secret stash ep 7: owen mahoney on why gaming isn't hollywood

Gaming isn’t about blockbuster budgets or flashy graphics - it’s about fun. And somewhere along the way, we’ve forgotten that. In this episode of Secret Stash, hosts Justin Kan and Archie Stonehill sit down with former Nexon CEO Owen Mahoney to unpack what’s gone sideways in the gaming industry and how to fix it. Here’s what you’ll hear:

• How game development costs are driving up licensing deals
• Why fun is losing out to graphics fidelity in a battle no one asked for
• The eternal showdown between distribution vs. product 
• Owen’s two favorite M&A deals at EA and the one mistake everyone should avoid
• How to build forever franchises instead of wannabe blockbusters

Owen calls it like he sees it, and the result is a refreshingly honest take on what gaming can and should be. Tune into the latest episode below or wherever you listen to your podcasts. Or, keep reading for the highlights.

Licensing as a downstream effect of development costs

Owen, 8:41 -  ”Licensing of IP is a great way to differentiate yourself and market yourself in a world that demands differentiation in marketing. It's very hard to differentiate yourself. So if you get the Warhammer IP, or the FIFA IP, or the Bond IP, or Disney, and you have a first person shooter, let's say, you immediately position yourself differently because people want to be in the Star Wars universe, or the Warhammer universe, or what have you.”

Owen, 9:21 - “How it came about to that point where there are so many licensed products, I think is directly related to the problems of game development - and that really goes back to development costs.”

Owen, 11:17 - “If I made a $200 million mistake because one of my games didn't work out, it would be a real serious conversation with my board. If I had a couple of those, and they were between two and three and a million, they might be calling for my head. And if they weren't calling for my head, certainly there'd be shareholders out there who would want to turf me. So if that's your framework, what do you do if you're sitting in my shoes? Well, you try not to make a mistake, right? And so when you're not making mistakes, suddenly your product development starts to look a lot like everything else - which means you have a not so differentiated product, which means that's a different sales prospect, right? Now you've got a different marketing problem. And so licensing is sort of downstream from this issue of development costs.”

The poor man’s Hollywood 

Owen, 13:09 - “The games industry kind of thinks of itself as the poor man's Hollywood. We call our project managers, producers. You could do a buzzword bingo at any free events about cinematic graphics and sound … So I think there's a fixation on trying to look like Hollywood and I would respectfully submit that we've gone well past the era of the time of diminishing returns. That last polygon on the page doesn't really matter, but you had all the developer tools, right? If you just look at the developer tools, it's all about graphics fidelity.”

“The problem with that approach to life and that sort of fixation on Hollywood style graphics and sound is our product doesn't sell based off of the last polygon on the page. Our product sells because it's fun. If you're not coming back five or ten years from now, we consider that a failure. It may look flashy for 10 minutes of gameplay, but I've got to think about how to bring you back to the thousandth hour or 10 years from now. And that goes back to fun. So the industry is fixated on this one topic just based on its own actions and its own words.  And yet, gamers buy something different. And so I think there's a serious mismatch.” 

“The problem with cinematic graphics and sound is, not only is it basically a commodity now, and it's not helping, it's also by far the most expensive cost in your P&L. If you're gonna do a AAA game, you're gonna have to scoop up 50 environmental artists and you're going to have to scoop up 10 or 15 sound people. They're expensive. So those are some of the reasons why it's gotten so expensive.” 

Be envious of Minecraft, not red carpet walks

Owen, 16:06 - “We should just spend the next two years talking about the impact of Minecraft on our industry … It's a beautiful piece of art … and it's also arguably the highest ROI of the entire games industry … So why don't we spend all our days talking about that? That is what we should be envious of, not the red carpet walks.”

Owen, 18:27 - “For a while the industry mantra was ‘fewer bigger bets’. I guess the analogy from outside the industry would be a little bit about what Hollywood did in the last five or ten years about the Marvel franchise and Star Wars franchise. Drama movies sort of went away and they focused on Marvel films.”

“Another analogy or sort of mixed metaphors is - if everybody's read the book Moneyball or seen the movie or both - people like to think it's about stats. What I really took away from both the book and the movie is, you could be looking at one set of facts, but those aren't the facts that matter. You should be looking at something different. That lesson was, it's not RBIs at all. RBIs don't win games. But getting people on base is actually what ends up winning games. And that was the insight. So if every single person you know is focused on RBIs, you're probably going to get the lesson that RBIs is what matters. And I think everybody I know in the games industry, at least in AAA, they'll focus on high end graphics and so on. And it's not to say that those things don't matter. But they're just one of the tools in your box to make something really cool. I think a lot of people miss that lesson. They miss the forest for the trees. I think that the industry is at a bit of a crisis point. So we may have a re-examination of some of those.”

