The Business of Social Games and Casino

Lessons and insights from social casino and gaming M&A activity in Q1

Last quarter saw some interesting deals in the gaming space. Several of the deals, and non-deals, suggest trends that are likely to continue in 2019.

Playtika acquires Wooga rather than another social casino

The most interesting deal was Playtika acquiring Wooga for ~$100MM. The thought-provoking element to me was that Playtika decided to invest outside the social casino space. In the past, acquisitions such as House of Fun, Buffalo Studios, etc., were focused on explanding Playtika’s social casino portfolio. Wooga, however, has no presence in the social casino space, instead is a casual, primarily puzzle, game developer. Playtika’s move suggests one of the following:

Given the stagnant user numbers in social casino, there are better growth opportunities in other genres.
Valuations in casino are too high compared with growth potential in the space.
Most likely, social casino companies will continue to expand (and acquire) in casino but also are maturing to want a more robust and diversified portfolio (consistent with Aristocrat’s acquisition in 2017 of Plarium at the same time it purchased Big Fish).

Zynga spent $560+ million for one title, Empires & Puzzles

Zynga’s $560MM acquisition of 80 percent of Small Giant Games (thus valuing the company at $700MM) shows CEO Frank Gibeau’s strategy of focusing on controlling large, long-term franchises. Small Giant’s core product, Empires & Puzzles, is the 13th highest grossing title on mobile. Empires & Puzzles is Small Giant’s only game live, they are not known to have any other big projects in the pipeline (unlike Natural Motion, which had Dawn of Titans in the works when Zynga acquired it), so the acquisition is to add Empires & Puzzles to Zynga’s list of franchises.

This strategy is consistent with what Gibeau learned at EA, that franchises transform a game company from a hit driven business, with wide revenue fluctuations, to a company with sustainable and predictable growth (and thus higher valuation). He is collecting evergreen franchises to try to turn Zynga into the EA of mobile. These franchises include his purchase of Gram Games, which provided the hypercasual franchise Merge Dragons, and Harpin, which gave him Patience – Solitaire. In addition, acquiring rights to Star Wars, Harry Potter and Game of Thrones for gaming creates additional franchise opportunities. Coupled with existing Zynga franchises Zynga Poker, Words with Friends, CSR Racing and to a lesser extent Hit It Rich!, Wizard of Oz Casino Slots and Farmville, Zynga now has a stable revenue base to build on.

Epic raises $1.25BN at a valuation of $5BN-$6BN, showing the breadth and value of its business

Last October, Epic raised $1.25 billion from KKR, Kleiner Perkins, Vulcan Capital and other blue chip investors at a valuation probably well over $5 billion. What is most impressive about Epic is how it has consistently succeeded in different parts of the game industry. While companies frequently are unable to repeat successes in the gaming space or expand beyond their expertise, Epic seems to do it at ease. Fortnite is only the latest in a string of successes that I find incredibly surprising, given the challenges other companies in the game industry experience. I remember Epic when they were still a small North Carolina company, largely an indie developer. Their odds-defying achievements include (and I am probably forgetting some):

I first learned about Epic from a CNN story (I think 1998) about someone who created a first person shooter (FPS) in their basement that was soon to be released but getting much buzz. At the time, the FPS market was dominated by id Software (Doom) and all the other FPS were fringe products. They might have a loyal following, like Bungee’s Marathon, but nobody challenged id. I did not expect Epic to launch the top FPS but they did. Unreal turned into the biggest FPS for years, making id an afterthought.
With the success of Unreal, Epic decided to license its game engine (creatively branded the Unreal Engine). At the time, the game engine industry was awful. Companies like NDL (Emergent) scraped by to make payroll as no major developers were using third party engines. There was very much a not invented here mentality in the video game industry. Fast forward ten years later and Epic built a game engine company that powers many hit products and is worth hundreds of millions of dollars.
Most successful games are followed with…not another successful game. The video game industry is known as being hit driven and even the strongest companies have had difficulty replicating their big successes. While Epic surprised me by successfully creating a huge franchise with Unreal, it did not seem likely that they could ever replicate their success. Then they launched Gears of War in 2006 and ended up with a bigger franchise than Unreal.
I have written several times about the challenge of traditional gaming companies competing successfully in the free to play space, most recently Nintendo. Not only is much of what a game company learned in the traditional videogame space worthless in free to play gaming, it actually hinders the ability to create a successful F2P product. Outside of acquisition, I did not foresee a traditional company succeeding in F2P. Then Epic, which had built its business around traditional console game (Unreal, Gears, etc), launched a title you may have heard of, Fortnite, which has now generated billions of dollars. Not only did it succeed in F2P, it helped build a new F2P monetization mechanic. Yet again Epic proved me wrong.

This fundraising deal shows Epic is arguably the strongest company in the gaming sector and one that can expand its footprint into other gaming areas. Although I consider the Google/Apple duopoly over mobile gaming unshakeable, same for Steam on PC, it is hard to bet against Epic. Its ability to expand from Unreal to one of the largest core gaming companies also suggest that Fortnite will not be a one-hit wonder but we should anticipate more Epic titles dominating free to play gaming.

