There seems to be growing momentum behind the thinking that social gaming is just a fad and that the industry will shrink dramatically in the near-term. While I do agree that the Zynga IPO will effect valuations throughout the ecosystem (see my two blog posts on this issue, Zynga Effect and Change in Zynga’s Valuation), I also feel that the social game industry has by far the strongest fundamentals of any part of the computer and video game industry (and possibly the broader entertainment business).
My optimism (and everyone who knows me will agree that my and optimism are usually not in the same sentence out of my mouth) is grounded in the numbers. For better or worse, I have now been in the game industry over eighteen years and have seen firsthand how the core gaming space, traditional mobile and casual behave. The opportunity, even for a second or third tier company in the social space is still orders of magnitude greater than anywhere else in the game industry.
Second and Third Tier Social Games Still Generate Strong Revenue
As always, I would like to use numbers to substantiate my claim about the opportunities in social gaming. I analyzed the mid-50 games on AppData, that is games that rank from number 50 in terms of DAU (daily active users) to number 100. This market segment is not dominated by the highly capitalized social game companies who have huge performance marketing budgets, allowing them to “buy” their way into the top 20. Let’s start with game ranked 50 among apps, which currently has a DAU of 960,000. For the purpose of this analysis, I will assume an ARPDAU (average revenue per daily active user) of $0.05. This number is on the low side for a successful social game (and I would consider any game in the top-100 successful). At these numbers, game number 50 would generate $48,000/day, $336,000/week and $1,440,000/month. Even game number 100 has 570,000 DAU. With the same ARPDAU assumption, we are looking at $28,500/day, $199,500/week and $855,000/month in revenue.
Still Opportunities for New Companies
Reinforcing this opportunity is the fluidity in the top-5 and top-10 among social game publishers. I do not have the AppData numbers for last December, but I know two of the current top four social game companies did not have a major presence. Wooga (currently number 3) was just starting to have its presence felt outside of Europe and King.com did not release its first Facebook game until earlier this year.
Much stronger than other areas of the game industry
If you compare those numbers above with other parts of the gaming ecosystem, it becomes very clear that social gaming is probably the best opportunity for a mid-tier company. In the casual game space, a game that ranks 50-100 won’t generate $336,000 over its life, let alone in a week. The mobile app market (discreet purchases rather than social games) is even worse, with an app that doesn’t make into the top-10 (maybe top 20) often not generating even $10,000 in revenue. Finally, the traditional (console and core PC) game market is suffering even worse dynamic. Other than the few top titles marketed by EA and Activision/Blizzard (or an existing franchise), most other games do not recoup development costs. The problems in the traditional gaming space are encapsulated by THQ’s decision to pull out of the DS market; while THQ was long-considered the only third party publisher truly successful on Nintendo platforms. So I feel it is ironic when people from these other game sectors try to knock down social gaming even when it is out-performing almost everything else game related.
It is not easy
I do not want readers to come away from this post thinking that social gaming is a money machine and there is not an imminent rationalization coming. First, it is not easy hitting the top-100. There are many, many games released worldwide every week, so to hit the top-100 requires a compelling title, strong marketing but most importantly effective monetization, virality and engagement loops; and that is not easy. Development costs are also much higher than the casual or mobile app space (though a fraction of console) and the on-going costs of a successful game have a huge impact on profitability. You just have to look at all the companies that have tried to go into social and failed (topic of a later post).
I wanted to post today so people realize that the underlying economics of the social game space are still probably the most attractive in the gaming space. There will probably be more gloom and doom as Zynga stock moves each day (and inevitably has some bad days) but that does not disguise the fact that the economics of social gaming still work.
The Business of Social Games and Casino 
Always look forward to your spot on comments and posts Lloyd!
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Well written, informative. You state “Development costs are also much higher than the casual or mobile app space”. True but I suggest that is largely due to a lack of imagination and innovation – and worse – closed minds.
Indeed, the problem with the industry across the board is it still operates like the movie industry of the 1920’s. Little wonder a company like Zinga could do so well so quickly – it wasn’t hard – they simply looked and listened – and moved. Social gaming has a long way to go – along with all gaming, It is all at the toddler stage.
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