The great debate: distribution vs product

Archie, 20:20 - “ I come from an investment background and unfortunately, it's a trade off. Do you make a really high polished vertical slice or something that actually proves an interesting system in gameplay? Unfortunately, to get the investment, you probably need to make the highly polished vertical slice because that's what the funding is. And if that's what funders are looking for, if that's what public shareholders are looking for, that's the kind of CEO they're going to hire, that's the startup they'll fund. I think it’s a vicious cycle.”

“But part of what we're trying to do at Stash is refocus the innovative minds of the industry on distribution strategy and release strategy as a component of product innovation. I would argue every game that has come out and been an innovative entry to the market, including Minecraft, but also League, Fortnite, Roblox, has had some interesting and great content, but they've also done something very differently in terms of how they released their games. Even Baldur's Gate 3 released into early access in an extraordinarily unique way, used that funding to compete with some of the big guys. I truly believe that we have reached a point where making a better version of your product and releasing it in exactly the same way is basically not growing the market.”

“I think you could prove this by looking at 2023, where arguably, it was the best year for game releases ever. Baldur’s Gate 3, God of War 2, Spider Man, Tears of the Kingdom, etc. And yet, according to Newzoo, the console numbers only grew by 0.3%. So what does that tell you about the impact that had? The things that are growing this category, and I think breaking out, are those that take really null approaches to how they treat their games as product, and especially how they get those products to players.”

Owen, 22:12 - “ I would agree with it, what you just said a thousand percent, that's exactly spot on as far as I'm concerned. I think there is a very strong case to be made that I hear on the other side, which is, it's really just hard to sell a commodity. Why pretend that something that is a copycat product is not a commodity? And commodity means low margins. And yet we have high cost structures in the games business.”

“Every once in a while, you'll meet a Brandon and Mark from Riot who have a very particular view about how to market the product. It's almost part of their product thesis and their whole company thesis, which is really smart … But I think you could also make a very good argument that you think you got a marketing problem, but you got a product problem … And the idea that you're just going to say, well, if I build it, they will come is, is probably pretty naive. I meet a lot of people like that. But at the same time, selling something that is a commodity is going to be super hard, especially in the games business.”

Archie, 23:57 - “ I think what you, what you raise is a valid argument. However, I think it's a fundamental misunderstanding of what you are selling in games. If you think you can divorce the distribution strategy from the product, like for example, licensing, where you would have thought that was a skin wrapper layer - no, it is actually better to play the fantasy of being the football team manager for the team you love, for the players you love than it is to play with this  anonymized game. Similarly, is esports like a marketing strategy for League of Legends or is it part of the products they're selling at League of Legends? I think that the best games understand that how players play the game is part of the player experience and part of the product.”

The two best M&A deals at EA

Owen, 33:12 - “ When you're doing M& A, there's some times where you're the chef and there's some where you're the short order cook. Somebody really needs something and you help them buy it and you're sort of the internal banker for them. There were two that were really interesting, that were not sort of buying and wrapping them in and making them part of the machine.”

“One was Jamdat, which was run by Mitch Lasky … I was very much a believer that mobile was coming and we need to be really smart about it - and the smartest people on the planet by far were the Jamdat team. And I thought Mitch was one of the most impressive executives I had ever seen, and he should be part of the executive team at EA. So we were catching up for lunch and he was like, ‘Hey, have you ever thought about coming out and working for Jamdat? I was sort of like, ‘Well, I wouldn't want to buy you. Why would I want to go work for you?’ And he kind of took umbrage on that comment and gave me a bunch of good feedback. I was so impressed by his response to that, I said, ‘Well, maybe I would want to buy you. So, you know, why don't we start talking about that?’ And then preceded the hardest negotiation I ever had in my life, because he is a real tire in the negotiating room. But it worked out really well for us at least in the near term.”

“The other one that was really interesting for us was DICE. It was interesting because it had so many aspects of what we're talking about here. They had just come out with the beta for Battlefield 1942, which, on the surface, looked a lot like a Medal of Honor, or like the first version of Call of Duty. So it looked like a WWII first person shooter that happened to have some vehicles in it … My intention at the time was I wanted to see if I could get Patrick Sutherland in this part of the studio because I thought he was very smart, his team was very good, and his product was just differentiated. I can tell you that there was a huge debate internally and it was sort of over a couple of dead bodies where we ended up making that original investment … I think it was one of the best investments acquisitions EA ever made on a returns basis. We ended up buying the company three years later and Patrick, sort of ended up running the studio very successfully in 2000 until 2018.”

“The interesting lesson on that was the objection that people had, which was, ‘we have a WWII franchise, why do we need another?’ It was a reasonable thing to say. What they didn't see was that it was a truly online game. You couldn't play the game offline at all. And it was a vehicular first person shooter. So you could get in the submarine and run the submarine, you could get in the airplane and bomb from above. It was just an insanely fun game. So if you just look at fun and different, it's in the upper right hand quadrant of that graphic. And going back to this debate of, is it distribution or is it product, on that spectrum, this would be a great argument for how a game could really break out in a very difficult environment by being fun and different, which most games are not. They're either not different, or they're not fun, or both. So 99% of the pitches that I look at a year are not differentiated at all. This one was very different, but our company had a hard time getting its head around that. All I knew is that me and my friends could not stop playing this game and there was nothing like it in the market. And it was just insanely fun. And the team was really good.”