What Q4 means for 2019

The big deals in Q4 suggest several M&A trends I expect to see in 2019:

There will be a pick-up in consolidation among social casino companies, but these companies will also look at growing in other game genres.
The major game companies (all genres and all platforms) will focus acquisition efforts on acquiring franchises, not talent.
Epic will continue to defy the odds

Key takeaways

The three most important deals in the gaming space in Q4 2018 were Zynga’s acquisition of Small Giant Games, Playtika’s acquisition of Wooga and a $1.25BN investment in Epic at a valuation of $5BN-$6BN
Playtika’s deal shows that social casino companies are looking outside the space to grow
Zynga’s deal demonstrates the value of franchises is increasing in mobile gaming

What’s next for hypercasual

Last year, hypercasual games were the biggest story in mobile gaming. These games captured more than half of all downloads and saw several exits at high multiples. Five of the top 10 free games in the Google Play and Apple AppStores are hyper-casual while Ubisoft acquired Ketchapp for $100-$200 million, Zynga acquired Gram Games for $250 million and Goldman Sachs invested $200 million into Voodoo.

The space, however, is very reminiscent of the early days of social casino where any developer, small or large, could launch a slots product and then sit back and count the money. From Playtika (Slotomania was not great in the early days) to High 5 to Plumbee to GSN, anyone with a decent social casino app would enjoy high returns. As in any competitive industry, over the last few years the companies that could not create great products lost market share or failed whereas the good companies grew. While the social gaming market has grown every year for the past ten years, there have been winners and losers.

The hypercasual sector is likely develop similarly to social casino. Currently, virtually any developer (even one person) can build and launch (with the help of the many publishers) a profitable hypercasual game, with some earning hundreds of thousands of dollars monthly. You also see new companies flocking to the space daily: traditional developers who see it as easy money, established gaming companies looking for a new revenue stream and small independents.

With the influx of so much supply, the next few years will become much more challenging for companies in the hypercasual space. There will still be huge successes, but there will be equally large failures, especially among players who are not committed or do not understand fully the space. Those that succeed will likely follow the five principles below:

Targeted demographic

”Know your customer” was probably the three words that a caveman etched in stone when writing the first business book. Developers of hypercasual games, however, claim their customers are “everybody” and there is no way to have an intimate customer knowledge if everyone is your customer. Most hypercasual games are thus developed for the lowest common denominator, so anyone can enjoy them.

This strategy works in the early days of a market, where there is so much demand a fun product will see a huge market. Think of Bejeweled in the early Match-3 days or Farmville when invest express games first hit Facebook. Those games were the biggest the category would ever see because there were so few options and thus everyone did play them. It’s the same with hypercasual, you still have a limited number of games.

As markets mature, the next phase is games that appeal to a specific demographic. Games for men 15-25, games for women 45+, games for students, games for artists, etc. Once you have a choice of a game optimized for your demographic, you are much less likely to be interested in mass entertainment. Thus, the next phase of the hypercasual market will see different developers focusing on different customer segments.

Focused on one game mechanic

Currently, as the hypercasual market is not very critical, developers are more interesting in create a suite of games quickly. They will replicate popular games and finish a game in a few months (or weeks), then move onto another entirely different game.

As the market matures, customers will be more discerning and will pick the best game in the category they like. The game industry is traditionally winner take all (or at least winner take most), so the likelihood the twentieth best stacking game will find a sizable audience are slim to none. Just as a slots developer is not going to create the best bingo game, a hypercasual developer is not going to create the best games for each hypercasual mechanic (tapping, swiping, drawing, turning, rising, stacking, merging, etc).

In the future, to succeed in hypercasual, you will need to master a game mechanic and create unique experiences. Rather than creating one game in each-sub-genre, create a great rising/falling game then iterate and keep making it better. To succeed, you will need to add unique features or elements to the genre and take it to the next level (pardon the pun).

Better UIUX

The current crop of hypercasual games often have poor user interfaces and mediocre customer experiences. While they are easy to learn, they are often difficult to understand and thoroughly enjoy. Most, even the successful ones, feel thrown together and the player has to figure it out as they go along. It is not a refined experience. They are the equivalent of cars that do not have handles on the doors or put the mirror control next to the back seat. As the industry evolves, customers will expect a smooth, intuitive interface and user experience.

Additionally, advertising now greatly diminishes the customer experience; with more product options players will be less accepting of so many intrusive ads. The only way to create a great UIUX is to devote the time to user testing and polishing and focus on the customer experience from installation through their lifetime, and this polish will be required to succeed in the future.

More robust revenue model

Now, most hypercasual games primarily generate revenue from ads. They do not have robust monetization models because they do not need it, revenue from ads is sufficient to cover user acquisition costs in successful hypercasual games.

Gram Games has expanded into IAP (in-app purchases) while several have a Freemium model that allows players to remove ads for a price. As the space gets more competitive, so will user acquisition. Simple supply and demand shows that UA costs will increase significantly while organic users will decrease as people will have more options. This phenomenon occurred in the social casino space and almost certainly will be replicated in hypercasual.

