How Istanbul Won the Mobile Puzzle Wars (Ep. 29)

Hello and welcome to the GameCraft Podcast. I'm your host, Mitch Lasky. I'm Blake Robbins. And this is a podcast about the modern history of the video game business. Episode four, how Istanbul won the mobile puzzle wars? So, Blake, in this episode we're going to discuss the rise of the Istanbul gaming scene. And, you know, we've been paying attention to this for a number of years and I'll tell some stories about my personal experience with Istanbul and with the Istanbul gaming scene going back 12 years, 15 years. But if you haven't been paying attention in the last decade and a half, Istanbul has spawned multiple billion dollar companies that are absolutely dominating the mobile match three in puzzle businesses. These companies in particular peak games, which Zingha acquired for 1.8 billion, and Dream Games, which was valued at least in part at 5 billion. We'll discuss that transaction a little later. It's fascinating and complicated thing for those finance geeks out there. They didn't invent the match three genre, but through incredibly clever operational execution, they came to dominate it. I think it's interesting to compare what's happened in Istanbul in many ways with sort of the history of the automobile. And this is going to sound a little weird in a little far field. But, you know, Daimler and Benz back in Germany in the late 19th century, they invented the modern car. But Ford in Detroit industrialized it, figured out distribution, figured out the way to build factories that could make the cars accessible to the masses. And the city of Detroit grew up around it. And as peak in this scenario is kind of the Ford of Istanbul, Dream maybe the GM, right? But really that concentration of talent and concentration of expertise in and around this one geographical location in this very particular way just produced magic. And we want to talk about how it happened. And we also want to talk about what its implications are for the future, not just around whether or not Istanbul can retain this crown in the puzzle game genre and continue to innovate potentially on top of what they've already created. But also what it may mean for other geographies around the world because the alchemy of what happened in Istanbul had elements of private and also public investment. And it may be an interesting analog for the future of games industries arising in unlikely places like Istanbul. I'm excited to cover Turkey because you and I have really talked about this a bunch over the years, but it's just increasingly just occupies actually, you know, let's say the average consumer average person who might even think of themselves as gamers is interacting with something from Turkey, you know, pretty regularly, which is, you know, I think if you told the average person in America, they're taking something that was exported from Turkey and playing it constantly, they wouldn't actually even think about it. But yet go to the top charts and almost, I don't know what's a 20 30% of the top 100, especially in the puzzle genre, is from Turkey. And, you know, like you said before, it's Turkey is super interesting because it might be the first ecosystem gaming ecosystem that's built more on this operational side than any of the like standard innovation that you and I would think of. And there's a real question, which is just like, is this operational edge an actual moat or is it just a compounding of arbitrage and maybe the right time and right moment of time and, you know, to use your automotive example, there's a little bit of, you know, we sort of know how the GM story or the Detroit story ends, let's say, and there's maybe cautionary tales and I'm excited to really dive into it in this episode. Yeah, and I think there's arguments for both, right? I think one of the things that's fascinating about it, one of the reasons that we wanted to do this episode and talk about it is because I think you could really make the argument either way that this is a sort of operational moat and industrial operational moat that has reinforcing competitive advantages. At the same time, you could look at those competitive advantages and really see them as simple arbitrages that are compounding that there's sort of a cascade of arbitrages and when those arbitrages close like with the automotive industry, you know, being challenged by Japan, let's say in the 1980s, you may have a very similar phenomenon happened in puzzle and I think you can already start to see the outlines of it as let's say China starts to emerge in this merge to category that we'll talk about later that's starting to gain some really serious momentum. Yeah, I mean, look, we can get into the numbers, but I mean, it's, I think today is 4% of the global gaming revenue, so we're talking even bigger than Roblox, which we covered in the last episode. And maybe actually it's just worth saying the past couple episodes were obviously, you know, very micro or or or more zoomed out on as well. And this is a like zooming very much into a specific ecosystem, which I think is part of this is, it's just such a big thing that it's even hard to ignore, but 4% of the gaming market, but it's also compounding at an insane rate. It has like a 33% compound annual growth rate for the past five years. And it's not showing any signs of slowing down and you know, we could we could run through all of the numbers, whether it's royal matches, you know, is truly taking the throne over Candy Crush, which is from Dream Games as the number one puzzle mobile game with 1.3 billion last year and over 4 billion lifetime. You know, it is, you know, just another part of this is Dream Games has fewer than 400 employees, you know, whereas what's this a king is as alternative as thousands of employees, the top 20 publishers are averaging in Turkey or averaging over a million in revenue per employee, so just talking about the efficiency that, you know, you and I were touching on and then maybe just as a teaser of what we'll talk about later on in this episode is there's actually 65 gaming studios that have lineage back to. One specific match three studio called peak, which is sort of remarkable of we're talking a lot about in Silicon Valley, the PayPal mafia and some of these other companies, but the peak mafia is very real very very real. And then yeah, it's actually Turkey is the 15th largest exporter of casual mobile revenue of any comparable ecosystem, so it's really built just for export and. So you that's the fifth it's the 15th largest domestic market, but it's but it's but it's near the top in terms of of you know it's punching well above its weight on the global stage, I think is what you what you meant there yes, yes, good good, good correction, yes, so let's say Turkey as a as a in at purchase market is 15th largest but it is the largest exporter of casual mobile revenue and that is that is extraordinary. I think it really comes back to this challenge of a very deeply held belief in the video game business, which is we have a real tendency as an industry to look at innovation along content lines look content innovation in general as being kind of what leads the industry what pulls the industry forward it's sort of the engine of the train and you know you and I have been critical of that approach throughout this series right throughout the 28 episodes now of the series we've. We've shown how distribution can be an extraordinarily important engine and we can we've shown how even technological change in innovation can drive aspects of the business forward rise of the internet the rise of three you know GPUs et cetera like all of those things have been contributors to innovation. Turkey and the Istanbul scene has approached this in a very unique way which is really in this kind of industrialization way right they've taken a genre and they've for better or worse they've perfected it and they've and not only have they perfected it as a