Bringing the Item-Based Model to the Western Market

1. Bringing the Item-Based Model to the Western Market Please download slides from: http://djames.org/gstar.ppt Daniel James, CEO | daniel@threerings.net | www.threerings.net

2. Three Rings Background • Daniel: MUDs since 1982 • Three Rings founded 2001 • Puzzle Pirates first US Casual MMO • Subscription launched 2003 • ‘Doubloons’ pay-for-item model Feb 2005 • Privately funded • Founders, Friends, Family $800k • Angels, small Venture Funds $1.5m (May 2006) • Profitable, $4M revenue run, ~30 fte employees • Two new games to debut in 2007 • Seeking International partners

3. Item-Based Model • ‘Free to Play, Pay for Stuff’ • Sale of in-game content by operator • Primary revenue source • May be combined with subscriptions etc. • Usually mediated through virtual currency

4. Western Market • US and Western Europe • Largest Interactive Entertainment market • Retail driven • Console dominated • Nascent online games business • MMORPG’s: World of Warcraft, EverQuest • Casual Game Portals

5. Western MMORPG Business • Hit games are very profitable • WoW ~3M US/EU subscribers = ~$500M • 100k+ subscribers -> up to 70% net margins • Development bets are huge (~$50M+) • Games are undifferentiated • ‘Feature list compliance’ • Opinion: • Glut of product, very few hits • Very bad business for Developers

6. Western Casual Games • ‘Bejeweled’, ‘Diner Dash’ etc. • Single-player, often Puzzle games with ‘story’ • Free ad supported web game • $20 ‘premium’ downloadable version • Was a good independent developer business; • ~$50k development costs, rising to ~$250k+ • Reasonable channel and emerging publishers • Increasingly competitive • Opinion: dead-end business • Economics and distribution becoming hit driven • Downloadable model monetizes <1% of players

7. Western Casual Game Portals • Advertising sales primary business model • Rarely share advertising revenue with developers • $20 ‘Downloadable’ model an after-thought • Games to attract a demographic, not to make sales • Most portals part of major online/media companies • Slow to implement new games and features • Rarely invest in content production • Aging web-based multi-player games • Slow to integrate games with new models • Problems sharing registration and billing platforms • Opinion: disruption ahead for existing portals

8. ‘Advanced Casual’ Games • ‘Korean-style’ Casual Games • Multi-player ‘console-style’ often ~8 players, sometimes MMO • Item ‘mall’ and virtual currencies • Often successful without portal distribution(?) • Attractive for developers and investors • Development budget in US of ~$1M • Low operating costs and very high item margins • Potential for ‘long tail’ and slow-building growth • Largely untested in western markets • Early signs are good!

9. Puzzle Pirates • Successful item-pay casual MMO • ~$45 average monthly revenue • ~$100 lifetime revenue, top players $10k+ • Revenues now ~$340k monthly (inc. $100k subscription) • Conversion registered user -> customer ~5% • Low ~$750k development cost • Distribution: revenue-sharing partners • Miniclip, Neopets, Shockwave, Popcap • Little marketing investment

10. Lessons from Puzzle Pirates • Do not require .EXE installation • Everyone but ‘core’ gamers very download-adverse • Virus scanners cause problems • PP now served as signed Java applet • Distribution via portals is a problem • Requires integration • Doesn’t fit with $20 downloads or advertising

11. Habbo Hotel • Teen chat room with Furniture sales • ~$70M revenues 2006, $35M 2005 • Majority revenues EU via SMS • Claim to monetize 10-20% of players • Runs in shockwave plugin • Company: Sulake of Finland • $20M+ Benchmark Capital investment • Worldwide offices • Some content / marketing deals e.g. Disney • Market leader in US/EU • Opinion: Japanese stock market?

12. Second Life • User-created Virtual World • Developer Linden Lab does not make any content • High-profile ‘landlords’ and business entrants • Low usage: 10,000 pcu • Hybrid land/currency business model • Linden $ player exchange for US$ (~$3M/day) • Primary model: renting world space • Secondary model: selling currency • ‘Not a Game’ • Attempt to make generic ‘metaverse’

13. Maple Story / Nexon • Successful ‘stealth’ release in US • Established global server with small team • Ramping up now on basis of success • Speculation on Kart Rider in US/EU • Numerous competitive games in development

14. Albatross 18 (Pangya) • OGPlanet US operator • Raised $1.5M from angels • Claims $25 monthly revenue per ‘player’ • Exclusive partnership with Lycos

15. GoPets Live • Korean-built viral online pet game • Worldwide distribution via local partners • ~125k US registered users • 25% of users, 50% of revenues • Virtual currency, item sales

16. ijji.com • First major Korean games portal entry • Korean team shipped out to Silicon Valley • Acquired ‘Gunbound’, basis for ~3k pcu • Differentiated from US portals • Multi-player games • Community and avatar features • Opinion: will be hard to acquire audience

17. RuneScape • ‘Lite’ Java MMORPG • Runs in-browser, ugly graphics • Simple high ‘grind’ gameplay • Incredible success ages 7-14 • ~3M active players, ~200k pcu • Free to play basic game • 750k premium subscribers @ $5 / month • Many competitive MMO-lite games in development

18. New Casual Game Entrants • US startups license Korean games: • K2network.net: mu / War Rock / Golf King • Acclaim: Bots, 9Dragons • Korean companies partner with US distribution: • Hanbitsoft: Albatross 18 • Shot Online

19. Collectible Card Games • Magic: the Gathering Online • Lord of the Rings, Star Trek, etc. (Sony) • Very high ARPU • Niche market

20. Social Networks in US/EU • Dominant players • Myspace.com (US) and Bebo.com (UK, RoW) • Very hard to get traction with new entrant • Viral growth pattern can top out very fast • Cyworld: appeal of ‘mini-hompy’ unproven • Opinion: will not succeed in the US/EU market

21. Pay for Avatar • Very popular with Venture Capitalists • Meez.com • Stardoll.com • GaiaOnline.com • Potential not yet clear • Successful with teen audience • Little revenue from item sales, yet

22. Advertising • Very cyclic business • Good times are here, for now • Long-term growth modest • $316M / 2006 to $573M 2007 (DFC Intelligence) • Opinion: monetization of players will always have greater value

23. Console • Xbox Live Excitement • Viable pay for item billing platform • Live Arcade for downloadable games • ‘Inspiring’ Sony and Nintendo • Revenues will grow, but slowly initially • ~$1BN business in 2009 (DFC Intelligence) • First Korean entrants (Webzen) • Opinion: unappealing for developers • Competing on console adds complexity and cost • Audience size and monetization potential uncertain • Good option for successful franchises

24. Mobile • First MMO entrants • Operators are the roadblock • Billing platform under-utilized (50% fees) • Handset porting issues abound • Opinion: a bad business for developers and getting worse

25. What to do? (Opinion) • Make small and cheap US/EU ‘organic’ bets • Build distribution and local expertise slowly • Very few acquisition targets and hot funding market • Carry on taking over the rest of the world • US market is not yet ready for Korean Games • Early entrants will continue to lose money • Asia, EU and RoW opportunities abound • Do not sell out to US/Japanese Publishers • Retail and console business to be disrupted by online • Korea is the worldwide market leader • Stay a mammal, don’t join the dinosaurs

26. Thank you! Please download slides from: http://djames.org/gstar.ppt Daniel James, CEO | daniel@threerings.net | www.threerings.net