The biggest M&A mistake is culture fit

Owen, 37:41 - “The games business is not like aircraft engines or auto parts or something like that. They're not factories. They are groups of people. All the M&A mistakes that either I've made, which have been many, or that I've seen around the industry, have been because of people incompatibility and cultural incompatibility.”

“Although I came as a kid who was raised in Northern California, I was very different culturally from my colleagues at Nexon. Actually, business wise, we were exactly the same culture. We had the same view about short term versus long term and about what really mattered in games and why we're here and all that sort of stuff. So we could communicate across these vast cultural and linguistic gulfs. But most, most times when you're doing M&A, you forget about that entirely.”

The internet boom in Korea 

Owen, 25:54 -  “You have to understand how interesting Korea was in the international world at that time. All of us were doing dial up 56K modems at the early stages of the internet in the early to mid nineties. Around 1993, you could get a megabit downstream internet connection for $20 US in those days. That was like super cheap, super fast. Stoll was essentially one giant LAN at 20 million people. The two biggest telcos were battling each other to the death to try to wire everybody up with broadband and it was because of course it's very sticky. So once you get one, you're not going to change to the other.”

“We sort of joked as the greatest generation of game companies that were born at that time. There were a bunch of really good tech and in game companies, but it was really the game companies. And Jay Kim and Jake Song and a bunch of other really smart people really were going to really good technical colleges and really good universities - Seoul National and KAIST in particular. But they wanted to do the internet stuff. And in the case of Jay, the founder of Nexon, the rumor was that he and TJ both got kicked out of Seoul National for starting their game companies respectively. You didn't drop out in those days, you got kicked out for doing that.”

“ Nexon’s games didn't look like games, but they were online.  EA really knew that the internet was going to change the industry. This is in 2000. They didn’t really know how the internet was going to change their business. They just knew that the storm clouds were coming.” 

Nexon is misunderstood 

Owen, 25:05 - “ I joined Nexon in 2010, I became CEO in 2014 and just retired in March of this year. So it was exactly 10 years as CEO. Nexon was this gem of a company. When I was at EA, I had tried to buy Nexon three times.”

28:37 - “Nexon was doing exactly what we were aspiring to do at EA at the time. I wrote this memo to the exec team at EA, remember I'm the new guy, I was only a few months in, ‘I've seen the future of video games and it is Nexon’ and I got basically laughed out of the room. They all thought I was ridiculous. One of the things they said was, these don't look like games - like they're pixelated 2D experiences that look like an early version of Mario. ‘We're gonna come in with our high fidelity graphics and nobody's gonna play these games anymore.’ It was a very understandable reaction. To the person with a hammer, everything looks like a nail …  It wasn't that they were dumb. It was just that we were very focused on how to win in the way that we knew how to win. But the Korean game companies were just phenomenal and they were so aggressive and so fast and they really, and so they had all these crazy ideas like, ‘Hey, let's make a Tetris game.  Then instead of being single player, let's make a dual Tetris. And you've got falling blocks and I've got falling blocks, but then maybe I get a power up so I can shove over my falling block to you. So now you've got to deal with two falling blocks.’ So you have all these different ideas.” 

Owen, 40:01 - “ We had two really great franchises and a number of others. But we were terribly misunderstood. And that was the heavy lifting during the IPO and was the heavy lifting during every quarterly call I had since the IPO. And I think the industry still misunderstands it.”

“MapleStory I think, is now 21 years in. Dungeon Fighters is about 19 years in. These games on the surface look old, and the mental model of the games industry is product life cycle. A game goes up and then it goes down and it never comes back and it creates all sorts of problems for investors to understand your business. If you think a game goes up and then down, you're going to value the company based off of essentially a tangent on the curve of wherever it happens to be at that time. If it's on the upswing, then you think that it's going to keep going up. And if it's on the downswing, you just assume it never comes back … And that's a serious bromide in the industry.”

Forever franchises

Owen, 41:47 - “ We recognized that we really understand what we call deeply immersive (some people call hardcore) online games. All we've ever done really well is online games that are deeply immersive. So let's just do that. Over the years we got out of the mobile games business, particularly casual mobile. We got out of Facebook games. We really kind of got out of esports. 

Our idea of where we're going to focus is making games that last and grow forever. We call them forever franchises. I would say that's probably the biggest lesson in the last 10 years and almost nobody has really taken that to heart. People talk a good game, but they haven't really been able to do what's required to get there. And what's required to get there starts at the operating level and goes all the way up to the CEO and how the CEO communicates with his or her shareholders.

“The scale is huge. What it really points to, though, more than anything is longevity. The games can keep on growing forever. And if you do that well, you've just got this incredibly substantial business. When I left Nexon, we were about a $23 billion market cap.”