content expression but they've also perfected it as both a marketing and sales perspective. And I think the combination of those elements has really driven a lot of the success and it's a unique way to move an industry forward I mean you don't you see we've seen hints of this before let's say in the shooter market and some other sub genres of the of the video game industry but it is relatively unique and I think worthy of conversation as a result. Yeah and I think it's really worth flagging that you know we refer to like operational excellence here it's not it's not just purely spreadsheets and it's not just purely you know advertising being great at or great at making ads it's also like execution and in the way that we're claiming it is actually around product excellence as well where look if you play Royal match versus any other match three game and this might sound strange to someone who doesn't play some of these puzzle games but I actually would encourage anyone who hasn't played some of these console games to go download you know Royal match and go play another you know go even Canada crush and you will feel a real difference and it's an excellent game it's yeah it's we're not this isn't this isn't engineering over entertainment these games are very very well made games. Yeah and there's like a quality aspect and you know again it will it will seem really foreign or strange to someone who's looked at the puzzle market as a just like seeing the in the screenshots if that makes sense because it does look very much like these are all incremental or these are all the same game, but the subtleties really shine through when you actually play them, but it's also all sort of in this pursuit of retention and monetization, which is why we would view it the closer to this operational piece. Right. And look, it's something we stress over and over again, which is that the real success in this industry comes from this marriage of great, well-executed content and a really deep integration of distribution and monetization advantages. And when you have those things in concert, you get really outsized successes. And I think the Istanbul scene and the dream and peak experiences in general really speak to that. Yeah. And I actually think that that's a great segue into just like what they actually did, which is they perfected the mastery genre, which you touch on. And it's worth going back in time to, you know, this was a genre that existed even back in the early 2000s that was proven as a retentive product and almost even a viral word of mouth product, which back in 2001, there's a company called PopCap, which is created, "Viguald." And, you know, this is your era of when you were building even. I mean, literally had the first "Viguald" license in mobile. So made one of the first match three products in mobile back into the early 2000s. We did, we had "Viguald" mobile. We actually figured out a way to make it multiplayer, even though we had, you know, one second latencies on mobile networks of that era. And it was a massive success for us. It was a huge, huge win for us to have "Viguald." We saw first hand, and this was in 2002, 2003, 2004, just how powerful the match three genre was as a genre on mobile phones. It had the perfect combination of click rates and distraction and short play pattern, you know, completion within a set amount of time and whatever that cluster of factors was that makes match three work, we could see it in embryonic form back in the early 2000s. And, yeah, we were a big profit center for PopCap, because even our licensing revenue from mobile was significant. It's funny to think of that you actually brought the first match three game to mobile. You know, you were early in that era and, you know, there's sort of the long winding road, a detour of, you know, PopCap actually then gets acquired by EA, even, you know, after you're gone. You know, you get acquired by EA, you're there running mobile for a minute and then, you know, a couple of years later, they actually go in that way. Yeah, Ricatella goes and buys PopCap for, you know, somewhere between 800 million and a billion three, depending upon how the urn outs went, but for a big number. Yeah. That's, so that's in, that's in 2011, you know, a year later, King comes around, you know, which is the creator of Candy Crush. And, you know, there's, there's a bit of they dabbled in web games, you know, all of that. And as we know it, the thing that really took was when they launched on mobile and they, they mastered the free-to-play monetization in a way that, you know, even to this day keeps them as a giant. You know, we, we won't go too far into King's history or Candy Crush's history, but that is sort of the white whale in this market and, and was, was the King, you know, pun intended for up until basically a year or two ago and before Royal Match detour on them. And Activision bought King for 5.9 billion in, in 2016. There's actually King was a public company and, and it's actually pretty fun to go back in time and look at those numbers and desk one, all of those things are actually a real treat of a time capsule, but you and I both know that, you know, when, when Activision actually gets bought by by Microsoft, I think it's pretty fair to assume that, you know, maybe it's equal weighting, let's say Activision Blizzard in King of, you know, that, that overall acquisition. Let's just see without, without, without revealing too much, King was a very important driver of that acquisition and access to that 225 million or whatever the number was mobile users that King had sort of in their surface area was a very important factor in, in green lighting that acquisition inside of Microsoft as far as we understand. And so the true value of King was obviously, you know, given the $70 billion top line of that transaction, the true value of King was maybe multiples of the 6 billion that Activision ended up paying for that for it. And I think that's absolutely fair to say. This is a massive category and King was incredibly important for proving that you could do match three at scale and monetize like, like a complete whale game. And it did it with the very simple mechanic of just paying for lives. Yeah. It's ingenious and devilishly successful in its own way. Yeah. Before we get to Istanbul, the last bit that's kind of interesting is, is playrics to think about because while playrics didn't reach the heights of these other companies, I mean, it did very, very well. It added an interesting innovation to the match three genre, which was this idea of kind of a meta game, right, as a longer-term retention engine than just larger and more complicated puzzles to solve, which was really kind of what King was doing, right? You'd continue along your journey and you would keep solving more and more and more and more complex puzzles. I think the playrics addition to this and garden shapes and home shapes, et cetera, I was really important because it was really a long-term engagement innovation. Yeah. And actually, it's pretty staggering. If you add up the aggregate revenue between garden shapes and home shapes and township and some of their others, it gets close to King or even Dream's revenue. It's just a little bit more disparate and harder to see because it's spread across those games. It definitely invented this, the medallayer, which maybe if you're coming from PC, free to play, it might not be as easy to comprehend. But in this case, it's actually closer to earn stars for completing a level and then get to build up your city. Very simple version of that, but just a deeper overall evolution rather than simply playing to complete the levels. It is really the three waves of mastery, which was pop cap, king, and playrics. And then not nowhere, but let's just say, you know, out on the side of all this is Istanbul. Yeah. With that, let's go back and look at what was going on in Istanbul that provided sort of the potting soil for a company