Career Advice Dec 13 2011

Gaming's New Frontier After Zynga

By joseph walker

In July of 2009, David Reid got a call from a recruiter who wanted to gauge his interest in joining a little-known start-up called Trion Worlds Inc. A gaming company founded a couple of years earlier by Lars Buttler, a former Electronic Arts executive, Trion had yet to release a product.

Trion, however, was said to be doing something big in the realm of massively multiplayer online games, or MMO, where players connected by the Internet do battle in fantastical virtual universes. Reid, a gregarious man whose short hair is the only indication of his past life as a U.S. Army lieutenant, had seen how social networks and smartphones were revolutionizing gaming, and he was interested in trying something new. But unlike some of his peers, Reid, 42, didn't want to make these so-called casual games that were so often used to kill time while waiting on line at the grocery store.

So he took the Trion offer, joining the Redwood City, Calif. MMO producer in hopes of making a truly beautiful product, a game with visuals as compelling as a big budget Hollywood movie. Something far more sophisticated than, say, Zynga's FarmVille, the early version of which was built in the space of several weeks. A game that people would pay hard dollars to subscribe to.

Watch FINS reporter Joseph Walker discuss the new frontier in gaming on The WSJ's Digits.

While the pending IPO of Zynga has the tech world buzzing about casual games on Facebook and the iPhone, the world of high-end gaming is also on fire. Since 2009, MMO revenue in the U.S. has increased 35% to $2.6 billion in 2011, according to Newzoo, a Netherlands-based market research and consulting firm. While the overall video games market has shrunk since 2009, MMO games have grown from 8% of total revenue in 2009 to 12% in 2011.

The demand for quality in gaming is particularly intense. Since 2009, the number of medium-to-high quality MMO games has doubled, estimates Newzoo Chief Executive Peter Warman. So has the number of companies making them. Electronic Arts, the granddaddy of gaming, will debut one of its most expensive MMOs, Star Wars: The Old Republic, later this month.

Like any good movie blockbuster, once a successful MMO game breaks even, the profit margins can be as high as 70%, says Michael Pachter, managing director of equity research at Wedbush Securities. The genre's most popular and successful game, World of Warcraft, published by Activision Blizzard, generates revenue of about $1.2 billion, earning profits of $750 million after covering initial costs and reinvestment in the game.

But achieving success isn't easy. A game that costs $80 million to build requires 1 million yearly subscribers to break even. A subscription to World of Warcraft costs $14.99 per month. Sustaining that subscriber base over a few years to profitability is something that fewer than 10 games have done, Pachter says. "The risk is high, and the potential reward is high," he added.

'No Joy in Mudville'

Trion has been on that high wire act since its founding in 2006. The company spent $50 million to build Rift, a fantasy world where players fight to save their planet from invaders, and its supporting infrastructure. Since being released in March, Rift has been played by over 1 million people. A subscription costs $14.99 per month. Trion says it has been a commercial success, although it won't disclose revenue or the number of subscribers. Trion is readying two more games for release, End of Nations and Defiance.

"This is a company that up until March had no revenue and had a lot of employees," says Reid, Trion's senior vice president of publishing, says. "Making three super ambitious games is not a cheap endeavor, so, great, Rift has had tremendous success -- the commercial results are just astounding -- but we've got two more big games coming....There is no joy in Mudville."

The sense of living on the edge permeates Trion's culture. Gordon Chen, the 40-year-old director of art for Rift, passed up an offer to work on Activision Blizzard's popular "Guitar Hero" franchise to join Trion in 2007. His 40-person team has to keep up with day-to-day updates of the game as well as plan for what future iterations of the game's monsters, environments and player avatars will look like.

"Every morning coming into work is triage mode," he says. "You're thinking really short-term all the time, while still thinking long-term." Trion plans to add about 100 employees, mainly in game development, during the first quarter of 2012, bringing total headcount to 520, says Tina Cruz, director of human resources.

New Model

MMO companies aren't just replicating the World of Warcraft subscription model and trying to steal that game's users. The industry is also taking a page from Zynga, which offers its games for free and makes money from in-game purchases of virtual goods. Trion will release its upcoming End of Nations as a free-to-play game to try and take advantage of this free-to-play market that counts on in-game purchases of virtual goods.

Tiny Speck, an MMO start-up based in San Francisco and Vancouver, has raised $17 million in venture financing to build Glitch, which brings players into a psychedelic world conceived by 11 giants. The game launched in September.

"More people signed up than we expected," says co-founder Eric Costello. But whereas Zynga makes about 5 cents from each of its 150 million unique users, Tiny Speck plans to make more money from each user off of the virtual goods they purchase, and thus needs fewer users.

It's a passion project for the company's founders, the original team behind photo-sharing service Flickr, which was acquired by Yahoo for $35 million in 2005. Flickr grew out of an attempt to build an MMO called Game Neverending, which never took off. Tiny Speck was started in 2009 to try again. The company has 41 employees, including 16 hired since June. About half of the staff is in engineering.

"Everyone likes to play games, and I think every engineer wants to be making games in the bottoms of their hearts," says the 40-year-old Costello, who spent his childhood stealing quarters from his parents to play games at the arcade. "We have an opportunity to do it, to make this silly thing that we've always wanted to make. and so we're going to do it."

Many of the company's technologists work eight hours at the office, then work another four hours at home. Some stay at the office as late 10 p.m, says Cal Henderson, vice president of engineering. Glitch is online 24 hours a day, seven days a week, so the company's engineers have to be available to fix server crashes and other problems whenever they occur, lest a player become frustrated and move on to another game.

Most Tiny Speck employees are based in San Francisco, but President Stewart Butterfield is in Vancouver, and Costello in New York. They communicate through instant messaging. "Working around the clock, being online all the time is a core part of our culture." says Kakul Srivastava, vice president of product and operations.

With competitive cash and stock compensation, plus a drive to build something as valuable as Flickr, the company's founders say they don't mind working the long hours that Glitch requires. They hire employees who don't mind it, either.

"A lot of our engineers and artists work really long hours," Costello says. "The game industry is famous for running their employees into the ground, and we definitely don't want to do that, but we've also found that building a game is a lot harder than we thought it would be."

Write to Joseph Walker at Joseph.Walker@dowjones.com



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