Next Wednesday at 4:00 pm, I will be speaking at Casual Connect about “Winning the War: How to Build a Great Social Gaming Company.” I wanted to post a preview of that presentation (I will post the actual presentation after the show) and highlight some key points.
Success in social games
The first part of the presentation will focus on how difficult the social games space has become, how different stakeholders view success and how to fund your business. Most importantly, social gaming is not the easy money-machine some in the press and Wall Street make it out to be. Less than 25 percent of games break even or make a profit. Let me repeat that figure in a different way: less than one out of four games breaks even. Although everyone thinks they are different and they are entirely confident their game will be successful, the reality is even if you do things perfectly the odds are against you. You see similar numbers from the big social game companies (Playdom, EA, DeNA), so to think you are immune from the odds is to deny reality. Thus, you need to build your business with this reality in mind.
As you are building your business, you also need to understand what you are building towards, what constitutes a success. There are really three key elements for success, and they build on each other. First is survival, you need to have enough resources and runway to operate your business and give your products a chance to succeed. Second is profitability, any good business needs to make money (to survive, see previous point). If you are not making money, you probably will not have a success you can look back at in 5-10 years. Finally, the holy grail for most social game companies is an exit; true success to many entrepreneurs is either a public offering or selling their company.
Potential and existing investors also have a clear picture of what constitutes a success. It is having an exit and the return on their investment. Institutional investors (VC, PE and most Angels) make investment for a large payoff. This payoff comes from an exit, they are not interested in a company that may be profitable but doesn’t give them a benefit. Moreover, the return is a key measure of success. Just having an exit is not enough. Given that they are expecting the majority of their investments to fail, the ones that succeed need to return a high multiple of what was initially invested. This last point is very important to keep in mind when raising capital, as you do not want to raise so much money that it makes most exit opportunities unattractive to your investors.
How to succeed
Although success is not easy in an industry where 75 percent of the products fail, there are ways to improve the odds. First, you need to build games with the goal of optimizing lifetime value (LTV). This consists of four elements:
- Monetization. Companies need to incorporate monetization into the game’s design from day one. A successful social game will have monetization that flows with the gameplay and appeals to consumers at appropriate time.
- Engagement. It sounds trite, but the game has to be fun. If a player is not enjoying themselves, they will leave and the game will fail.
- Retention. Related to the above point, the game has to bring players back again and again. In practice, I find this is the area that most often leads to failure in a social game. Someone will play once or twice, may enjoy themselves, but will never come back. The key to success is getting into the player’s head, so they are thinking about the game when they are not playing.
- Virality. Virality has always been an important part of social games (hence the word social), but with the cost of advertising on a perpetually upward spiral, it is even more important. Viral hooks need to be incorporated from the onset and players need a reason to share the experience with their friends.
The Melnick Conundrum
The final part of my presentation at Casual Connect will focus on what I refer to as the Melnick Conundrum, the fact that two key determinants of success are at odds with each other: Focus and Diversification. Given the competitive nature of the social game market, it is impossible to succeed without sufficient focus. You are competing with literally billion dollar companies whose singular goal is to make successful social games. To think that a ten-or twenty-person company can create a great social game when they are also creating console titles, casual download games or browser games is delusional, yet many try.
In 2009, at my first game company, Merscom, we decided to focus on social gaming and to end our casual download business even though it was quite profitable and we had a string of top-five games. The end result was we ended up selling our company to Playdom about eight months later (You can decide if we made the right choice).
The counter to the need to focus is the need to diversify, hence the Melnick Conundrum. If a game only has at best a 25 percent chance to succeed (I don’t believe you can fight the law of averages) and you are focused on creating one great game, if the 75 percent wins you have nothing left. You need to look at your portfolio more as a mutual fund manager, balancing risk and return by diversifying between genres, platforms, schedule, etc.
And that is the way I suggest you address the Melnick Conundrum. Keep your focus on social games that leverage the free-to-play model but either develop or publish multiple titles that are not closely correlated to reduce the risk.
Again, I will be going into more depth on this topic on Wednesday at 4:00 pm at Casual Connect, so if you can make it I would love to have you there.