Tag Archive MZ

Countervailing the Facebook – Google Duopoly (forthcoming)

Lawrence Abrams No Comments

This paper will lay out the requirements for a company with an digital ad demand-side platform (DSP) to be large enough and astute enough to countervail the Facebook – Google duopoly in digital ad supply-side platform (SSP).

We will start with a review of the Galbreath – Stigler debate over the value of an intermediate market countervailing power, mentioning our contribution to the debate: “Business models matter”  See our 2007 article Pharmacy Benefit Managers as Conflicted Countervailing Powers

There are article highlight the prospects for (SSP) competitors to Facebook – Google:

WSJ: The Race is on to Challenge the Google – Facebook Duopoly – June 2017

Buzzfeed: The Campaign Against the Facebook – Google Duopoly is Going Nowhere – August 2017

“For well over a year now, the digital advertising and publishing industries have grappled with the growing power of Google and Facebook, which suck up 98% of every new ad dollar spent online, according to some estimates. With so much growth and power concentrated in just two companies, publishers worry about the viability of their ad businesses, while advertisers bemoan their loss of leverage around ad buys.

Deeply unsettled by the idea of a Google-Facebook duopoly, both groups have done what they can to defend against it. But so far, nothing they’ve done seems to have worked. Google and Facebook both turned in mammoth financials in the first half of 2017, and are on track to account for 64.6% of digital ad dollars spent in the US this year, according to eMarketer.”

Adtech

Madison Avenue & 50th looking south 1941

Edge Computing Use Cases for MZ’s (Machine Zone) Platform

Lawrence Abrams No Comments

This is an expanded answer to a Quora question that I posted on August 6, 2017

Machine Zone (MZ) describes its new “RTplatform” as capable of “high-fanout” and “many-to-many” apps. What are the use cases for this?

I wrote a blogpost about 1 1/2 year ago valuing MZ. At the end, I suggested a few use cases that would benefit from the low latency of their platform. With the passage of time, there is a lot of talk about how the IoT requires a new computing paradigm called edge computing. I now am thinking about how MZ’s publish-subscribe, many-to-many platform could be used as a “first alert” messaging platform at the edge. Servers would be called only in cases of a need for higher order compute functions and storage.

The obvious use case for MZ’s platform would be v2x middleware for the era of autonomous cars. Another use case would be a IoT to IoT “first alert” message of a computer virus akin to what Tanium has developed.

Also, moving 400 billion or so daily events connected with RTB ad exchanges to the edge by conducting individual ad impression auctions within a Docker located on the device.

Also, many-to-many AR games placed via Bluetooth at the edge without calls to the server.

MZ’s has contracted with Switch, an innovative data center provider based in Las Vegas, to house thousands of MZ -owned servers with FPGA’s optimized for its Erlang-written publish-subscribe platforms.

Switch has recently announced  “The MOD 100…for a rapidly deployable, single user environment that can be extended to nearly any location around the globe. The MOD 100 data center can be customized to fit on premise, at the edge or in a dense urban environment on a parcel as small as 400 feet by 400 feet.”

MZ has recently entered the AdTech business with an omnichannel, demand-side stack featuring RTB for display ad impressions. We could see them leverage their relation with Switch and growing expertise in rapid-response, FPGA servers.  One way would be to enter AdTech from the supply-side via an edge CDN featuring 1,000 of MOD 100’s full of video ads and connected to auctions via MZ’s publish-subscribe platform.

Below is a picture of Switch’s SUPERNAP 8 data center outside Las Vegas:

 

 

Quantifying the Requirements to Scale a Carpooling Business

Lawrence Abrams No Comments

Summary

  • Carpooling is now seen as last big opportunity to grow a shared mobility as a service (MaaS) business ahead of the arrival of autonomous vehicles (AVs).
  • We present the case that Waze’s altruistic vision of carpooling is insufficient to scale the business.
  • Our transactional vision of the business, requiring market pay rates to drivers, creates little incentive for people to choose carpooling over solo commuting.
  • We think that it will take a minimum of $4,000 in cost saving to motive a significant number of people to go carless.  This implies that fares will have be reduced by an additional $1,583 a year to reach that level of cost savings.
  • The way to recoup this is by negotiating referral credits (dollar or accounting) with related units offering last-mile ride-sharing, delivery, and weekend car rentals.

© Lawrence W. Abrams, 2017

Inquiries : Lawrence W. Abrams, labrams9@gmail.com, (cell) 831-254-7325

Our Vision of the Modern Carpooling Business

A Horizontally Integrated MaaS Business

The success of ride-hailing apps has given rise to the idea that app-enabled carpooling could be a scalable business.  Plus, carpooling at scale could become a much needed poster-child of tech “public good”  as it would be the first impactful solution to traffic congestion and automobile pollution in years.

The question is:  Why would any company want to enter the carpooling business today?  What kinds of driver and passenger incentives would be required to scale this business?  

The unexpected early success of autonomous vehicle (AV) R&D has given rise to the idea that automobile ownership will be replaced within a decade by companies offering shared mobility-as-a-service (MaaS).

Given this, why would any company want to enter the driver-centric carpooling business with its limited life expectancy and profit potential?  