like Dream to come along and get to, you know, what at least for its investors was a $5 billion outcome. So I think it really comes down to two people who were really like the God parents of this movement in Istanbul. And that was Siddharz Sahin, who was ultimately the CEO of Peek and Rina Oner, who was one of the founders of Peek and who went on to have a really interesting career both as an investor and then as a founder herself of another company, of multiple other companies. And those two individuals, I think, in the foundation and formation of Peek games originally back in 2012, really catalyzed Istanbul as an important locus for gaming. Yeah. And, you know, there's this like amazing Wall Street Journal article back in 2012, where they're interviewing Siddharz and Siddharz literally says, I want there to be a Peek games Mafia one day, and that's a play on, again, this PayPal Mafia, which is very much a framing that you will hear in Silicon Valley of just legendary alumni that went on to go build great companies. He's saying this all the way in 2012 when this company's in the nascent stages saying, I want this to be a place that inspires people to go build their own companies. And man, he was right. He was right. He was definitely right. And he's saying this way before the Exit or way before they really even have hits. And it's crazy because when we were preparing for this episode, I was talking to Mitch and Mitch actually sent me a photo of him being out of rooftop with Siddharz and Rina in 2012, in Turkey. Yeah. Like, you know, there is there is lore here. And I think it's worth really like diving into that story of like, how does that even happen? So I don't think I had read that Wall Street Journal article, frankly, but I had heard from the partners at Baldurton Capital in London, which originally was benchmark Europe, right? You know, we had gotten into some differences of opinion about how we should pursue the investment opportunity and the venture opportunity in Europe. And ultimately, we had split up and Baldurton had renamed as Baldurton. And they were, they start were investing in the European and Middle East on their own. And I got a call from them and they were talking about this company peak that they were looking at in Turkey and wondered if I had heard about it and I hadn't heard about it. In fact, at the time, but I was going to Istanbul anyway, Istanbul by the way, one of my favorite places on planet earth, I've spent an inordinate amount of time in the city and one point when I was younger, I lived in Istanbul for an entire month in a single, crummy hotel room. I just, and just explored the city, I just absolutely love it. I would recommend it to anyone. It's a magical place. And I happen to be in Istanbul or on my way to Istanbul in the summer of 2012. And I thought, you know, what the hell? I'll call these people up and go check them out. And so I called up Siddhar and I went over to their offices in Catacoe, which is on the boss fris on the European side. And we grabbed some Starbucks and we Vrina and Siddhar and I went up on the roof and we talked about the games business in Turkey and it was really, really fun. They were fantastic people at the time. They were doing a lot more kind of regional product, if you will, like they were making mostly for Egypt and for the Arabian Peninsula. They were taking these long standing card and like cribbage game dice game play patterns that were very, very, very popular locally in places like Saudi Arabia or Oman or Cairo and they were basically making mobile versions of those play patterns. They hadn't really gotten around to doing match three and some of the other kinds of card puzzle games that they later went on to do but those regional games gave them a real foothold. And they were very, very clever and they were very well financed. But I had the feeling and they never really fully disclosed. It's me that Rina's family, Rina is a really fascinating character. She's an ethnic Armenian in Turkey, which any of you who know the history of Turkey and Armenia, that's a pretty dicey proposition given what happened to the Armenians at the hands of the Turks. But I think came from some wealth. Again, when I met her, she was just like a punk rock girl. She was wearing like a t-shirts and jeans and like you would never know in a million years. But just I did a little digging and I think she may have bankrolled peak originally. Or she and her brothers. I mean, they also, they raised some, I think the stated is like raised 20 million throughout the entire time that the company existed and they don't, you know, hummingbird and I think technically Baldur 10 maybe. I don't actually know if they invested or not. But hummingbird was definitely an investor and, you know, they don't really talk about too many of the other investors, like you said. And so that is very believable. Yeah. And they, they go on to actually sell that, that, that like culturally specific, yeah, like the specific games, like the card games maybe is like, and that's at the time that's like gin, rummy and spades and games like that. They had made and they actually sell that to Zinga in 2017, November of 2017, for 100 million. And, you know, the piece that's interesting there is like, okay, you know, I don't know. They call anywhere between five to seven years into building the company, they clearly have like figured out operationally of how do we, you know, either scale those games. Maybe they hit some ass them to or whatever. But it's very clear they're like, hey, we figured out user acquisition, we figured out how to, you know, get as much revenue as we possibly can. They probably hit that ass them to and those card games or and realize, hey, we should, we should go in for a bigger swing. And so actually, you know, later that year, they, they go and release after, after they sell off to card division, they release their first match three game called Tomblast. And, you know, this is funny again in, in, in that, if anyone looks at these games, they would be like, this is the exact same thing as Candy Crush or, or any of the others. And their innovation, which again, you and I would, I, and I think most people would probably laugh at the idea of just being innovation. But instead of swapping the tiles, it was, they called it Blast, which is, you tapped the tiles to, to, to, to find like, have them go away. That was their whole mechanic. That was, that was their like, their genre innovation on some level. And I think it's fair to say they really took the like operational excellence from that, that card game era and just applied that to what it was a better overall genre. And man, they, they, they crushed it, they executed beautifully with that. And, you know, that, that story, I guess, ends formally in, in, in what is them, them selling the rest of, you know, the rest of P to, to Zing again. So, yeah, just three years, we have three years later, right? They sell the rest of the studio for a billion eight, the, the, the piece that I, I think is probably true here in that this is, historically, how, how, it was the Turkish studios that I talked to today is, I think there's a fair assumption that they likely took the hundred million dollars from the card games and reinvested that into UA. Yeah, which is, you know, like I, I would be stunned if, if anyone, any of the investors were paid out on that hundred million dollars, or even if Sadar Reno is paid on on that hundred million dollars. Yeah. And I think instead that went directly towards, we have a game that we believe in, we're going after Candy Crush, we're going after, you know, whoever else is a giant at that time. And look, it clearly paid off, you know, they, you know, that company, you know, ends up selling for 1.8 billion. Yeah, with only a hundred employees. Yes. Right? I mean, we're remarkable, really incredible, right? Good for them. And he said, our was such a great guy. It was so it was