Funcom and Age of Conan

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AUG 17, 2008 • On May 20, 2008 one of the most anticipated online games of the year was released by Funcom, Age of Conan: Hyborian Adventures. Conan was highly anticipated and got off to a quick start. After only a week, Funcom issued a press release claiming over 400,000 gamers had entered the game. But, already there is concern that this initial buzz has rapidly worn off. Nevertheless, if Funcom can avoid the over hype and naturally resulting disappointment, Age of Conan has the potential to build a steady revenue and income source for several years to come. In fact, Age of Conan is one of the few high-end massively multiplayer online games (MMOGs) that has the potential to reach what DFC Intelligence has classified as the Mega-Hit tier. Of course, the only game that has so far reached that level is World of Warcraft.

The fact that a small Scandinavian developer like Funcom can have a major hit MMOG in today’s market could spur renewed investment interest in the category. On the other hand, the rapid rise up and downturn of Funcom’s stock shows the inherent trouble of such a high risk/high reward property. Furthermore, it is important to understand that Funcom and Age of Conan did not come out of nowhere. Conan was the end result of a business strategy and initial investment in development resources going back to the mid-1990s. In fact, the Funcom story is an important case study in what it takes to be successful in the highend MMOG space. In the next few issues we will be taking a look at Funcom and the development challenges for a product like Age of Conan. In this issue, we provide an overview of Funcom and show what one hit product like Age of Conan could do to the bottom line if it continues to be successful.

Headquartered in Oslo, Norway, Funcom was founded in 1993 as a small developer of PC and console games, working for several publishers worldwide, including Activision, Interplay, Sony and THQ. The company’s most successful in-house, solo-play title was The Longest Journey, released in 1999 and a number one hit in Europe. Overall, the company has released over twenty titles since 1993. However, today Funcom is best known as an online game developer.

Funcom made a deliberate strategic decision that put the company on an early track to take advantage of the larger trends in the game industry. In 1996 the company started to almost exclusively focus on online game play. This resulted in the release of the sci-fi based MMOG Anarchy Online in 2001. After laying off 30 employees in 2001 from its mobile division, this title briefly became the company’s sole source of revenue.

An early concept for the Mage class in Age of Conan.

The title’s business model followed in the footsteps of Ultima Online and EverQuest, with a retail box to be purchased and a monthly subscription fee of $12.95 to access the game. It was one of the hottest-selling retail units of 2001, with over 120,000 boxes sold in less than two months. However, due to extreme technical instability and the presence of critical bugs that limited play for many users, the game struggled to expand from its initial success.

In 2002, Funcom worked hard to correct the technical problems with Anarchy Online. Funcom started offering the retail version of Anarchy Online for free and released some expansion packs from 2002-2004. In late 2004, Funcom started offering free play for the basic Anarchy Online game. Users only had to pay the subscription fee if they wanted to upgrade to a play the expansion packs. The free play was supplemented by advertising revenue from in-game ads through a partnership with Massive Incorporated (acquired by Microsoft in 2006).

A free to play, advertising business model is all well and good, but a quick glance at Funcom’s financial is a perfect indicator of the need to get consumers to pay. From 2004-2007, Funcom saw very little revenue growth. The revenue increase in 2006 was due almost entirely to the release of the offline retail PC game Dreamfall, a sequel to The Longest Journey.

Nevertheless, the potential of being able to develop a hit MMOG was able to attract investment. Funcom received an investment of $5.6 million in April 2004 from Nordic capital firms Northzone Ventures, Teknoinvest and Stelt Holding. In December 2005, Funcom had a successful IPO on the Oslo Stock Exchange in which they raised $30 million, which gave the company a $90 million valuation (Oslo Stock Exchange: FUNCOM).

Most of this development capital was put into ramping up MMOG development, specifically on Age of Conan and beyond that The Secret World. It was clear that Funcom’s entire future was riding on the success of these products. Age of Conan was supposed to ship in 2007. However, the game was delayed and the hype and buzz about the product only continued to ramp up.

Ironically, the launch of Age of Conan has actually turned investors off to Funcom. In the early days of the Conan launch, Funcom stock soared to the $50 a share range. After actually reporting its second quarter numbers on August 14, Funcom stock dropped to below $15 a share. Much of this has been due to reports that users are leaving Age of Conan in large numbers, but it is also clearly in large part due to confusing press releases and statements from Funcom.

In its second quarter report, Funcom noted that Age of Conan had shipped 1.2 million copies worldwide and actually sold 800,000 of those copies. Funcom claimed that there were more than 415,000 online users. The problem with the 400,000 number was that it was very similar to the number of users that Funcom was claiming only one week after the Conan launch. This clearly indicated that growth for Age of Conan may have stagnated. This also seems eerily similar to what happened to Anarchy Online, a strong initial launch, followed by a backlash.

The fact of the matter is that Age of Conan has some promising initial numbers. The problem is Funcom had built up so much hype for Conan as the successor to World of Warcraft, and made so many comparisons between the two products, that any negative news was sure to result in a major backlash. Clearly Conan is not in the same league as World of Warcraft. However, the important thing to note is that it can still be a major success on its own terms.

In the DFC Intelligence report MMOG Subscription Business Models, we broke out figures for different tiers of MMOG products. As a best case scenario, Age of Conan has the potential to wind up in what we defined as the “Mega-Hit” tier. Failing that, Age of Conan is already very wellpositioned to be in the “Big-Hit” tier. Of course, there is a massive difference between the two tiers and that is what has the investment community so concerned.

The Funcom/Age of Conan story shows that a small dedicated company can develop a successful high-end MMOG. However, it also shows that for companies banking all their eggs on a single product, relying on funding from the public markets may not be the best strategy. Funcom has set itself up to be at the whims of the fickle investment community that has little patience for long-term strategies.

The good news is that Funcom has potential beyond Age of Conan. As we will in later issues, the company has built its own proprietary game engine and Funcom’s technology, experience and expertise are a very valuable asset. Funcom has one other major project in the works, the MMOG The Secret World. There are also plans to launch some casual MMOG products. However, right now the focus has to be on stabilizing the Age of Conan user base.

 

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