Interview with Acclaim CEO

Just saw an interview with our CEO, I'm the Chief Creative Officer for Acclaim.

For those that follow Acclaim's progress, it's a good update.

An Interview With The Founder And CEO Of Acclaim

We had a chance to interview Howard Marks, the founder and CEO of Acclaim, a developer and publisher of free-to-play online games largely focused on the audience in the western hemisphere. We believe that a shifting user preference toward the social and connected experience will likely drive the popularity of free-to-play and multi-player gaming, especially with the younger generation, which does not view gaming as a solo experience limited to consoles. The company is not seeing any impact of the slowing economy, which may reflect the resiliency of online and free-to-play gaming, and also, the apparent nascent stage of the opportunity.

KEY POINTS:
• Acclaim is a developer and publisher of online games, with over 10 million registered users, mostly from the U.S. and Europe. The company offers its games as free-to-play and monetizes through virtual goods sales and in-game ads.
• Given the broad demographic of the gaming audience and the shifting user preference from traditional media to online games, Marks expects in-game advertising to emerge as a sizeable market opportunity.
• While the older players in western countries, who grew up playing console games, may find free-to-play, PC, and multi-player gaming a different experience, the younger generation, which grew up on the Internet and is used to the connected social experience, such as Facebook, Twitter, etc., is much more comfortable with the multi-player gaming, free-to-play, and virtual goods model, driving the popularity of free-to-play multi-player online games, in our view.
• We view favorably the frictionless and scalable model of online gaming that relies on acquiring players through viral or word-of-mouth marketing, which we believe strengthens community bonds among players and ultimately helps to promote the longevity of the games.
• According to Marks, the company seems to be benefiting from the slowing economy, which may represent the resiliency of online and free-to-play gaming and the apparent nascent stage of the opportunity.


Can you explain Acclaim to investors?

Howard Marks, Founder and CEO, Acclaim: In 2005, we purchased Acclaim assets with the goal to restart it as an online game company based on a free-to-play model. Currently, we have close to 10 million registered players. We have a few types of games; we have hardcore massively multiplayer online game targeted toward young males, and we have browser-based games that are targeted toward a broader demographic. We are also developing our own browser-based game using Flash. And the first one is being released, called Rockfree. We have another one called Prize Potato, which is on Facebook right now, and a couple more games, one is called Kogamu and the other is called Acclaim Poker.

What is your business model?
Howard: All our games are free-to-play and we plan to monetize them through selling virtual goods and ads.

What is the current revenue split from various streams and where do you see that trending over the next couple years?
Howard: Advertising model is dependent on economic conditions. Longer term, I think that there'll be some significant opportunities to get brands to target our consumers because brands will have a hard time finding their audience on TV, radio, or prints, given the declining popularity of traditional media amongst the younger generation.

Who is your primary target audience?
Howard: It depends on the game. Just like a TV network targets a broad audience through a variety of shows, we target a different audience through a variety of games. The download MMO games are hardcore, certainly 90% men, usually teenage boys and young adults. The browser-based games target different demographics. We have games just for girls. We have games like Rockfree, which will be probably 50-50 boys and girls, teenagers, and young adults. Currently, about 75% of our revenue comes from the hardcore market, but we expect that to change with new games that we are launching now.

Can you talk about the geographies that you target?
Howard: We are 65% U.S. Half of the remainder is Europe; the other half is the rest of the world.

What is the typical ARPU on your games?
Howard: It depends on the game; the monthly ARPU for hardcore games is generally $25 to $45, and for the browser games, is $10 to $15.

How big could this market be for Acclaim?
Howard: Well, it's pretty simple to calculate. Look at the size of the videogame market and then look at the size of the TV market. What's interesting with online games is that we cover both. We're more of an online media company. To understand our potential, look at the value of Google! Now, where do people spend most of the time online? Is it on searching for things or is it entertaining themselves? If it's entertaining, then our industry is worth more than what Google is worth. So we think the potential is pretty big.

What are the secular drivers for online games, and free-to-play, ad supported, and virtual goods models?
Howard: A big size portion of the ad market is going to go towards us because the consumer is changing their habits. As they change their habits over time, like they did with the record industry, that's where you capture the value. So we're already seeing a transfer of value from the traditional media, like TV to games. With video games, it was hard to capture user behavior post the game sale; with online games, it is very easy to capture and that will drive the advertising sale on games.