To mitigate higher acquisition costs, developers will have to increase LTV. Rather than simply relying on ads, successful developers will personalize monetization for each customer, with some happy to generate ad or affiliate revenue, others paying for IAP and some preferring a Freemium or subscription model.

High quality and tested

In the early days of any business, simply being first to market covers a lot of sins. Think of US automakers through the 1970s or the first Facebook games (which seemed to be in maintenance mode as much as they were live). As these and other industries matured, people placed a premium on reliable products. I have been amazed at how often the current generation of hypercasual games crash and how little time the developers have apparently devoted to QA. Success in 2019 (and beyond) will depend on making games that are reliable and bug-free.

How to win

To succeed in hypercasual in 2019 and beyond, you need to create a game that is best of breed for your target customer. Understand your customer and grow the segment, rather than trying to be everything to everyone. Most importantly, make sure the product is fun and polished.

Key takeaways

In 2018, the hypercasual market was like the early days of the social casino market, put out a decent product and count the money. As companies flock to the hypercasual market, success will be much more challenging in 2019 and beyond.
To succeed, rather than every developer putting out a plethora of different hypercasual games, the successful ones will target a demographic and specialize in a game mechanic that allows them to create a superior experience.
Successful hypercasual developers will also polish products so that they have a professional UIUX and they work flawlessly.

Social Casino Outlook for 2019

As I write virtually every year at this time, I cannot predict the future, nor do I think ANYONE else can. While the Mary Meekers, Elon Musks, Bill Gateses, etc., will often come up with insights of how the economy and world will evolve, if you review their predictions you will find they are wrong as often as they are correct.

December, however, is a useful time to reflect on the key trends from 2018 that are likely to extend into 2019, impacting opportunities for those in the mobile and gaming space.

Two emerging revenue models will become much more important

While in-app purchases (IAP)will continue to drive revenue for social casino and social games, two other revenue sources will grow in importance.

Advertising revenue.While advertising revenue already been the primary revenue source for many social games, it still represents only a small percentage of total social game revenue and many applications. In 2019, I expect advertising to become more important for all apps, particularly social casino. If done correctly, watch to earn videos do not cannibalize IAP revenue from spenders and creates revenue from the 95+ percent who do not monetize. Not only do ads not cannibalize IAP revenue, it often increases it by improving engagement and retention.

Additionally, as customer growth in many social gaming verticals stagnates, particularly social casino, it will be increasingly important to generate additional revenue from existing players. Advertising will provide incremental revenue that complements the other product initiatives and allows companies to cast a wider net in their user acquisition activities.
Subscriptions become another revenue option. While advertising will grow as a revenue source for social casino and social games, subscriptions will make an even greater impact. The subscription model has worked very well in Asia, it is a large part Tencent is valued at over $350 billion, but has not made a big difference in the mobile gaming space in the west (US and Europe). It is also the key to Netflix’s success and arguably Amazon’s (see Amazon Prime). Mobile game companies are finally understanding how to incorporate subscriptions in their business models, rather than just throwing them out there as an additional in-app purchase. The strength of subscriptions throughout the economy suggest it can become as important or even more important than IAPs eventually for social games.

Hypercasual will prove it is not a fad

The biggest development in social gaming in 2018 was the rise of hypercasual games, which now make up more than 50 percent of all mobile downloads. They have also dominated the M&A scene, with Zynga buying Gram Games for $250 million, Goldman Sachs investing $200 million in Voodoo as well as multiple smaller deals. Hypercasual games typically have a single mechanic and a single goal, yet reaching a high score can be very difficult. Effectively the core game loop is very straightforward, do one thing, get rewarded (so you can try again) and keep repeating to get a higher score.

In 2019, I expect the hypercasual segment to mature. By mature, I do not see lower growth but a more professional approach. Companies will no longer succeed by throwing a lot of products at the market. Instead, the industry will fragment, with different companies focusing on specific demographics or gameplay mechanics. I also expect you will see higher product values, while a $25k hypercasual game can be a huge success now, competition will raise the bar. UIUX will improve as will technical stability (today’s hypercasual games remind me of Facebook games from 2012, while games crashing are part of the experience). The increase in quality will eventually drive out the small and independent developers (except for the best and the brightest) but will result in better consumer experiences.

Convergence of Real Money Gaming and Social Casino will accelerate

With both Real Money gaming and social casino becoming increasingly competitive, they will lean more heavily on each other to capture best practices and improve their businesses. Social casinos are great at progression and social mechanics and these features will increasingly find their way into real money gaming, where just adding games no longer will be enough for success. On the social side, with the ability to grow the social slots market seemingly coming to an end, social casinos will take more gaming mechanics (sports betting, live dealer, virtual sports) from real money and adapt them to the social space.

