NaturalMotion

Today Benchmark announced an $11MM investment in NaturalMotion, a publisher of 3D games for mobile devices.  I am joining NaturalMotion's board of directors.

Many people in the packaged-goods games business know NaturalMotion from their Euphoria and Morpheme 3D animation engines, which have been used in high-end console games to produce incredibly realistic character animation (if you've played Rockstar's Red Dead Redemption, for example, you've seen this in action).  Torsten Reil, CEO of NaturalMotion, recognized that he could port a substantial subset of these technologies to the surprisingly-capable iPhone and iPad platforms, and in so doing leapfrog existing assumptions about what gaming could be on those devices.

The early results, My Horse and CSR Racing (which Apple recently demonstrated on stage at the WWDC keynote), show the incredible promise of console quality and production values matched with the successful free-to-play business models that have taken root in mobile gaming.  NaturalMotion is in production on a slate of innovative products that will stretch the boundaries of some existing genres, as CSR has done with iOS driving games, and also create some exciting new genres we haven't seen before on the platform.

I'm looking forward to working with NaturalMotion, and with an incredibly talented entrepreneur like Torsten Reil, on this exciting endeavor.

Euro 2012 Group Stage Recap

Ok, you can't deny this has been a very entertaining tournament so far.  All of the final games of the group stage had stakes, and every pair of final matches in the groups had real drama. There was even some decent football.

There has been positive play and goals have been plentiful (not a single nil-nil draw in the group stage), including some real gems like Ibrahimovic's or Welbeck's or Ballotelli's (you could put Di Natale's in the mix, or Silva's, or Schevchenko's brace, too). Unfortunately, many of the first-round goals went in against the Irish, whose -8 goal difference and 9 goals conceded in repeated pastings were an embarrassment -- and not a great advertisement for the expanded 24-team format in 2016. Apart from Ireland, there were three 5-goal matches and five 2:1's, a welcome absence of play-acting and diving, and few major complaints about the officiating (save the Ukraine non-goal vs. England).

The fact that every group went down to the last match (and in several cases, down to the last kick in injury time) made for some excellent TV. The final matches went on simultaneously, with the mood of the fans rising and falling as news came into each stadium from the other match in real time via text and Twitter. There were several moments when a single goal could (and did) upend a group.

In Group A, the Czechs beat Poland and the Greeks miraculously beat previously dominant Russia by equally-tense 1:0 scores, sending the match winners through to the quarterfinals against most predictions.  In B, Portugal stylishly beat the floundering Dutch 2:1 to advance (pre-tournament favorite Holland lost all three group matches); Germany beat Denmark by the same score and won the Group of Death. In C, the big favorite Spain won the group, but barely beat Croatia 1:0 in a game they could easily have lost but for Casillas' save of a diving Croatian header (which, had it stood up as the winner, would have knocked Spain out of the tournament).  In the other match, Italy beat the hapless Irish to advance. Finally, in Group D, England gutted out a win over the hosts Ukraine 1:0 and won the group, while Sweden manhandled a lifeless France 2:0 and left the tournament with some pride.

I can't move on from the group stage results without mentioning the utterly baroque tie-breaking rules for the UEFA tournaments. I've read the commentary on both sides of this issue, and I appreciate the potential unfairness of the UEFA rules. It's lame that most fans couldn't figure out the various permutations for advancement in a major tournament without a computer.

That said, the mini-leagues and UEFA coefficients produced some unexpected results, and I would argue that the net result was a meaningful forcing function in favor of winning the final matches rather than drawing (and the fact that there were no draws on Match Day 3 seems to support that -- despite the fact that draws would have been just fine for many teams). I think that made for a better viewing experience. By the way, the best and simplest fix for this that I heard was to use UEFA rules for two-way ties (head-to-head) and FIFA rules for three-way ties (goal difference).

As good as the group stage has been, the tournament looks set up for a great finish.  On one side of the bracket, Germany play Greece and Italy play England. On the other side, Spain play France and Portugal play Czech Republic. I'd love to see a Portugal-Spain semifinal, with Ronaldo going against his Real Madrid teammates, and a Germany-Italy grinder. But I can imagine England getting past Italy to face Germany, and I wouldn't be surprised by a Czech victory over Portugal in a low-scoring game.

