December 16th, 2008 by Arjan Olsder Posted in Interviews | 2 Comments »
Some weeks ago, we announced an interview with Greg Ballard, themed around the problems at Glu. For the first time ever we gave you, our community, the chance to send us all your questions.
It took us some time to compile this whole list of questions. We are glad that Greg Ballard took his time to answer, what we regard, our biggest and toughest interview ever.
THE COMPANY
[Arjan] What do you see as a feasible IRR (Internal Rate of Return) in order to build a sustainable business?
[Greg]…
[Arjan] When looking at the market, who do you see as worthy opponents (except for Gameloft and EA)?
[Greg] We see many content publishers with creative, innovative and compelling offerings and approaches to this industry. We have always believed that our greatest advantage has been our ability to create high quality titles and deploy them to all of the addressable handsets around the world within a short period of time. We continue to believe that this will be the core of our advantage going forward and is an advantage limited to very few mobile publishers.
[Arjan] Why did Glu acquire Superscape (a 3D studio) and MIG (a Chinese superpower)?
[Greg] Both acquisitions represented important steps in our goal to become the number one mobile games publisher in the world. Superscape's strong market position in the United States, heritage in 3D technology, and unique position as a leading white label publisher made them a perfect complement to Glu's existing global presence and portfolio. The acquisition of MIG, an established leader in China with locally-relevant high-quality portfolio, exceptional team and a strong relationship with China Mobile, allowed us to establish an instant leadership position in China.
[Arjan] If Glu is not able to pay it's debts toward MIG in time, is there any chance we see an alternative like turning the acquisition into a merger (giving the old board of directors from MIG a substantial share of Glu) or do you rather give MIG back to it's former owner?
[Greg] As our CFO said on our recent earnings call, we are confident that our cash position is not at risk of reaching a level where it would materially impact our operations. There are a number of different ways to improve our liquidity. As for the scenario you've described, I can't comment on a hypothetical. We will share more information on this when it's appropriate.
[Arjan] With cash running out, is Glu preparing a fund raise amongst investors?
[Greg] Again, we are exploring a number of options, but I can't get into specifics beyond that at this time.
[Arjan] How do you feel about the massive loss of your shareholders?
[Greg]…
[Arjan] With Glu's shares being worth less then $ 1, getting delisted from Nasdaq is a possibility if there is no recovery of value within a set time. What will be the consequence?
[Greg] NASDAQ has suspended the delisting of companies for the near-term due to the recent turmoil in the financial market. It's worth noting that more than 400 NASDAQ listed companies, over 15%, have recently fallen below $2 million.
[Arjan] Glu's value is very low right now (somewhere around $ 10 million), do you fear that any of the publishers that failed to enter the market on their own (Konami, SEGA etc) might acquire you?
[Greg] All Boards of Directors always have the right and obligation to turn down an offer they believe is not in the best interest of their shareholders. Right now, I don't believe our board believes that our share price adequately reflects the true value of the company.
[Arjan] How big is the chance that partners like Konami and SEGA get scared of the current situation and pull out their games in order to start distributing themselves again?
[Greg] Our partners are comfortable with the way that glu is executing and there is nothing about our situation that should scare them.
[Arjan] When looking at the market, Glu and Gameloft are the only companies that handle the complete development of their own portfolio with in-house studios. As developers are often skilled in working with specific genres of mobile games, it takes a lot of effort to re-educate them into creating other genres. When looking at companies like EA and THQ, they outsource most of the development in order to get the best possible quality for the lowest amount of money. Why does Glu hold on to this strategy?
[Greg] This was a strategy that we employed very early on in the company's history and it is among the key reasons that we have achieved the success we have to date. Developing a mobile game that is deployed on a global level is increasingly complex, and we have always believed that it's essential to own all aspects of the development and porting of titles in order to maintain quality and control the timelines we set. It is also cost effective for us, with our fully loaded costs being more efficient than our competition.
[Arjan] Have you ever thought about turning Glu into the worlds most powerful aggregator? Glu is already known to have the best sales team available in the market. Abandoning development will have a huge positive effect on expenses.
[Greg] While we agree that our deployment capabilities are the best in the industry, they are only a part of what has made Glu successful. We have a long track-record of making high quality games. If you look at the games that Glu studios have developed internally, we consistently produce some of the best games in the industry. We have been tracking review scores internally since the start of 2006 across several leading international review sites (IGN, PocketGamer, MobileGameFaqs, Modojo, WGWorld), and in that time period, we've maintained the highest average review score (7.5 or 75%) of all of the major publishers.
[Arjan] It is widely known that you are the best paid executive in the market. Is there any chance that you will reduce your salary until Glu is back on track?
[Greg] As you may know, I've just reduced my salary by 25%. It's also worth noting that my salary, as well as the salaries of the entire management team, is set after a reference to a set of comparable public companies (similar size, market cap, etc.). Our goal is to set our salaries at or near the 60th percentile of these companies. As such, even my previous salary is not the highest, or frankly even close to it, when compared to those companies.
THE PORTFOLIO
[Arjan] Glu has always been operating with huge brands for about 80-90% of it's portfolio. There is a lot of fear that your branded games are loss leaders for your company as many analysts say that you are overpaying for the licenses. Is this the case?