There have been at least a dozen carpooling startups trying to grow the business since 2010, but none have gained traction and most have closed down.  Perhaps their timing was premature as the urban ride-hailing companies like Uber had not yet matured enough to provided acculturation spillover benefits or been in a position to partner with a carpooling company in a tight “mesh-transit™” network. (see more on this later)

Today, the only commuter carpooling service with serious financing is Commute by Waze, a division of Alphabet (Google).  But, Uber, Lyft, and Ford  could enter this business easily by expanding their existing urban ride-sharing services to long-distance commuters.

uberPOOL and Lyft Line are urban shared-ride versions of their on-demand  services.  Ford’s new acquisition Chariot has recently rolled out an app-enabled, fixed-route vanpool service using Ford Transit vans and full time drivers.  Lyft has just introduced a similar urban fixed route car jitney service called Lyft Shuttle.

Waze’s vision of of the modern carpooling business is in the spirit of  altruistic carpooling among neighbors and coworkers.  Everyone takes turns driving and chip in to cover out-of-pocket expenses if there is an imbalance.  

Consistent with this vision, Waze has capped driver pay rates at the business mileage reimbursement rate of $.54 per-mile.  It has set per-ride fares that, when aggregated, just cover driver pay.   It also limits drivers to two-a-day rides, eliminating the possibility of full-time work.

Despite low pay, driver commitment is high because drivers have an altruistic “gift relationship” with passengers rather than a “transactional relationship.” (more on this later)

While Waze’s vision for modern carpooling is laudable, we will argue that scaling the business will require a business-like transactional approach, starting with driver pay rates on par with Uber.  

We envision the modern carpooling business as a unit of horizontally integrated MaaS company that also offers ride-hailing and has third-party tie-ins with ecommerce delivery companies like Amazon and Walmart and rental car companies like Hertz and Avis.  

The carpooling unit would be credited for dropping off passengers at transit hubs for last-mile ride-shares. It would be credited for delivery of meals, groceries, etc.  It would be credited by rental car companies when carless carpoolers come in for cheap rentals on the weekends.

While never profitable on its own, the carpooling unit would be building brand-awareness and customer loyalty.   It would be an important contributor to positioning for the biggest business opportunity of a lifetime —  the AV MaaS business.

The carpooling unit would be accumulating valuable MaaS logistics data.  It would play an important role in the acculturation of commuters to the shared-ride lifestyle much like AirBnB and WeWork are doing for the shared-living and the shared-work lifestyle, respectively.

More MaaS synergies originate from carpooling than any other mobility service.  And those synergies magnify when carpoolers go carless.

The fundamental strategy of an integrated MaaS company today should be to reduce carpool fares to the point that passengers will go carless and unleash a demand for related services.   Good accounting practices dictate that the carpooling unit get credit for these spillover benefits.

We think that it will take a minimum of $4,000 in cost saving to motive a significant number of people to go carless.  This implies that fares will have be reduced by an additional $1,583 a year to reachthat level of cost savings.

The way to recoup fare reductions would be to negotiate referral credits (dollar or accounting) with related units offering last-mile ride-sharing, delivery, and weekend car rentals.

Next, we present a brief look at the carpooling business from the vantage point of specific companies — Lyft, Uber, Ford, GM, Google, and even Amazon, Walmart, Hertz and Avis.

Besides spillover benefits to related companies, carpooling at scale will have a significant impact on traffic congestion and automobile emissions.  These “public goods” justifies government support.  We discuss the merits of a few ways government can help scale the carpooling business with minimal expenditures.

A Sense of Carpooling at Scale

By quantifying “carpooling at scale”, we will show why Waze’s altruistic vision of carpooling with driver pay set at $ .54 / mile is insufficient to scale the business.

For this exercise, we chose California Highway 101, a.k.a. “The Bayshore Freeway” between San Jose and San Francisco (SF).

The Reverse Commute along Highway 101 — aka the Bayshore Freeway

There are number of reasons why Highway 101 would be good starting place to scale a carpooling business:

  • Significant carless commuters in SF  
  • Significant reverse commute from SF to Peninsula
  • Ride-hailing at scale that facilitates a “mesh-transit™” system
  • California highway not US Interstate
  • Home of Waze, Chariot, Uber, Lyft, Google, and Ford Smart Mobility

The question is how many carpool drivers would be needed to reduce the rush hour traffic along Highway 101 by, say 30%?  How would that estimate compare with the number of Uber and Lyft drivers now working in SF?

Based on 2015 CalTrans data of vehicle traffic flow, we estimate that there are approximately 150,000 vehicles flowing both ways past a mid-peninsula point along Highway 101 (at Highway 92)  during a typical weekday commute period of four hours (5-9 AM or 3-7 PM).

We derive the following table of driver requirements:

Driver Requirements for Scaling Carpooling Along Highway 101

To get some sense of the magnitude of this requirement, we cite a  2016 report by the San Francisco Treasurer’s Office estimating a total of 45,000 Uber and Lyft drivers currently working in the City.

We conclude that it would take one-third the scale of Uber’s and Lyft’s combined operation in San Francisco for a carpool service to impact commute congestion along Highway 101, assuming an average of 3 passengers per carpool.  And this is just one highway in the Bay Area.

Attracting 15,000 new drivers would be a huge undertaking.  But, if the business could use existing Uber and Lyft drivers during peak commute hours and allow them to do multiple commute loops, the task becomes much more manageable.

Reverse Commuters as Early Adopters of Carpooling

 Highway 101 is especially attractive as a place to start a carpooling business because of a strong city-to-suburb reverse commute.  

