When it comes to value-added exports, it's pretty hard to beat magic armour.

In a nondescript Henderson office block, Chris Wilson - founder of Grinding Gear games - is showing me how his rapidly expanding company makes money.

Wilson and his team of about 90 artists and programmers sell handcrafted suits of armour. They're shiny, spiky, super cool, 100 per cent Kiwi made - and 100 per cent virtual.

Prices range from about US$40 ($54.80) to top of the line models like the Phoenix Armour, which retails for a staggering US$440.


If the prices the Grinding Gear team can command are impressive, even more impressive is the fact that they have created their own market for the fruits of their imagination. There are now 14.2 million registered users of Path of Exile, the fantasy role playing game that Grinding Gear has been giving away for free since it was launched in 2013.

Path of Exile is a global hit in the very large niche of massively, multi-player, online, role-playing games (MMORPG). These are immersive virtual fantasy worlds where players can interact with each other, fight monsters and make themselves the lead character in their own Lord of the Rings-style epic saga.

Grinding Gear is the largest of a small but growing band of successful studios in New Zealand forging a new kind of export industry - one that is entirely immersed in the digital economy.

Data released last month showed New Zealand's fledgling gaming sector now generates about $90 million in annual revenue.

More than 90 per cent of that is exports, so it's not a bad for an industry that started in bedrooms and garages about a decade ago.
But it is still tiny - less than 0.5 per cent of total dairy earnings - and easily overlooked from an economic perspective.

It shouldn't be. In terms of growth potential and as a model for how other New Zealand businesses can tackle the internet economy, the video games industry could perhaps be one of our most important.

I could be biased, of course.

The gaming sector currently employs 475 New Zealanders in high-tech, creative jobs - the kinds of jobs that my children are going to want to do. It would be nice if they could stay in New Zealand to do them.

Video games industry member Stephen Knightly. Photo / Dean Purcell
Video games industry member Stephen Knightly. Photo / Dean Purcell

I'm also a want-to-be gamer who never quite made the grade. My playing career peaked in 1981, when I clocked the Casio space invaders calculator I kept playing through the arcade boom of PacMan and Defender, the first clunky PC games, and first person shooter games on consoles like the PlayStation.

When parenthood and time constraints ended my pixelated indulgences about a decade ago, the idea that people could make games for a living in this country was still far-fetched.

That's about the time Wilson and co-creators Jonathan Rogers and Eric Olofsson were dreaming up Path of Exile in a New Lynn garage.

All passionate gamers, they set out to make the kind of game they wanted to play.

"If we were more aggressive we could probably make more money from the game," says Wilson. "But our goal is to get people having as much fun as possible because that's what we know and love. I understand how to make people have fun in a game.

"Trying to work out what sort of coloured armour will sell best and those kind of things, I'm not very good at that and it seems a bit mercenary, so it's more about providing an experience."

If we were more aggressive we could probably make more money from the game.

It might seem an unbusinesslike approach. But Grinding Gear keeps growing. Next year they will launch in China, where there is the potential to double user numbers, even if the game is only a moderate hit.

Wilson is either very lucky, or more likely, very savvy.

In fact, the Path of Exile approach - giving a away a quality product that makes a deep emotive connection with players - has become the most successful industry model in the past few years.

"We knew when we started in 2006 we wanted the game to be free; at the time that was a pioneering thing for us in the West, it was working really well in China and South Korea," says Wilson.

If you are smart and know your niche, then you can create a buzz in the online community and grow a sizeable audience.

But how do you monetise that audience?

The obvious answer: allow players to pay to win more.

"So a lot of studios will make games where they sell advantage," says Wilson. "The analogy we give is a chess set. So imagine you give away free chess sets but then the popular manufacturers allow you to buy back pieces while you are playing. You lose your queen, no problem, buy one or two more, you'll beat your opponent unless they also buy pieces."

Grinding Gear Games founder Chris Wilson. Photo / Dean Purcell
Grinding Gear Games founder Chris Wilson. Photo / Dean Purcell

The Grinding Gear model, however, is to sell immaculate diamond chess pieces, he says.
"So you're buying suits of armour, they don't affect your actual game play but they make you look cool and feel good about your character."

Gaming has successfully embraced the "freemium" internet model - give something away, then charge for extras - where many other traditional businesses, such as media and music, have struggled.

Globally, the gaming industry is now worth US$100 billion and growing at about 9 per cent a year - outpacing movies and music.

"There is huge potential for growing the local industry," says New Zealand Game Developers Association (NZDGA) board member Stephen Knightly.

The key to making it work for the New Zealand economy is for local studios to hang on to their own intellectual property, he says.

In music industry terms, that is the equivalent of not just writing and performing the hit single, but also releasing it on your own record label, handling marketing, distribution and merchandising - then getting all the royalties.