The Spain-Germany final looms. They are clearly the two most in-form teams in the tournament so far, and I can't really see any of the remaining teams beating them if they play at their best. But there may be a lot of twists and turns left in this tournament before we get there.

thatgamecompany

If you've played Journey from Jenova Chen's thatgamecompany (TGC) you know you have experienced something strange and magical, something that feels totally unique and yet fun and full of the pleasures that games can deliver (and if you haven't played it, and you own a PS3, stop reading this post and go download it). If you've also played Flower and Flow, you know that Jenova is one of the most ambitious and creative forces in games.

I first encountered Flow seven years ago as a PC game Jenova made when he was a student at USC. At that time, the company I worked for was trying to figure out how to make a mobile version of EA's Spore, and we were struggling with the design. The simplicity, logic and depth of Jenova's game just shamed us. It was beautiful -- meditative but tense in the perfect way.

Today, I'm delighted to report that Benchmark Capital invested $5.5 million in a Series A financing for TGC.  I will be joining TGC's board of directors.  The intent of the investment is to provide the resources for TGC to remain independent, so they can innovate with complete autonomy from the pressures of platforms and publishers. I am really excited about getting to work with Jenova and his team to help build TGC into a global entertainment company.

We believe fundamentally in TGC's vision for interactive entertainment: to bring to games a little of what Pixar films brought to animation -- emotional depth, engagement with fully-realized worlds, and a strong sense of authorship.  In the modern, hyper-connected games market, we believe TGC can reach the broadest possible audience if that vision can be fully controlled by the company.  We're excited to be able to help to make that happen.

Investing in Content

The other day, a friend sent me an introduction to a game company with a note saying, in effect, "I thought you might be interested in this since you invest in content."

Certainly, looking at some recent investments Benchmark has made, you might get that impression. Riot Games, Meteor/Adhesive, Red Robot Labs, and two as-yet unannounced new investments [subsequently announced: Jenova Chen's thatgamescompany and next-gen mobile publisher NaturalMotion] are all companies with core competencies in game design and development.  Yet, in none of these instances would our investment properly be characterized as an investment in content.

Why the misunderstanding? A lot of it has to do with the changing nature of publishing in the video game business in recent years.

In the past, publishers played four key roles in the video game value chain:

1. Product development capital. Until recently, publishers were the sole source of development dollars for the creation of new products (unless a studio had the resources to self-fund development). Large, expensive development teams, often working for years before seeing any revenue, required lots of deficit spending.
2. Marketing reach.  Publishers not only spent millions of dollars on conventional media buys (magazines, television) but also managed a ton of channel marketing, spending on merchandising (end caps, marketing circulars), co-marketing with platform providers, and point of sale promotion.
3. Physical goods distribution. Publishers provided the capital and logistical support necessary to build the retail inventories of packaged products. They pre-paid platform licenses (which often required letters of credit to the tune of millions of dollars before a single disk was sold at retail). They organized the shipment of packaged goods to stores, and managed returns of unsold or defective inventory.
4. Intellectual property management. Often publishers managed "franchises" -- video game brands deployed across a number of platforms, requiring a number of localized versions. Generally, the core development team would concentrate on one or two key platforms and the publisher would manage development of ports and localizations, and control sequels. In addition, publishers could pay for and manage the substantial costs associated with major brand licenses (like sports or movies). 

All of these publishing services benefitted from economies of scale, and publishers had incentives to aggregate products in order to spread cost and risk across a portfolio. Publishers with lots of good product flow got better treatment from platform providers and from retailers, too, further reinforcing the benefits of aggregation. The supply-chain nature of the packaged goods business created an environment in which these services could demand a substantial premium, both in revenue share and, ultimately, in equity value.

Think about what has happened to this model in the last seven or eight years. Capital is now more readily available for game development than ever before, and, further, modern games (and not just mobile or social games) require much smaller teams and much shorter development cycles, and therefore far less pre-revenue capital expenditure. The internet profoundly alters the nature of marketing reach, frequently to the disadvantage of incumbent publishers, and certainly changes the nature of channel marketing. Games are increasingly delivered as services rather than goods, and even when they are delivered as goods they are delivered electronically with a distribution infrastructure that can be rented from cloud providers like Amazon.

