Big Fish Games Bets on Freemium Games, Streaming Service

4/10/12Follow @curtwoodward

When Paul Thelen started Big Fish Games—“just in my bedroom, coding games,” he says—the Internet was just beginning to transform the way people got their entertainment. And it was a very big deal: Instead of heading to the store and forking over a few $20s for a disc in a colorful box, you could test a game out and download it straight from the Internet.

In the decade since, Big Fish has matured into a steady success story. The privately held casual game company has been profitable for years, recently reporting more than $180 million in revenue for 2011, a 30 percent growth. It smartly embraced the mobile revolution in gaming, becoming a publisher and distributor of top games on Apple’s iOS platform. And these days, with nearly 600 employees worldwide, Seattle-based Big Fish occupies the kind of nameplate-adorned waterfront headquarters usually reserved for big public companies.

“It goes fast, you know? It seems like just yesterday, but it’s been a fun ride,” Thelen says from his spacious office at Big Fish, where he serves as chief of strategy. “I was having fun building games, and some of them even started getting successful and I started hiring people. And here we are.”

Paul Thelen

There should be plenty more in store. On the eve of its 10th birthday, Big Fish is placing key bets on the newest changes roiling the video game industry, a sector that is often on the front edge of new technologies and ways of doing business.

After years of dedication to the traditional pay-to-play model, Big Fish is making a major push into the “freemium” consumer market—games that are free to play, but make money by charging for premium perks.

The company also is getting ready to unveil a cloud-based gaming system that will make game play faster and available almost anywhere there’s an Internet connection and a screen, a move that will open up its considerable library of PC and Mac-based games to new sales.

On top of all that, Big Fish has placed a big bet on social gaming for the first time, acquiring San Francisco-area studio Self Aware Games, which created a high-grossing gambling game for iOS and is preparing for a major move to Facebook.

These moves all come at a heady time for the video game industry, which has seen exploding businesses on the Web and social networks create fast-rising public companies and overnight multimillionaires, even as revenues have plummeted on other fronts, such as console gaming. You wouldn’t, however, mistake Big Fish for a frenzied participant in the latest gold rush.

The company, as CEO Jeremy Lewis told VentureBeat last year, is typically methodical and analytical about the moves it makes. That has parallels in the company’s core games business, too. Big Fish produces its own titles in-house, but also serves as a marketplace for other game developers to sell their wares. Big Fish has perfected its data-driven sales and marketing channels so well over the years that, Thelen says, Big Fish can very closely predict the lifetime value of a game even before it starts selling.

You can see that methodical bent in Big Fish’s approach to investments: The company took on $83.3 million from venture capitalists in the fall of 2008 but has not touched the money, even for its recent headline-grabbing acquisition of Self Aware games, Thelen says. And although the company is often mentioned as a future IPO candidate, Big Fish seems to be in no rush to head to Wall Street.

“We are at scale and profitable, so that is an option. But at the end of the day, an IPO is a financing event,” Thelen says. “If you’re talking about strategic acquirer, that’s always an option. But there needs to be a business rationale to do so as well.”

One of the newest changes to emerge in the domestic video game industry is the rise of freemium business models, first on Facebook and then on mobile channels. The idea is that, by giving a game away, publishers can accumulate a huge user base. With a big enough base, the relatively small percentage of those players who will pay for game-enhancing add-ons is enough to make serious money. And the game ends up taking on a life of its own in many cases, continually evolving as a service that offers new data for developers to study for ways of finding more revenue.

That’s a lot different than how Big Fish has built its business. Dating to the original Web transition to downloadable games, Big Fish has always staked its finances on games that people pay to play—there may be a free trial, but the game itself requires forking over some money.

That’s changing soon. Thelen tells Xconomy that, starting mid-year, Big Fish will start rolling out freemium titles on its existing marketplace. This has the potential to add a large new set of players to the company’s existing base of “millions of paying customers,” as Thelen puts it. He says the reason it finally makes sense is summed up by one company: Apple.

“The real epiphany there was that originally for free-to-play, you had to be on a social network to scale big enough,” Thelen says. “Apple kind of proved that wrong with the iPad and the iPhone.” On those platforms, developers have seen success selling freemium game additions that help players get through levels faster or add special powers to their characters.

“We actively have a queue of games that we are lining up to roll out this summer,” Thelen says. “We’ve been building the technology for some time.” Now, the company has begun telling developers outside its very close partners that their freemium, virtual-item games are welcome on the Big Fish store as well—with all those paying customers at the ready.

