Wargaming sets its sights on global dominationSeptember 25, 2013: 9:00 AM ET
The Belarus-based gaming developer is moving from PCs to consoles to grab more of the U.S. market.
By John Gaudiosi
FORTUNE -- Just over 15 years ago, Minsk, Belarus-based game developer Wargaming launched with a focus on hardcore turn-based and real-time strategy PC games like DBA Online, Order of War, and the Massive Assault series. By 2008, the company saw publishers shy away from these genres amidst shrinking retail space. At the same time, the advent of digital distribution opened up a unique opportunity for game developers to deliver games directly to PC gamers.
After seeing its multiplayer World War II tank combat game, World of Tanks, turned down by publishers, Victor Kislyi, CEO of Wargaming, decided to explore a new direction. In 2010, World of Tanks was self-published and launched for free to PC gamers in Russia. The free-to-play massively multiplayer online (MMO) game became a hit, as 15 players per side engaged in historical combat. Within six months the virtual tanks rolled through Europe and North America. The game most recently has invaded Asia. Today, World of Tanks has over 70 million registered players. According to Kislyi, 25-30% of these gamers are paying members, and the average payment equals the price of a movie ticket. When you do the math, on the low end, Wargaming is making over $175 million a year on this one game.
While currently a dominant PC gaming force, Microsoft (MSFT) had Kislyi on stage at its E3 2013 press conference in Los Angeles to announce World of Tanks: Xbox 360 Edition -- one of the few games to share the stage with the next-generation Xbox One console. That free downloadable game, which will launch Oct. 30, will bring the fight to over 80 million consoles around the globe. But more importantly, it will offer Wargaming direct access to the console-centric U.S. gaming audience. Like the PC edition, the game features more than 200 tanks and armored vehicles from WWII, but it's been designed for the console controller.
"In the U.S., consoles connected to the TV screen take 16% of all game time when you add up all time spent on games regardless of device or genre," said Peter Warman, founder of video game research firm Newzoo. "But those same consoles take 46% of all money spent on games. That is a sign of a platform, or rather screen, that is 'unbalanced.' Over time, games played via the TV screen will offer the same choice of business models that the PC, smartphones, and tablets offer. What share the current console manufacturers will take from this future situation is undecided, but offering 'AAA' titles like World of Tanks for free on their platform will certainly help. And it will ensure there will be a huge amount of Xbox 360s still being used for years to come."
The battlefield will grow even larger over the next two years, generating additional revenue for the fast-growing publisher. Wargaming will launch World of Warplanes on Sept. 26, taking its WWII combat to the unfriendly skies for multiplayer dogfights. Three million registered gamers have already logged in to partake in over 200 million total combat flights. And just on the horizon is World of Warships, a free MMO featuring ships from all countries involved in the Second World War. That game, which has a slower, more strategic pace, is expected to launch in 2014, although no firm release date has been announced.
Warman said these new PC MMOs won't triple Wargaming's revenues, but they will position the company as the single destination for gamers looking for an immersive war game experience. The new games will also attract plane and ship enthusiasts to the fold, helping to grow the very large niche audiences that Wargaming serves.
In August, Wargaming launched its Unified Premium Account, which will connect these three game worlds by allowing gamers a single login for all titles. Kislyi said the company is offering a "buy one, get one free" incentive with this program. This allows paid credits from one game to transfer to another. In addition, each of the games will be tied on the meta level of clan wars where clans from three games will be fighting against each other for domination on the global map.
"Wargaming has a great niche in the market, and they are trying to exploit their success by broadening their product offering," said Michael Pachter, video game analyst at Wedbush Securities. "The secret of their success with World of Tanks is that they have created a 'pay to win' compulsion loop and combined it with a really good game that makes players want to play more, giving them enough satisfaction from winning that they keep coming back."
According to Kislyi, the core of World of Tanks monetization is that it doesn't pressure the player into buying a ton of paid options.
"We've designed the business model so that it doesn't give a huge advantage to those paying money," said Kislyi. "In 2012 we introduced the free-to-win business model, eliminating all battle advantages for payers and allowing for an immersive free gaming experience. The free-to-win illustrates the fundamental value paradigm that we build our projects on, and we will keep improving it in future."
World of Tanks' success has allowed Wargaming to grow from a tiny development studio with 150 people into an established international business with more than 2,000 employees and 16 offices worldwide. It's also moved the global headquarters from Belarus to Cyprus. In the U.S. alone, Wargaming has recently opened four new offices in addition to its headquarters in Emeryville, Calif., including, Chicago; Hunt Valley, Seattle; and Austin. Each office is working on its own specific projects, said Denny Thorley, general manager for Wargaming's Chicago office.
"Where the Chicago and Hunt Valley team focuses solely on console, Austin will act more as a global services hub focusing on business intelligence, global design services, and central technology," Thorley said, adding that Seattle "is working on a top-secret title that will be announced at a later date." Emeryville is where marketing strategy for the U.S. will be implemented. "All in all, the U.S. is playing a bigger role than ever before in Wargaming's collective global success."
Warman believes the U.S. will remain to be an "emerging market" for Wargaming. While the analyst believes the company will be successful in the States, it has the luxury position that it does not rely so heavily on having more success in the U.S. Wargaming's roll-out throughout Asia, including Southeast Asia and other growth markets, will probably contribute even more to its future growth.
Kislyi said gamers from Russia and former U.S.S.R. countries make up the bulk of the player base for World of Tanks. The second-largest region is China, where Wargaming's projects are operated by partner KongZhong Corporation. The game is also popular in Europe.
"The hardest thing about achieving success is making it continuous," said Kislyi. "After the initial excitement had died down, we took time to analyze what went right, what went wrong, what we could have done better, and what we could do better in the future."
Wargaming is taking a page from Riot Games and its League of Legends as well as Blizzard Entertainment's StarCraft II. Wargaming has recently invested money into eSports, or electronic sports. By offering teams of gamers the chance to win large sums of money -- $100,000 was awarded in Las Vegas at the Wargaming League North America Season One Finals -- World of Tanks is taking advantage of the growing livestreaming phenomenon to generate additional interest in the U.S. and beyond.
Long before free-to-play became popular, Wargaming gambled that PC gamers would invest in micro-transactions to enhance their WWII gameplay experience. That risk has paid dividends and continues to grow a business based on a hardcore niche that retailers would never support with boxed product (although GameStop (GME) and others sell prepaid cards for in-game World of Tanks purchases). The rest, as they say, is history.