The two other areas with strong reverse commutes are in Washington, D.C area with reverse commutes to government complexes in suburban Maryland and Virginia and along Santa Monica Freeway from downtown Los Angeles to coastal Santa Monica.

There are several reasons why highways with reverse commutes should help.  It may be that these corridors should be the only places targeted, given the limited lifespan and profit potential of the business.

Reverse commuters are city dwellers who do not need a car for running errands, going out to eat or seeing a show at night.  Parking is expensive.  They already sense tremendous value and little added inconvenience by going carless.  They are primed to be early adopters of a well-run carpooling service.

Corridors with strong reverse commutes also are attractive to the carpooling business because companies can offer drivers full time work via a combination of multiple carpooling loops mixed with periods of ride-hailing work.

Finding other metropolitan areas with strong reverse commuting would be a high priority research project for any carpooling company.

The Rationale for Market Rate Pay for Carpool Drivers

Carpool drivers have to be on-time twice a day, five days a week, 250 days a year.  After all, failure could cost passengers their jobs.  Work-going carpoolers are “on-the-clock”. Bar-hopping ride-hailers are not.

The management of a carpool business has to demand a greater level commitment out of its drivers than Uber and Lyft now demand of their drivers.   As independent contractors, Uber and Lyft drivers have a great deal of latitude in choosing work hours and routes.

Driver commitment isn’t an issue in Waze’s altruistic vision of the carpooling business because a driver is driving for neighbors and co-workers. The desire for continued respect is the prime motivator. Waze’s choice of limiting driver pay to the $.54 / mile is consistent with this vision.

But, we believe that carpooling at scale has to involve a vast majority of drivers working for strangers, not neighbors and co-workers. It is a transactional business  where driver commitment is secured by market rates of pay and the threat of being fired.

Recognizing that performance is affected significantly by the type of relationship a driver has with his passengers is similar to what Richard Titmuss discovered in blood-giving as chronicled in The Gift Relationship, a social science classic.  

Basically, Titmuss found that the quality of blood was much better when it was give freely by altruistic donors than when it was given in exchange for pay.

As a result, we firmly believe that a carpooling business has to pay drivers equal to what an Uber driver gets per-mile.  

An Estimate of Driver Pay

Below is an estimate of an Uber fare and related driver pay rate on a per-mile basis for a 25 mile uberX ride from Redwood City to San Francisco taking 50 minutes during rush hour.  We use 80/20 as an estimate of Uber’s current driver/company distribution ratio.

Estimate of Uber Fare and Driver Share for Typical Rush Hour Commute

We believe that a transactional carpool business has to match Uber all around in terms of gross fare rate of $1.55 / mile and driver pay at $1.18 / mile, which is set at 80% of gross fare less booking fees.

The idea of uniform fare rates and driver share across all mobility services is consistent with our vision of an horizontally integrated MaaS company and a “mesh-transit™” system that seamlessly integrates carpooling with last-mile ride-sharing.

 An Estimate of Passenger Cost-Saving Over Solo Commuting

We next estimate a passenger fare assuming Uber’s fare of $1.55 / mile shared by 3 passengers.  We also derive the cost savings for switching from a solo commute to carpooling.

Estimate of Carpool Passenger Fare and Cost Saving Over Solo Commuting

Even with 3 passengers who share the fare, carpooling yields only a $2,417 cost saving over solo commuting.  Even if passengers did commit to carpooling, we do not believe that this cost-saving would be enough incentive to “cut the cord” of car ownership and go carless.

Motivating Carpoolers to Go Carless

We were not surprised to see a lack of passenger incentive to choose carpooling over solo commuting assuming market rate pay for drivers.

Our initial thought was that government-mandated congestion pricing would be the only way the carpooling business could scale.  Congestion pricing would force the cost of solo commuting even higher than the already high cost of carpooling.

We now envision carpooling as a unit of horizontally integrated mobility company.  The business scales via reduced fares. These reductions are recouped by referral programs that offer credits and rewards coupons redeemable by passengers for using ride-hailing, delivery, and rental car services of related units.

In economic terms, the business scales via its “own elasticity of demand” through reduced fare prices rather than via its “cross-elasticity of demand” through raising the price of substitutes via congestion pricing.

The fundamental strategy of an integrated MaaS company today should be to reduce carpool fares to the point that passengers will go carless and unleash a demand for related services.

We think that it will take a minimum of $4,000 in cost saving to motivate a significant number of people to go carless.  This implies that fares will have be reduced by an additional $1,583 a year to reach that level of cost savings.

The way to execute this strategy would be to build app payment algorithms that posts dollar credits and rewards coupons to passenger accounts that are redeemable at related companies.   

The dollar value of these credits and coupons are set at the discretion of the related companies. Separately, the carpooling company negotiates payments with related companies for setting all of this up. Payments would accrue as these credits and coupons are redeemed.

In the case of tie-ins with third-party delivery and car rental companies, the carpooling company receives cash.  If the carpooling business and the ride-hailing business are owned jointly, say in the case of Uber or Lyft, the carpooling unit earns accounting credits offset by debits to an intercompany clearing account.

Below is an illustration of a series of credits earned from referral programs that would recoup a $1,583 per passenger fare reduction. The distribution of the credits among the related companies is based mostly on a qualitative ordering of “spillover benefits” generated by carpoolers.  

