Gree and Funzio: Inside The $210m Acquisition

We've been an independent social game company primarily focused on mobile, building really high-quality games, and we were creating this mid-core market for ourselves. Over the course of working on the business, we had an opportunity to start interacting with some of Gree's executives. We had multiple dinners with the CEO of Gree and the CEO of US Gree. What came out of those conversations was that mobile gaming in Japan is going gangbusters. The style of games they make, the game mechanics that they have, the monetization characteristics of the games... they have really proven that they can out-execute any game developer here.

The second thing is we felt that the Gree team is just fantastic, their vision to become the #1 mobile gaming company in the world was something that we were totally aligned with, and that this would just accelerate that growth and our ability to hit that vision. So we felt we were aligned in every single way, and decided to do the deal.

Gree started life in Japan, and most recently has been pursuing a strategy outside of Japan of global expansion and application of lessons learned and assets created in Japan; a big piece of that is finding the right games for that strategy. As you look across the landscape of folks who make games for the mobile social experience, the Funzio team is a complete and total standout. They're unique in that they have a 100 percent hit rate; they've made three games and all of them have been hits. They come from very interesting places from an employee pedigree standpoint, they have a deep understanding of social, they have a deep understanding of mobile, and they're a world-class team in an area that's very young. As we talked to them it really became clear that they saw the world the way we did. The longer we talked about it, the more combining forces made a whole lot of sense.

From a people and employee perspective, one of the proposals that we actually brought up to the management was we wanted to go full out and integrate with Gree. There's going to be a lot of knowledge exchange that's needed, and if you really want to execute on that vision, we need their help and they need our help. It's going to be more of a hybrid, where Funzio studio - I hate to call it Funzio, I would call it a mid-core studio or just another studio that exists within Gree US - with some of the execs, folks like me going completely horizontal. So we are not part of any studio, but we are just going to help the Gree International business succeed. I think in the end it's the talent that wins, it's the culture that wins, and they see it exactly the same way.

That's an excellent question, and something that we always talk about here internally. What we tend to focus on here is less on the style of games; we tend to focus more on the game mechanics. We try to figure out if those are successful game mechanics. At the end of the day you can break each game into those game mechanics, and figure out if those game mechanics can apply to the style of games that we do here. I can't get into more details, but we did implement a few of the game mechanics that we ended up learning while visiting Japan, and we have seen really good success in North America and Europe. We already know that the particular game mechanics are transferable, so we tend to obsess less about the style. It's not about a card game; it's about what are they doing within the card game that makes it so fun and addicting where people are actually paying a lot of money. That's why we are extremely bullish about this deal and we think we have so much more to learn from them.

If you look at the types of content that historically have been hits in Japan, a lot of that product never makes it out to the global market and there are good reasons for that. That said, there are franchises that cut through from Japan, like Resident Evil on the console side for example, Mario... all of these classics from the big Japanese console companies. There are comparatively few examples of non-Japanese content to succeed over there; Grand Theft Auto is a surprising standout. Some of our platform partners in Japan are companies like Sega and Konami, and they have franchises that historically have been successful cross-market, and we're hopeful we'll be able to partner with folks like that to try out these ideas, but to your point, yes, there are certain categories of games that don't apply everywhere.

Our focus today is mobile first and web second. I don't think that's going to change, because we feel that the race is really on for who's going to dominate mobile. The second realization we've had over the last couple of years is that cross-platform strategy is pretty important because these platforms can change at any time; they can change their rules, they can change their policies. The winners are going to be the ones that are flexible and understand each of the strengths and weaknesses of the individual specific platform. We've had that holistic view and I don't think we're going to change. Having said that, the real focus right now is on mobile. What we are most bullish about within mobile are iPads and tablets. Funzio is probably in the top three or top five iPad gaming companies today in terms of revenue, with all three of our games doing really well on the iPad.

That's a good question. We do think that some of those other mobile game companies are focused on the casual market. Our games tend to attract more males. Our Kingdom Age game seems to attract a nice healthy mix of male and female, but our previous two games, Crime City and Modern War, you can imagine just based on those themes are much more male-centric games, which is unlike most of the players in this industry that tend to focus very much on the casual female, stay-at-home mom. We've kind of created our own market and our own niche, which was always our initial strategy.

