[NX] Excited about Zynga’s IPO? Get Ready for Korea’s Nexon
Silicon Valley loves to dismiss Asian companies as nothing more than copycats who thrive, particularly in China, because the government protects them and punishes Western competitors. Even when the businesses in question are dramatically different in practice and scale, they are described as the “eBay of China”, “The Google of China” and “the YouTube of China,” not Alibaba, Baidu and YouKu. I’ve argued why this is mostly nonsense before.
But the starkest argument that Asia does indeed innovate may be found in the world of free-to-play games and virtual goods. This is a new market we’re in a lather about here with the impending $1 billion IPO of Zynga, but one that is much larger and more than ten years old in Asia.
And one of the industry’s pioneers, Nexon, is also said to be readying itself for an IPO. Nexon was started in Korea, but more recently moved its headquarters to Tokyo. And get this: It has higher revenues, far better margins and dramatically better user engagement statistics than Zynga, even if most average Western investors have never heard of it. No big deal, because it’s likely to file somewhere in Asia according to sources familiar with the matter, not on the NYSE or the Nasdaq. And in Korea, China and Japan, Nexon most definitely doesn’t have the problem of being unknown.
Nexon is a 17-year-old company with 1.14 billion cumulative registered users and 3000 employees. In 2009, it reported revenues of $643 million– just north of Zynga’s 2010 revenues. And we hear from people close to the company, Nexon has been growing revenues at about 30% per year for the last five years. That would put 2010 revenues around $900 million, and revenues in 2011 on pace to comfortably break $1 billion. That’s impressive growth considering Nexon’s size, age and penetration in its home market, and it means Nexon’s revenue-per-employee is almost double Zynga’s.
What’s more: Nexon’s margins are far better than Zynga’s because they don’t have to pay the 30% Facebook Credits fee on purchases. Our source says the margins are in the range of their largest competitor, Chinese juggernaut Tencent which had 50% margins in 2010. Increased tax and marketing expenses caused margins to fall to 46.3% in its March 2011 earnings report. Still, for what’s essentially a media business, those margins are pretty enviable.
And like Tencent, Nexon is starting to eye North America and Western Europe for growth. Nexon’s biggest market is in Korea, closely followed by its business in China. But its fastest growing market is North America. Nexon is growing more than 50% a year here, albeit off a pretty small base. Nine days ago it launched a private beta on its first Facebook game, a version of its popular MapleStory Adventures. (Featuring that world-weary pig above.) Some 31,000 players have “purchased” 363,000 items over that period. Purchase is in quote marks because the company isn’t actually using Facebook Credits during the beta period, so the purchases are being made from game play points. Actual monetary purchases will almost certainly be less. Still, it gives you an idea of the engagement going on. The game opens to the public July 27.
Recently I talked to Nexon CFO Owen Mahoney about the North America strategy. He wouldn’t comment- or even hint about- the IPO speculation, Nexon’s revenues, growth or margins, but he had some interesting color on Nexon’s push into the US. The driver isn’t so much Zynga’s success, although the company has done an exemplary job of evangelizing the free-to-play, virtual goods model. The biggest driver is that North America and Western Europe are finally reaching critical mass of broadband needed to support Nexon’s traditional graphics-rich games. Yep, when you are a Korean-born gaming company, we are considered an infrastructure and technology backwater that’s just now starting to look interesting.
For the last few years that Mahoney has been working between the US and Asia, it’s been a surreal experience, with the US considering virtual goods an absurd business model, and Asia considering console games selling in boxes on store shelves just as absurd. The journey has been all the more surreal, because Mahoney spent nine years as an executive at EA.
There’s no dying EA equivalent in Asia, because that model was largely leap-frogged over a decade ago as companies like Tencent, Nexon, Shanda, Giant and others started to soar on the free-to-play model. Even subscription-based gaming models have long been out of vogue. “For two years we couldn’t talk to anyone in North America about microtransactions. It was this weird disconnect because Asian markets couldn’t understand why you would ever go to BestBuy and buy a box. It seemed insane. That’s much less the case now,” Mahoney says.
That disconnect is core to how the social Web and the Web in general has evolved in Asia. In the US, the Internet started with email, commerce, transactions and finding information. It was all about convenience and efficiency, and it’s only in the last five-to-ten years that entertainment-for-entertainment-sake has started to become a huge business online. In Asia, it’s largely the opposite. Put another way, social networks emerged because of gaming in Asia, not as an after-thought add on. And that’s benefitted the big Asian game makers who don’t have to pay the 30% customer acquisition costs to a platform like Facebook or Apple. (Although clearly, Nexon is swallowing those terms to expand more broadly in the US.)
The Nexon game and type of gamer is still pretty distinct from Zynga’s casual Farmville farmer. While Zynga excels at games that continually rope you in for short periods of time and develop new versions of its games to keep people engaged, the life of a Nexon gamer playing a single game is measured in long sessions over months and years. A whopping one-third of its users have played for three years or more and play for tens of hours a month. So you could argue just as big Chinese Web 1.0 giants were never true copy-cats of Valley companies, so too has Zynga iterated and “localized” the free-to-play model.
Of course since Asian gaming companies have the five-to-ten year headstart, it’s their turn to be the giant foreign Web company tapping a new market– in this case, the US. In addition to Nexon, Tencent has been wading in as quietly as it can, doing one big acquisition of Riot Games in February and dozens of smaller, unreported acquisitions over the last year or more. It’ll be interesting to watch whether the Asian Web companies coming to the US have a better track record than we had going to Asia.