We believe that a ride-hailing partner would get the most benefit by far.  The expected benefit values to delivery and rental cars companies are about equal, but far behind.  

Recouping Reduced Carpool Fares

 

Surge Pricing Would Kill the Carpooling Business

The ride-hailing business is “on-demand” with no set commitments made by drivers or passengers.  Peak-load pricing, or surge pricing, is used to balance out supply and demand.

Commuter carpooling is not “on demand”.  Passengers rely on the service to get to and from work.  They risk firing if late.  The business depends critically on gaining customer confidence through reliability and predictability.  This can be achieved by paying drivers market rates and require them to meet precise pick-up times. Surge pricing would kill the carpooling business.

Given the level of commitment by drivers,  it would be reasonable to ask customers also to make weekly or monthly commitments in return for a set fare rate.

Why Would A Company Enter the Carpooling Business Today?

 The success of ride-hailing apps like Uber and Lyft plus the unexpected early pace of autonomous vehicle (AV) research and development has given rise to the idea that shared mobility-as-a-service (MaaS) may be here sooner than later.

Most agree that so-called Level 4 AVs — no steering wheel or accelerator, but location-constrained —  might start appearing by 2021. But, there is widespread disagreement as to when the ultimate Level 5 AVs (hereafter just AVs) will appear.  

Also, there is widespread disagreement as the length of time it will take to scale AV production. For example, there are a number of optimistic predictions that mobility-as-a-service (MaaS) using AVs will start appearing around 2020 or 2021.  

On the other hand, The Alliance of Automobile Manufactures, a trade group that represents Ford, General Motors, Fiat-Chrysler, BMW and more, has estimated that AVs won’t be available for sale before 2025 and it might take another three decades until 2055 when AVs represent a majority of vehicles in use.

Our view splits the difference between these two extremes.  Namely, we start with the view that AVs first appear in a decade, say around 2027, with another three year to congestion-ending scale by 2030.   

Given the driver-centric carpooling business has a short life expectancy and limited profit-potential, why would a company want to enter the carpool business in 2017?

Traditional Automobile Companies

We think that the fundamental reason for entering the carpooling business today is to establish a consumer-facing MaaS brand ahead of the biggest business opportunity of a lifetime — the AV MaaS business.   

The only companies that NEED to enter this business are traditional automobile companies.  Executives in the automobile industry knows that MaaS and AV are existential threats as they could end their 110+ year history as consumer-facing brand.  Auto companies fear becoming the “Intel Inside” of the MaaS business.

We expect that both GM and Ford will seize this opportunity with the goal of scaling the carpooling business over the next decade. They are also in the unique position of subsidizing this business by using their own vehicles.  

To have any success at scaling they business, they will have to partner either with Uber or Lyft to share drivers and mesh their branded carpooling with last-mile ride-sharing services offered by Uber or Lyft.

A Diagram of a “Mesh Transit™” Sytem

Ford has entered the ride-sharing business by acquiring Chariot.  Chariot is a modern day urban jitney service using 15 seater Ford Transit vans and full time drivers.  It has plans to expand to eight cities in 2017.  

The picture below illustrates what we mean by using carpooling to establish a consumer-face MaaS brand.  Ford is much further along than GM in establishing a MaaS brand.   It has brought all of its AV and MaaS efforts under one division located in Silicon Valley called “Ford Smart Mobility.”   Ford also has promoted the head of this division Jim Hackett  to CEO of the whole company, a huge indicator of Ford’s priorities.

Example of MaaS Branding Ahead of AV Era

GM has just begun to roll out a niche MaaS service called Maven, an hourly car-rental service.   GM is way ahead of Ford in partnering with a ride-hailing company as it has a 9% stake in Lyft.

We expect GM to enter the commute carpooling business shortly with its own consumer-facing brand and partner with Lyft.  But, Lyft and GM are “frenemies”. Both want be a consumer-facing MaaS brand. Lyft might consent to a carpooling service branded as “GM Mobility powered by Lyft”.  The only question is whether Lyft will enter the business with its own brand similar to Lyft Line or Lyft Shuttle.

Ride-Hailing Companies

Uber and Lyft have established MaaS brands at great cost over the last 7 years.  Their existential threat is from the AV supply side not from the branding side.  Uber and Lyft might enter the carpool business, but they don’t need to.  On the other hand, Ford and GM need to partner with Lyft or Uber as a source of shared-drivers and to mesh a carpooling service with last-mile ride-sharing service.  

Google

Alphabet (Google) has chosen to enter the carpooling business via its Waze Division’s Carpool service.  As we have mentioned earlier, Waze’s altruistic vision for the carpooling business doesn’t scale.  

Google is probably in a better position for the coming era of AV MaaS than any other company on the planet.  It’s Waymo division has a 5 year lead on AV R&D. With their Waze and Google Maps real time traffic monitoring apps, Google has established a brand awareness with commuters that is second to none.

But, Google is on the verge of applying the same muddled strategy to the carpooling business as it did with Android and the smartphone business.

Without an existential crisis to focus its thinking, it seems that Google is about to compete with itself once again. Namely, Goggle sold their own Nexus brand of smartphones.  At the same time, they licensed Android to countless Asian manufacturers who turned around and competed with Nexus.  

It is not clear what Google’s ultimate goal is. Does it want to become a consumer-facing MaaS brand with Waze taking the point?   Or does it want to  become an “Intel Inside” AV OEM to automobile brands like Chrysler-Fiat and a host of European and Japanese auto companies?  

