A few years ago, gamers had a good laugh when they learned that a Chinese chicken meat company bought Digital Extremes, the maker of Triple-A games such as The Darkness 2 and Warframe. Then, when the company bought Splash Damage in 2016, people did a double take again.
Alex Xu, the CEO of Leyou, was the guy behind that. He was the chief business officer at Perfect World, a Chinese role-playing game maker that acquired Cryptic Studios and publishes titles, such as Neverwinter. To do more deals, he left Perfect World and acquired control of a shell company in Hong Kong. It so happened the shell company was a chicken meat supplier, and Xu planned to use it as way to buy more companies. He exited the chicken business, and he is fully focused on publishing triple-A games. Xu will be a speaker at our upcoming GamesBeat 2017 event in San Francisco on October 5 and 6.
Xu’s company, Leyou, sees a big opportunity in publishing free-to-play games on the consoles — like Warframe and Dirty Bomb. The consoles don’t have as many users as mobile devices or the PC, but they do have very committed audiences. And games like World of Tanks have shown that you can run a free-to-play game on the consoles because a larger percentage of players are willing to pay for something. Warframe has been going strong for years now, and it will help Leyou expand into the West. I caught up with Xu at the Devcom event in Cologne, Germany.
Digital Extremes has a Warframe booth at PAX West, the big fan show in Seattle this weekend. That shows that Leyou is willing to spend money to raise its profile among Western gamers. And if Xu gets his way, we’ll be seeing a lot more Leyou games in the West in the future.
Here’s an edited transcript of our interview.
Above: Alex Xu is the CEO of Leyou, owner of Splash Damage and Digital Extremes.
GamesBeat: Tell us how you got started.
Alex Xu: Once upon a time, it was big news when a Hong Kong chicken meat processor acquired a triple-A game studio like Splash Damage. A lot of people were asking questions about that, why a chicken company was buying game studios. That was my start. I didn’t have any chance to explain that.
Back in 2013, when I was at Perfect World as chief business officer, we were trying to do cross-partnership deals. Perfect World was one of the early Chinese game companies that tried to do some Western operations in the U.S. We acquired Cryptic Studios, the makers of Star Trek Online and Neverwinter, and Runic Games, the maker of the Torchlight series. We did a lot of those deals. We had experience in working with Western studios. Perfect World was trying to talk with any Western studio doing online games, multiplayer games, trying to get them join Perfect World’s platform and bring in more online game players.
We found Digital Extremes, which was doing a free-to-play game that had just launched on Steam, Warframe. Warframe had a lot of potential, so we talked to them about doing something together. We thought we could link up Chinese experience in developing and operating online multiplayer games, especially free-to-play games. We had that experience from working with Cryptic, how to make a free-to-play game run in the right way in the Western world. We had a lot of synergy there.
Then, we come to the point where we were talking about merging together with Digital Extremes.
GamesBeat: But it wasn’t easy to do?
Xu: But in early 2014, Perfect World already had some plans to go private off the Nasdaq. We were trying to find another way, instead of using internal funding, to do the acquisition. I was forced to find some other ways to do the acquisition and still keep the possibility of Perfect World doing a buyback in the future. That wasn’t easy. Whenever a studio gets sold to someone else, in most cases, it’s hard to buy that back. You have to pay multiple times the valuation in the future.
A Hong Kong-listed company could serve that purpose. If you don’t do any promotion in the market and attract eyeballs from investors, you can make it very quiet. I was able to find a shell company. Previously, they were in the chicken industry, supporting KFC or something, but they were almost out of business. They were still listed, but that was all. We leveraged that company to acquire Digital Extremes step by step, by issuing bonds or new shares, whatever. It’s very complicated. That took almost a year. We signed the deal in 2014 and partially finished it by 2015. It was 100 percent finished in 2016.
During those two years, Perfect World was doing the privatization and relisting A shares on the Chinese domestic financial market. We were also talking to Splash Damage. We kept finding more good targets to acquire but still by using the Hong Kong-listed company. Back then, the company had a different name, but after the acquisition of Digital Extremes, we changed the name to Leyou. It’s an independent Hong Kong-listed company. We’ve been able to get rid of everything related to chicken. It’s just a game company now, holding Digital Extremes and Splash Damage.
Last year, when Perfect World was trying to acquire the whole listed company back, there were some difficulties. It didn’t happen. Now, there’s a new owner of the Leyou group. They did a general offer to take over the whole shell company from the previous shell owner. It’s now owned as an independent company, and they hired me as a CEO because I’m the guy who made the deals happen. I’d already left Perfect World to work for Qihoo 360. They hired me away from Qihoo 360 to join Leyou as CEO.
Above: Perfect World booth at ChinaJoy 2015.
That’s the whole story over three years. We’re an independent company holding two triple-A game studios in the West. The strategy is very clear. From the beginning, it was about trying to help Western triple-A studios do online multiplayer games for the worldwide market — not only for the Chinese market but built from scratch for the worldwide market, especially targeting PC and console. We see the biggest opportunity on console.
