IPO Watch: PlaySide Studios game for growth

For this week’s IPO watch we’re speaking to Gerry Sakkas who is the CEO of PlaySide Studios which is an Australian videogame developer focussed mainly on mobile games but also virtual reality, augmented reality and PC games. As Gerry explains, PlaySide develops its own games internally using its original IP but it also does contracted game developments for customers in the entertainment industry and works with some big names such as Disney and Warner Brothers. They have seen a bit of a spike in users and game downloads during COVID lockdowns.

The plan now is to really go for growth through customer acquisition and developing new games with partners. They’re looking to raise $15 million at 20 cents per share for an indicative market cap of 73.3 million dollars and the offer closes on December 7^th.

Here is Gerry Sakkas, the CEO of PlaySide Studios.

Table of contents
Addressable market
Monetising users
Opportunity in the mobile gaming market
Three main revenue streams
Impact of COVID
Competition
IPO & use of funds
Financials
International expansion
Gerry's experience at EA & founding PlaySide
Pipeline for next 12 month

Thanks for joining us, Gerry. I thought a good place to start would be an explanation of where PlaySide fits into the gaming market given it’s so large. Could you explain what area you operate in within that?

Definitely. PlaySide has been operating for almost nine years and we focus predominantly on mobile games, freemium mobile games. We have also developed VR, AR, we’re doing some console and PC stuff but our core focus right now is on mobile. I guess what sets us apart is the monetisation techniques that we use in our games and the ability to acquire users into those products so I guess it’s more than just making a fun game with a good story, there’s a lot more elements to it these days.

Could you explain that addressable market that you’re targeting? Because in the prospectus it says there are 2.6 billion mobile gamers globally but only 38 per cent of them are paying for those games so how could the mobile industry monetise those customers and reach the potential that that offers?

Our core market is in the US, that’s probably where the majority of our downloads come from, probably around 90 per cent of them. It’s where the majority of our business comes from for work for hire as well in the other part of it. In terms of how we monetise those users, the freemium model is the most successful and useable model right now which is the users download the game for free and then within it they can pay for clothing, weapons, skins, all this sort of stuff. Then they can also be shown ads if they’re not paid users so for a user that comes in and doesn’t pay anything we can then show them adds by tracking what that user is doing within the game and then there’s also subscription which is a lesser model but that’s in there as well.

What’s happened in the last couple of years is mobile started this whole freemium model and what’s happened since then is PC and console games like Fortnight, Call of Duty Warzone, Destiny, they have all gone to this freemium model as well. It’s a pretty widely used model now and it’s pretty successful for those games.

How often are we speaking in terms of someone downloads a game for free and then the likelihood that they’re actually going to spend money once buying that game?

The likelihood of an actual user spending money within a game is quite low, it’s under 10 per cent within a game but the chance of monetising that user is still very high. Because of the ads we monetise all the users, so the average lifetime value of every user – it depends on which game but you can be anywhere from 50 cents, to $1, to $3, so you look at it as an average of everyone and you base that based on advertising and the app purchases.

Could you give us a bit more about specifically this mobile gaming market? Why have you chosen that particularly to focus on, what’s the opportunity that it presents?

Sure. Myself, I was one of the designers at EA in the home console back in 2011, I was there for about four or five years and then I left and started PlaySide. We chose mobile originally just because in the beginning it was the best entry point into the gaming market, it was a way to get in as a small developer, make smaller titles and monetise those titles. The games industry has changed many times since then and now the barrier to entry is quite large, it’s very similar to starting a console studio now. We have managed to grow throughout that time and we have grown to about 70 people.

I guess mobile for us just makes the most sense. You can rapid prototype, you can develop multiple titles throughout the year and have multiple shots at goal in the chance of finding that one really big title like your Candy Crush or your Clash of Clans. The difference, the way I sort of tell people is mobile is a lot like TV where you create a pilot episode, you put it out, see if people like it and then you create a series whereas console is much more like movies where you’re going to have a spend a lot of the money upfront and then only towards the very end of production are you going to put a trailer out and see if anyone actually wants to watch it.

We enjoy mobile but we are definitely dabbling at the moment with a PC title and a console title as well.

In terms of how you’re developing these games as I understand it, you develop games internally using your own original IP but then you also do contracts with customers within that entertainment industry. How does that relationship work?

There’s three main relationships. One is just a straight work for hire model where someone from Hollywood will pay us or someone from the games industry will pay us, like a Lego Batman or something like that, they’ll pay us to do straight work for hire and we’ll make a product for them and launch it and a lot of the time we’ll support it post-launch with live operations so we’re doing updates, etcetera, and that’s just straight work for hire. The next model would be a partnership model where we would do a JV with these people so sometimes they’ll pay us and we’ll get a percentage, a lot of the time it will just be a straight revenue share depending on what the product is. Then there is our own original IP as well.

