OCT. 5, 2011 • One game company that has successfully avoided the me-too, casual game approach on Facebook is Kabam. Against all of the conventional wisdom of what sells on social networks, Kabam has gone after males with core strategy titles. That novel approach has netted the firm a smaller than typical user base for its games, but those people who play titles like Kingdoms of Camelot spend significantly more money on virtual items.

Kabam has raised $115 million in venture funding during the last year to fuel growth, and has increased its staff from 25 to more than 400 since 2010.  With offices in Beijing, Kabam is also positioning itself to migrate its content to wider points in Asia, in addition to its existing North American and European markets.

In recent months Kabam has been the subject of much conversation in the venture capital community. As the firm seems poised for a major breakout in coming months, DFC spoke with chief-executive Kevin Chou, and chief operating officer Chris Carvalho, to discover what Kabam’s plans are.

DFC: So give us the big picture overview of Kabam.  How did the company come together? What are your primary products?  How long have you been around? How would you describe your business model?

Kevin: Kabam, previously known as Watercooler, has gone through a number of business model iterations in our five years of existence.  The company initially focused on the development of social network applications for corporations.  The founding team then pivoted the company’s business to become one of the first developers on Facebook creating apps for sports and entertainment communities. App installations eventually topped 60 million as the company built a strong expertise in app development for the Facebook platform.

However, those early apps relied on advertising to generate revenue and the economic recession in 2008-09 took a severe toll on that business model. So a little over two years ago the company shifted its focus to concentrate on the emerging market of social games and pursued a distinctive strategy we believed would address a market need and create significant value.

This new strategy focused on creating social games for core gamers.  Our founders are hardcore gamers themselves, with a particular affinity for strategy games, so they recognized this was an untapped, potentially high value, segment in the social games space.  As other game companies developed casual social games that appealed primarily to less ardent or experienced gamers, Kabam developed hardcore social games.  These games were Massively Multiplayer Social Games (MMSGs) for core gamers, combining the game mechanics of MMO strategy and RPG games with the social connectivity and interactive benefits of social platforms.

Concurrent with this new direction, Kabam also adopted a free-to-play/virtual goods business model, offering a “frictionless” experience for our consumers.  There are no hardware or software requirements to play Kabam games: all a player needs is an Internet connected device, as our games are delivered directly from the cloud to their browser.  Players can play for free, and only choose to pay once they have derived value from playing the game.  It is always the consumer’s choice whether they pay for any goods, what they buy, and when and how much they buy.  That’s why we like to say the consumer is in control – they decide if they want to pay and if so, how much they’re willing to pay to maximize their enjoyment.  This model also enables Kabam to enjoy a direct relationship with our customers, which we believe is a strategic advantage over traditional retail game models.

Our first  title, Kingdoms of Camelot, proved to be a runaway success when launched in the fall of 2009.  Over 20 million people have played the game to date. We have since launched additional hardcore social strategy game titles such as Glory of Rome, Dragons of Atlantis, Global Warfare, and Edgeworld.  By the time this goes to print, Kabam will have seven games available on Facebook, Google+, and other social networking sites worldwide. In addition, the company has also begun to expand into the mobile space.

DFC: Since January 2010 Kabam has gone from 25 employees to more than 400. What are all of these new people working on?

Chris:  We have our employees focused on three things:

•  Sustaining great games that entertain our players. One key to our success is maintaining healthy, thriving franchises and online player communities by continuously adding features and value to our current games.  Our player are very engaged and immersed in our games; nine out of 10 users play our games daily and play sessions average over three hours a day. This high engagement level is one reason why Kingdoms of Camelot won the 2010 IGN Readers Choice Award for Best Facebook Game and is still going strong twenty months after its launch.

•  Expanding our portfolio by developing games with new, enhanced features, as well as expanding into new genres and platforms. At the start of 2010 we had one game on Facebook.  At the end of 2010 we had three games in the marketplace on Facebook.  By the end of 2011 we will have ten games in the marketplace on multiple social platforms globally and new platforms such as mobile.  And, there’s more to come.  With this expansion, one important thing does not change. With each new release, we focus on innovation and adding new features to attract and keep our players entertained and engaged.