Delivery Services

Uber has begun to capitalize on the synergies between its ride-hailing business and the delivery of food, groceries, and other goods.  These synergies would be even greater in the carpooling business.  

Look for Amazon and Walmart to seek tie-ins with carpooling companies.  This could include partial financing of transit hubs where ride-hailing, carpooling, and e-commerce delivery services meet and re-distribute people and goods.  Commuter favorites like Starbucks and McDonalds might also want to lease space there.  

Car Rental Companies

The stock prices of Hertz and Avis shot up by double digit percentages recently when Apple and Waymo announced that they had contracted with these two car rental companies to maintain their fleet of prototype AVs.

Suddenly, there was a recognition by investors that car rental companies might not be wiped out when the era of AV MaaS arrives.  

We can see another reason why Hertz and Avis might want develop an association with a carpooling company.  Carless carpoolers have a need to rent a traditional car for weekends and vacations where getting a car “on-demand” just isn’t good enough.   

It is a natural fit for rental car companies as most of their cars are used for business purposes and sit idle on weekends.  Indeed, they currently offer such steep discounts for weekend rental that we have observed their offices jammed on Friday afternoon with carless families jumping at the chance to get a cheap rental for the weekend.

Example of MaaS Tie-in

The Rationale for Public Support

If the carpooling business could scale, it would provide significant “public goods” via reduced traffic congestion and reduced automobile pollution.

This would justify public support via congestion pricing,  increasing the minimum requirement to use the HOV lane, and building transfer hubs where carpools and last-mile ride-shares could redistribute passengers.

The unexpected early success of AV R&D has given rise to the idea that automobile ownership will be replaced by MaaS within a decade. This realization will actually make congestion and pollution worse in the meantime.

The reason why is that AV forecasts are starting to be used to persuade government authorities rightfully so to kill off plans for expensive, long lasting infrastructure projects like new highway lanes, light rail extensions, and bus terminals. The only positive environmental benefit of AV hype would be if it was used to kill off plans for new city-center parking structures.

Our initial thought was that government-mandated congestion pricing would be the only way the carpooling business could scale.  Congestion pricing would force the cost of solo commuting ever higher than the high cost of carpooling.

Now, we see congestion pricing as a first option primarily in Asia and Europe. At one time, the technology necessary to implement congestion pricing was crude.  But now,  real-time pricing is possible via “connected cars” and real-time cloud-based pricing platforms using an architecture similar to MZ’s (formerly Machine Zone) RTplatform™.

In the United States, we now view congestion pricing as a “doomsday” solution to be deployed a decade from now in the event that AVs show little promise in solving the congestion problem.

And, given that there are about 263 Million passengers vehicles registered in the United States, with about 17 million vehicles sold a year, it might take another ten years, or until 2037, until AV carpooling has scaled enough to end congestion.

In the meantime, scaling the carpooling business is one of the best options we have for reducing traffic congestion and automobile pollution before the era of AVs.  And, support for carpooling won’t cost the government trillions of tax dollars.   It may just take a boost in the HOV lane minimum from 2+ to 3+, which the State of California is considering for Highway 101 .  If a carpooling company could show some success on its own in reducing congestion along 101, this could accelerate the State’s own plans to improve management of HOV lanes.

© Lawrence W. Abrams, 2017

Netmarble IPO: How Greed Destroyed Its Kabam Acquisition

Lawrence Abrams No Comments

Netmarble is the ninth largest mobile app game publisher in the world and the largest in South Korea. In a month, the company is set to raise $2.3 Billion via an IPO on the KOSPI Korean stock exchange.

If successful, the company will be valued at $11.7 Billion and catapult it to the level of Supercell and MZ (formerly Machine Zone) as one of the top 3 most highly valued mobile game companies in the world.

Our analysis of this IPO, indicated that expectations for revenue doubling in 2017 has been fully priced into the IPO price of 157,000 Korean Won  / share or  $138 USD / share (based on conversion of .00088 USD / Won).  We recommended staying away from the IPO, and look for an entry point 36% lower, or around $86 / share USD.  

While doing research on Netmarble, we began to see that the aggressive pricing of its IPO was not the only instance of what we considered to be a pattern of greed as defined by making choices favoring short term gain at the expense of long term gain.

For one, Netmarble had a history of overworking its Korean workers.  So much so that employees pulling “all nighters” before every game patch started calling its highrise HQ in Seoul  “the lighthouse”.  

As Netmarble’s IPO date grew nearer and investor scrutiny intensified, the company changed its work hours policies, saying it would ban “all nighters” and weekend work.

The purpose of this paper is to explore in detail another instance of Netmarble greed:  how it has managed a recent $710 Million acquisition of the Vancouver studio of the fallen USA mobile game unicorn Kabam.

Netmarble has repeatedly stated that its long term growth strategy hinges on growth outside S. Korea.  This includes localizing its Korean hit game Lineage II: Revolution for the Chinese market. It also includes acquisitions of studios in the West with games generating $100+ Million in annualized revenue (ARR)  like Kabam’s Marvel: Contest of Champions (MCOC).