So, what is a modern video games publisher? What is the new set of skills and assets that a modern publisher must possess? The new paradigm of online, free-to-play gaming based on virtual goods sales has completely invalidated most of the old value-creation mechanisms (this should be obvious to anyone who has looked at market cap as a multiple of sales for EA or Activision vs. Zynga or TenCent).

In my opinion, the four traditional publishing values have collapsed down to two completely new ones:

1. Customer acquisition leverage. Selling games-as-a-service, generally free-to-play and actualized by the internet, has more to do with traditional e-commerce than with traditional packaged goods distribution. A key component of e-commerce is funnel management. You need to find or create demand, aggregate that demand through downloads and activity, and direct a portion of that engagement and activity to sales. The key skill in this new environment is leveraged customer acquisition -- i.e., a competitively advantageous ability to get customers into the top of the funnel in hopes of selling them something along the way. And, by the way, I don't consider the ability to buy traffic slightly more efficiently than your competitors as a sustainable competitive advantage. CPI marketing is like SEM -- good for a short-term arbitrage and cash-flow generation, but bad for long-term value creation. To foster true organic customer demand, content must be at the core. It is both the honey-pot attracting new users and the motor for on-going engagement.
2. Integrated merchandising and game design. In the old packaged goods days, development teams made games, and sales and marketing teams figured out how to get people to buy them. If customers played them a lot, that probably generated some good reviews and good word-of-mouth for marketing, but ultimately publishers only really cared about generating enough buzz to get a customer into an EB or Target to plunk down $50, whether that customer played the game or not. Now, not only do the games have to be engaging enough to get customers to want to buy virtual goods to enhance the play experience, the games themselves need to be created with the merchandising of virtual goods as a core design value (as well as all the e-commerce instrumentation and analytics). Again, content is central; the store and the game are, in the best sense, one.

The companies that figure out next-gen publishing will create the greatest venture capital returns. Whatever you think about its current stock price, Zynga has clearly validated this concept, and scores highly against my two core next-gen publishing values. Conversely, companies that develop next-gen content alone can produce cash flow (look at just about every successful company selling one-off games on iOS, for example), but rarely high-multiple equity value. By way of example, look at the recent large acquisitions in the mobile games space, where companies sold for between 2-3 times annualized revenue run rate; versus over six times run rate for a company like Riot, that had deeper control over commerce and audience.

So, in a round-about way, this is why I back games companies that develop content. I am really backing platform-based publishers, and my goal is to see them scale to multi-product powerhouses.  But I don't believe you can create publishing leverage by starting with the platform. I think it fundamentally starts with great content.

As much as I admire and appreciate pure game development platforms, I think they will struggle to cross over from tools companies to publishers or distributors without creating partner friction. Meanwhile, companies like Valve are using must-have content (Half Life, Portal, Counterstrike, DotA) to aggregate large audiences (on the Steam platform); those aggregated audiences then create customer acquisition leverage for future Valve titles and also for titles from third parties who pay a toll for access to that highly-qualified audience.

That, for me, is the essence of value creation in the games business, and that's what's guiding my investments in these great and diverse companies in the Benchmark portfolio.

Sports Analytics: MIT Sloan Conference Impressions

The fascinating MIT Sloan Sports Analytics Conference which took place in Boston this weekend (and which I had the privilege to attend) is known affectionately by its attendees as "Dork-palooza" -- a celebration of the number crunchers and obsessive compulsive fans of sports statistics. Panelists, researchers, and attendees discussed a wide variety of topics with a very ambitious goal: to change the way we watch and measure team, individual, and business performance in sport.

The presence and influence of the great Bill James cast a warm glow over the proceedings. James' hugely influential work in baseball statistics, and the Society of American Baseball Research's "saber-metricians" remain the best case study of how the geeks can influence a sport. In panels, research papers and hallway conversations many conference participants talked to the broader project of replicating in other sports James' revolutionary success rethinking how baseball is measured and discussed.