•  Foundational Services for us to scale the business. Adding major resources to teams in areas that enable us to maximize our service and business, such as:

Business Intelligence – this drives our ability to measure and quickly react to game and industry changes

Marketing – we use sophisticated models that target and attract core gamers to our games

Quality Assurance – ensuring our games are of the highest quality

Payments – we support 190 markets and 25 currencies

Customer Support – we provide seven days a week coverage in multiple languages

Localization – we localize in 13 languages including Swedish and Turkish

DFC: You have been quoted as saying that your games do not aggressively push Facebook viral channels. Granted, your model is attracting a smaller number of total users, but a higher number of paying customers, but if you are not pushing the viral tools, what is the ultimate benefit of being on Facebook compared to a portal like Bigpoint with more than 200 million users?

Kevin: Kabam’s strategy is to create hardcore social games that players can enjoy on any platform.  Our focus is to design great gameplay that is social and immersive so that players want to share the games voluntarily with their friends.  Facebook offered a significant audience of over 700 million people and allowed us to leverage our deep experience in creating apps on that platform. We’ve been very successful on Facebook, and that’s just a starting point.  As a consumer focused company, we’ll expand our distribution to include additional platforms where our players choose to spend their time.

DFC: Are social network users really pining away for more core strategy game experiences?  How do we know this?

Chris: First off, we look at the performance of our business.  With five hardcore social games in market as of this interview, and more on the way, we are seeing excellent growth and revenue from our portfolio of massively multiplayer social games. That tells us that there is an appetite for hardcore social games.

We have also conducted qualitative research and several quantitative studies to help us understand the social game market, and the social game player in particular.  This research tells us there is a very sizable audience of core gamers on social platforms, roughly 50 million in the U.S. alone.

Our research also reveals a behavioral change taking place in the market.  When you provide people with a credible alternative to console or computer based games that core gamers might enjoy along with a “frictionless” model, as we have done, there’s a good chance that you will see shifts in behavior.  Our recently completed Social Gamer Survey indicates that such a consumer shift is indeed taking place: 55% of our Kabam game players tell us that they have decreased the amount of time they are spending playing games on other core game platforms like consoles.

Finally, we know there is growing interest in more hardcore strategy games on social networks by looking at the massive disruption going on in the $45-plus billion gaming space.  In 2008, online gaming (defined as social, web, and mobile) represented approximately one-third of total gaming revenue.  Sometime in 2012, we expect to see online revenues surpass console gaming revenue and they will continue to grow.  This tectonic shift is happening because social games are now providing a viable alternative to console gaming with games that are deep and engaging with gameplay features core gamers seek and delivering those games to consumers in a frictionless manner.

DFC: When going after core strategy gamers Kabam is not competing with Zynga, Popcap and others that target a different demographic.  Instead it is going right after the gamer that enjoys big franchises from companies like Activision Blizzard and Electronic Arts.  How do you think you will be able to compete if these companies start aggressively pursuing this space using some of their core franchises?

Kevin: Social games that utilize a free-to-play, micro-transaction model are very different than console or even subscription model online games in nearly every way – game design, gameplay, technology, distribution, marketing, monetization, etc.  It requires an entirely different DNA.

For example, a major console title release takes two to four years development time and tens of millions of dollars before it reaches market.  Once the game ships to retail, the bulk of the work is done.

We are used to operating much more quickly and efficiently than traditional game publishers.  We produce our games on six to nine month timelines and for a small fraction of the cost of console games.  We’re also used to the fact that after we launch, the bulk of our work lies ahead of us. We iterate/add to our games nearly weekly, adding new features, optimizing game play, making fixes, etc. In this sense, we are continually listening to our customers and improving the game over time, and developing direct customer relationships that just do not exist in a retail-delivered product.

The bottom line is the manner in which one generates revenue in a free-to-play/virtual goods model is complicated and difficult to get right. We’ve built Kabam on these new dynamics – it’s in our company’s DNA and impacts everything we do. Our franchises are designed from the ground up to succeed in an online social environment. There’s a big difference between creating original titles in this manner compared to bringing a packaged goods title to the retail market.  That’s a difficult chasm for any company to cross.

DFC: The majority of Facebook users tend to be females close to 40 years old. Yet 70% of the people Kabam games are attracting are males between 18 and 35. How are these males finding you on Facebook, and how are you marketing to them?