Knightly, whose own InGame studio makes games for corporate clients, notes that there are still plenty in the industry employed as contractors. Some like Ponsonby based Marker Metro - sold last month to a large Swedish company - have contracts for big names like Disney.

But that business model is always at risk of becoming commodified.

We've had offers over the years but we've not felt the need to take capital with various strings attached to that.

The closure of an Auckland studio owned by French company Game Loft earlier this year cost 150 jobs - most likely transplanted to lower-wage economies.

It was a blow, although experienced developers are in hot demand and almost everyone was re-employed locally.

Knightly can reel off a list of a dozen or so successful studios up and down the country - some still contracting, but most looking to move to developing their own intellectual property.

With direct access to the global market, a good niche can go a long way.

Auckland studio Scarlet City, for example, grew out of an 80-year-old Bible School and makes quirky allegorical games for a Christian audience.

Weta Workshop has a gaming division, as does Natural History NZ, the Dunedin based wildlife documentary maker.

A developer from Oamaru called Dean Hall became an international star working on a hit game called DayZ. He has just returned to set up his own studio in Dunedin.

Another West Auckland success story is Ninja Kiwi, the Kumeu-based studio founded by brothers Chris and Stephen Harris in a spare bedroom, also around 2006.

A scene from the game Path of Exile.
A scene from the game Path of Exile.

They've made a big splash at the opposite end of the gaming spectrum to Path of Exile - with mobile phone games.

One game - Bloons - is so ubiquitous on Apple devices that when I head home and ask my 8-year-old if he's heard of it, he looks up from his iPad and says "Dad, I'm playing it now!" The basic game is charmingly non-violent: you defend your home base from an onslaught of balloons, which your character, a monkey, has to pop with darts.

It might sound simple but its's clearly highly addictive.

A version of Bloons is so popular that it has been in has been in the top of the US charts for paid iPhone apps ever since it launched in 2012.

The business employs 60 staff - split between West Auckland and Dundee, Scotland (the headquarters for their original distributor, which they eventually outgrew and purchased).
Ninja Kiwi also uses the free-to-play model, finding its own ways to make money from its audience.

"We're reasonably late to the free-to-play space," Harris says. They released a free version of Bloons in 2013 but it was about a year ago that they decided to fully embrace it, recognising that it was their most popular game in terms of daily active users.

Harris is now sold on the model that creates value by making games which users view as a hobby.

Gaming is a great career but it is a lot of work and requires a lot of thinking outside of the box. It is a little bit less well defined than many careers.

There are adverts in the free game, but there are also in-game purchases, including a virtual currency which can be staked on head-to-head battles - and purchased with real-world money, of course.

Like Grinding Gear, Ninja Kiwi has grown organically.

Neither Harris nor Wilson is particularly keen to sell down their control anytime soon.

"We've had offers over the years but we've not felt the need to take capital with various strings attached to that," Harris says.

Wilson did some capital raising with angel investors back in 2011. "Just friends friends of friends, finding people who were crazy and had some money to spare," he says. "In general, the way to way to raise less money is just to be smarter ... use less manpower to do things."

And when a game is successful, it can generate vast amounts of money, he notes. The best example example is Minecraft - sold to Microsoft for more than $3b.

"That's what you sell airlines for. They made it with a few guys in an office," Wilson says.

"Path of Exile might never be that big, but it is an example of how the GDP it can contribute can greatly outweigh the amount we spend on it. Kiwi ingenuity, the whole number 8 wire thing, is a bit of a cliche. But it really helps with games."


Still, raising capital is a constraint for some in the industry, says Knightly. Particularly in the start-up phase. "We do need investment in marketing and distribution - particularly as we become publishers and distributors of own IP," he says.

"The real shame is the lack of access to capital because there are very few investors in New Zealand with any depth of experience in this industry." The other big issue is a shortage of skills. Some 47 per cent of studios say this is limiting growth, according the NZGDA's latest survey.

"I'd like it to be easier but we're doing better now," says Wilson. He has had to learn about immigration processes and bring in talented developers from around the world, though he says he tries to hire New Zealanders first and maintains a good relationship with the schools.

"Gaming is a great career but it is a lot of work and requires a lot of thinking outside of the box. It is a little bit less well defined than many careers.

"People should specialise in things like programming and art and sound ... then they will get a chance to see their ideas realised as part of team." There are about 15 different jobs involved in getting an idea like the armour or a new monster into the game, he says.
"Most kids I talk to would love to get into the gaming industry because its something they know and love, says Ninja Kiwi's Harris.

"I don't think we have much in the way of technical deficiency here. There are lot of schools that teach coding and art and games courses and that's great. But what is very hard to teach is the business of the industry."