A couple of themes stood out for me in the small subset of the conference I got to sample:

New Data Collection Methods. A couple of research papers on the NBA showed how promising the STATS SportVU 3D positional data will be for future basketball analysis. Data mining the 3D positional information of players and ball can provide some intriguing insights. Several panelists and companies talked about re-introducing context to measurement -- think, for example, about the problem of NFL receivers dropping passes when measuring a quarterback's completion percentage. A hockey panelist talked about "contextual +/-" in assessing the influence of a player's time on ice. And a promising company called StatDNA, which presented in the startup competition, uses trained experts to visually analyze soccer matches, coding events with remarkable fidelity and perhaps some interesting predictive power. I didn't attend any of the bio-metrics panels, but it seems equally interesting work is being done with acquiring granular medical data and using it to enhance athletic performance.

New Methods of Communicating. In a remarkable panel called "Box Score Rebooted," the participants talked about the need to focus on, for lack of a better word, poetics, the languages we use to communicate deep, data-driven concepts. For example, Bill James talked about the decision to name the arcane Blown Save Win concept in baseball "BS Wins" to preserve the double entendre. Muthu Alagappam tried to expand the concept of "positions" in basketball beyond the five traditional ones with data analysis and visualization, revealing 13 actual behavioral groupings that were much more evocative of observed play (I got to see an early preview of this research when his company, Ayasdi, presented to us at Benchmark a few months ago). Kirk Goldsberry developed a visual language of NBA players' shooting efficiency -- point production per shot attempt -- at 1,200 relevant positions on the offensive end; he produced a series of heat maps which allowed delightfully intuitive comparisons of the capabilities and tendencies of the league's stars.

Modernizing Old-School Methods. Obviously, the human mind is amazing at visual pattern recognition, and sports are filled with phenomena that are intuitively obvious to people both inside and outside the sports who pay close attention to games, but which would be hard to quantify through statistics or machine learning. Several panelists reminded the audience of the continued vitality of film analysis to players, coaches, and scouts. The ability to digitize and add metadata and search to video clips, as well as the ability to personalize the film session and distribute game film on iPads, may ultimately be more important than whiz bang  innovations like USC's Voronoi Tessellations (cool as they were).

"Fanalytics", Social Media and Business Intelligence. Sports is a business, and cash money rules. While a lot of analysts justified their work because it could theoretically add efficiency to drafting, trading, transferring, and managing salary for players, there was an equally compelling movement to bring data to bear on the customers -- sports fans -- to study their tendencies, behaviors, and spending patterns to better serve them (and get them to spend more, of course).  From the CEO of Ticketmaster, to Mark Cuban and other team owners, to Vegas bookmakers, there was a consensus that data mining and analysis could provide meaningful uplift, and that social media engagement was crucial. The growing importance of social media to the experience of sport cannot be overstated. In particular, the degree to which Twitter is connecting audiences, athletes, clubs, and even the analysts themselves, is astonishing. It would not be a stretch to call Twitter the deus ex machina of modern sport. [Disclaimer: Benchmark is a significant venture investor in Twitter].

In a broader context, the SSAC is further proof of the revolutionary and disruptive business impact of big data, business intelligence systems, and advanced statistical and marketing analytics. These tools have transformed entire market segments -- think about what data and analytics mean to the book selling business after Amazon, or to the video game business after Zynga, or the advertising business after Google, not to mention oil drilling, or inventory management, or Wall Street investing. Several Benchmark portfolio companies like Hortonworks (Hadoop), Domo (BI and visualization), New Relic (application performance monitoring), and others are helping customers solve data/analytics problems, while many, many portfolio companies are using data analytics fundamentally in their businesses to create competitive advantages and enhance customer experiences.

Analytics has become a key business practice across industries. But it's cool to see it flowering in sports, where it uniquely functions both as management tool and a component of the fan experience -- a unique form of content separate from, but enhancing, the core product.

Meteor, Hawken, and Free-to-Play Gaming

Benchmark Capital has announced an investment in Meteor Entertainment, the publishing company that will bring the amazing mech shooter Hawken to market, together with Adhesive Studios, later this year.