Also, real money online gaming companies will get over their phobia that social gaming is cannibalistic and realize what their land based brethren discovered years ago, the two businesses are complimentary and increase the size of the pie. Social gaming provides the trigger for players to want to play roulette or slots and can also prove a great brand building opportunity. Partnerships similar to MGM’s relationship with Play Studios (where MyVegas and Play Studio’s other games share MGM’s rewards program) will extend into the real money space. As the US real money market emerges, real money operators will be increasingly anxious to partner with social casino companies to access their players.

Social casino consolidation

With user growth slowing in the social casino space, the top companies have to look elsewhere to grow their businesses. They have proven quite adept at increasing revenue from existing users, leading to unbroken annual growth for the past ten years that is likely to continue for at least another few years. But growing revenue per user has its limits, and the owners of the top social casino companies are demanding even more growth. While companies have had mixed (i.e. disappointing) results purchasing small players, the major casinos are driving growth by acquiring the other big boys. Late 2017, Aristocrat purchased Big Fish for about $1 billion. DoubleU also acquired DoubleDown Casino for over $800 million. These two deals have created the number 2 and number 3 social casino companies and I expect this trend to accelerate in 2019 as there will be limited other options for rapid growth.

Return to blogging

One prediction I can be 100 percent confident in is that I will be blogging more in 2019. While the real world got in the way of my blogging in 2018, there are many topics I plan to cover in 2019. I also look forward to any ideas from my friends and followers on topics you would like to see me discuss.

Retrospective

It would be intellectually dishonest if I wrote about my expectations for 2019 without reviewing how my picks for 2018 did. So how did I do last year:

The convergence of micro-segmentation, AI and machine learning to create extreme personalization. In 2018, the social casino industry continued to experience strong growth despite flat user numbers. The key driver for this growth has been better personalization and segmentation, the successful companies are tailoring promotions and sales for individual users. If anything, I expect this trend to accelerate in 2019 as companies actually understand what they are doing with machine learning and AI.
Voice recognition. While it has not had a big impact on the social casino space, voice driven devices continue to gain ground with Google and Apple joining Amazon promoting voice heavily. I expect in 2019 game companies will figure out how to combine the growth of voice with gaming products.
Big change in social casino. I will call this one a slight miss as the space has not evolved dramatically. Stars Group did release the first social casino games, PokerStars Play and Jackpot Poker, with Live Dealer but overall the industry did not change much from 2017. I still expect an innovative company will change the market in 2019.
Devices and platforms will become less important. I will admit to a miss here, the ecosystem still revolves around Apple and Google.
Dual devices. Another slight miss here. Dual devices have become a reality but they have not significantly impacted the game space.
Big players will enter free to play, and fail. This was a big miss and indicative of a sea change but one I am very happy about. After years of social casino and mobile gaming overall being the shiny thing and companies make stupid investments to get into the space, the business has rationalized. Companies are now looking at the competitive situation and financials before moving into the space, leading to a much more rational environment.
Privacy. BOOM, did I get this one correct. As someone who personally does not worry too much about my online privacy, privacy became the story of 2018. While privacy concerns will not go away in 2019, I think the concerns will ebb as people understand how to control what they share. The days of aggressively compiling and sharing user data, however, are gone and those companies that still act in a rogue way put their whole business at risk.

See you in 2019, have a great year.

Key takeaways

2019 should see the emergence of two additional revenue streams for social casino and social games, subscriptions and advertising.
Hypercasual will prove to have legs, remaining a dominant genre in gaming
Real money gaming will borrow more from social casino in 2019 while social casino operators will try game mechanics popular in real money.

How to build a Leaderboard that actually works and drives KPIs

Leaderboards are a common feature in games but developers are often surprised because they are ineffectual or quickly lose impact. The problem is not in the underlying value of leaderboards but in how they are often designed. A recent blog post by Omar Ganai and Steven Ledbetter, How to Motivate with Leaderboards, does a great job of presenting the underlying psychology driving leaderboards and best practices.

What makes leaderboards work

The key principle behind leaderboards is that people want to win and winning improves status. What is often neglected, however, is that some players do not want to win, they want to avoid losing. The latter is important as players who want to avoid losing perform worse when competing. Competition is good for motivation and achievement only when it helps users feel competent. You need to design your leaderboards so it does not make your players feel incompetent.

Ganai and Ledbetter point out that self-determination theory shows people seek and engage in undertakings that fulfill three basic needs. Thus, a well designed leaderboard is consistent with these three needs:

Competence. The emotion a player feels when they successfully complete a challenging goal. The opposite feeling is ineffective or helpless.
Relatedness. The feeling a player has when they are understood and liked by other players. The opposite feeling is rejection and disconnection.
Autonomy. The satisfaction a player gets resulting from a personal commitment and choice. The opposite here is coercion and manipulation.

An effective leaderboard will combine competence, relatedness and autonomy while not making the player feel helpless, disconnected or manipulated.

Best practices in designing leaderboards

To design a leaderboard that drives behavior and incorporates the three needs above, the authors point to four “ingredients”:

Goal-setting.Goal-setting involves giving or guiding a user toward a goal, and has become recommended as an effective building block for behavior change. The goal of most leaderboards implicitly is to be number one. You need to go beyond this implicit goal and guide your player toward a goal. Effective goals include having fun, learning and showing autonomy. They also recommend nesting intrinsic goals with the extrinsic goals, like making yourself a better poker player by competing on the leaderboard. Finally, an effective technique nests individual goals inside team goals, so the leaderboard is more about playing with others than being number one.