Chris: We find people on Facebook through targeted marketing campaigns and have developed highly sophisticated performance marketing programs to acquire customers.  We also find that these players often have friends that share similar interests, so they serve as “ambassadors” for our games.  The strength of social gaming is the way you can bring a user in to a game – if your game is fun and engaging you will invite your friends to join you.

DFC: How close are you to transitioning Kabam.com into its own portal for places where Facebook is not a major player?

Kevin: Kabam.com is important to our future and to our players, but we will always be part of successful social networks like Facebook or Google+.

DFC:  You just opened an office in Luxembourg. How does this new office help Kabam expand, and what is your European strategy?

Chris: We are focused on becoming a major, global gaming company.  Europe is very important to that strategy.  We have set up a center of expertise in Luxembourg to localize and support games in 13-plus languages. We are building out other key teams  – from marketing to tech ops to business development – and are looking to the day when we might set up a gaming studio in Europe.

DFC: Is it true that the majority of your most recent users have come from outside North America? If true, from what parts of the world are these news users coming from?

Chris: The vast majority of our users typically come from the U.S. and Europe at this time. We’re also making inroads in Asia.   One of our strategies has been to aggressively market and grow our games in non-English languages, and we will continue to do so.

DFC: Some analysis has claimed that Kabam’s primary growth target for the future is Asia. Would you agree with that claim, and if so, please tell us how you intend to pursue Asia. What social networks or portals would you leverage, etc.?

Kevin: Asia is a $10 billion-plus market opportunity for Kabam, but has historically proven to be a challenging market to enter for North American companies.  Kabam is uniquely positioned for success due to our experienced Beijing studio and Asian American founder relationships. We will be actively growing our China, Japan, Korea, India, and South East Asian markets through partnerships.

DFC: In terms of China, your team in Beijing has said staff there will expand from 80 to 200 employees by the end of the year. It has been reported that Kabam already has sealed, or near sealing, distribution agreements with Tencent, RenRen, and Kaixin001 to launch social and mobile games in the country.  Please tell us more about your China strategy.

Kevin: We are discussing our market entry strategy with a number of partners.  Our investors include SK Telecom, who has been actively helping us in talking to a number of partners in Korea, China, Japan, and India.  We will be solidifying our partnerships shortly.

DFC:  At our last count, your games were localized into 13 different languages. A year from now, what do you expect that number will be?

Chris: Our operations and localization teams constantly evaluate markets that will help expand our games.  We do not have a specific target yet, but a year from now we could easily be localized in twice as many languages as we are today.

DFC: Do you feel your hardcore content focus is a better F2P fit in Asia than the Americas or Europe?

Kevin: For a number of reasons – including IP protection issues – Asia has led the development of F2P hardcore games. That trend has been growing over the last decade and there are nine publicly traded Chinese companies that have led this charge.  However, the U.S. and Europe are rapidly catching up.  Kabam in particular, has been on a very steep growth curve, and so far the vast majority of our revenue is derived from N. America and Europe.  We believe strongly that not only is there a worldwide opportunity, but there’s an incredible opportunity for us in Asia and beyond.

DFC: How well do you think you will be able to compete against Asian providers that are already aggressively marketing their core game franchises?

Kevin: We don’t expect to compete head on with Asian providers.  We will focus on what Kabam does best, which is creating streaming gaming experiences. This is different from the large Asian gaming companies, which primarily focus on heavy client games that create much more friction for consumers to get into a game.

DFC: What are the other challenges of operating in Asia?

Kevin: The regulatory and cultural challenges differ market to market in Asia.  Consequently, we are taking a localized approach to the region.  We’re not treating it as a single market, but rather looking at each market as a vibrant, different marketplace that requires a local product and strategy.

DFC: Kabam has pulled in venture capital funding in two big chunks this year: $30 million and $85 million.  Where is all of that money going? 

Chris: We plan to use that money to accelerate our growth in the following areas:

•  Continue to expand and diversify our games portfolio, furthering our game technology and capabilities in the process

•  Pursue further international expansion, particularly in Asia

•  Actively solicit additional acquisitions

•  Continue expanding our game brands to include licensing branded IP

•  Expand our platform capabilities in line with our customer preferences.

DFC: Google Ventures was part of that larger series of funding, what do you think of Google+, the new social network?