We believe that not only is the monetization better, but we can keep the user far longer than these other games. You see a lot of our competitors launch games that quickly fall off the charts. What we want to do is build franchises that people are playing on their phones, on their tablets for two years to four years. That's been our charter from day one and that's how we guarantee success.

It's a bit of a problem and an opportunity. On the opportunity side clearly there's a validation from a lot of smart people that the opportunity is huge. I think our own success speaks to that, as do some of our competitors. In terms of a problem, the only problem we should all be concerned about in the space is how this affects the ability of players to get access to games that they'll be rewarded by, and for developers to create them. Our approach is to try and create that ecosystem that will be rewarding for all different parts of the ecosystem.

As an independent game developer that might have looked a bit scary, even though we've had three games, three hits. Now that we're a part of Gree we know we have the resources, which means more than just money; it means talent, it means their deep understanding of this market, and they've been building games for years and years. Every subsequent game we've been able to raise the bar of our games - the quality, the animation, the game design just keeps getting better and better, and it actually shows in our metrics. Our monetization patterns, our retention patterns, they just keep improving with every subsequent launch. I think we are very uniquely placed with the combination of these two entities to be able to achieve this faster than anyone else can.

Yes, that is true, but the way we build our games is very engine-specific. We build a common engine, and then on top of it we tend to tweak the engine based on the genre. So while the initial cost of building the engine might be more, once you have the engine then releasing these games becomes much faster. What we've tended to do at Funzio is have a three to four month cadence; within three months of each game we launch the next one. What we've been able to prove is, and this is another thing Gree loved, we've been able to raise the bar at a speed which matches any of our competitors. That's part of the winning strategy here.

It's kind of a copout answer, but you just named them all. At a very high level, what we're trying to do is create the largest ecosystem for players and developers; in order to do that we have to do all those things you just mentioned. Those are building blocks on the way to that larger goal, which is for players we want to create the premier destination for them to find content and games that they enjoy, and for developers we're trying to provide them the premier set of tools and audience for them to build their business and grow their audience base.

That's an excellent question. New IP always works. Another thing we've not done is that all our games are only in English right now. Every day I look at my numbers and I say "I wish we were in French, German, Italian, I wish we were in all the Asian languages for Android." I think there's a lot of money, not just users, that we're leaving on the table by not having these games localized and customized for these large countries and these large populations.

That ties into our next goals; as Gree CEO Tanaka-san said, our goal is to reach a billion gamers across the world just on mobile. We can accelerate that and get to that vision once we release new IP, localize our games, and build up more studios. Right now we are focused on mid-core, which was always a beachhead strategy. We are thinking of starting new studios focused on different verticals in the gaming space. I think a combination of all of those is challenging, but that's what makes it so fun to be involved in trying to achieve that vision.

Yes, that's a good way of looking at it.

In the mobile space things will just keep going at least for the next couple of years. There's going to be more smartphones than Facebook users. We don't see that changing at all. The second big thing we see is a lot more focus on tablets. We are hoping that Android figures out tablet at some point, so it's not just the iPad that we have substantial traffic from. You'll start seeing a lot of game companies only focus on the tablet market. I'm starting to see some right now.

I do feel with regards to social web, if you take Facebook and Google+ as an example, definitely the growth there is slowing down. Those platforms need to figure out what they need to do in order to accelerate that growth to match the mobile growth. It definitely seems to be slowing down right now.

That's a great question. You're talking to the geek in me now. I don't know where Gree stands on it, but the geek in me can't wait for that to happen. I would say yes it's going to happen, and I think Apple might be the first one to figure that out, where gaming becomes actually a pretty key part of the TV experience. Whether you're playing it on the iPad or your TV or your phone, I think Apple has the best chance to enable that. Having said that, not all games are going to make sense to play on TV. It's really the developers who can figure out what genres, what style of games will work, but I think it's going to be a booming platform.

I think people's awareness of corporate brands is a function of the maturity of the space. As the space matures, people will become more and more aware of companies because they'll play multiple games by that company, and they'll start to realize 'Oh, that's the company that makes XYZ game'. I think that's more a commentary on the state of the market today, and not necessarily where we'll be as the market matures. Gree's intent is that as consumers become more and more aware of us as a place to find and play the games that they like, they will continue to recognize the brand and hopefully they'll look for it in the future.

We're exceptionally excited to be working with the Funzio team. We have an immense amount of respect for them and we can't wait for the next phase of the business with them.