really wonderful to see him succeed at that level. And, and Reno as well. And I think they, they, they, you know, Sadar stayed in Istanbul with the, with the team as far as I can tell. And, and Reno's then gone on to do all kinds of interesting things, started a venture capital fund invested in a bunch of new studios in Istanbul and really catalyzed in a lot of ways, the broader Istanbul gaming scene. Yes. And, and frankly, it ultimately invested in dream. Yeah. Yeah. And look, she has a, she has a studio today that's called Spike, where she is back at it. Yeah, she is in the mud again, doing all the same stuff. So yeah, she is very cool. So I want to get back to, you know, when we think broadly, and we'll get to the dream story a little bit later on, and the dream transaction, but basically dream comes on the heels of peak and takes really the, the crown of match three perfection from them. And, you know, becomes a billion dollar a year revenue studio, maybe greater than a billion dollar a year gross revenue studio. And I want to think about really take a step back and think about why this worked in Istanbul uniquely. Like, what was it? What were the competitive advantages? And I think one of the things that's interesting is you and I have dug into these competitive advantages. I think you could really, this is like one of those optical illusions, where if you look at it one way, it looks like a vase. And if you look at it another way, it looks like two faces, you know, and I mean, and if you, when you're seeing the, when you're seeing it one way, it looks like compounding competitive advantages. And when you look at it another way, it looks like kind of cascading arbitrage. And I think it's kind of interesting to think about it, because it ultimately will come back to the where we want, we want this episode to end, which is, is this a durable competitive advantage that's being built in the Istanbul gaming community around these sorts of games? Or is it really just the consequence of these multiple arbitrages and the interplay of these arbitrages? And that ultimately, when the taste from match three games diminishes, if that ever happens, and look, we're 25 years into the match three revolution, and it doesn't seem to be diminishing at all, at least right now, it may be, you know, in the way that, you know, Brandon Beck threw down at one point in an interview and said that, you know, with League of Legends, he was inventing basketball, and it wasn't going to be time-bounded that his own cat is own way of talking about it as a forever game. It may be that the genre of match three is itself a forever game, and that, that these aren't ephemeral arbitrages. But to the extent that they are, it might be interesting to think about them as ephemeral arbitrages and sort of dig into it a little bit to see where they might, they might be under a little bit of pressure over time. And I think there were four compounding arbitrages. I'm going to talk, talk through them as arbitrages, and then we can talk about whether or not we think they're actually competitive danger. You know, that's just the way I am. Okay, Arb-1 currency. So remember that if you're going to characterize anything that happened here as an arbitrage, this was the arbitrage to end all arbitrages, which is Turkish inflation had been like out of control. Right? I mean, we're talking about greater than 50% inflation, like Lira inflation, the Turkish Lira. And in the local currency, people are being paid in Turkish Lira, and there's all kinds of, you know, things in the economy that are, that are, of course, restraining local pricing in order to not create, you know, violent revolution in the streets when you're having, you know, your currency being devalued at that rate. And so here you have a studio that is basically creating this export product and breaking in euros and dollars, right? All of the payments are dollar and euro denominated primarily. I mean, this is game took off in US and in Europe. And so this is a massive, like, inbound, you know, leveraged currency play on a certain level. Yeah, I mean, look, they're, they're getting paid in Lira. The engineers are getting paid. Yeah, then years are getting paid wages or their expense line of this company. Does imagine expense line of this company is in Lira or bulk of their expenses are in Lira. And revenue coming in is US dollars or euros or, I don't know, inter, you know, other amazing currency. And what that effectively means is, you know, I don't know, we can use, use any number, but like, that really in practice probably means the talent and the teams that are paying is 50% cheaper. Yeah, then, then what If you were going to go higher that equivalent engineer and even in Helsinki or Tel Aviv or I mean certainly in the US So that's pretty damn remarkable. Yeah, and I think it was Something that I've talked to some of the Zingha executives about it was very present in their minds When they were arguing internally in favor of spending a billion eight in order to acquire the studio That leverage of being able to transfer dollars to Istanbul and have them Basically be multiplied in terms of buying power in the local economy was a huge driver of that deal Yeah, and look it's you know The amazing thing about casual puzzle games is that it's primarily it turns out the product market fit is largely in the US and Europe and And we'll what would be like tier one countries from a revenue standpoint? And so you know the interesting thing here is you know following the peak evolution of you know peak initially is building Sort of for their region which again makes sense But ultimately makes the decision to really build towards like what's the mom in you know columnist Ohio gonna play and You know, they might not have ever even been to the middle America or you know never even met a you know 40-year-old you know mom in In America, but that's ultimately the persona that that this is resonating the most with it's unbelievable It's so cool, but yeah, what an advantage right and an advantage a significant advantage over you know Even a king in Sweden, Iceland, you know, Dublin wherever these markets were The competitive markets existed right like they had a real wage advantage So that's arb number one arb number two is a little bit weirder and I think it speaks to just how important this is to the Turkish economy on a certain level Right, and that is that turkey subsidizes games in a very unique way they don't subsidize wages which is the way that most Local subsidies basically work, which is like when I had a studio in Montreal for example And we'll get back to Montreal because I think Montreal is a really interesting analogy for what happened in Istanbul But I had my offices located in the old city of Montreal and if you If you were in that specific economic zone and you did you know You check these specific boxes you could get like 50 60 percent of the of the labor costs subsidized by the the government of Quebec and I think that's really At play here except in a very different way and instead of subsidizing Wages they subsidized the growth loop Right, they subsidized you a spending Yes, now they didn't subsidize it a hundred percent, right? I mean, and you you manage to have some AI read the Turkish Law so I'm going to defer to you on this one because it's beyond me, but But while it wasn't you know, I mean that obviously dream at it's at at at the end of the of the day before They did their big transaction and some of the what leaked out around their transaction I mean they were spending close to a billion dollars and user and user acquisition costs on a global basis That's not subject to to the rebate, but what it did do was give a bunch of smaller studios and probably dream and its infancy A running start that other game studios and other jurisdictions just don't have Yeah, and look I will get into exact details, but I like you know the closest version of this would