AGDC: Nexon's Min Kim On The Power Of Microtransactions

Minho Kim is Nexon America’s director of game operations, and Nexon’s incredible success with its free-to-play, pay-for-items online game model makes him a perfect keynote to start the final day of the Austin Game Developers Conference. Nexon, as Kim explained, was established in 1994 in Korea -- first a developer, then a publisher, they serviced their own games, as well as those of third parties. In 2005, Nexon’s revenues were $230 million, with a net profit of $75 million, and the company had some 1,600 people in its employ. And in 2005, 80% of their revenue came from in-game item sales. “The great thing about microtransactions is that they’re scalable,” said Kim. “You can spend as little as zero dollars -- but as much as you want. You’re not linked to a certain scale.” And his model is clearly working, as Nexon’s casual MMOs MapleStory and KartRider are played by about 25% of the South Korean population. MapleStory, says Kim, is one of most profitable online games globally - $16 million per month, with 210 concurrent users. On the casual MMO’s success, Kim said, “We find that pushing graphics is not important. What we find is, if you take out that graphics card, most people can’t play it.” It’s a barrier to entry that Nexon tries to avoid. “Everyone’s been saying PC is dying for a while, but with YouTube and MySpace and services like that, people are living on the 'net, and that’s where they play these games,” Kim explained. When Nexon first entered the Western market in 2000 with games like Shattered Galaxy and Kingdom of the Winds, Kim admited, “We weren’t prepared for what we got into here. Teens weren’t yet living online, it was just a losing business for us. So we went back to Korea and decided to work on that market.” The Maple Effect Kim then performed a case study on MapleStory, which was launched in 2003 in Korea, and 2006 in North America and Singapore. “We had no marketing,” he recalled, “just posted in forums and got our IPs banned in a lot of places. But the reception was good, which was perplexing, because we’d bowed out of that market in the past.” User figures continued to grow virally, and average playtime for a given user grew to over 40 hours a month. Players showed resilience against the company’s long downloads for patches and spotty service. “We weren’t doing a good job, but they kept coming back,” he said. “We didn’t know who our players were or who they would be in the future, or if they’d even buy virtual items. We had no idea that we were riding the wave of a new online/social generation.” Kim and Nexon discovered that people were looking for new ways to communicate, and said that that things like downloadable mobile wallpapers and ringtones primed the industry for microtransactions. Hack and Slash When Nexon America opened in September of 2006, the company quickly found itself plagued by credit card fraud and hacking. Fraud isn’t easily predictable, Kim said; it grows, and with the inevitable delays involved in credit card transactions, it’s hard to know when it’s happening. On top of that, the added revenue clouds your ability to even identify it – on the surface, it just looks positive; more money coming in. But each fraudulent transaction costs Nexon a fee - $20, plus the loss of whatever revenue would’ve been gained from the transaction. “Increased fraud levels can expel you from credit card transactions,” he warned. “Companies that I know of have been dealt fines in six figures.” As Kim said, fraud rates over 1% result in hits from the credit card companies. Nexon would require additional manpower to fix this. “We really had to localize a different system,” he said, referring to the North American version of the game. “We had to remove lucrative gifting features because people were using it to charge up accounts and items and use [them] for fraudulent purchases. The volume of unauthorized spending has increased with revenue, but charge-backs have been drastically reduced.” The other major hurdle was hacking. “If there’s any value in your business,” said Kim, “somebody else is going to find value and try to take some of that. The U.S. is a hacking hotbed, and it hadn’t really happened to us in Korea yet. Hacking is like a drug - they keep doing it, it’s a fun challenge for them, and once players start using a hacking tool, it’s hard for them to stop.” Hacking flattened user growth as well as depressed revenue, he said. The hacks were working for players, but they also came with Trojans, which allowed people to drain the users’ stash of items in order to sell them. As with every MMO that has in-game currency, farming was another issue. Chinese farmers invaded the hunting areas in the game, and when farming is conducted at such volume, legit players succumb to pressures of competition, Kim said - at which point they turn to the hacking tools. “You just can’t win; you have to build it into your system,” he advised. The developers in South Korea finally realized hacking wasn’t just a U.S. thing, and had to ramp up their GM staff and extend their coverage. “We couldn’t have our guys go against these hackers head to head, we had to build it into our client,” Kim recalled. Stats and Growth A lot of MapleStory's initial growth was viral. PayPal showed players had a high appetite for high spending, with many players spending over $20, so Nexon decided to release $10 and $25 prepaid cards with retailers - which was hard, because they don’t give a lot of space. “We were worried about the idea that this was a free-to-play game,” he began, “and people would freak out if they saw this $25 card at retail - but it turned out not to be a huge issue, especially since a lot of our audience doesn’t have credit cards.” The age breakdown for MapleStory in North America has turned out to be 50% 13-17 year olds, and 30% 18-24 year olds as the main demographic. Gender breakdown is 75% male, 25% female, and ethnicity is currently 37% Asian, 39% Caucasian, 9% Hispanic, and 7% African American. In order to develop North American-oriented content, Nexon has the U.S. side create concept art for characters they think North American players will like, but then it’s sent to Korea, where they "Maple-fy" it. MapleStory also has a number of specific events that users can do, like weddings, for which Nexon charges $15-$20 – they’ve had over 50,000 weddings so far, which create deeper bonds in the players, and also keep the players playing. To popularize the prepaid cards, which are sold at Target, they created a quest in the game where people do chores for their NPC parents, get allowance money, and go to an in-game Target to buy a card, mimicking the actual experience they’d go through in real life. “We had over 200,000 players play that game,” he said, “which was good marketing for Target, which you don’t usually get in games.” This translated into $1.6 million in prepaid card sales. Why do prepaid cards at all? It’s a perfect fit for the target demographic, Kim said. Over 50% of the game’s players didn’t have direct access to credit cards, and the prepaid cards also had the happy side effect of lowering friendly fraud and account theft. “A lot of that was because players wanted to customize their characters, but couldn’t,” says Kim. Retail was initially not interested, and it was tough to convince them of the new business model. Eventually they got the cards into Target, and within a few days after putting them on shelves, they were reordered. Nexon is on its 4th shipment to Target in Q4, making their game card the number 2 content card behind the iTunes card. “They really paved the way for us by educating consumers about buying things digitally online,” added Kim, who says the company is in talks with 7-11 to distribute the cards across the U.S. Hawaii was successfully used as a test market. In terms of future plans, Nexon plans to keep expanding the content, and is also making an interactive trading card game that you can play offline, co-developed with Wizards of the Coast, and people will be able to take items from that and use them in the main game. There’s also an animated series being produced by Madhouse in Japan. Outside of MapleStory, Nexon plans to release KartRider in North America before the end of the year.