Kevin: In general, we believe that competition is good in a marketplace.  Ultimately, choice benefits everyone in the ecosystem – consumers, developers and even the platforms themselves.

We’ve been impressed by Google+ so far. Their ability to deliver a feature parity product at version 1 says a lot about the commitment, effort and desire to deliver a great user experience.  It has excellent design and features that are well-tailored to games, and its clear Google has thought through the needs of gamers and developers.  For example, Circles looks to be a very good feature, one that is more conducive to better management of gamer relationships.

DFC: What Google+ feature could immediately enhance Kabam’s publishing model?

Kevin: Based on what we’ve seen so far, Circles and Hangouts look like features that would both benefit our games and be very compelling to our core gamer audience.  Circles will enable gamers a better way to organize, manage and communicate with their game-playing friends and share updates without including their entire social graph.   A major point of difference for Kabam games is our group play feature, i.e., alliances.  Hangouts will enable more expansive communication among people in alliances, and the video chat ability will make Kabam player alliance planning more interactive and fun.

DFC: What would it take to publish your games on Google+?

Kevin: We are very open to considering publishing on additional platforms.  In fact, we do so right now in Europe and are actively seeking partners around the world.  Our decision process for any new platform, including Google+, includes the following steps:

•  First, they will need to have a games platform.

•  Then we’d need to evaluate it for fit and performance of our games on that platform.

•  Third, we will need to know the level of commitment, developer support, etc. that the platform owner would provide.

•  Finally, we would need a fair price where the tax rate enables investment in innovative gameplay, and allows game companies to make money on a network.

When these factors come together on a platform, and in this industry things can come together quickly, you’ll see Kabam look to publish on that platform.

That was the case with Google+, where two of our games, Dragons of Atlantis and Edgeworld, were included as two of the initial launch games on that platform.

DFC: Kabam is said to be actively investigating publishing on other platforms.  What platforms are a good fit for the strategy experiences that are your calling card? 

Chris: One of the great things about Kabam games is that our game worlds are both persistent and device agnostic. Our games are designed so that all you require is an Internet connected device in order to play. A persistent world means that there is always something going on, e.g., an action you can take, resources to mine, etc.  These two factors combine to enable our games to work across a number of devices – computer, tablet, and smartphones, as well as a variety of social, online, and mobile destinations.  You can start mining resources in the morning via your smartphone, initiate building or upgrading base structures from your computer at work during a break, then team up with your alliance at night via your desktop PC to do battle with another alliance for control of strategic resources.

DFC:  It has been a while now since Facebook Credits became the only coin of the realm. How has Kabam weathered the transition, and what opportunities have you identified to exploit?

Kevin: Facebook Credits has had both positive and negative impacts.  We do believe that universal payments are good for the consumer, and support Facebook’s initiative to create more frictionless payments.  Our players are benefiting from a more streamlined payment experience.  However, Facebook Credits has many opportunities to improve that experience for players in terms of offers and international payments, and also in creating value for game developers.  Most importantly, other platforms like Google+ have created similar value for consumers, but are charging a significantly lower tax rate, which helps enable significantly more investment from more game developers.

DFC: Please give us a breakdown of what virtual items you sell, and how much they cost.

Chris: We sell a large number of items that range from very inexpensive, utilitarian goods to very valuable items whose cost is commensurate to the value they represent to the gamer.

DFC: What virtual items are very popular with your users, and why?

Chris: Kabam game virtual items are nearly all related to the participation and advancement of progress in our game worlds.  Put another way, we have very little in the way of “vanity items.”  In our games, virtual items relate directly to building, adding resources, enhancing defense or strengthening combat skills.  As such, they are integral to the game for any user.  Since our games are more competitive than casual social games, these items rate a high value with Kabam gamers.

We’ve also found that “speed ups” are popular among many users; these are items that essentially reduce the time needed to build/upgrade structures and units, train troops, etc. The time-based benefit of speed ups is very popular among those players who are in a hurry to advance their progress and don’t want to grind to build their levels.

DFC: We have read that Kabam is offering users a growing number of randomized virtual items that encourages users to buy more not knowing what they will end up with. How do you respond to critics that claim randomized virtual items are another form of gambling that preys on children?

Kevin: It’s our policy not to let anyone under 13 to play our games.