be Helsinki pays you $60,000 just like we'll give you $60,000 to start a gaming studio. Yeah, this is 10 times better than that. I don't know you know 20 times better than that and you know, I guess credit to Turkey on and the Turkish government on some of why I have to imagine Siddhar and Rina you know or or we're sort of in their years from the peak days of if you want the next version of Peak to emerge you sort of have to to enable them and one thing that that we didn't mention But is worth recalling on on the peak story is you know They actually ended up paying close to 75 million dollars and taxes back to the Turkish government You know in that time and so clearly a like an important part of the economy like it is a it is Really critical and you know for all the reasons that we've discussed so far becoming even more critical to their economies So they launched a they sort of update this every year, but they I took their presidential decree that that came out It's actually number 10,962 if anyone wants to go read it and that was that was effective as of January 1 this year Where they sort of update it and and you know you can the 2025 one to this one is Pretty much the same, but maybe some light numbers changed But what it ultimately means is you're eligible for 50% back the subsidy of eligible international user acquisition or marketing fees And and and so that's in all markets and then in specific markets that they call out that's actually us and UK and you have some of these other regions where Assuming they want that they want those dollars. Yeah, yeah, those dollars They'll give you up to they'll reimburse you up to 70% and There's caps for this, but for a single game startup the subsidy is up to $333,000 a year for each individual game Which is not much, but it's but it's a start I mean, I'm sure if you went to a little independent studio in the US and you said hey, we're gonna give you 300 grand to spend on UA They'd be delighted. Yeah, and look at it. It's a lot of Again, going back to this even you know peak probably reinvesting the hundred million dollars You know a lot of the mentality in mobile games is you know reinvest all in that dollars that they they make anyways And so and some levels just start to flywheel uh of like you know We'll get it back and you know if that they turn that 333 and the 500,000 They're gonna go to put the 500,000 back in and so forth and so it's really a Kickstarter for it And then they'll they'll do up to 1.1 million annually. So really it's call it though But that's that's the important distinction there is that's uh You can get 333 per game and really that means they'll cover you up to like three games uh that they're launching And so really the like idea of just we're gonna enable you to test on multiple games But they also have this other line which they call it easier quality tier It's the it's the dream tier. Yeah dream tier. Let's just call it a peak tier Where these these ceilings get moved up to 11 million annually again not not you know Yeah, compared to a billion. Yeah, yeah, yeah, like it's it's it's not gonna move to total needle But uh it's real and and and the other thing is like They'll actually cover 50% of your your app store in google play commission. So cut the On the ip side. They'll cut it from 30% to 15% up to 200k and like there's all these like You know, there's it's actually if someone's curious of like how to build incentives. There's you know This is like a 10 page document with random, you know specific things that they'll they're trying to do to enable it You know even localization they'll subsidize you all these pieces and you know, it's important to note like they they're it's very clearly a cash refund Not not a tax credit. Uh, they'll pay you back within five months and that is just there's something just remarkable about this of like Know your strengths know that we're great at UA know the genre that we're building in of of casual puzzle games or choirs UA And when we say UA that's user acquisition and these marketing dollars and there's probably a very funny like you could probably trace This Turkish subsidy to to app eleven dollars, right? Like yeah, there's just like a direct funnel. Uh, I would I would love to have been a fly on the wall When this law was being drafted because how interesting it is for it to be centered around things like UA and App Store commissions and Like folding in foreign owned entities that as long as they maintain a Turkish LLC and employ people in Turkey and whatever like it's actually quite Forward thinking the way that they're old. Yeah, very old. The way that it was drafted I mean you would it would have been easy to come in here and fuck this up by basically making it a wage subsidy or some other thing like that That would have created a very different incentive and I think this actually Is a real direct progenitor of the 65 peak peak lineage game studios that arose in Istanbul in the years after the acquisition I mean, it's you know the the whole sort of flowering of the ecosystem in many ways was really helped by the subsidy Even though at scale it was probably meaningless Yeah, and exactly and and you know, it's clear it works right it is you know Give someone the confidence to go and start their own studio and get get started on this and Pretty damn remarkable. Yeah, so cool. So that that that that's the that's the government subsidy and actually Maybe one of the only ones that I know of in the gaming industry that is like directly lean in Build their economy around it. I mean look Helsinki is is obviously also another city that is built around They're their mobile gaming ecosystem. Yeah, but Helsinki really came from Nokia and there was like a really There was a real corporate Component to Helsinki's growth right over over that period sure they you know they had You know Finland socialism and capitalism kind of interesting combination, but really It was a very different animal than than what happened in Istanbul I think I think the Montreal example is actually more interesting and more apt because Montreal really did Understand that there was this problem and the problem was the same problem that we're going to talk about now when we talk about the third arbitrage Which is talent right and that is if you were a francophone Kibakwa right a francophone Canadian and you were a software engineer, game developer, software engineer. You basically had two choices. You could learn English and try and figure out how to go to work for an American company. Or you could immigrate to France and maybe go work in one of those Montpellier studios or at Ubi or somewhere like that. Or if you wanted to stay locally and speak your native language, you had to go to Montreal. And originally, they leveraged that in the form of these kind of tools companies, like softy mage and discrete logique and some of these other companies that were very important in the early special effects business and 3D art business prior to the games business. But they extended those subsidies into the gaming. And you know, it resulted in Ubi, EA, a bunch of other companies like even shit companies like my startup taking advantage of those and getting access to this really extraordinary talent that was kind of forced into this labor pool by circumstances, by cultural and economic circumstances. And I think in many ways, the same exact thing happened in Istanbul. Because if you were a really hot shot Turkish software engineer, either you like went, maybe you found family in Germany where there's a lot of Turkish emigrates or you figured out some other place to go. And in fact, you know, the Kri Tech founders were Turks were emigrated Turks and set up in Germany and ran Kri Tech in Germany. So there was some precedent for this. But basically, you know, you were kind of stuck. And so the explosion of these labor markets of this of this talent pool that could basically be absorbed into this gaming