This is going to be fun. First, I get to work with a remarkable new talent, Khang Le, and his team at Adhesive Studios in LA. I discovered Adhesive the same way everybody else did -- through their YouTube gameplay demo for Hawken. My brother sent me a link along with a simple message: "Find these guys!" I've been looking at games for 20 years and Hawken is one of the most astonishing things I've ever seen.

Second, I get to work with my good friend Mark Long. I first met Mark early in his career in the video game business, when he had just started Zombie in Seattle. Mark is a pro's pro, and I was honored that he agreed to come on as our CEO at Meteor. He not only brings recent experience creating free-to-play games, but also a deep understanding of the marketing power of transmedia. Mark is an accomplished graphic novelist (Shrapnel, The Silence of Our Friends) and has worked closely with Brian Grazer's Imagine Entertainment developing leading-edge film and television concepts.

Third, I get to join Meteor's board along side Rick Heitzmann from FirstMark Capital in New York. Rick and I were the Series A investors in another well-known free-to-play company, Riot Games, a startup studio that had a monster, worldwide hit with their first title, League of Legends. Riot was acquired by the Chinese internet giant Tencent early last year. Rick and I had a great experience together on the Riot board and have been looking for something interesting to do together ever since. I can't think of a better project than this to reunite the team.

Free-to-play is the future of core gaming. Every month we hear the dire reports from the front lines of the packaged goods business, with sales off 10-30% year over year, a trend that we've seen continue unabated for the last couple of years. The packaged goods business is undergoing the disruption that we've witnessed in many other media businesses (music, newspapers, TV) as the internet, free-to-play models, and micro-transactions erode the traditional brands, retail bundles, and price points. This is a huge opportunity -- perhaps up to $8 billion of core revenue is at stake in this migration to free-to-play/virtual goods in the next few years.

If the other media businesses are any guide, this will happen fast. Some of the incumbents, like EA and Valve appear to understand what's happening and are taking action, but the opportunity is enormous for new entrants built from scratch for free-to-play design and publishing. Riot was able to come out of nowhere and, with a single great title and a deep commitment to customer service, reach over 35 million players around the world (and growing), while generating outsized revenues and profits. They did this without the "reach" of the incumbent publishers, without access to their distribution channels, and without their massive conventional marketing budgets. That was simply not possible in the past.

I think Meteor has a great chance to build a really big business in this space, and that's why we invested. I look forward to getting to work with this great team to make it happen.

Riot Games & Tencent

As was widely reported yesterday, the Chinese internet giant Tencent has agreed to acquire a majority of the capital stock of Los Angeles-based Riot Games, a Benchmark portfolio company. The transaction is a huge validation of Riot's meteoric rise to prominence in the online game business. CEO Brandon Beck, his co-founder Marc Merrill and the team at Riot have executed their business plan brilliantly, and the Tencent transaction now gives them a global platform to continue to disrupt the video game business for years to come. Congratulations!

For those unfamiliar with the company, Riot develops and publishes high quality, online, session-based games aimed at the core video game audience. The games are free to play; the company makes money by selling virtual goods to enhance the play experience. Riot's first title, "League of Legends," was an instant hit in the US and Europe, and will launch in Asia this year. The game has attracted a passionate audience, and by the strictest measure of video game engagement -- peak concurrency -- only the multi-billion dollar "Call of Duty" franchise does better than LoL among session-based games.

Benchmark Capital was privileged to invest in both Riot's Series A and Series B financing rounds. We were attracted by three key ingredients: the team's maniacal commitment to product quality and user experience; their belief that they could create sustainable customer acquisition advantages by delivering modern, upgraded versions of well-established play patterns (i.e., DotA); and the inherent benefits of the free-to-play, virtual goods business model. It worked like a charm -- the company delivered remarkable usage, revenue and profit growth. Hat's off to the team for executing so well against the opportunity.

One quick word about Tencent. I've been lucky to know the company since before their 2004 IPO (Tencent distributed some games from my last startup, JAMDAT Mobile, in China). I have immense respect and admiration for Pony Ma, Martin Lau and David Wallerstein. They are smart, honorable business people. I could not be prouder to see the combination of these terrific companies, and I look forward to great things from Riot and Tencent in the future.