There are also some goals you should avoid as they will prove demotivating. These goals include meaningless rewards (get more worthless points by finishing number one), emphasizing outcomes players cannot control and focusing on pride (i.e. you should win because only the smartest win).
Feedback. A strong feedback mechanic can promote feelings of mastery and competence. You should provide feedback for players on how they are progressing tied to the above goals they have set. The authors also suggest proving juicy feedback, “juicy feedback is varied, unexpectedly excessive sensual positive feedback on small user actions and achievements.”
Social comparison. Social comparison helps players understand how they are doing compared to others. Rankings are inherently a form of social comparison. The trick is doing it right because social comparison can make people feel ineffective and unrelated. People tend to compare themselves with people above them so it is easy for them to then feel incompetent.

There are some techniques to mitigate the risks in social comparison. First, you can tell players they have achieved a standard, even if they did not finish first. Second, explain why players got the score they did and explain how they can do better. Third, give players a choice of playing more or stopping (putting them in control). Finally, acknowledge losing is not fun. If you keep players focused on improving and playing well, they are likely to stay engaged. Also, if they lose as part of a team, the impact of the loss will not be as great, thus it is critical to emphasize connections and relationships.
Social rewards. Just as Facebook uses the Like button, let other players reward a player for their activity. You can achieve this impact by letting them follow the player or just sending a virtual high-five. It also helps to make the rewards surprising, as predictable rewards undermine intrinsic motivation.

What to do

Rather than avoiding leaderboards, build them but build them correctly. If you employ a lazy approach and just rank players 1 to one million, the leaderboard will not work well and impact will diminish over time. If you take the time, however, to set up effective goal setting, provide good feedback, employ social comparison and have strong social rewards, you will have a winning feature and move up the AppStore leaderboard.

Key takeaways

While leaderboards are a central feature in many games, for them to be effective you must build them properly or else they will be ineffective.
A key to good design is keeping players from feeling incompetent or inferior.
The other critical components of powerful leaderboards are clear goals, a strong feedback loop, social comparison and rewards that are social.

Key takeaways for game companies from Mary Meeker’s 2018 Internet Trends

Mary Meeker recently released her 2018 Internet Trends (entire presentation below) and several of these trends are particularly important for gaming companies (both real money and social). For those of you not familiar with Meeker, she was formerly one of the top tech analysts on Wall Street and is now a leading VC (Venture Capitalist) with Kleiner Perkins. Her annual Internet Trends report has become required reading and although I hate predictions (they are about as accurate as your local weather man) she does a good job of identifying underlying developments that change the way business operates.

The trends that are most important to companies are:

Smartphone shipments are flat, the base is not growing, while growth in the number of Internet users has fallen to less than 5%. This fact means for game companies growth will come from increasing the amount of time existing people spend in games and, in particular, your games. It also means you need to monetize these existing users better.
Easy to use products are becoming pervasive, and Meeker points to Messaging (Telegram), Commerce (Square Cash) and Media (Spotify). This development is consistent with the growth of hypercasual in the game space.
Messaging (WhatsApp, WeChat, FB Messenger, etc.) is growing at an incredible rate. This trend suggests CRM, acquisition, support and games on messaging platforms will become incredibly important.
Voice technology is lifting off, suggesting voice will be an increasingly important element of games.
Personalization plus collective data is creating better consumer experiences. Game companies need to continue making experiences more personal for players without crossing over concerns about privacy. This can be done by keeping data cumulative, rather than personal.
Social media discovery is driving purchases. Discovery of products is expanding from Google and Amazon to Facebook and Instagram, which should reinforce their importance for game marketing.
In performance based marketing channels, competition for top placement has reduced ROIs and increased the importance of improving LTV.
Shopping and entertainment is converging, with one example people using YouTube before making a purchase. Game companies need to leverage this by making their games purchase ready on entertainment shopping destinations.
New retail, a phrase pioneered by Jack Ma, puts the right product in front of the right customers at the right time. This translates to how we should present in-app purchases in games, right package to the right player at the right time.
Data is an increasingly important driver of customer satisfaction. You should look to leverage this data so the player experience is tied to their interests.

All of these trends should be considered as your green light and grow your games. Rather than building for today, you should build for when you launch the product and years in the future when players will still be playing. I am sure there are other trends you may find useful and recommend you review the full presentation.

The Complete Mary Meeker Internet Trends 2018 presentation:

INTERNET-TRENDS-REPORT-2018

Is Hypercasual worth the $450 million that Zynga and Goldman Sachs just spent

In February, I wrote that the next big casual gaming phenomenon would be hypercasual, but even I did not expect the genre to take off as quickly as it did. Last week, Goldman Sachs invested about $200 million in French hypercasual game company Voodoo. The next day, Zynga announced it acquired hypercasual game company Gram Games for $250+ million. These deals follow Zynga’s acquisitions of Harpin and Peak Games’ card business for $142 million. With about $600 million in deal, money talks, and money is saying hypercasual is for real.