industry in Istanbul was a real arbitrage for the country. You know, they weren't competing with the googles and the apples and the EA's and the software companies broadly in SaaS and other industries. Basically, this was the only gaming town. And as a result, they had their pick and probably had a real talent advantage broadly over other companies in the match three space. Yeah. And, you know, so there's, you know, even today, you know, I imagine if you're, you know, a 22-year-old, you know, considering where you're going to go after you graduate from engineering, it's clear that it's like this is probably the highest status, highest comp, highest chance of, like, generational wealth is probably going to join one of these casual puzzle studios in Turkey. And so that's part one. I think the other part is obviously the this mafia that we keep referring to, which is, you know, peak had, you know, 100 employees at the time of exit. 65 studios have have can be traced back to peak. And so just a remarkable number of founders that were created from that DNA, likely probably, you know, from Siddhar, you know, going back to that 2012 quote of him saying he wanted to do it, he did a great job recruiting. What would be future actual founders? And, you know, that's went on to be a game, just studios like dream games and a cypher games and spike games. And, you know, we'll go through them a little bit more later on when we talk about how puzzles have expanded from Matt Street, but Matt, you know, any, any time there's an exit in that ecosystem, it makes it stronger. And we know this to be true in Silicon Valley, but it is, you know, their own version of that is happening in Turkey, where every time one of these studios exits, it just creates even more entrepreneurs, which is remarkable. Yeah. And, you know, and these acquisitions are continuing to happen. And as we both know, and as we alluded to in episode one of this season, a lot of Western venture capital looking for growth opportunities in gaming is focusing on Istanbul and this community. And so it's not just your, your Ohio mom spending her dollars that are ultimately ending up in Lyra and in the pockets of these engineers, but it's also Western venture capital, which is also dollar and euro denominated. Yes. Which, which I think actually sets up nicely for what is the fourth fourth arbitrage, which is UA and distribution. And, and more specifically this mastery or casual puzzle genre, which is the thing that is being passed down from this talent and a whole bunch of ways is actually closer to tacit knowledge than or like earned secrets rather than than even, you know, the traditional low. I'd like now know how to scale a SaaS company. It's, you know, this stuff is so in the weeds, nitty gritty, you know, this mechanic monetizes better than this one or not. And mastery, I think is just worth calling out is like, why is this such a good place to be arbitraging? And, you know, we've talked about this at some points in the podcast before. But, you know, mastery is sort of like the perfect mix of high LTV, high retention, all of those pieces that, that wouldn't make for like what I would call is like the perfect mobile game is like a mastery game. And what we've learned or what we've now seen of 25 years of this genre is closer to what you're, you're saying, which is this might be the forever game genre of mobile, you know, which is if someone gets into a candy crush and, yes, there are a lot of people that still play candy crush every single day, they almost never churn. You know, you know, I'm not going to say never, but it flatlines closer to, you know, a social networking app and that these people stay there for a very, very long time. And, you know, there's there's other parts of this, which is, you know, short session links. There's, you know, Royal Match says pure enough purchases. And so they like there's cohort driven monetization. There's all these like specific mechanics or DNA of match three that are interesting. But I, and a lot of for me, it feels like it's actually closer to this like pure product market fit of the mobile ecosystem. Yeah. And I think it's interesting because it is essentially a kind of genre or category arbitrage in a way, right? Which is that match three in its specificity. And in the way that it's go to market works and in the way that it's retention and in the way that its monetization works, all of which are both extraordinarily well understood by the people in the space, extraordinarily difficult to understand for people outside of the space. I think that's really important, right? Yes. Yes. Yes. Like if you think going in and I could tell you from personal experience, if you think going in running one of these match three games at scale in the advertising environment that we're currently in, the user acquisition environment that we're currently in, the distribution environment that we're currently in, the competitive environment that we're currently in with China and the U.S. companies in Europe and, you know, Ilka and Nelson and, you know, just, I mean, this category is ridiculously competitive. And so winning in this category involves not just getting the big picture right, but getting a million little things right, right? And a little, a million little AB tests, a million little decisions about how something functions on the screen, how long it takes, where, where, you know, how difficult it is, how it ramps, like all of these things, and it's become lower in this community. And I think particularly important in terms of how it informs all of these startups in this ecosystem who have all come from that sort of same branch of the tree. Yes. Yeah. And look, it just so happens that the biggest exit in those, in that region happened also to be maybe the best or, or highest monetization mobile game genre. And so, you know, that, which it was amazing. But it's also there are being the fact that they are what is currently the best monetization or best retention mobile game. It'll be interesting to see how this progresses over the next five years or so because obviously they've chosen a very both defensible genre in the sense that you'd expect match three to still be a persistent genre five years from now. But also a wildly competitive genre where it may be that there are going to be innovations and potentially content innovations that occur in the future that are going to obviate some of these natural column arbitrages, column competitive advantages as you like. But that some of these windows may be closing in the future and it'd be really fun to watch what happens as Istanbul evolves because it may very well require that they get into the innovation game and that they can't simply take existing intellectual properties from the pop from the pop caps and the kings and the play ricks as of the world and recombine them in this interesting new way. They may really be forced to innovate their way out of this and it'll be really interesting to see what happens. Yeah, look, I mean, one example of how the R potentially got blown up was when the the abstracting transparency stuff happened with Apple, right? They switched the way that advertising happens and let's just say the tacit knowledge or the earned secrets that they had on some level were blown up of they were doing great job of running meta ads and whatever else and it gets flipped on its head and to their credit, Dream is born from that era. Yes. And so that's a real sign of like, okay, they're going to figure it out. But Matt, talk about a weird force that is completely outside of their control, potentially risking the entire ecosystem for them and Dream, obviously, which we could talk about now is goes on for a legendary run and builds real match. And we've talked about Dream a little bit, you know, bits and pieces now over the past hour. And the thing here is Dream is actually founded by five people all from peak. They're sort of the leads on