Where we’re looking to move into going forward is focussing a lot more on licensing, so instead of doing work for hire for the Hollywood studios as much as we’ll still be doing that for now what we want to do is license the actual brands and put them onto our original IP. That allows us to still call it our own IP but it will be branded as a Marvel product or a Batman product, etcetera. That’s what a lot of the larger studios are doing at the moment.

Why are you focussing on that particular area, is it more profitable than what you’re seeing happening with the Hollywood studios?

Yeah, I think work for hire is great and it’s been great to get us to this point, it’s been a really good security net. As we grow it will still provide a security net until we are fully cash flow positive and killing it ourselves in our original IP. Our original IP, our latest title, is doing very well, we haven’t announced much about that yet but we can sort of get into that a bit later. Essentially, we know which products work, we’ve worked with all of the biggest studios, we’ve launched titles with them, we’ve seen which brands do really well and which ones have converted in downloads, and more so which ones have converted paid users.

With a lot of the sort of Hollywood brands a lot of them are very kids focussed, they don’t convert well to paid users. We know which ones work, we want to go in and just license those now and do it ourselves. We feel like we can do a much better job having full control over it.

Just off the back of that is there a specific demographic that you’re finding is most profitable? I can’t imagine kids games that don't have too much access to credit cards to spend money, so is there a specific age group?

You’d be surprised, the kids love us and the parents with the credit card, but it is a barrier to entry. I think where the kids games fail the most is in that where there is sort of a double barrier to buy something, they have to ask and then get it. Also, you can’t show ads to any child under 13 if it’s a COPA compliant game. If you make a game that is I guess deemed to be COPA compliant, which means that you are only marketing it to children, the game looks like a children’s game, it’s not a Call of Duty, it’s not a Fortnight, etcetera, then you will have to ship it under COPA compliant laws and which means anyone who plays the game has to tell you their age, anyone under the age of 13 doesn’t get shown any ads and if they do get shown ads they get shown kids ads which don’t convert very well, they don’t monetise very well.

Then you end up with a whole bunch of other monetisation problems and how you can monetise those users. We tend to look at 15 and above, anywhere between 15 and 35 is probably the sweet spot. Men or women? Our best games are both. The more people that you can show it to. the broader your audience, the better but for us we don’t focus too much on the kids market.

I wanted to get a feeling of how this year has impacted you in terms of COVID. Would you see it as a positive in terms of all these people locked down and turning to these games and spending more time and more money on them, is that what you’ve seen happen?

Yeah, firstly I probably don’t see it as a positive but it definitely happened that way I guess. If you look at it in a positive light I guess people who have been at home have had the ability to watch Netflix very cheaply, play games very cheaply by playing this freemium game. People have been able to have free entertainment essentially and then they can just choose whether they want to pay. I think during a recession whether it’s Covid or whether it’s whatever people are going to want to pay for very cheap entertainment to keep themselves entertained during that period, they’re not going to be able to go out if it’s Covid but they’re probably not going to go out during a normal recession either. Staying in and being able to play videogames and watch Netflix it’s done very well for us.

I wouldn’t say it’s been a massive boost because America is probably only just going into lockdown now really, it hasn’t affected America too much, Netflix probably a bit more because people have just chosen to stay home a bit more but I think over the next few months probably even more in the States. For us it was more about how quickly could we move home and work from home, we all worked from home probably a month before we were in lockdown, it was like overnight. We had all the servers, the security, everything was ready, so being able to see how that worked, how it impacted the team environment, it was actually really good. The morale still stayed really high which is always amazing. It’s been okay for us.

The gaming industry specifically seems like a highly competitive market. Your prospectus mentioned that the top 50 companies account for 85 per cent of the global games market. I'd Imagine all of those competitors are in the US so how are you able to compete with them?

Historically we’ve been able to compete just based on the quality of our products, that’s been our key since day one, it’s been to make sure that whatever games we produce, people can look at any one of our games in our portfolio and see quality. I think the second we start doing projects just for a good work for hire deal or just for a brand, etcetera, and you know the quality of the project is not going to be good it will negatively affect who works with you in the future. I think that’s something that we have done really well from the beginning, it’s allowed us to pitch and tender for projects for really big studios like Tencent, etcetera.

There’s a lot more on the horizon that we’re looking at doing and we have never really found it an issue, tendering against some of the big US studios, we have always gone up against them when we’re pitching projects and a lot of the time we win the deals. When it comes to our original IP and pushing that there’s more than enough people in the world for all of us to play in it so it’s really about who has got the hit title at the time and we’re all sort of always fighting that. The good thing about this industry is one hit title won’t take away from all the other hit titles, it seems to just constantly build the industry as a whole. The industry is always making more and more money so that’s good for when something like Fortnight comes out, all the other console games don’t just suddenly lose money, they all do really well as well so there’s definitely enough users.

