Plans also include launch of a global gaming platform uniting all titles developed by us and our partner studios. But in simple terms – this is a rebranding exercise.
Q: Will strategy change following rebranding?
A: Neither structure or strategy of the business will change - we aim to continue to develop the best games for the right audience in a diversified portfolio approach. Our focus remains on F2P monetization model but with every new project launch, we will be taking into account our target audience and its media consumption habits, which determinates ultimate monetization model for each game. Our cross-platform reach also remains in place, as we think that it is important for our players to have the option to play on their preferred platform, be it PC, console or a mobile device. However, we anticipate rising skew of overall portfolio towards mobile, in sync with global gaming market trends where mobile already accounts for 51% of the market. Our current strategy sees 80% revenue share of mobile games in our portfolio by 2022 vs 59% in 2018. Gaming release strategy will not change either. As a publisher, we aim to reach the biggest audience possible, although due to the different nature of various markets, it isn’t always possible to release games at the same time across all regions.
Q: How does MY.GAMES differ from other global gaming companies?
A: MY.GAMES is the biggest launch for Mail.ru Group since the company began in 2006, with contribution of >33% to Group revenues as of 1Q19. We are a highly experienced gaming business, with more than 10 years of development history and senior management reps with 20+ years of industry experience. We started as a local PC developer and publisher but have since transformed into an international player with a diversified portfolio of >60 gaming projects in operation and >150 titles in portfolio in total, which makes MY.GAMES one of top-50 gaming companies globally. We publish, develop and invest into games across multiples genres, platforms and countries, create gaming services, hold large-scale e-sports tournaments and festivals with access to own teams. Creativity is at the heart of our gaming business. Combined with our effective internal ecosystem, this means that 1,500+ of our in-housing gaming employees and 26 studios across our portfolio (including 11 internal) located across 10 offices can grow and create successful gaming titles for millions of players around the world, with 540mn registered users of MY.GAMES across 190+ countries, with MAU of 25mn (games only, ex. gaming platform) and DAU of 5mn (games only, ex. gaming platform) and target to double EBITDA of in the next 4 years.
Q: Why are people around the world spending more time and money on gaming (vs. other forms of entertainment)?
A: There are more than 2.3bn gamers globally and 46% of 1.1bn spend money on games - with $135bn spent on games in 2018 - meaning that every third person on the planet is a gamer and ~15% of global population being paying audience. According to App Annie’s annual report on mobile trends, Games continue to rank as the top category in revenue and downloads in both iOS and Google play stores. Globally, on a category level, games accounted for 74% of consumer spend in 2018 and are expected to account for 75% in 2019. Plus, gaming is becoming more and more multi-dimensional and fragmented, with gamers not just playing games but also watching e-sports or consuming game video content. According to Newzoo, 19% of gaming enthusiasts play high-quality games, preferably F2P or discounted titles and only spend on hardware when necessary. For 13%, gaming may not be their favorite hobby, but they definitely enjoy watching others play, with another 13% of gamers seeing gaming in their DNA and like few things more, spending free time and money on games. At the same time, 27% of gaming enthusiasts play games when they have time to spare or at social events and prefer mobile games and this group could turn into ultimate gamers as market continues to grow and quality of games and diversity of genres improves, with the activity becoming more and more of a social norm.
Q: What is in the target release pipeline for 2019 and beyond?
A: We are committed to releasing at least 2 PC and console titles and 4 strong mobile games every year. So far in 2019 we have launched 3 new mobile products: Space Justice, Bombastic Brothers and Evolution 2. Among some of the additional key planned 2019 releases, we will be publishing Conqueror’s Blade in Russia/CIS, Europe and US, developed by China-based Booming Games. Soon, we will also publish in Russia/CIS the hotly anticipated isometric action RPG, Lost Ark, by South Korean developers Smilegate RPG. Having launched console version last year, mobile version of Warface will be launched this year.
Q: Given rising competition on the global gaming market, do you experience shortage in talent?
A: According to the World Economic Forum, Russia offers the most engineering talent globally, which puts us in a unique position. Furthermore, rising competition in the industry and higher quality standards, provide for a broader range of opportunities for MRGV given our access to capital and our sector expertise. But of course our main asset is our people and the technology-driven culture which they create, with future success of Mail.ru Group dependent on our ability to attract, retain and motivate the best talent. In order to educate the market about the gaming industry and seek cooperation with potential new engineers and gaming studios, we and our partners organize major events like The Big Deal Conference , which marked the biggest ever gaming forum hosted in Russia with Epic Games, Blizzard, Tencent, Ubisoft, Riot Games, Google, iDearmSky, App Annie etc among presenters and more than 900 gaming industry professionals among attendees. Our idea is to make such events into a leading local platform for an exchange of views on best practices in gaming development and publishing, with access to real-life case studies on product development, design, optimization, analytics, and investment, discussion and debate around gaming market trends and outlook, as well as on the specifics of various gaming markets, with an ultimate goal of broader market understanding, cooperation and attraction of new talent.
