My Definition of Beta

In the social game industry, financial beta is often overlooked, especially when crafting an international strategy. In financial circles, beta is a measurement of risk for stocks and other investments in relation to the market. This is how closely the financial instruments performance is correlated with the overall market performance.

When determining a global strategy, social game companies also should look at beta. To avoid unnecessary revenue volatility, it is important to launch and run games in markets that are not closely correlated with their core markets.

This strategy allows companies to deal with macro-economic jolts and to reduce overall risk. If a developer primarily publishes games in markets that are highly correlated with its core market (say Facebook US) major jolts (such as the economic crisis in September 2008 or 9/11) can be difficult to manage, or even ruin, a smaller company. Such shocks can create cash flow issues, putting pressure on debt service, payroll, marketing, etc. In such cases, a company might have to scale back its growth, raise new financing on unfavorable terms or, in a worst case, discontinue operations.

By having an international strategy that proactively lowers its beta, social gaming companies can more easily weather such a shock and potentially even use it to build its competitive position. If there is a major shock in its core market, cash flow from non-correlated international markets can be used to continue global operations and pay its bills. Moreover, while competitors might be scrambling to deal with a shock to the system, the well-diversified company can use its international revenue to gain market share while its competitors are weakened.

As I have said before in this blog, few social game companies actually look beyond the brightest object (or the most recent email) when deciding where to expand. For the companies—and the industry—to continue their great expansion, they should take a more sophisticated approach to building their international business.

Author: Lloyd Melnick

I am GM of Chumba at VGW, where I lead the Chumba Casino team. Previously, I was Director of StarsPlay, the social gaming vertical for the Stars Group. I was also Sr Dir at Zynga's social casino (including Hit It Rich! slots, Zynga Poker and our mobile games), where I led VIP CRM efforts and arranged licensing deals. I have been a central part of the senior management team (CCO, GM and CGO) at three exits (Merscom/Playdom, Playdom/Disney and Spooky Cool/Zynga) worth over $700 million.

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