While projections for the social casino (free to play slots and poker) industry continue to be overwhelmingly positive and the industry has never seen a revenue decline on a sequential basis, there is an ominous KPI that nobody is discussing. While the industry continues to grow, that growth is from better monetization, not bringing new customers into the market. This fact potentially puts a ceiling on potential growth or worse portends to a future decline.
The good news
Earlier this year, Adam Krejcik, the Principal at Eilers & Krejcik Gaming, presented encouraging growth metrics at the Casual Connect conference. The industry has grown from $1.3 billion in 2012 to $4.5 billion in 2017, representing 28 percent annual growth. Moreover, this growth was consistent, with the industry never suffering a decline on a sequential basis.
Eilers and virtually every other industry analyst expects this growth to continue at least through 2022. According to Krejcik, social casino should continue to grow at an annual rate of 7 percent, reaching $6.5 billion in 2022. This growth would mean ten years of uninterrupted growth, which unless you are Amazon is something to be quite happy about.
If that was the end of the story, we could all be content continuing to invest in social casino with both our dollars and our time. The future, however, is much more uncertain.
Why you should be worried
Krejcik’s presentation, along with most of the other industry analysis, points to improved monetization as the growth driver. Companies, including those in the space for 5+ years, are generating high profits by monetizing their players better: more players are converting (going from a free to paying player) and those spending are spending more. Most analysts (and optimists) project the continued growth to 2022 from higher conversion rates. Krejcik argues that social casino has about a 3 percent conversion rate, while MMOs (massively multi-player games) in Asia enjoy conversion rates from 7-15 percent.
My concern is, however, what if conversion and average revenue per paying user (ARPPU) has peaked or is near its peak. Without new customers, the industry has no room to grow. While Krejcik compared social casino with Asian MMOs, Asian MMOs are largely an outlier. Social casino games monetize much better than virtually any other free to play genre targeting a recreational audience, the conversion and ARPPU in social casino games is already much higher than puzzle games, match-3s, endless runners and the other categories that target recreational players. Even the MMO space outside of Asia does not experience the same KPIs as Asian MMOs do, so we are comparing with different users as well as different genres.
If revenue per user does not increase significantly and the industry does not attract new customers, the overall space will shrink rather than increase. Even the most successful businesses will churn some users as they age and find alternative forms of entertainment. Moreover, these will probably be the more casual players who the industry needs to convert; the hard-core players who spend regularly are already invested and less likely to leave. With a churning user base, monetization will need to stay ahead of the churn just to maintain the status quo, making industry growth more challenging.
Even the current improvements in monetization KPIs may be somewhat illusory. As recreational players leave the space (thus creating the flat user numbers), only the monetizing, aka invested, players are left. Having looked at many companies as potential acquisition candidates, you often see games that are in decline and past there prime with very high per player KPIs. This phenomenon is driven by these games being left only with the committed players. Thus, if the social casino space is even in a small part mirroring the phenomenon of individual games, the growth in monetization KPIs may actually portend that the industry is stagnant.
You can liken the situation to the electric car industry. Tesla’s valuation is not based on being able to sell cars for more money. It is based on more people wanting electric cars, even at a lower cost. It is hard to think of a growth industry where the growth is based on getting customers to spend more rather than attracting more customers. Those that are focused on getting the most from existing customers are cash cows, and part of the strategy when dealing with cash cows is to minimize investment.
How it ends
I am not a prognosticator and I am not going to claim I can see into the future. Based on the above analysis, there are three possible outcomes for the social casino industry, you can predict how likely each outcome is (but do not put a higher expectation on the one you want just because you want it):
- Monetization continues to grow. Many smart analysts and corporate development experts see strong additional opportunities to increase monetization. If social casino companies can convert players at the rate of Asian’s MMO, that could drive all the growth projected for the next five years.
- There is a disruption. Social casino games have not changed much in the last five years and games like Slotomania, Doubledown Casino and Zynga Poker (all almost or more then ten years old) maintain top positions in the game charts. If you look at screenshots of these games when they launched, other than transitioning to mobile, the games have not changed much. That implies there is a Blue Ocean opportunity, which by definition turns non-customers of the industry into customers. Expanding the industry could help both the new entrant and existing companies. It may come from new game mechanics or formats, a new business model or something we have not even thought of.
- The industry begins to contract. It is hard to grow an industry if you are not growing the user base. If the monetization per player approaches its ceiling faster than expected and players naturally churn, the industry will start to shrink.
- The social casino industry has experienced uninterrupted growth for five years and analysts project growth for the next five years.
- Virtually all of the projected growth comes from monetizing current customers better because the industry is failing to grow its user base. This is highly risky, as very few industries grow significantly due primarily to better monetization, they need new customers.
- There are three paths the social casino space can take. First, it can continue grow due to higher per player monetization. Second, there may be a disruption, a new game mechanic or business model, that brings non-customers into the industry and fuels growth. Third, the space may start shrinking if monetization projections are overly optimistic and existing players churn.