Q: How does MRGV work and how do your approach partnerships?
A: MRGV investment division was launched in 2017 to monitor and make targeted acquisitions and other investments globally as part of the development of our games vertical, with up to $100mn in allocated investment budget. Our investment arm MRGV is constantly expanding its project portfolio. We are currently partners with 15 studios around the world. Our Russian partners include Zillion Whales, Mobirate, Game Garden and Red Brix Wall studios, among others. We always welcome imaginative, ambitious, brave, passionate and creative developers who are looking to take that next step and team up with a global publisher. MRGV helps us to form a gaming community, allows for exchange of ideas as well as diversification and broadening of our portfolio.
Q. What does MYGAMES contribute to e-sports?
A: We continue to develop Warface as our primary e-sports game, having been holding e-sports tournaments in Warface since 2013, with ~20 tournaments held every year and >240,000 players having participated globally since launch. In the meantime, we are actively developing our international e-sports online platform, which will allow players to organize tournaments in any game in the long-run.
Q: Are there synergies with the social media business unit?
A: Yes, but mainly around traffic as our Games division is not focused on production of social games. Overall, with ~65mn players, NewZoo ranks Russian market #11 in the world, which suggests a lot of growth potential while it accounts for only 1.5% of global gaming market (~$1.7bn gaming turnover) and we aim to become increasingly international.
Q: In the future, is it possible that your mobile games to be placed on the VK app environment as well and thus, circumvent the typical 30% fee to the platforms?
A: VK has 70mn MAU in Russia and is a predominantly Russia and CIS focused platform, while our gaming division is becoming increasingly international, with domestic revenue share declining over time. Hence, while distribution via own services makes strategic sense, global distribution does currently require usage of global gaming platforms (App Store, Google Play, Steam, PSN, XboxLive and others).
Q: What would you (the gaming business unit) do differently if you were not part of Mail.ru?
A: Gaming unit as well as other units within Mail.ru Group is independently managed with purely financial KPIs set out for the division from top management. Outside Mail structure, the division would have been less well capitalized, which would have not provided for the launch of MRGV, among others. Plus, there are synergies from being part of the broader group in terms of access to expertise, brand awareness, reach etc. Hence, we see current business structure as most optimal for our strategic ambitions.
Q: Do you localize games? Or just translate? (Thinking about why War Robots was successful in Japan… and whether going forward you may look to do more localization to drive global adoption?)
Q: Will your ambitions around Asia change with the launch of MY.GAMES?
A: Asia is one of the most lucrative markets for international publishers and developers alike given its 52% share in global gaming revenues (incl 28% China share). Our company is not an exception, although the base remains small, with only 8% of our gaming revenues coming from Asia in 2018. Yet, some of our games have already established a presence in the region, including success of War Robots in Japan, and we are planning to strengthen our position in Asia in the future.
Q: To what degree is success in China factored into your outlook?
A: As China accounted for 28% of global gaming revenues in 2018, while accounts for single digits of our gaming revenues currently, we see it as a major potential opportunity given the very low base. Yet, we acknowledge difficulties in expanding operations there given regulatory constraints and need for local partnership and game adoption. Hence, major expansion there is not currently included in our base case forecast.
Q: Will it be possible to leverage Tencent's gaming expertise and presence in China?
A: Despite Tencent being our 7.4% shareholder invested into Mail.ru Group since pre-IPO, our gaming relationship with them is based on fully arms-length basis and potential partnership is equally possible as with any other company with gaming expertise and presence in China.
Q: Does MRG plan to conquer Middle East and African markets (UAE, Turkey, Saudi Arabia, Egypt etc.)? What are the main difficulties connected with entering these countries and operating there?
A: Yes. Level of required localization, user preferences, cultural specifics. China, US and Japan accounted for 75% of global mobile gaming revenues in 2018 and hence naturally these are our focus markets. Yet, importantly, between 2016 and 2018, data shows that user spending has been growing remarkably fast in both mature and emerging markets. Hence, we see broad global opportunities for growth, including in Middle East and Africa. We are confident in our international ambitions given quality of our titles. For example, in January 2019, Warface became #3 free-to-play game on PS4 in the US in terms of downloads. We also note that Chinese players have started to be introduced to Western titles, which could present a major opportunity for us, as Asian market tends to be higher in terms of ARPU and therefore LTV, while localization could become more simple or less necessary over time.
Q: Are there other ways you could monetize your IP (theme parks, derivative products, movies, eSport...)?
A: We see large potential long-term synergies between Gaming and esports, among others. We also see trends like subscriptions as well as rising appetite for social components through clans or neighborhoods, leagues within games, personal rankings, concerts and other events etc.