What are hypercasual games?

Hypercasual games have a single mechanic and a single goal, so they are very easy to learn. Mastering them, however, is almost impossible, as the games get more challenging as you try to reach a high score. Effectively the core game loop is very straightforward, do one thing, get rewarded (so you can try again) and keep repeating to get a higher score.

Are hypercasual games here to stay?

As I said in February, unlike fads, hypercasual taps into the key to product success, simplicity. Most successful products are not crammed with features that generate a lot of checkmarks on a competitive analysis. Instead, products with very few options generate tremendous value. Uber is valued at tens of billions and when you open the app you are asked where you want to go, and then you are given 3 or 4 options to get there. You are not picking the color of the car that collects you, the height of the driver, what route they will take, etc., which is all handled by Uber. Apple is another great example. The iPhone and iPad have virtually no extraneous features or options.

The science behind simplicity is neuroscience, particularly related to cognitive load. Cognitive load is how much info people are processing at any one time. A simple user experience minimizes cognitive load, thus not creating too much strain and making enjoyment more likely.

Many people often do not realize it is much harder to make a simple product, just as it is harder to create a five slide presentation than a 50 slide one. Keeping a product simple means you must decide what features to exclude, so you need to understand your customer and what you are trying to achieve. Given the market’s feedback to Gram and Voodoo last week, the effort is worthwhile.

Do opportunities remain in hypercasual?

Often when there is a spate of deals it means the end of bubble, or at least the end for small developers, but that is not the case with hypercasual. First, hypercasual is not really a genre, but more of a game making philosophy. It is about creating games with a straightforward and simple mechanic. There is no reason to believe this philosophy cannot be extended to every genre, from simple car racing games to hypercasual social casino titles. The opportunities for hypercasual are as bright now as the opportunities for free to play were after Farmville and Who Has the Biggest Brain.

What should you do

<pThe key is to learn from hypercasual rather than try to imitate what is already in the market. If you have a successful game, see how you can simplify it. What can you do to reduce players’ cognitive load. If you are looking for new product opportunities, identify what player segments currently do not have good hypercasual options and build products for these players. This can be an extension of your current customers or can create games for customers where the competition is irrelevant. By focusing on simple yet repeatable fun, there is a great opportunity in the game industry.

Key takeaways

Hypercasual it the hottest sector in the gaming space, with two deals valued at $450+ million announced last week.
Hypercasual games have a single mechanic and a single goal, making them easy to learn and play but hard to master
The key is simplicity, and the opportunity is to make your own games simpler or create products for an existing or new market that leverages simple mechanics.

How to add features that your customers actually want

One of the challenges successful game developers face is what features to add to the product. With a successful game, you are not in panic mode but you also must deal with the reality that in a free-to-play product you need to keep players engaged or you will become the next Trivia Crack. The fundamental issue is adding features that are useful and fun for your existing players, that enhances their enjoyment of your game.

Keys to adding successful features

There is an excellent post by Casey Winters that highlights three keys to building features that enhance a successful product:

The new feature must retain players. The feature itself retains the player and you do not have to drive players artificially to it from other parts of the game. For example, if you add Blackjack to your social slots application, it works if players engage with Blackjack and then come back to play it regularly. You can use the same retention metrics (D1, D7, D30 and CURR) to assess if a feature is working as you do to look at an app.
The feature can drive its own use at scale, you do not need to create a plan to build adaption. To use the Blackjack example, if you integrate it in your lobby players will try it without forcing you to run specific campaigns.
The feature must improve KPIs of your core product. To use the blackjack example, it needs to improve either your overall retention or monetization.

The last point is critical to success. I used to be at a game company where product managers regularly presented analysis of their features and bragged about the great performance of the feature. Overall, though, the company’s games continued to lose players (DAU) and monetization per player (ARPDAU) was also decreasing. While the features appeared to perform great in a Powerpoint, they actually were costing the company money because they drove lower overall performance.

How to add features that improve LTV

While you may infer from the previous sections that you should only integrate features that appeal to everyone, the opportunity is to segment your players and build features to appeal to target segments. If you limit yourself to only adding features that are accretive to everyone, you have a small pool to pull from.

Given you already have a successful game, by definition your players are already enjoying your product. While there may be opportunities to add features everyone enjoys, you have a bigger set to choose from if you also identify features that may appeal to a subset of your players. This is particularly powerful because this feature can appeal to a segment that is likely to churn and keep them engaged or a segment that does not monetize and prompts them to spend. Conversely, it could only appeal to the ½ of 1 percent that are VIPs but given how much they spend could have a great impact on revenue

If you are building a feature that appeals to a specific segment, then you must be careful not to violate the third key to creating a successful feature, you do not want it to impact negatively overall KPIs. The way to achieve this balance is by positioning or displaying the feature only to the target audience. This can be done as an AB test, where you only surface the feature to specific players. It can be achieved through targeted CRM (in-game banners, push notifications, email, etc.) that is only sent to players in the target group. Surfacing a different UIUX to players who you want to engage with the feature can also accomplish the same goal. The key is maximizing how much the target audience uses the feature and minimizes how much other players see it.