Big Fish is also beefing up its staff in another new arena for gameplay, one that holds plenty of promise as the consumer markets inch ever closer to next-generation Internet-connected TVs: a cloud-based gaming service that will stream Big Fish’s games to players wherever they are.

The trick here is that a cloud gaming service keeps all the computing tasks on a remote computer somewhere else in the world—there’s no traditional game software running on the player’s device, just a streaming video feed delivered through a thin client and the interaction of mouse clicks or finger swipes.

If you’ve been near its Seattle headquarters, or on Interstate 90 connecting Seattle to the Microsoft-dominated suburbs, you might have seen on of Big Fish’s giant billboards advertising jobs for cloud-gaming engineers. The company has previously added some of those specialists, particularly at its offices in Ireland, but is looking to ramp up even more this year.

Big Fish has been quietly testing out its technology on this front, using the cloud streaming service to allow players to try games online before they buy them. But Thelen says the cloud streaming technology will start powering a standalone commercial service by midyear—with a compelling catalog of titles ready to roll.

“We have a huge catalog of content we are exclusive publishers or outright owners of, from developers all over the world, and those are PC games. But we’re actively virtualizing that entire catalog, over 1,000 games, into the cloud,” Thelen says. Those games can be delivered to basically any connected device, which helps solve headaches that can crop up with perfecting games for platforms like Android, which runs in several versions on a multitude of different handsets, all with different specs.

That opens up the possibility of totally different business models, as well, Think subscription-based gaming services, similar to how Netflix does streaming movies or Spotify and Rhapsody do streaming music, Thelen says.

“It’s a challenging technology. Because if you think about Netflix, one way they deliver video very consistently is they have a four- to five-second buffer where they have time to get the frames and packets down,” Thelen says. “In interactive video, the challenge is when you click—that click has to go up to the server, get incorporated into the video, come down, go through the buffer and be displayed. Five seconds is an eternity in gaming. So our threshold is 150 milliseconds.”

That’s actually easier than what some other streaming game offerings like GaiKai and OnLive, which focus on “core” game titles like war-themed shooting games. Playing a laid-back, animated casual game from Big Fish’s library allows for a little more lag time than some player spinning around in a room unloading a virtual machine gun, Thelen says.

“Our technology is fully commercial-ready now,” he says. “We’re just putting together the business models and rolling it out.”

When it was announced last month, Big Fish’s acquisition of Self Aware Games garnered a lot of attention because of the studio’s game CardAce: Casino, a top-grossing iOS title that put players together in an interactive virtual gambling parlor.

Casino games are gaining a lot of attention in recent months, ever since the U.S. Justice Department’s sudden relaxing of the federal government’s previous objections to online gambling. That change has opened the door to states possibly regulating online gambling for the first time, a tantalizing opportunity for game companies and big casinos alike. You don’t even have to leave town to see the upside: Seattle startup Double Down Interactive, which makes a popular Facebook casino game, was purchased early this year for $500 million.

Thelen says Self Aware’s real value was its social DNA. It’s no mistake, he points out, that the first companies to really capitalize on Facebook as a lucrative gaming platform—Zynga, Playdom, Playfish—started life as app developers, not dyed-in-the-wool gamers. Facebook and social networks generally are just a different system, and not one that traditional game developers and distributors were really ready for.

“No existing game companies really understood social at the time. And the ones who understand it now are acquiring their way in,” Thelen says.

Even though Self Aware’s biggest success is on mobile, not Facebook itself, Thelen says the company’s DNA in creating a community of players should translate well. Card Ace: Casino isn’t simple a gambling game with a bunch of people crowded around it, he says—it’s the inverse.

“We were looking for a differentiated product in an undifferentiated game space. There’s only so many ways you can do blackjack—its got a fixed set of rules. Same with Texas hold ‘em, same with roulette,” Thelen says. “They put the social and community [aspects] first. The games are what you do with that community. Most others lead with the games, and by the way, there’s other people playing at the same time.

“That’s a large part of their success on iOS. There’s dozens and dozens of casinos on iOS, but you only see one in the top 10,” Thelen says. “That’s why we think it’s handicapped to be successful on Facebook as well, because it’s very different than the ones that are out there right now.”

The possibility of legalized online gambling? Big Fish sees it as more of a bonus that might become ripe. “What we bought was a stock,” Thelen says. “The call option on that stock is if gambling is legalized in more areas of the country.”

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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