Q: Do you think some of the distributors will eventually create some of their own IP/games like Netflix did (google, Amazon/Twitch...)?
A: We all know about the plans of some big companies entering the gaming market. Many major players are creating their own distribution channels and of course, they can create their own IP in future. We are waiting for announcements from Netflix, Amazon and ready to help them with distribution of their projects in our territories.
Q: Are you able to reliably predict a gamer's LTV?
A: The gamer’s LTV is a key metric for us for evaluation of product potential. And the early prediction of this metric is the key challenge for our analytic team. We developed special automated prediction tool that analyzes the play behavior for each player during the first day of his play in the game and predict the LTV of this player. This tool improves the accuracy of the prediction every minute the player is in the game. This tool is used by our User Acquisition team to make the decision about UA campaign optimization on the daily basis.
Q: How do you think about monetization? Pre-paid, in-app purchase, subscription, 1 time CD, advertising, freemium, new business models... What the price elasticity of the different games/genres/platforms? Does that differ per country/region?
A: Focus remains on F2P, but advertising revenue share has grown to ~20% of mobile revenues and here we are closely monitoring hyper casual gaming genre. We are also experimenting with ideas around P2P and subscription-based monetization models.
Q: Do you think the big-hitters are more interested in developing mobile/ FTP games now (eg. Apex Legends, mobile CoD)? Is that a problem for you? In terms of driving up cost of traffic, taking share of audience?
A: We are optimistic about the future of our industry and will be very glad to see such projects, as it will definitely contribute to the overall growth of the gaming market. We have different studios that develop games for consoles/PC, mobile and of course we want to create AAA titles, such as Warface or Apex, and are constantly looking at the market team able to do it.
Q: For the in-game spent iOS and Android charge a commission, usually around 30%. Is that commission charged to in-game advertising as well, or only in-game payments by users?
A: Only for in-game payments.
Q: How should we think about margins on new platforms such as Google Stadia, Epic Game Store etc? What's the cost structure likely to look like?
A: Stadia launch by Google could be transformational for the market in case it is able to take away gaming budget away from consoles. According to NewZoo, Console games accounted for 28% of gaming spent in 2018. Launches like Stadia could make high-quality games affordable to a much broader audience, which could unlock further potential of the Russian market, among others
Q: Can you please talk about old games and how quickly their revenue is declining/decelerating and same for EBITDA?
A: It really depends on the title and its success rather than genre of a game or platform on which it is being launched. Some title practically decline from the start. Others can be in growth phase for 5+ years, including some of our top titles like War Robost or Warface, especially as we expand our most successful titles across platforms and regions.
Q: What are the market benchmarks for retention rates based of? Is it all games or does it include only top games? What is the source for your analysis? Also would be curious to know if the top 10-20% of your payers are 80-90% of your revenues (in line with other mobile gaming companies)?
A: A unique feature of Mail.ru is our wide game portfolio and many years of experience with different game projects. Over the years, we have developed and launched games of different genres and for different audiences. It helped us get the full picture of retention for different classes of games based on their future potential – hits, average potential and unsuccessful products. In addition, we regularly communicate with platforms (Google and Apple) and exchange the market benchmarks for all key metrics, including retention. We indicated the top games benchmark in the presentation because we use this reference point when creating our products. The distribution of payments between payers ' cohorts is very different for different products. But we try to keep a more balanced distribution than you have indicated.
Q: M&A – do potential large transactions as part of MRGV require BoD approval?
A: Yes, all transactions in excess of $10mn.
Q: M&A - has the change in voting structure made it easier to get M&A deals done?
A: No, process remains unchanged.
Q: Is it fair to assume the 10% capex/sales group guidance applies for the gaming segment? How does capital intensity vary for mobile vs. pc vs. console games? Should we assume the capital intensity profile of the gaming division or the group to change as the gaming segment grows over the next 3 years?
A: We anticipate investments to be heavier in 2019 as part of the 2019-22 investment cycle outlook. Target 10% capex/revenues ratio applies to the broader Mail.ru Group and could differ between divisions.
Q: On slide 20 it says that hustle castle had rub8.3bn in revenues whereas on slide 21 the revenues was rub5.0bn for all of fy18. Was there a lot of revenues in 4Q17/1Q19? VAT impact?
A: Slide shows cumulative revenues of the game since launch.
Q: What is your user privacy protection policy?
A: Mail.ru Group’s data policy places security and user data protection as top priorities. All of our products develop and constantly update effective security systems designed to protect user data. We are committed to comply with the applicable data protection laws. As part of our GDPR preparation process, we have revised and updated all our internal processes and procedures including data systems, implementation of the Data Impact Assessment and documentation in order to ensure full compliance with the GDPR.
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