Our interest in Netmarble stems from a long running interest in Kabam.  We have followed the the ups and (mostly) downs of Kabam for the last three years, focusing mostly on valuations based on App Annie app store revenue rank trends. Below is a list of our articles chronicling the fall of Kabam and its causes.  They are available on our blog GloMo Investing:

On October 18, 2016, VentureBeat reported that an unidentified company had made an $800 million offer for Kabam’s Vancouver studio.  That studio had been responsible for the only game keeping Kabam alive at the time:  Marvel: Contest of Champions (MCOC).  

The Vancouver studio also was valued for the game engine behind MCOC and for the hit potential of another game in final development based on Transformer IP licensed from Hasbro. At the time, MCOC was a #9 revenue ranked game with our estimated global annualized revenue run rate (ARR) of $250 Million. We noted at the time that the bid seemed right for a studio + hit game + game engine as long as the two-year running MCOC could sustain a $250 Million ARR.

On December 19, 2016, it was announced that Netmarble was the successful bidder. The bid was later officially pegged at $710 Million based on Netmarble’s IPO filings in late March 2017.

Throughout 2016,  Netmarble talked about an IPO.  It played up its plans to use  the proceeds from the IPO  to buy USA-based companies knowing that the mobile game market in the USA was six times that of S. Korea.  It was especially important for Netmarble to demonstrate its acquisition prowess before its IPO, given that it had narrowly lost a bid for the social casino game company Playtika in June 2016.

What follows is a closer look at the way Netmarble has managed two major software releases since it closed the deal for the Vancouver studio just two months ago. It is evidence of a kind a greed that favors short term monetization over long term player engagement.

The first instance of a disastrous release — the now infamous MCOC Patch 12.0 — was released on March 1, 2017 just one week after Netmarble closed the acquisition on February 23, 2017.  The other was the design and release schedule of Transformers: Forged to Fight (Transformers).  

Even though development of both started before Netmarble took over, the final releases were made on their watch. Netmarble could have stopped these releases, mandated more player friendly designs that would sustain engagement even if that meant less revenue in the short run.  But they did not.

Using the AppAnnie iOS USA app store revenue rank trend line below, we will show the context and likely rationale for MCOC Patch 12.0.  

MCOC was first released 2 ½ years earlier in December 2014.  Five month later in May 2015 the game cracked the Top 10 revenue rank (first red line).

It remained a consistent Top 8-10 revenue rank for a solid year until July 2016 (second red line) when it started a slow fade down to a Top 10-15 for the second half of 2016.  Patch 12.0 went live on March 1st (third red line).  

Player criticism was instantaneous led by a YouTube video entitled “Patch 12.0 is Terrible” by MCOC Youtube channel celebrity Seatin Man of Legends. It quickly spread.    On March 6th, the MCOC development team issued an official apology, said it heard the criticisms, and would issue a fix shortly. Note that on the day of the apology (fourth red line), MCOC broke below #20 first time in two years.

Here is a more detailed App Annie chart for the last year that shows MCOC fade starting in mid-2016:

MCOC Fade from Top 8-10 To Top 10-15

 

You might think that a slight fade from a consistent Top 8-10 revenue rank game to a Top 10-15 game is insignificant. But,  in the mobile game world, there is a strong power function relation between revenue dollars and revenue rank.  

At this high end of the mobile game power function a single digit swing in revenue rank translates into a $20 Million to $40 Million swing in ARR. Using our long-standing metric of 2.5 times ARR for valuing mobile game companies or studios + game engines, a one digit swing in rank translates into a $50 Million to $100 Million swing in valuation.

Below is our reconstruction of global annualized revenue of top ranking games currently on the iOS Apple app store charts as a function of rank. The iOS USA numbers are from Think Gaming,  which we believe are algorithmically derived and smoothed out rather than actual tallies.  

Over the years, we have used this simple rule of thumb to derive global revenue of top ranking games on Apple iOS USA — companies that generally derive the bulk of their revenue in the USA as opposed to Asia or Europe. 

The global mobile game revenue for top ranking USA iOS games can be divided into three equal segments: iOS USA,  Android USA,  and Rest of World.  Thus, global ARR = 3 * iOS USA.

 

Notice that the average ARR of Top 8-10 game is $242 Million whereas the average ARR of a Top 10-15 game is $156 Million, about $100 Million less in revenue and $250 Million less in value based on our 2.5 valuation multiple.

Obviously Kabam was acutely aware of MCOC’s fade and its implications for the value of the Vancouver studio. Also, Netmarble must of been aware when it turned its eye to Kabam after its June 2016 failed bid for Playtika.

Given the extent of the changes involved in Patch 12.0, the development team must have began work about two months after the start of the fade, say around August 2016. As Kabam and Netmarble were closing in on a deal, Kabam must have discussed Patch 12.0 with Netmarble including design choices based a trade-off between increases in average revenue per paying user (ARPPU) and the likelihood of player defection.

 Kabam may even have been savvy enough to prepare several versions of Patch 12.0 with different expected ARPPU  knowing that it would be Netmarble who would make the final decision once the deal closed. Normally, before a major update to a long running game, it is customary for a development team to do two things:

  1. invite key players to test the beta version and solicit feedback;
  2. present a detailed rationale for each change on official forums on the day of the release.

Netmarble did neither.  On March 1st, the final version of Patch 12.0 was released.

There was an immediate shock and outrage by hard core players as evidenced by their vents on YouTube, Facebook, Reddit, various game blogs, and official Kabam hosted forums. Among long running hard core games, the level and breadth of MCOC player outrage was unpresented.