Using the blackjack example yet again, we can illustrate how it could help a social casino game. Overall, slots monetizes much better than blackjack. It is a faster game and many blackjack players will play in a way so they lose very few chips. If you added blackjack to a successful slots game and promoted it across your player base, you probably would get great engagement as a lot of people love blackjack. It would, however, drive some players from your slots to blackjack where they are likely to monetize at a lower rate. If you were looking at how it would impact overall performance, then, you would say blackjack is a failure.

If, however, the blackjack game was not in the main lobby but embedded deeper in the game and you then drove players who were likely to churn (maybe you have a nice machine learning algorithm that can identify these players) to blackjack, it would engage some of these players. They would then come back regularly to play and rather than churn some would monetize. Thus, you would have a successful feature that helps the overall product.

Add features that help your game

Although it sounds obvious, when building your product roadmap you need to dive deeply into each potential feature and identify how it will improve KPIs of a target segment. Effectively, how will it solve a problem for you or your player (user churning, user not spending, etc.). The bigger the problem, the higher the priority.

Key takeaways

The key to adding new features to a successful product is ensure the feature itself retains players, can generate its own use and helps the overall KPIs of your game.
You must avoid features that seem to perform well when reviewed in a vacuum but actually hurt the KPIs of the game.
You can achieve launching a successful feature by targeting your players and then only showing or promoting the feature to players who will benefit from it.

How to use nano-marketing to grow your game or app

One of the constant challenges developers face is user acquisition, as costs seem to increase much faster than revenue per user. This issue is not limited to game developers as more companies see digital and performance marketing as their premium-marketing channel, the competition for eyeballs drives up costs. It is a constant challenge for everyone in growth or marketing to understand the newest techniques for finding the best and most effective channels. No longer can any executive run television ads and then hide behind ambiguous results. The issue is magnified when trying to reach millennials, who spend most of their time (free time or not) in the digital world.

A recent article in the MIT Sloan Management Review, The Right Way to Market to Millennials by Jay Sinha and Thomas Fung, does a great job of presenting the idea of nano-marketing, one of the most promising new growth mechanics. Nano-marketing is using micro-influencers to market your product or build your brand. This approach is evolving into one of the most effective forms of advertising.

Who and what are micro-influencers

While we are all familiar with the personalities who have huge social media followings, the Kim Kardashians or Gwyneth Paltrows, the people with smaller followings are proving most effective. Micro-influencers have between 1,000 and 100,000 followers. Although their following is relatively small (Kim Kardashian has over 100 million followers), they have a category specific following and much more engaged audience. Micro-influencers also build more personal relationships with their fans, as they can engage with them one-on-one. They are also frequently considered experts in their fields (something you may not say about a Kardashian).

People also often consider micro-influencers more credible. When LeBron James tweets his support of a shoe, most people assume he is getting paid for that tweet. Conversely, a micro-influencer who promotes your game will believe he is a fan and give him the benefit of the doubt. Even if people assume the micro-influencer was paid, they also assume that the personality has a true affinity for the product.

Not only can micro-influencers drive sales, but they can contribute to your brand building. Sinha and Fung discuss how Coca-Cola leverages micro-influencers to develop compelling brand narratives. They also discuss how start-ups, such as sock retailer Stance Inc., have used micro-influencers to grow into major brands.

How to leverage micro-influencers

Working with micro-influencers is different than working with celebrities or other marketing channels, it also requires a personal approach. There are several keys to building a successful micro-influencer program, with may of them highlighted by Sinha and Fung as well as a VentureBeat post on how micro-influencers are essential. The elements of a successful program include:

Use micro-influencers to target highly segmented audiences. This channel is not the right option to reach millions at once. Instead, micro-influencers are a great way to amplify a feature that largely appeals to a niche or helps you recruit a specialized segment.
Understand who you want to reach. There are millions of micro-influencers, you need to understand exactly who you want to target and the goal(s) of your campaign. Once you have a clear understanding of your target, you can then find the micro-influencers who reach that audience.
Look at micro-influencer work as a long-term investment. Build a long-term relationship with the most appropriate micro-influencers, so they can continuously weave your brand into their stories.
Effective micro-influencers integrate their personal narratives with the brands they endorse. Rather than trying to foist a message on the micro-influencers, use their story-telling ability to create a compelling message.
Avoid heavy-handed or aggressive push-marketing and instead have the micro-influencer give their audience a gentle nudge.
Before approaching micro-influencers, follow and engage with them. As VentureBeat writes, “this helps you better understand their personality and interests so you can determine their fit with your brand. It also helps you approach them with a more personal request, which is more likely to get a positive response.”
Allow the micro-influencer to create compelling content rather than directing them. As Sinha and Fung write, “young, creative micro-influencers are good at producing innovative content that features the brands in an interesting way. They know their audience would want to be educated about new offerings, while being entertained at the same time.”