In PC and mobile, 60 [to] 70 percent of the revenue, the majority of revenue, comes from item trading, free-to-play, continuous live operations, the game-as-a-service model, as opposed to the premium model, paying per download. But on console, still, almost 100 percent of the revenue comes from premium. A bigger and bigger percentage is coming from online, but it’s still premium. You pay before you play. But, we’ve seen more and more games on console, even premium games, building a longer life cycle by putting more efforts into live services after sales. Premium games on console are selling more content, more items, and greatly lengthening their lifespans. People are becoming more engaged with one game because they love it, and they want to keep playing together in multiplayer modes for a longer time. That’s changing the premium world as well.
Still, most developers in the West, especially triple-A developers, are scared of doing a game that starts from scratch as free-to-play. There are different reasons. They’re investing huge development costs in games, hundreds of people working for many years. They’re doing very high-quality games. It seems reasonable to charge up front. It’s an easy way to generate money. They still don’t know how to design a game, too, for a long life cycle, how to make players happy in that context. People hate the pay-to-win model, and that’s mostly come from Western developers or a few Asian developers who don’t know how to design a game in the right way for a Western audience.
Above: Dirty Bomb has a standard assault rifle gunner.
GamesBeat: Would you agree that Asian players are OK with pay-to-win, and Western players are not?
Xu: I don’t know if I could make the judgment in that way. It’s more that Asian users can accept free-to-play game design more easily than Western users. That doesn’t necessarily mean Asian users like real pay-to-win. Nobody really likes that or the idea that if you don’t pay, you just stand still. We’ve designed our games the right way.
In the Chinese market, we’re trying to build a virtual community in our games. The whales, the people who have less time and more money to spend in the game, they can work together and build a virtual group with people who have more time and less money. We design the game mechanics, so they need each other. Everyone’s more happy playing together instead of playing PvE. We call it PvP not because it’s about player killing. In the West, a lot of users make the mistake of thinking that PvP just means player killing. In most cases, when we design a free-to-play multiplayer game, most of the PvP experience feels more like cooperative play. Your cooperative group competes with another cooperative group — like guild versus guild.
People link together because they need each other, just like in the real world. They have fun playing together in a user-generated way. We give them a virtual world where they can have fun in a way they organize themselves. There’s no pay-to-win in this way of thinking. It’s about community, about guilds, about membership, about cooperation.
We feel like this way of doing things is more fair than charging everyone the same price. If someone’s willing to pay more because they have less time to play or they’re willing to pay more to benefit other players that play together with them — there’s no way for them to do that in a premium game because everyone pays the same. For free-to-play users, they’re contributing a lot to the virtual society — their efforts, their time, their skills. It’s fair for them to earn something instead of paying something. Payment follows a curve, not a straight line. It’s more fair for everyone — if you want to pay, you pay, and if you don’t want to pay, you don’t have to. That’s the philosophy when we design a free-to-play game.
GamesBeat: I talked to Kabam a lot, before they disbanded, about their Chinese version of Marvel Contest of Champions. They thought they had the answer in redesigning a Western game for the Chinese market with something they called a VIP system. They believed that suited the Chinese taste. If you wanted to spend money, you could get more privileges and things you described there. They thought they could basically Asianize the game, but it didn’t really work for them, even though they spent a long time designing it.
Xu: Most western game developers think in the same way. They think that if you want to go into China, you have to redesign your game, redesign your monetization, culturalize your content. They spend almost as much effort as they would on a completely new game. That’s the wrong way to do it. If you design from scratch as a free-to-play game for a worldwide audience, you can reach the entire world.
If you look at Game of War, they haven’t had to culturalize it. It just works. It went direct to China. Or Clash of Clans. Or Clash Royale. They don’t even have to change the monetization design. It’s universal. If you design a game from the beginning in a purely Western way, then you face a big challenge coming to China. Some Chinese games want to go to the West and face the same challenge.
We’ve had successful experiences in designing a game for free-to-play in the West and then seamlessly going to Korea, going to China, going worldwide. Even on console. Warframe is the top-grossing free-to-play game on PS4 and Xbox One.
Warframe uses very different mechanics. You can think of it as something like Game of Thrones on TV, where they’re making a TV series with a movie-level investment and movie production quality. It’s a game changer. We’re using a triple-A team to make a free-to-play game. They’re designing and developing the game with even more investment and effort than some premium console titles. People love it — free users, paying users. The conversion rate on that game is the same as you see on other free-to-play games. The majority of users still play without paying anything.
Above: Action from Warframe’s The War Within update.
GamesBeat: How many years has Warframe been going?
Xu: More than four years already. Four years this April. It’s still growing, still breaking records. It’s a beautifully designed mechanism to make users happy and keep generating revenue. That’s our specialty, knowing how to design and build a game and run live services like this.
GamesBeat: Do you see Grand Theft Auto Online as the same category?