 When we googled “player revolt” plus game name, we could find evidence only of one revolt by players of  MZ’s Game of War: Fire Age.   There have been no noticeable online revolts by players of Supercell’s hit games — Clash of Clans or Clash Royale — nor of players of MZ’s other hit game Mobile Strike.

Based on our reading of these criticisms, we believe that final version of Patch 12.0 was focused to the extreme on increasing ARPPU without giving much weight to player outrage and defection.

First, beyond the questions of objective, there was a major screw-up of core gameplay mechanics that made block and parry unplayable.  

Then, there was what we call widespread “devaluations” of player assets  designed to increase ARPPU.

 It included diminishing the fighting power (“nerfing”) of the most popular characters, or Champions, and providing incentives to buy unpopular Champions by increasing their power (“buffing”).  

Another devaluation occurred by making battle losses more costly in terms of power loss, thereby increasing regeneration costs. Finally, there was fundamental change in the scoring system with no rationale given.  But it appeared to the most experienced players that this change was designed to increase ARPPU.  

Player outrage and talk of organized revolt ended abruptly on March 6th when the company officially apologized and promised rollbacks which did occur with Patch 12.0.1 on March 10th.

In the end, Patch 12.0 and subsequent roll-back likely did nothing to reverse the fade of MCOC.  But it caused irreversible loss in trust by long term players.  Players can never again be sure that accumulated investments made in MCOC won’t be subject to another Patch 12.0 type devaluation. MCOC will never again be a consistent Top 8-10 game.  

Netmarble will likely hold off from making ANY major changes in the next six months to MCOC, leading to player ennui and defection to more engaging games.

Now on the the other instance where Netmarble’s greed led to decisions which caused a new game release by the Vancouver studio to be a bust. Kabam’s Vancouver studio was especially valuable to any acquirer because it had a proprietary  “game engine” called “Fuse & Sparx” thought to be capable of churning out a series of re-skinned MCOC hits.

First up was a game with MCOC-like game mechanics based on Transformers IP licensed from Hasbro called Transformers: Forged to Fight. (Transformers) Below is the countdown to the global launch of the game:

Notice that there was only a two month soft-launch before global release.  Based on App Annie charts, the game struggled in soft-launch and never cracked the Top #100 with any consistency.  

Normally,  a company would add a couple more months of tweaking before making a decision to launch officially or can the game.   Given Netmarble’s May 2017 IPO date, we think that they rushed released a deeply flawed Transformer game causing it irreparable damage as the early word was that it was buggy, slow to load, and freezes.

Even if the game’s bugs could be cleaned up, early players of the game reported that it is “too complex to play”  and there is “kitchen sink” approach to development with a mashup of game genres and a mind-numbing complexity to scorekeeping and purchasing.  

To us, this suggests that the priorities were early monetization over long term player engagement. Below is the revenue rank trend of the game:

 

Our four years of reading App Annie charts suggests that there are no more “late bloomers” in the mobile game world. If a newly released game does not crack the top 50 in the first few days, it will never crack the Top 10. The Transformer game is a major bust for Netmarble.

But worse, it raises doubts about the hit making ability of  Vancouver’s game engine “Fuse and Sparx.”  Could the success of MCOC be due more to the original team that developed it, long since gone,  and not its game engine nor the current team?

The bust of the Transformer game and the fiasco of MCOC Patch 12.0 raises serious doubts about Netmarble’s ability to manage future acquisitions in the West.  

Will Netmarble’s greed once again force newly acquired companies in the USA to release their own Patch 12.0?   

Will Netmarble’s greed force acquired companies in the USA to junk up games similar to what happened with Transformers: Forged to Fight?

Netmarble’s IPO will give the company  $2.4 Billion to make acquisitions of USA-based companies with current Top 20 hits.  This would include the privately-held companies Pocket Gems, Product Madness, and Jam City, a company already with a $100 Million Netmarble investment.

It would also include the publicly-held company Glu Mobile and the Com2uS, a company listed on the Korean exchange, but with most of its revenue coming from its global hit Summoners War.  

Unless Netmarble can change its focus to long term player engagement over short term monetization boosts, we think that they will destroy future acquisitions just like they destroyed Kabam’s Vancouver studio in two short months.

Netmarble IPO: Priced for Perfection

Lawrence Abrams No Comments

Netmarble is the ninth largest mobile app game publisher in the world and the largest in South Korea.

The company is seeking to sell 17 million shares on the Korean KOSPI stock exchange in early May garnering proceeds of between $1.8 Billion and $2.4 Billion USD (all USD figures converted from Korean Won at .00088 USD / Won). Roughly half will be used for new acquisitions and half will be used to retire debt.

This is a big deal IPO by both Korean and USA standards.

It represents the largest IPO in S. Korea in 7 years. It would rank as the one of the largest tech IPO globally in last 2 years.

In January 2017, Netmarble launched a mobile role-playing game called Lineage ll: Revolution based on licensed IP from NCSoft’s legendary PC game Lineage. According to app analytics company App Annie, the game immediately rose to #1 on the S. Korean revenue rank charts.

Netmarble told the Korean press that the game generated $176.6 Million in revenue in the first month. That translates into an annualized revenue run rate [ARR] of $2+ Billion.

Obviously, that run rate is not sustainable. But, even if the game managed to produce $1+ Billion in revenue during 2017, it would place Netmarble in the rarefied company of Niantic, Supercell and MZ (formerly Machine Zone) as the only companies that released a $1+ Billion Dollar game in the last 2 years.