Just on the IPO how has that come about? Has it always been sort of targeted at this specific time? Because you’re raising $15 million so what are the funds going towards and how did the IPO idea come about?

Yeah, we always do strategy sessions every year and at the beginning of this year, we started talking about the IPO and the possibilities of doing an IPO. The goal was to never do it unless we knew business wise we were completely ready to do it in terms of being able to scale the business through user acquisitions, having a full data analytics and monetisation team. All these are very important to scale a games company. We wanted to build the foundations of the company into what the sort of larger players are doing so that way when we got the money we were able to spend it and to scale.

If you just focus on creating fun games spending money on making more fun games isn’t a good way to scale, you don’t know if they’re all going to fail, you don’t know if they’re all going to succeed, there’s no way to really forecast growth. For us, it’s always been about how do we get there. The last two years we’ve spent working with major studios, learning ourselves what this whole sort of user acquisition and data stages look like. What it essentially allows us to do is while we’re developing a title we will know whether it’s going to be successful by the time we launch it or at least how successful it will be. If it’s not going to be successful at all we’ll keep it in soft launch for a bit more, we’ll try and pump it up a bit and then we’ll launch it.

We can know from the beginning whether an art style is the wrong art style, for something like Animal Warfare which we have just launched we were running Facebook ad tests from the first week of development on the colours of the animals, something as small as that would affect 20 per cent of people downloading it more. We’re really into that data analytics and data-first approach and I think that’s the only reason that we can now do this. Obviously, the money is going to help us with user acquisitions, it’s going to help us hire even better monetisation people but also it’s going to help us get these licenses. With a license what that allows you to do is if I’m going to show you an ad for a game and I show you a car game, the chance of you clicking that car game compared to me showing ads of a Fast and the Furious car game, obviously the chances are you’re going to click it more because you’ve seen the movie, you know the franchise, you know the characters, you’re sort of embedded in that.

That’s where we’re sort of looking with branded stuff, it’s to use it in advertising in a way where people instead of clicking a boxing game they’re going to click a Rocky game instead. That’s sort of where we’re going.

What sort of cash position will that leave you in then post IPO with that $15 million you’ve raised?

Essentially we raised a $3 million pre-IPO as well earlier so it would be somewhere around that $18 million or a little bit more mark depending on the month really.

You went EBITDA positive in financial year 2020 but still operating at a net loss after tax. When are you expecting to turn a profit?

I think our goal right now is to focus on growth. If we can turn a profit in the first year that would be amazing but my goal right now is to scale, it's not to lose a ridiculous amount of money, it’s literally just to scale at a decent pace the same way we’ve always been doing it. As you said, year on year we’ve always been somewhat profitable since pretty much inception and we don’t want to change the way we’re working now just because we’re IPOing. We want to run it that same way, still be safe.

The other thing is, Alex, you can’t just go and suddenly produce 30 games at once, there is a limit to how fast you can scale and so we are doing that in a safe way and I think really within the first two years we should have that major success that will hopefully take us to that next step both revenue and profit wise.

In terms of that scale you speak about, you’re obviously based in Australia and as you said the US is a major market there. The prospectus mentioned an LA office you’re planning on building, so what’s the plan there?

My business development manager, TJ, one of our VPs, he was actually already going to be in LA by now before we even did the IPO but due to COVID, he is still here. The goal originally is to set up a sales/business development studio over there that when we’re working with a studio over there if they’re in the next block TJ can walk over there and talk about the latest milestone, how things are tracking, pitch for even bigger deals just by being there all the time. I think initially it will start off as a more sales-driven and opportunity-driven studio but then I would have no doubt that within a year or two we start building a small team of developers there and then it would probably end up growing as well, it’s not our core focus, we don’t need to do it and developing in Australia works really well for us. But there is probably a limit as to how far we can grow our studio with developers in Australia, it’s not like there are 100,000 developers in Australia that we can choose from.

If the console and the PC stuff really starts to work out we’ll probably start to look at hiring overseas and putting them in that studio as well.

There’s also mention of an opportunity in the Asian market and more specifically China too. Do you expect over the coming years for that – I think you said 80 per cent or 90 per cent of your market is in the US, will that spread out across the globe do you think or is it mainly focussed on the US?

I guess it really depends on what happens with China at the moment and with all the stuff that’s happening now, it’s not looking amazing but they are becoming a very big market, they will be accounting for 50 per cent of the entire market very soon if not already now. The US is still a major player. In terms of shipping something in China, you can’t just take a game that’s been really popular in the States and put it into China, it needs full-blown localisation of not just the language but also the art assets.

