PopCap’s Slow and Steady Investment in Asia May Be Starting to Pay Off

By Kim-Mai Cutler Comment

PopCap Games has long adopted a “What happens in Asia, stays in Asia,” approach to its business in the region, giving the unit an unusual level of autonomy to experiment with and localize its titles.

That hands-off approach may be starting to pay off.

The Asia unit is set to contribute about 10 to 11 percent of PopCap’s overall earnings, up from about 5 percent in previous years, according to James Gwertzman, who heads the unit for Electronic Arts. Before it was acquired by EA, PopCap said it made more than $100 million in revenue last year so a back-of-the-envelope guess means we may be looking at a runrate of about $15 million for the Asia business alone.

PopCap’s recent release Plants Vs. Zombies Social also reached close to a half-million daily active users on Renren this past week, thanks to an aggressive marketing campaign by the Chinese social networking platform on behalf of the gaming company.

This traction didn’t come easily however. It’s the product of more than five years of investment and relationship building in the region.

The idea for an Asian PopCap office started in 2005 when Gwertzman, who had worked in Asia for Microsoft during the first tech bubble, went back to the region on a trip and discovered that Chinese consumers were passionate about PopCap titles like Zuma.

“We had this huge existing brand awareness in China. People knew our games and thought they were fun despite the lack of localization,” he said. “But the question was — how do we make money?”

Lessons From Other Western Mistakes in China

He started traveling to the region every month or two to study the market. “There were already several cautionary tales in the gaming space,” he said. “We were resolved that we weren’t going to spend PopCap’s money until we could really coherently explain the mistakes by Western companies. And I wanted to make new mistakes, not old ones.”

Some of ways in which other Western companies had erred included:

  • Not giving the local team enough authority or power to make their own decisions: Companies would insist that decisions have to be approved by upper management in the West.
  • Not hiring a local enough team that really understood the Chinese market: Gwertzman said many U.S. companies would bring in expats and not listen to local staff when they made recommendations.
  • Or they’d do the opposite and hire a Chinese head or GM who was relatively unknown to senior management: Because they didn’t grow up in the culture of the company, their decisions might be second-guessed by central management which was thousands of miles away back in North America or Europe.
  • Over-investing too early: Companies would set up extremely high revenue expectations right away and when revenue didn’t meet those targets, they would ramp down their investments. “You’d see these huge over-investments and rapid collapses,” he said.
  • The leadership they chose wasn’t stable enough. “Companies might go through four different GMs in four years,” he said, making strategy unpredictable.

In response, PopCap and Gwertzman set up a framework to run the local office and he moved over to Shanghai in 2008 to open up the studio. They agreed that the Asia unit would have total autonomy and the only decision where upper management would be involved was the annual budget. The PopCap Asia staff would be given relatively free reign to modify the company’s best-loved brands for the local markets.

They also agreed that what happened in Asia would stay in Asia. “If we want to do crazy business models, it stays here in Asia,” Gwertzman said.

They also chose not to bring in talent via acquisition as many other gaming companies like Zynga have done in China (although Gwertzman said Zynga’s XPD Media deal was probably one of the smarter acquisition decisions).

“A lot of companies acquire to get into Asia,” he said. “There are a couple problems though. There’s no guarantee the culture of the company will match yours. Also, if they came in as a group, they can leave as a group.”

Gwertzman said he started the unit slowly, trying to be cash-flow positive from the outset. Revenue doubled every year subsequently, although this is the first year where it will be meaningful in terms of PopCap’s overall business.

Choosing Platforms in China

The unit’s latest big release has been the social version of Plants Vs. Zombies on the Renren platform, which is quite distinct from the Western version as it marries city-building with the original title’s tower defense elements.

When PopCap began looking for platform partners in China a year and a half ago, there weren’t many social networking sites that were open to third-party developers. Tencent had yet to launch its open platform and Sina Weibo only announced a gaming platform this summer, so Renren was the only major one.

“In the end, they basically offered us a fantastic deal,” Gwertzman said, adding that Renren is footing the bill for a major public advertising campaign on buses and in subway stations in the major Chinese cities. Gwertzman wouldn’t comment on the terms of the Renren deal. But the experience echoes what we’ve heard from other developers in that Chinese platforms tend to be more flexible on revenue split than American social networking sites are. Renren’s open platform usually gives 48 percent of revenues to the developer from for-purchase applications, a higher cut because building a payments infrastructure in China and dealing with censorship make operating a platform here more expensive. (Platforms generally have to review applications before they go up in the store to comply with censorship requirements, so you can’t operate a platform like Facebook or Android where apps are only taken down after the fact.)

They launched the game six weeks ago, and quietly optimized the title before scaling up last week. Last Monday, the game had about 30,000 users on Renren and then they bumped it up to a half-million by the end of the week.

They’ll also be taking Zuma Blitz to Tencent and putting the game on a few parts of the Chinese Internet giant’s platform like QZone, which has 530 million monthly active users.

Dealing With The Mobile Market in China

As for mobile, PopCap has been translating its games on iOS. The Chinese-language versions are doing twice the volume of the U.S. ones in terms of installs.

They worked with Sina Weibo, which is a Twitter-like platform in China that is quickly eclipsing other social networking sites like Renren to promote the game via site takeovers and banner ads. Because many people use Weibo from their mobile phones, it produced a good conversion rate although Gwertzman didn’t provide specifics.

Monetization is more of a challenge in China however. Even on iOS where Apple has a very fluid payments process through iTunes, PopCap is seeing five to seven pirated copies for every legitimate app it sells because of jailbroken devices.

That’s why the company will probably move to a freemium model eventually. With free-to-play games, the best titles in China can see average revenue of 1 to 2 cents per daily active user, he said.

Ultimately though, he expects Android to overtake iOS in China as it is doing in the U.S. market. “We’re excited about iOS because it attracts an affluent consumer base, but Android will have the volume play in China,” he said. “We’re seeing $100 Android handsets that are pretty powerful.”

But Android is far more fragmented than it is in the U.S. with competing variants of the platform plus several independent app stores (which we wrote about in an in-depth piece over the weekend). So PopCap is bypassing this by going for pre-install deals with carriers and device makers for distribution.

Other Opportunities Outside Gaming

Like Rovio’s Angry Birds, PopCap’s brands have shown a lot of promise in merchandising in China. (Throughout the past few weeks, I’ve seen Plants Vs. Zombies shirts and trading card decks around on kids and adults alike in the bigger cities.)

The company has more inbound interest than it can handle in terms of licensing its brand. It did a deal with China’s largest casual wear chain, Meters/bonwe, that saw sales of 10 T-shirts a minute in Shanghai on the first day.

Of course, like with pirated apps, PopCap has to deal with copycat merchandise. There are 75,000 knockoff items related to PopCap brands on Taobao, which is like the eBay of China, Gwertzman said.

The best strategy to deal with that is doing higher-quality work than what the copycats produce.

“What we’ve come to realize is that this is an incredibly complex market,” Gwertzman said. “It’s often very difficult for Western companies and they have to be prepared for the long haul.”