Xu: They’re still doing a premium game. Elder Scrolls Online is another example. You still pay to download the game before you can play it. Warframe is completely free. You download this huge 35-gigabyte game without paying anything.
GamesBeat: They seem to have graduated up to … I don’t know if they’re making more money from virtual goods now. The initial payment seems like it would become a smaller part of it.
Xu: That’s why you see most traditional game developers — their stock prices, their P/E multiples are going much higher these days. You see that on the market. That’s the secret. Live operations, live services. But they’re not going all the way with it.
You see League of Legends, Dota 2, Team Fortress 2, World of Tanks. A lot of examples are out there. Warframe isn’t the only one. Mobile has even more examples. People’s psychology is the same anywhere. Why should game players behave in a different way on console? It doesn’t make sense. Our firm belief is that if you design a game in the right way, it’ll work for everyone.
GamesBeat: It seems like an interesting year for Take-Two and EA and Activision. They have very light release schedules. They’ve delayed all their games into next year. But they’re not reporting bad quarters. They’re generating all this money from live operations. EA’s been talking about that for two quarters now.
Xu: Ubisoft as well. They’re learning. We just announced last month that we signed a deal with Take-Two. We acquired a company that’s doing Civilization Online, a free-to-play Civilization MMO. We’re trying to work with the big players — major IP holders, triple-A game developers — as well as independent game developers. We just signed a license with Hasbro to do a PC and console free-to-play Transformers game with them. We’re actively trying to do more of these deals, working with all possible parties for project funding, investments, acquisitions, IP licensing, co-development, co-publishing, all the possibilities to contribute our knowledge of online multiplayer game design.
A lot of Western studios have a separate department, a “monetization design group” apart from the core development teams. That’s not the right structure. We think monetization has to be the fundamental backbone from the very beginning when you’re designing a game. It’s the core mechanic. You have to start by thinking that through before you set up the rest of the game design. If you finish the game and then a separate team takes on the question of what you’re going to sell, that’s not going to work.
Above: Warframe’s success has emboldened Digital Extremes to try its hand at helping its fellow studios.
We have a lot of experience in how to design a game in a fundamentally different way for a very long life cycle. Warframe is four years old, and that’s not nearly the oldest. In China, a lot of games made by Perfect World and other companies are more than 10 years old — Westward Journey from NetEase, many others. You have to design a game in a different way. Whenever you have an online game with a very long life cycle, people are living in that virtual world, creating content on their own. That continuous revenue gives you the freedom to set up new projects in the future.
Most independent studios here, even triple-A studios, they’re working for other publishers. They’re targeting a one-time sale, project after project. They always have to find that next project, someone else to work for because they can’t fund a project on their own. We’re giving them a different way of living. That’s one reason we got together with Splash Damage. They’re a triple-A studio. They know online multiplayer games. With our experience, we can take them a step further to do something as successful as Warframe. We can fundamentally change the lifestyle of that studio.
We’re setting out for the blue ocean. We’re doing something different. If the user’s mentality and psychology is the same, in the future, perhaps half of the console market can come from item transactions, live services, this kind of monetization. Studios here have been doing traditional game development over and over for maybe 10 or 20 years. It’s time for them to think in a different way. Some of them may have already had bad experiences trying to do free-to-play games or mobile development, trying to follow successful cases like CrossFire in Asia and failing. We’re giving them a different way of thinking. With our help, we can do things the right way.
Above: The bad guys from Warframe doing the ALS ice-bucket challenge.
Look at Digital Extremes. They’re free now, forever. Developers dream of having the freedom to do original games on their own, funded and published by themselves. We’re supporting that, helping them be independent. They’ll generate revenue to fund their future projects. Helping them with one successful title sets them up forever, instead of working like a traditional publisher, funding one project after the other every year. After 10 years of that, they might not build up enough budget for even one original game. We’re coming in with a different model.
GamesBeat: We give a conference every year, and we like to have a lot of different ideas there. An example, kind of a crazy one, is this idea of the leisure economy. We have all these people who are starting to get paid to play games — esports athletes, streamers, content creators. If AI is going to eliminate a lot of jobs in the future, what are we going to do? Maybe we’ll just play and get paid for it.
Xu: More people will live in virtual worlds, after an AI revolution. You don’t have to care as much about losing your job in real life. You go to a virtual world, find a position as a gamer in the game. You contribute in your way and earn money benefiting that virtual world. Something like a real society could happen. That’s why I think free-to-play game mechanics are the future. We can have mechanics in a game that require a premium subscription — VIP entrance fees, things like that — but the world doesn’t require that everyone pay the same. A virtual society still needs the freedom for everyone to choose their own way of living in it — no entrance fees, no requirements to pay.
That’s my own way of thinking, but I think it’s reasonable. You can’t go far on a pay-to-win philosophy. We need to let the world know that we’re doing something different.
Disclosure: The organizers of Devcom paid my way to Germany. Our coverage remains objective.
