1

What’s Next with Games

Trip Hawkins

Outline

• Trends• Strong long-term macros; but current issues• Social product disruption• Game leadership is open• Convenience and the browser

• Big Issues• Discovery cost• Key is LCV (Lifetime Customer Value)• Shift from Distribution to Discovery model

• Opportunities 2

Beyond the Issues: Long-Term Upside1. Billions of gamers2. Billions of devices3. Leverage of Social, F2P4. Upside of virtual goods economies

But Big Current Issues5. Value chain tough on content (+services, tech)6. Platform tweener recession7. Struggling leaders (Sony? FB vs FV? EA? )

3Confidential

Leadership Openings1. Mobile F2P “Freemium” games2. Tablet games3. Browser games (PC, tablet, smartphone, TV)4. Cross-platform games5. Interoperable games6. The science of virtual goods7. Gamification8. Global leadership

4Confidential

Era of Convenience

• Disruptive Product Theory• Social = the new benefit• Trading performance for convenience• Film, music, voice, news, software• Games!

5

Cross-Platform Destiny

6

Convenient Games

• Gamers are growing up, busy• Short sessions, 24x7• Multiple access points, screen sizes• Wolves go where the sheep are• “Casual mastery”• Fantasy Sports evidence• Migrating whales

7Confidential

The Dolphin Market• Dolphins are “streamlined” whales• Curious and intelligent• Love to play, social• Happy to play with friends and strangers• Prefer casual, short sessions• Highly competitive “carnivores”• Echolocation = the first wireless network• Whales are in fact, really big dolphins

8Confidential

What Form Will it Take?• Free to Play• Social• Virtual Goods• “Trip to Vegas”• Cloud-based• Apps “craze” today• Evolving towards browser

9Confidential

Evercore/Gartner Forecast

• Console/PC was $50B in 2007

• Global game industry $50B in 2011

• Console/PC declines from $35B to $15B

• Global game industry $115B in 2017

• Social/mobile grows to $100B

• Sony, Nintendo, EA, ATVI, Take2 ?10Confidential

Discovery Disrupts DistributionTen key principles of distribution business models that become irrelevant with Internet Discovery:

1. Limited physical space2. Travel required to destination3. Financial scale4. Physical scale5. Volume inventory buying/owing power6. Brands needed for sell-through conviction7. Higher cost to bring products to market8. Consumer’s limited time/space at site9. Significant infrastructure requirements10. Must pay/owe in advance

11Confidential

Why Discovery Beats Distribution

• YouTube, newspapers, Pottermore.com• Search beats Shelf• No gatekeepers• Free, open, fair, democratic, competitive• IP relevance wins• Originality beats brand• Very few see this coming!

12Confidential

Software Leadership Requires Systematic Advantages

• IP originality and ownership• Culture of innovation• Technology leverage

• Examples: Unity; Extreme Reality 3D gesture input

• R&D efficiency• Traffic efficiency• Best Practices at scale

13Confidential

Recent Trends• Facebook changes

• Virality down 95%, retention down 50%• FB Credits, Spartan, HTML5

• The app/discovery Flood• Shift to mobile app habit• Apple has 400M credit cards• iPad rules; other tablets coming• Browser ubiquity• Value chain dominated by platforms/services

14Confidential

Gaming’s New World• Must have Internet Lift > Drag

• Reduce eCPA• Increase LCV

• Potatoes = market reach• Technology leverage = 2X

• Guano = free traffic• Discovery engineering = 3X

15Confidential

Discovery/Traffic

• Free in 2009• Social/Viral design features• Cross-Promotion• Marketing leverage

16Confidential

Types of Virality• Word of mouth• Collaboration• Communication

• Social networks• Email• Notifications

• Incentivized• Multiplayer• Competition 17Confidential

Monetization

• Lifetime Customer Value (LCV)• LCV = RASM• Retention• ARPU• Sessions• Monetization share

18Confidential

The Science of Game Design• 3D bias for last 20 years (“Art”)• Shift from Action to Strategy (“Science”)• Game today must be Harrod’s, Disneyland• Economics, merchandising, promotion• How Poker is different

• Repeatable game mechanic that’s play, not work• Virtual currency and spending model• Not a “content treadmill”

• Strategy, Skill, Luck, Dexterity• Study Top Grossing Charts 19Confidential

What’s Up with Zynga?• Facebook, mobile turbulence• Management character, confidence issues• Draw Something: a humbling picture• Legitimate revenue and growth• Outstanding long-term sector• Investing towards independence, cross-platform• Some good products, developers, best practices• Emerging mobile leader; Zynga.com upside• Enormous scale advantage in sector• Strategic cash position• Stock EV is trading at less than 3x EBITDA 20Confidential

What’s Next With Games

• Era of Convenience• Target Dolphins• F2P, High LCV original IP• Apps today, browser tomorrow• Value-added services, Tech +• Master Science of Virtual Goods

21Confidential

Do or Do Not

22