One of our games that we’ve got over there which is one of the ones we’re partnered with, so TJ went over to China last year and he rang me and he’s like “do you know that Battle Balls…” which is a game about little jelly balls that fight each other, he’s like “do you know that the icon on the store is a dog”. I said “what do you mean it’s a dog?”, he goes “it’s a picture of a dog” and I said “well, who chose that?” and he goes “I don’t know, I’m going to go and talk to them”, alright. Then he rings me back an hour later and he’s like okay, so apparently on Valentines Day in China there is something about a dog and I can’t remember if it’s the guy that didn’t have a date or the guy that did have a date and dogged the boys, it was one of the other but apparently it’s a massive theme over there. The game ended up getting like 100 per cent more downloads just by having that icon.

There’s things that culturally we don’t know about in China so you have to partner with really large publishers. We have done that, we’re looking at partnering with more and we’ll see what happens in that space. It’s not a core focus of ours, it’s not something that we have to make something work in China because I think we’re doing really well with the States at the moment and UK, Canada and Europe but we’ll see what happens. It would be good to crack the market in some way but a lot of the largest US studios have still not figured out a way to fully crack it yet.

I guess this partnership thing has been a bit of a theme but there was a few lines in the prospectus about acquisitions going forward, what sort of companies would you be looking at that would fit into your growth strategy acquisitions wise?

I think it’s about finding some studios either locally or globally that are profitable and that have some really strong IP. It’s about finding a game that we might all know about but we didn’t know that it was a smaller studio that was doing it and we can possibly acquire the studio and the game. We don’t need to acquire for talent, we don’t need to acquire just for the sake of revenue and you can’t really do that in the mobile industry. If you acquire someone who is just making revenue and losing money that studio is going to end up bankrupt in the next couple of years. Everyone has to start turning a profit very soon and especially the mid-sized studios. We would be looking to buy people that are definitely profitable and have great IP.

There are some things that we’re sort of looking at very closely at the moment but they’re more based around I guess companies that own quite large brands as well, so stuff like that.

I just wanted to go back to your own experience as well, Gerry, and you mentioned before you worked as a designer at EA and then moved over to PlaySide but did you specifically notice something, or was there kind of a spark or a niche in the market that you noticed working in EA that made you kind of switch to founding PlaySide?

When I was working at EA, EA does very good quality games in terms of the art and some of the design behind it. They’ve, in recent years, had a bit of a bad wrap about certain things they’ve done with monetisation but in all people are going to say that EA games are quite high quality. Working there for so long and learning, and I went from being a tester to being the lead designer of the studio within I think four years. I think I started there when I was 21 and I left when I was about almost 25. I learnt a lot in that time and I feel like what I wanted to get away from was we spent 4.5 years making one game and it never shipped, they ended up cancelling it before it came out. It was completely fine to ship it, it was great but management changed and they just decided to not do it.

If you’ve been working on something your whole working life, which is what I had done at that point, what have you got to show for it at that point? They offered me a job in the States when they shut down the Australian console studio and I thought this is the time where now I feel like I know what I need to do, I feel like I’ve learnt enough about design, somewhat being involved in running production in a way in terms of pushing design ideas and working with the team really well. I thought now is probably the time to get into the industry myself and mobile was the best step forward into it at that point. I think Fruit Ninja and Angry Birds had just come out, I fully backed the idea that mobile would be the biggest thing in gaming and it’s so far turned out to be true. You never know what the future holds and what’s going to happen with all of the different devices but that’s how it essentially started.

In terms of PlaySide’s pipeline for the next 12 months and next year post listing what should investors or potential investors be looking out for?

We’re going to keep doing the same types of development we’ve been doing on our casual games which is the smaller titles that we develop in about 3 to 4 months. One of those that came out recently was Animal Warfare, the only thing we essentially announced about Animal Warfare is that it did 2 million downloads in its first month which is quite a lot so it’s doing really well at the moment and we’ll probably have more to announce about that a bit later on. We’ll keep doing that but what we’re really focussing on now is creating larger more monetised products. We’re working on a female based puzzle game that we’re just starting development on now, we’re looking at licensing that with some pretty large brands as well that we think that most people in the world will know.

Those types of larger products that take about eight to twelve months to develop, they’re the ones that are going to have the best shot at taking us to that next level. The casual games will do amazing things for us over the next couple of years but to really take us to that level of Zynga or Jam City and all those guys we need to get one of those larger titles. We’ve got that one in development, we’re also developing a PC game at the moment which is kind of like your old Age of Empires style RTS games and we’re also doing a console game, a relatively small one just to get our foot in the door but a relatively small console game if it’s successful can still make over $100 million in revenue. It’s just about figuring out what’s working with the larger titles. We already know how the current business runs and how that’s going to scale btu layering these extra elements on top of it is going to be really important.

Gerry, thanks for joining us, and thanks for your time.

That was Gerry Sakkas, the CEO of PlaySide Studios.