[Greg] No. We've actually paid market rates continually for our licenses. When we lose a license, it usually is because we have refused to bid as high as the competing company. When we win, it has rarely been because we were just the highest bidder, but because we bring superior execution to the brand holder. But I should add that sometimes it may look like we are bidding higher than others because we are overpaying, when in fact we can bid higher because our better global distribution allows us to extract more revenue from a given title than our smaller competitors can on the same license.
[Arjan] With the current developments of the iPhone market, do you still think branded mobile games ar
e the key to success in this market?
[Greg] Yes. We continue to see demand for a range of titles from various genres as well as branded titles and original titles.
[Arjan] Before there was Glu, there where Macrospace and Sorrent. Though the Sorrent portfolio was stuffed with branded mobile games of poor quality (I was a content manager for some operators back then, so I speak from experience here), the Macrospace portfolio held a lot of great quality games, though not all branded. Why was this quality abandoned at that time?
[Greg] Quality has always been paramount to Glu. To reiterate my previous answer on this topic, we have a long track-record of making high quality games. If you look at the games that Glu studios have developed internally, we consistently produce some of the best games in the industry. We have been tracking review scores internally since the start of 2006 across several leading international review sites (IGN, PocketGamer, MobileGameFaqs, Modojo, WG World), and in that time period, we've maintained the highest average review score (7.5 or 75%) of all of the major publishers.
We have seen, however, an interesting phenomenon in which game players from one region may see a game made in another region as lower quality, when it really is a matter of taste. During the period you reference, while the Europeans saw some Sorrent titles as low quality, we also had similar and equally sincere complaints about Macrospace titles here in The States. And in Korea and other Asian countries, we hear the same comments about any title produced in Europe or The States.
[Arjan] With the big amount of brands in your portfolio, we can imagine that some of them need to be renewed over the coming months. Will Glu keep committing to those, or rather lean on the huge portfolio of branded games from partners like Konami, Codemasters and SEGA?
[Greg] We don't disclose the terms of our licensing deals, but looking at our history, we have had a steady stream of new licensing partnerships, and as there are fewer publishers with the global deployment capabilities of Glu, we expect that stream to stay strong.
[Arjan] In the PocketGamer interview, you said that Glu is always a bit slow with supporting new technologies and platforms. Yet, you have already released a few titles for the Android platform, while there currently is no option to ask money for them. Those games obviously costed a lot of R&D budgets. What is the philosophy behind that move besides the press coverage?
[Greg] We worked closely with Google on the Android project for a significant period of time, which gave us a great advantage on this platform. We received a first look at the device and our team worked closely with the Android team throughout the pre-launch process.
[Arjan] In your interview with PocketGamer, you also explained that Glu intentionally didn't invest too much in iPhone development. According to you this was a good move as Gameloft and EA didn't show any real growth after releasing several titles on the platform. Yet, you also stated that consumers purchase most games in the 90 days after buying a new phone, and that most consumers went to buy an iPhone. What about the philosophy that Gameloft and EA might have chosen to support the iPhone in order to keep their income on their mobile games stable instead of missing sales they would have received through this group of consumers if they bought a different phone?
[Greg] The iPhone is still very young in its overall penetration rate. When we look back in several years, it will be clear that the first few months were relatively meaningless in terms of revenue but very important in terms of learning. We focused on learning which we think will set us up for future titles very well. In contrast to some of our competitors who deployed games faster, we will be doing all of our titles in house and will be doing them mostly in the framework of a larger roll out of the games onto other platforms. All of this is possible because we have taken our time to integrate iPhone into our mainstream development effort rather than making it a sideshow.
THE MARKET
[Arjan] During the conference call that took place after the release of your latest financial data, you spoke about the importance of various platforms in the market, as well as the possibility to release, for example, web based games. How will Glu split the releases of 2009 in percentage over the various platforms?
[Greg] We have not announced any specific plans to move onto non-mobile platforms, but would not rule out the possibility.
[Arjan] A lot of developers and publishers are currently trying to build D2C brand value for their companies and start engaging D2C activities. A great example of this is FishLabs who is operating a successful blog and participating in Consumer events. Will Glu start engaging D2C activities in the near future?
[Greg] As the new platforms and D2C opportunities grow, you can be assured that we will implement programs to establish direct relationships with consumers.
[Arjan] As with all interviews, our final questions is about your personal preference in mobile gaming. Which non-glu game do you love to play, and why do you think it's that good?
[Greg] I'm a big fan of Who Wants to be a Millionaire. We don't have the rights in North America so I bought it from Capcom who I think has done a very good job. I also love racing games but I can't bring myself to tell you which ones I play…
Thanks Greg!
First a big respect that he finally send you the feedback you asked for.
I bet 5 bugs he never played a single mobile game on his phone from another publisher.
The rest of the interview is just…
Glu are in deeper trouble than the rest of the industry and will need cash very soon. The share price reflects that there is no solution for that problem yet. It will be interesting to see whether they can raise more money and if yes, how.
If no, could Glu actually bite the dust?