Sweet Success For Cut The Rope: An Interview With ZeptoLab’s CEO

Games rank as the most popular form of mobile content today — 68 percent of tablet and smartphone app users who downloaded an app in the past 30 days chose a game for their device, according to Nielsen. And ZeptoLab’s Cut The Rope — a game of physics, boxed spaces and candy — has been one of the biggest of them all, with millions playing the game daily and active monthly users in the tens of millions. For a look at what it takes to make a successful piece of mobile content, and how to extend that into a wider business, we talked with Misha Lyalin, CEO of Moscow/San Francisco-based ZeptoLab.

Little more than a year old, last week Cut the Rope reached a couple of milestones in its growth. To add to existing iOS and Android verions, Zeptolab launched Windows Phone (in HTML5) and native PlayBook editions of the game, and appointed a new head of merchandising, Tanya Haider, former SVP international consumer products at Nickelodeon & Viacom (NYSE: VIA) Consumer Products. Her job will be to make Om Nom, the central character of the game, into the next Mickey Mouse.

Om Nom may have to get in line for the Mickey suit: merchandizing can be a lucrative route for the most successful games developers, and Zeptolab is not the only company pursuing that track. paidContent has heard from sources that by next year, Rovio projects it will make more in merchandizing birds, pigs and eggs than it will from the game that made them famous.

Talking about the new versions of Cut the Rope, Lyalin was not overly enthusiastic about the PlayBook per se, but but he does make an interesting point: the PlayBook operating system, QNX, is actually more like iOS or Kindle Fire than it is to Android in terms of development, since there is only one device and no need to think about different skins, screen sizes, OS versions and the other variables that come into play when considering an Android app.

Here are some highlights of the conversation:

Explain how you think merchandizing fits with mobile content. Mobile is the new screen: we see millions playing Cut the Rope daily, with monthly actives in the tens of millions. Some people now watch less TV and play more on mobile phones, which means that mobile brands have the potential to become household names. I haven’t met a person who doesn’t know what Cut the Rope is, and same with Angry Birds. In that sense, merchandizing is a logical extension to our business.

We tested the water last year [launching a line of plush toys and a few other items]. We’ve liked what we’ve seen so far, and 2012 will be big for us. We’ve seen amazing demand, and have been surprised by what people buy. We will be doing this digitally too, since our core is games. [So far] the comics we have launched have had a few hundred thousand downloads, so that also looks very positive. But you have to also be careful: there is an assumption that if you have a great mobile game you will be an expert in movies, animation and merchandising and the rest. Everything we can learn we will do ourselves; everything else we will partner.

How much money have you made from Cut the Rope to-date? We won’t say, and don’t try to guess how much. 2011 was amazing and in 2012 we will blow that out of the water. When it’s time to talk about how much money we make, we will. But currently we see no limits to how far it can go.

You’re now on Windows Phone as an HTML5 app; what about a native app and how about other platforms, like Symbian? We are bringing it to other platforms, because when you have an entertainment platform you have to invest in all platforms. It will be coming to both Windows Phone and Symbian soon: we actually started working on Symbian a while ago but there are a lot of device models so we need to make sure we can deliver it to everyone — similar to Android, which we wanted to release in the spring but had to wait until the summer to make sure it worked properly everywhere.

PlayBook was different: it is a powerful machine and we could have it done in short order. Some platforms, like Kindle Fire and iOS, you start things and it just works, PlayBook is kind of similar. But don’t make this about how nice RIM (NSDQ: RIMM) products are: I don’t have many hopes for the PlayBook, but there are some who are choosing it and we will deliver the game to them.

ZeptoLab is self-funded; do you think that occurs more with mobile gaming companies than it does with other mobile apps companies, which can raise millions in pre-revenue stages? Or are you talking to VCs? Yes, we are self funded [although] we could be talking to people now….There are currently 20 people working for ZeptoLab, and that was the same figure a year ago, yet we are growing. We have been fortunate to make money from day one. Others are not so fortunate: gaming does require a lot of capital in order to succeed. It’s not a simple job that can be done in a garage or apartment.

How do you make money on Cut the Rope? So far we have been making most of our money on paid downloads. Of the 85 million downloads we’ve had, a quarter of them are paid. [note: the general trend is for free apps; Nielsen notes that games attract the highest number of paid downloads of all apps but it’s still small: only eight percent of users in the last month have downloaded only paid games apps; most other categories are around two-three percent.] Still the number of people taking out Lite-version, free app, compared to those taking our premium version, is staggering. We believe we still have a chance to convert those so it’s a premature question.

Some of our other properties, like comics, we’ve chosen the fremium model, where we give the app free and expect a small number to convert for some paid content. Advertising is another model that people use; don’t discount that for some type of content and some behavior. Ads make a lot of sense when you have a lot of pageviews.

We think that ultimately every model works in the industry for someone out there. We are exploring all of them. Everything we do from now on will always be a combination of models. Even our paid app has in-app purchases on it already. Some just don’t get enough and we will continue to pay for more levels.

What do you think about apps that rip off your game? It depends. If someone did in a nice way and took the concept to do something different, we would never take action against them. But if someone takes our Cut the Rope brand and slaps it on something else instead of our game, and claims to be the original, that’s when we have a problem. Before we showed up on Android, so many games were there called Cut the Rope. We have taken hundreds of games, simple copycats, off the market already. We do have good lawyers.

Direct distribution or third-party publisher: which is better? We use (Electronic Arts-owned) Chillingo for the original iOS game. Everything else we do ourselves. Whether or not the decision to use Chillingo was smart, I’d rather not say, but we certainly will publish everything ourselves in future. But that’s easy to say when you have success, and knowing what we know now.

There is a certain place for publishers: they can help finance the development of a game, acting not just as an expert in marketing or design but also a financial partner. It all depends on how much money a publisher will throw behind your title; but you could just lean to do the marketing and other parts yourself.