By following these steps, you can build an effective micro-influencer program that will support your marketing initiatives.

Key takeaways

Marketing continues to evolve quickly, with it increasingly difficult and important to find effective advertising channels. Nano marketing is one of the most promising of these channels.
Nano marketing entails working with micro-influencers, people with between 1,000 and 100,000 followers, to promote your brand or products.
Micro-influencers are particularly effective because consumers consider them more genuine and they have much greater focus than celebrities who have huge followings.

Finally, a new approach to monetization in free-to-play games

I am excited that the latest gaming phenomenon, Fortnite, is not only a hit game because of its content but also because it has brought a unique monetization mechanic to the mass market. For over ten years, people have been optimizing the free-to-play model, improving monetization primarily through in-app purchases. We have all talked about finding new or additional revenue mechanics but there have been no dramatic changes. Many companies have gotten better at getting players to pay more (or more players to pay) but nobody had changed the paradigm. Yet, as I have written many times, the real opportunity for growth is to find a blue ocean, do something your competitors are not.

Why Epic

Epic Games has overcome this challenge with Fortnite, creating a monetization mechanic previously seen only in niche titles. Initially, I have to admit I was particularly surprised this innovation came from Epic, as I frequently wrote that traditional game companies ( most recently Nintendo) could not succeed in the mobile space because they were too wedded to the old monetization model of discrete purchases. Epic is definitely a company that has benefitted mightily from the old model, from Unreal to Gears of War to their other hits, they have made billions of dollars from selling great games in pretty boxes. Now, though, they have disrupted the free-to-play space.

In retrospect, it is not that surprising that innovation did not come from a mobile game company. Just as traditional game companies could not embrace the free-to-play model fully, the “what are now” traditional free-to-play company cannot discard their in-app purchase (IAP) optimization strategy fully. Thus, Epic, which did not have the IAP optimization baggage, could look holistically at the opportunity and come up with a new approach.

What Epic did

Fortnite’s Battle Pass system is a unique approach to drive monetization that is showing great results. According to a recent article by Adam Telfer and Joseph Kim, Fortnite has generated $126 million in revenue, including $5.3 million mobile revenue in its first 10 days.

The Battle Pass is a mechanic that avoids pay to win (spending to get a competitive advantage over other players) but finds a way to get players to pay significantly for cosmetic benefits. Traditional thinking in free-to-play is that cosmetic accessories (avatars, skins, emotes, etc.) can only generate limited incremental revenue. With Fortnite, however, they have made the cosmetics the only way to show success and progression, so players are motivated to acquire (and show off) more and better items, and subsequently monetize to get the great cosmetics.

Battle Passes are largely a challenges mechanic, and even in traditional IAP games challenges are a proven monetization mechanic. They are a great way to drive player activity, guide them to specific activities and provide a sense of completion. It’s not surprising that the evolution from challenge systems to Battle Passes yields a new monetization mechanic.

The first key element is that there is not a leveling or stats system. Thus, you cannot show others how skilled you are by pointing out you are level 5,274. Instead, status is conveyed by how great your cosmetics are. The more, and better, cosmetics, implicitly the better Fortnite player you are.

The second key element is the Battle Pass, a series of challenges to earn cosmetics. The Battle Pass is a series of challenges with each one providing cosmetic rewards.

The third key to the Battle Pass is offering multiple paths. In addition to the free path is a premium path that provides significantly more rewards. Epic is also very loose in providing rewards for the premium path, players feel they are getting an incredible value.

Fourth, each Battle Pass only lasts a season. Each of these seasons has its own cosmetics, so if you miss a season you never get them. This creates an incentive for the player to play each Battle Pass so they do not miss any content forever.

Fifth, and a key difference with traditional IAP models, players can pay to skip ahead in tiers. Since tiers are not levels, players are not actually paying to win anything, just to get to higher value cosmetics.

Sixth, if you fail at a challenge, you need to start the entire path again unless you monetize. Critically, if you die during a challenge (which happens to most players of Fortnite), you have to start at the beginning of the challenge. Thus, there is a strong incentive not to lose your progress (and plays to people’s loss aversion). People do not want to start from zero repeatedly.

How you can use Battle Passes

Battle passes effectively change monetization from the core game loop to the challenge mechanic. By eliminating levels and points, you can move monetization from interrupting gameplay to super-charging it. Challenges work in many genres but the Battle Pass takes it to the next level. Zynga credits much of its current success with Zynga Poker to challenges. Virtually any PvP game, and even some single player games, can integrate a challenge system. The key to success though will be recentering monetization on this system rather than the traditional IAP model, making it the source of showing progression and providing a VIP path.

Key takeaways

Fortnite is one of the biggest gaming successes ever, and it is being driven by a monetization system previously not seen in mass market free-to-play games, Battle Passes.
Battle Passes allow players to earn cosmetic rewards, which have a high value because they are the only way players can show progress in Fortnite.
By centering your monetization on a challenge system, you can develop a similar mechanic as Battle Passes.

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