on tombblast, which was the core game that ends up but selling to Zingha for 1.8 billion. And Sona, the CEO, anyone that's ever met him or interacted with him, I have unfortunately not, just says that he is truly world's class, and I've looked at results sort of speak for themselves, but in a very untraditional way, they actually went and raised 57 million before they launched the game, their first game. So they leave, they leave peak before the accident, actually, they leave and start dream in 2019 peak sales in 2020. They leave and they immediately go and raise 57 million dollars from Baldur 10 and Makers and Index and. - And Reena? - All of, yeah, and Reena and all these great investors, but just clearly with, we know what we're gonna do, we're gonna go build a great master game, and just give us the money we need it 'cause we're gonna go build it. And if that's not a sign of we know how to execute or like we know the playbook, just let us go execute it. I don't really know what it is. I mean, it's sort of amazing, and it worked. It worked in, and it's interesting to think about because typically that argument wouldn't have worked, which is essentially give us 57 million dollars, it's gonna cost us a couple of million to make the game, but we're gonna need the rest for UA. Like that's historically not been a great pitch to venture, like, hey, let us give us some money so we could go buy users. And, you know, I've gotten that pitch, I'd like this sort of ham-handed pitch, like a hundred times. - Yeah, I mean, it's a pitch I get most frequently in games, to be honest. - Yeah, I get that pitch way more than I get, you know, I'm gonna do free-to-play or something like that. - Yeah, it's like, hey, we've made this game, it's really good, we're getting really good reviews, but we've only, we can only get it in front of X1000 people, give us 10 million dollars so we can market it, and I'm like, fuck you, get out of my office, right? But in this case, they were right, right? Like, this was the one time that it worked. (laughing) - Yeah, I mean, literally, it's, I mean, look, it's a, it is insane to think about as, and I will say the same thing now, which is, I think if I was pitched this, I would hope that I would have said yes, but I can almost guarantee you that my own biases and, you know, survivorship bias, maybe it's the real truth here, but like, I would have looked at this and be like, there's no way, like, you can't just throw money at it and just make it work, but boy, what I'd be wrong. - Yeah, and look, it worked. - Like, this is gonna, this is an interesting one because I think it exits in a very interesting fashion. I wouldn't say, you know, conventional fashion. So, obviously it did monster numbers, right? You know, tens of millions of downloads, hundreds of millions of revenue, initially scaling to over, like, I think a billion three in gross last year. - Yeah, but, you know, spending insane amounts of money on customer acquisition, I mean, it was rumored, I don't know if it's true, but I think I heard through the grapevine that at the time that the deal got done that we're gonna talk about, the CBC Blackstone deal, they were spending essentially 100% of net revenue on customer acquisition. Like, they were not profitable at a billion three, at a billion dollar scale. Basically, let's just call it for sake of argument, which is kind of the Achilles heel of the mobile business, right? Which is this sort of profitless scale that because customer acquisition costs don't really have economies of scale, right? You don't actually get, it doesn't get cheaper to provide that N plus one user. You still have to pay the same amount that you paid for user one to get user N plus one. In most cases, if you don't have some other kind of reinforcing advantage that lowers that customer acquisition, it gives you leverage in the customer acquisition market. And so, the question is how valuable is that really? I mean, yeah, a lot of cash flow, right? But it's not something where basically a single product company, which was what it was at the time. They've subsequently diversified to some extent. But like, it was basically a one product company at the time. And the question is, how do you value that? And interestingly, it was valued very conventionally, right? Like, I mean, the investors, the original investors, Baldurton makers, index were bought out at essentially a $5 billion valuation. And while that sounds extraordinarily good, it's like four times gross, five times net, right? Yes, that's not that different from, you know, somebody making, I mean, the history, we've talked about this a million times, but in the history of the games business sort of four to seven times revenue exits are pretty much like, you know, hitting for average in the, in baseball. I mean, it's not nothing extraordinary to sell a company at that kind of a multiple. So they got a decent multiple, but not like a home run multiple. Yes, yes. And I think it's, it points to a couple different things, but I actually think one of the biggest pieces here is, and if someone listened to this for some reason, hasn't listened to season one of the podcasts, I highly recommend listening to Calculus of Fun, which really covers a lot of more of this specific topic in depth, but, you know, the return on adspen, which is usually how these studios think through their buying, they're basically saying, what days are we gonna get paid back, you know, from our user when we acquired them? You know, when you and I first started looking at mobile games, you know, it was, you know, short windows, I don't know, maybe 30 days or something like that, and they can get recouped. You know, some of these mastery studios, you know, and I won't speak to dream in specific, but in most of the mastery studios that I get pitched, we're talking well over a year to get recouped or paid back on that, which means you're really hoping that the user is gonna retain for, you know, over a year, and, you know, that's a remarkable, you know, that's a big estimate, and yeah, and so it is, I think that's a lot of what this is, and, you know, it's also very clear that you get a discount because your growth is directly tied to each incremental dollar that you spend. And so, you know, if you want us to be at $2 billion, you're a revenue business. You likely have to spend closer to $2 billion and meta ads or whatever that might be. And so I think that's all, you know, just maybe the, maybe the thing worth just calling out in this genre, that as competition increases, the spend increases, and all of those pieces. - I think we can say it's very simply that there's not a lot of leverage in match three, right? It's like even when you're doing it as perfectly as Dream was doing it, right? As, I mean, achieving an achievement and an execution at the pinnacle of the market. - Yes. - They are still basically bound to the earth because of this extraordinary need to spend money on user acquisition, right? And it's one of the real problems of building big companies in mobile. You have, you know, dollar scale, right? Because you're getting to, you know, billion, three in revenue, nothing to shake a stick at, right? Dream in King's case, in Dream's case, and all of these cases, these companies are getting to really, really big revenue numbers. But they're not really, you don't see that same software dynamic at work where, you know, you're just, once you've, once you've figured it out and once you've got product market fit, you can keep replicating the underlying software infinitely and your marginal costs, you know, don't increase. You don't have that problem. You have linearly increasing marginal costs at scale. And that's unique and troublesome. - Yes. And by the way, the structure of this deal is literally like take on debt to go and fund, you know, a UA finance. - Yeah. - And so, a billion and a quarter in debt. - Yeah. So, you know, the actual deal with CVC and