As for the virtual items model, it is about changing consumer preferences. A lot of old gamers, who grew up playing console games, may not be comfortable with this model, but the younger generation is very comfortable with it. We have already seen the changing consumer preferences transform businesses like Facebook and Twitter. We have already seen success of the model in Asia, where online games has become a quite significant industry compared to TV and music.

But in the U.S., we have not seen the level of success with the virtual goods model as we have seen in Asia?
Howard: I think that in Asia, they have all these cafés that already download the games and prepared the PCs pretty nicely and ready to go. They didn't have a videogame market because there was too much piracy, so there was a latent demand that was being not met. Online game satisfied the demand and made it convenient for consumers to go to the cafés and spend money on a per-hour basis to play those games. And then Korea invested a lot more money than we did on a per-capita basis to connect the fast Internet into the homes. We're going to come around to it. We are a matured Internet market right now. Game section is still a little bit immature. But we have already seen some hints of the success of the model in the U.S., for example, Club Penguin. We need a few hit free-to-play games and we'll sell plenty of it.

How do you acquire new users?
Howard: It has to come virally. If you buy them, they're expensive, and most of the time, not profitable. So you have to work on the viral nature of the game, get to be a well-known brand, get a reputation, get the community engaged to go out to their friends to invite them. A lot of the companies that have raised cheap money go out and spend money on marketing, but that doesn't make money. Look at the success stories of internet, how much money Google has spent on marketing, zero; eBay, PayPal, Facebook, MySpace, all have spent zero dollars for customer acquisition.

Who are your competitors currently and then who do you think could be your competitors potentially?
Howard: I don't think that competition matters because we are at a very early stage of a very big market and it doesn't seem like a winner-takes-all market. There are game companies like Jagex, Nexon, Activision-Blizzard, some Chinese companies. But most of the media companies and most of the videogame companies are not involved.

What's the reason that companies like Electronic Arts or Activision have not been so much behind this free-to-play model?
Howard: For one, it is too small for them. These are much bigger companies and they don't want to waste their time on a game that would generate $5 million a year. They'd rather spend the effort on a game that will sell $200-300 million. Secondly, I think they have a business model friction issue with the retailer that is not easy to solve. There's going to be definitely a revenue mix change for the retailer, which I don't think the retailers are too happy about. But it's unavoidable. Look at music and look at what they were doing in music 10 years ago and look at what they're doing today. I think the videogame industries are probably going to experience the same thing.

What is your secret sauce? What part of your business is difficult for anybody else to replicate?
Howard: The brand is hard to replicate. We have a good team, a senior team. Most of the companies in this space are newcomers. There are a lot of Asian companies who are bringing the Asian business model here, but they don't have the recognizable brand. We're also making our games; we're going to continue to license, but we think that owning your own IP overtime is pretty important.

How might this current economy be impacting your business?
Howard: I think in a very strange way, it's actually a benefit for us. Because money is tight, consumers may not spend as much this year as they did in previous years, so they will look for things that are better-suited for their current economic time, and our business model, free-to-play, is pretty well-positioned.

How big is Acclaim and how fast is it growing?
Howard: We are currently eighty people. We think we will double our revenue every year. But, it could slow down, it could accelerate, it could be a hit. Hits do make a big difference when you have a hit. At the end of the day, you have to look at our industry as operating content, but when you have a hit, everything changes.

When you look out the next three years, what do you see as big challenges for you guys?
Howard: The challenge is to stay focused, operate the business with good business sense. Don't go crazy. If the hit doesn't come, that's okay. Our model is designed to work well without hits. So that's our strategy.

In the next three years, do you see Acclaim as a standalone private company, as a part of any bigger platform, or do you see it as a public company?
Howard: We don't have a strategy. Look at what happened to YouTube or what's going to happen to Twitter in the next few days. It's hard to predict. I think as a strategy, an independent private company makes sense; a public offering makes sense if there's a market out there for us. But I suspect that the market is not pretty closed right now, and for a short period of time, there is not going to be an opportunity.


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