The IPO will be watched closely by the mobile game industry given the poor post-IPO performances of King Digital Entertainment in 2014 and Zynga in 2011.

A case could be made that these IPOs were anomalies and not a fair test of how a mobile game stock is capable of performing. Both Zynga and King Digital had enough numbers in their S-1s to suggest that their best days were behind them at the time of their IPOs.

However, there is absolutely no question that Netmarble’s best days are ahead of it. There is no question that its revenues and profits will soar in 2017 if Lineage II manages to sustain an ARR greater than $1+ Billion.

Lineage II is not all that Netmarble has going for it in 2017. In February 2017, the company completed a $700+ Million acquisition of the Vancouver studio of the USA mobile game company Kabam.

If managed properly (questionable as we will argue below), Netmarble could generate a fresh $100 to $300 Million in revenue from two Kabam game. One is Marvel: Contest of Champions which has been a long running Top 15 revenue rank game in the USA. The other is the recently released game Transformers: Forged to Fight based on IP licensed from Hasbro.

No question, 2017 will be a spectacular year for Netmarble. The Korea Times has reported that analysts there expect Netmarble’s forward 2017 revenue to be around $ 2.7 Billion, a whopping 107% YoY increase. This is a far cry from Zynga’s and King’s anemic post-IPO YoY revenue growth rates of 12% and 20%, respectively.

The question is has all of this been priced into Netmarble’s IPO price and valuation?

Our analysis will show that expectations for revenue doubling in 2017 has been fully priced into the IPO. Netmarble’s IPO is priced for perfection.

Furthermore, there is a pattern of greed on the part of Netmarble’s management that has not served it well. It includes:

While Netmarble’s short term prospects are tied to the performance of Lineage II in Korea, its long term prospects are tied to success in the West.

The company has announced that it intends to localize and release the Lineage game in China but those prospects are uncertain, even with Tencent (TCEHY) as a significant minority stockholder.

The uncertainty is result of China’s recent freeze on licensing new games from Korean companies due to geopolitical tensions between the two countries.

In our opinion, Netmarble’s greedy handling of the Kabam games causes us to believe that Netmarble’s current and future acquisitions will underperform due to employee and player defections.

We start with a summary of the IPO — the expected price range, and the expected post-IPO valuation based on those prices.

The next spreadsheet is our valuation of Netmarble as a multiple of 2017 forward sales. We have been unable to find any official company forward looking revenue statement. If there is one in the Korean version of their S-1, we have found no reference to it by the Korean financial press.

Lacking official numbers, we use $2.7 Billion for Netmarble 2017 forward sales, a number reported by The Korea Times that analysts there expect.

Any lesser number would only increase our estimated price / forward sales ratio (P/S), which is already high. Any greater number would be incredulous as Newzoo has reported that TOTAL Korean game revenue (mobile + console + PC) was only $4 Billion in 2016.

Moreover, given the $4 Billion Newzoo figure, it seem incredulous that there would be enough demand in Korea to sustain any single mobile game at an $1+ Billion ARR.

The next spreadsheet is a comparison of the valuation / forward sales (P/S) ratios of Netmarble — 3.3 — with Com2uS — 2.61.

Com2uS is a Korean-based mobile game company listed on the Korean KOSPI exchange. Gamevil, a smaller publicly-held Korean game company, holds controlling interest in Com2uS.

Com2uS is much better known in the USA than Netmarble due to its global hit mobile game Summoners War. The game was released in the USA in June 2014 and has maintained a remarkably consistent Top 20 revenue rank in the USA for the last two years.

Based on this comparison, we believe that Netmarble’s IPO is overpriced by 26% at its announced price range of $106 to $138 USD or 121,000 to 157,000 Korean Won.

We believe that it would be a buy only around $84 USD or 95,250 Won.

You might argue that Netmarble’s upside potential is higher than Com2uS. That is true. But, we are not talking about financials, but stock prices whose movement is based on perceived and actualized performance that has not already been built into the current prices.

Netmarble is a buy at the announced IPO range if you believe that it will exceed an expected 107% in revenue growth this year. We think not.

Netmarble is a buy if you think it can successfully localize and release the Lineage II game in China in late 2017 or 2018. We say wait a half year before you invest to get a better feel for geopolitics between S. Korea and China.

Finally, Netmarble may be a buy if you believe that the newly released Transformer: Forged to Fight game will become a Top 8-10 hit like its cousin Marvel: Contest of Champions. We think not.

Our four years of reading App Annie charts suggests that there are no more “late bloomers” in the mobile game world. If a newly released game does not crack the top 50 in the first few days, it will never crack the Top 10.

Our reading of the App Annie chart says that the Transformers game is a bust.

(Source: App Annie)

While the Transformer game began development under Kabam, the final architecture and release schedule came under Netmarble’s watch. Both reflect a greediness that we believe has resulted in its quick bust.

The game was rushed into global release on April 5th after a relatively short two month soft-launch shakedown in Singapore and Canada.

Experienced early players of the game report that it is “too complex to play” and there is “kitchen sink” approach to development with a mashup of game genres and a mind-numbing complexity to scorekeeping and purchasing. To us, this suggests that the priorities are early monetization over long term player engagement.

In sum, Netmarble in not a buy at the announced IPO price range. Wait at least six month and evaluate its performance then.