Blackstone, which, you know, they value it at 5 billion, but there's two and a half billion outweighed, you know, a billion and a quarter from CVC to buy out those early investors. And then there's another billion and a quarter from Blackstone for the debt financing, presumably for UA financing that they'll pay down. - Yeah. - Which is, you know, again, just speaking to how reliance or how necessary it is to have this big pool of capital to go and buy more users. - Yeah, and I think, you know, we'll get back to it when we talk about this new phenomenon that's arisen over the last couple of years, which is these very specific UA financing through debt, which several companies have started to pioneer and invest in, and, you know, to really satisfy the need of that company that had come into pitch you or I and said, "Hey, give me $10 million to go and take my product to market," while it might have been unpalatable to venture capitalists like us. People are using debt essentially to do this now, and one of the nice things about the game's businesses is that it produces cash flow. And so you do have a way to service the debt on an ongoing basis. And so there may be some interesting, you know, ways to structure that such that you can make it profitable. But again, it's real financial engineering, much like the UA business broadly, right? And so here they've raised a billion and a quarter in debt from Blackstone, a billion and a quarter in equity for CBC. My understanding was that the founders cashed out somewhat, but retained a large degree of ownership in the company, but they were cashed out at a much lower valuation than the $5 billion from colloquial understanding of how this deal went down. I'm not sure if that's accurate or not, but if anyone out there knows it would be useful, you know, hit us up in the comments basically. But I think that it was a bifurcated deal and that they structured it in the way that they did so that they could get the VCs out at a number that would give them a viable return. but not necessarily the founders. The founders were still gonna have to grind. - Yeah, and I think from what I remember reading, it's something like they're gonna use this as a way to get now that that is cleared from the cap table. I think it is a way to basically buy up their ownership over time. - Yeah, so let's move on from this. Let's just one last bit that I love is that in 2024, Dream was the 18th largest taxpayer in Turkey. So again, back to, like this company was a top 20 taxpayer in Turkey, making match three games, which is pretty great. - And then it didn't exist, you know, five years prior to that. - Here's earlier. - That's right. - So good for Turkey, which is, yeah, amazing for Turkey. - Yeah, I'd argue if there's a flaw in the armor of the Istanbul scene, it's gonna be the merge two games, right? It's like we've started to see it with the Chinese games, like Gossip Harbor, which is sort of like a story, merged two game, but like that pattern, it's starting to look like that may actually be really dangerous to the kind of incumbency of the match three genre. - Yeah, and look, there's sort of infinite versions of these ostriches of puzzles. And so, you know, the other one that's really worth calling out is there's a game called, there's a studio called Loom Games, which had just innovated and built a new game called Pixel Flow in the hybrid casual space. And, you know, that was in the last 12 months or so they launched. And they actually just sold the majority of the company to Scopely for a billion dollars. And this is a team of 20, you know, again, just amazing, amazing story. But the nuance of this is a lot of the structure of this acquisition is in performance. And, you know, I would almost view a closer to Scopely giving them, you know, UA financing. - And earn out. - And earn out. - Yeah. - Based on, you know, how did you actually hit that? Did you return that? And so, there's, but again, I don't want to downplay because it is truly, you know, an incredible game and maybe a perfect example of operational excellence here. And again, maybe it's as accredited of like an actual genre innovation. I think it's closer to incremental innovation on the genre of within that world, but still, it's definitely worth calling out. And so there is a lot that is happening within the ecosystem. I still view it very much as these other genres are all incremental in trying to take on mastery over time though. - Yeah, and I think look, I want to call attention also to the fact that there's something unique about the value that these companies pose for their acquirers, right? It's like, why are these attractive acquisitions? When you're like, okay, there's a lot of arbitrage, there's a lot of profitless UA spending. They required ongoing massive UA investments from the companies that acquire them in order to keep them going. And we saw that with Activision in King. We've seen that with Scope Lee. We've seen that across the, you know, I mean, the Saudis really came to the table with UA spending in order to bolster Monopoly Go and some of those other titles. These companies remain valuable to acquirers for their cash flows in a lot of ways. And that is weirdly unique. And I think a reason that they continue to be both funded and that they continue to be acquired. - It is such a great call out in that stand alone maybe as companies, it's a lot harder to see the durable value in that, you know, there's the single rescue. - Yes, all of those things. But at the same time, you know, if they do get to a billion dollars in revenue, you know, like, there's a lot of public companies that would love to say they have another billion dollars in revenue and, you know, again, maybe that's even an arbitrage of itself for Activision. But it's such a great call out of why these things still are getting acquired and swooped into the overall organization. - Cool. Well, I think it's probably time to wrap this episode up. We've gone a little long. And I think it's interesting just because it's such an interesting phenomenon this, this Istanbul scene that I hate to end the episode with, you know, we'll see it. We'll see how it turns out. But I think in some ways, we'll see how it turns out. And I think it's just a wonderful nuance of the games business that we've seen over the last 15 years. This just incredible wealth creation opportunity and these incredible games coming out of this part of the world that we would have never thought of as a hotbed of gaming. And really, it took some remarkable individuals like Renoir and Sardar Sahin to pioneer Istanbul as a locus of game development. And some really forward thinking acquisitions from, you know, Frank at Zingha and others, the Baldrerton guys, original investments, index and some other funds that we're willing to take a chance on Istanbul. And it's just really cool. And I'm really, really delighted that this has happened and that these people have sort of, that it's worked out for all of these people. - Yeah, I don't want the other thing I would add is just like, it is clear that if there's a region that's going to win in competitive markets, it is Turkey. And so to the extent that it continues to be as competitive as it is, they are operationally on a different level and they're ruthless. And many ways betting the company and many times over just to go for the big swings, which I just deeply respect. And so every time I talk to a studio in Turkey, I am just amazed that they're ambition, but also just how clear they are at, they're going to do everything they possibly can to win. And so I definitely would not bet against that. I don't know, I would say looking back at five years from now, it would not surprise me if a significant percentage of the mobile business continued to run through some of those neighborhoods in Istanbul. Couldn't agree more. All right Blake, thanks for that. - Thank you. - See you next week. (upbeat music) (upbeat music)