January 2019 – The Business of Social Games and Casino

Convergence of social and real money casino goes both ways

When I listed my expectations for 2019, the one that generated the most conversation was that the convergence between Real Money Gaming and social casino would accelerate. The underlying driver of this convergence is that both ecosystems are strong and have many learnings to offer. Real Money casino is a $10.6 billion business. Meanwhile, social casino is a $5.4 billion industry that has grown every year since 2012 and is projected to continue growing 7-12 percent per year through 2022.

What social casino can learn from Real Money gaming

Content is king

Real Money casinos focus on adding more content (slots and table games) to increase revenue. While social casino operators also will profess content is king and acknowledge that new games are the strongest driver of KPIs, they do not have the singular focus on adding content that their Real Money counterparts have. Most social casino companies are happy releasing a new slot every second week and launching with 20-30 machines. Conversely, the top Real Money casinos often have over 500 slots and introduce new games much more rapidly.

Given the proven results from launching new content, social casinos should look at much more aggressive content schedules. To achieve this result, social casinos will need to move from their reliance on exclusive, homemade content.

Real Money operators can launch hundreds of games because they license the slots non-exclusively, thus providing access to thousands of slot machines and table games. While exclusivity does provide a unique selling point, many of the homemade social slots are not truly unique. They have common themes and standard math, they are effectively a commodity. Thus the exclusivity is only a perceived advantage, it has no value to the player. Rather than recreating the wheel for every machine, social casinos can still create a unique machine every two weeks (or four weeks or one week) but supplement it with non-exclusive content from the many third-party slot developers.

Cross-sell

While most social casino operators are focused on creating a strong slots app and then optimizing acquisition for that app, Real Money operators have a more robust model. While they still will acquire slots players for their casino products, they have entire verticals that exist largely to acquire players that can be cross-sold into casino. Virtually all the Real Money Bingo products derive the bulk of their revenue from slots. While sports betting is a profitable real money vertical on its own, all of the major sports betting companies rely on slots to drive LTV and allow for more aggressive user acquisition.

In the social space, the siloes are much stronger. Only Kama Games, which uses products like Blackjackist and Roulettist to drive traffic to its poker offering, regularly uses other casino mechanics to acquire players and then cross sell them to its core poker product. Even the social game companies with strong bingo products generally treat bingo as a standalone vertical with its own P&L, just acquiring players for bingo rather than to cross sell into their slots offerings.

Social game companies need to look more at their ecosystem rather than individual products. This will allow them to acquire more players at a higher ROI.

New mechanics

All successful social casino products are based on mechanics proven in the real money space (either land based or online) but not all real money gaming mechanics have made it to social casino. One of the challenges faced by social casino is that the number of players is no longer growing. While revenue continues to increase, it is driven by better monetization of the player base, rather than expanding the player base. One of the most obvious ways to appeal to more players is offering more gameplay options.

There are several real money mechanics that could benefit social casino companies:

Sports betting. Sports betting is the largest Real Money gaming vertical, worth well over $22 billion. Social casino companies have tried to replicate Real Money sports betting apps with no success; they have failed for several reasons. The products are normally very complicated, not lending itself to a new sports betting player. Sports betting is also very event driven (you are only interested when there is a match you want to bet on), while social games rely on strong daily retention. Despite these issues, given the overall interest in sports, strength of social fantasy applications and lack of Real Money sports betting in some core markets, a creative game designer can come up with the killer social app for this segment.
Virtual sports. Virtual sports is an important but small part of the online real money gaming ecosystem. Technology, however, has made it much more viable and a great option for social casino companies. Virtual sports are similar to slot machines in that winning is based on a random number generator with set odds, they just simulate a real sporting event. Technology, however, has made these simulated games look as good as real sports. The video below from virtual sports provider Inspired Gaming shows these matches look better than what you would see on a gaming console. Unlike actual sports betting, virtual sports are always available to the player so you can create an experience players can return to daily.

Live dealer. Live dealer games are the fastest growing mechanic in the real money gaming space. Companies led by Evolution Gaming, provide games where customers play against a live dealer or host through a video feed. Just as with virtual sports, technology has made this offering much better than only a few years ago, with smoother and higher quality streaming. It is the fastest growing segment of real money gaming and virtually when any B2C company reports its financial results, Live Dealer is the highlight or only bright spot. There are challenges integrating it into social games, bandwidth costs, one-to-one dealer requirements, etc., but as Stars Group showed these issues can be overcome.

New Audience

Real Money gaming shows that the addressable market is not limited to 40+ women. While 73 percent of social casino players are female, 65 percent of real money gamers (and 55 percent of real money casino players) are men. With user growth stagnant in social casino, appealing to a male demographic can expand the market for social casino.

Offer driven user acquisition

While social casino companies are more sophisticated with their overall digital marketing, Real Money operators are better at using promotional offers to bring in players. Promotions, such as a free money welcome bonus, spin to win, triple winnings their first day playing, etc., have a very strong pull. While the cost in Real Money of these promotions is sometimes challenging, in social casino they are less risky as providers are only gifting virtual currency. These offers are complicated by AppStore restrictions but this challenge is not insurmountable and more creative offers will improve social game companies user acquisition efforts.

VIP 3.0

While social casino is more reliant on VIPs than Real Money casinos, more than 60 percent of social casino revenue comes from 0.5 percent of players, Real Money operators are much more sophisticated in working with their VIPs. Only a few social casino operators, such as Zynga, have true VIP management programs, most social casinos have one person (who may also be responsible for social media or support) who runs their VIP “program.” Conversely, the most successful real money casinos have a more robust VIP support initiative:

Proactive. While much of VIP management in social casino is better customer support for spenders, VIP management in Real Money gaming consists of proactively reaching out to your top players and understanding them as a process. The VIP team can then anticipate problems or opportunities and provide a better experience to the player.
Rake back or loss return. Many real money gaming companies (both land based and online) refund part of player losses to their best players. This practice allows players to take more risks and helps overcome periods of bad luck. While it is a controversial practice, many in the real money space lament the cost is not worth the effort, it is a strong way to increase loyalty of your most active players.
First class promotions. Why are most fights in Las Vegas, answer is so the casinos can give their VIPs front row seats. Real Money operators will send their top players to great sporting events, sold out concerts, the top restaurants or even a luxury cruise to show their appreciation. While VIPs will often spend over $200,000 in a social game, these VIPs are often rewarded with a t-shirt (if they are lucky). Treating top VIPs similarly to the real money industry will keep them more engaged with social casino offerings.
Hospitality events. Not only do Real Money casinos send their VIPs to great events, they create great events. By creating your own event, you are building something unique that competitors cannot replicate and the player cannot get anywhere else. Thus, they are less likely to churn as they would not want to lose access to these events, while they can always buy fight or concert tickets. It is also a great opportunity for your VIP team to build personal relationships with your VIPs, and the personal bond is often stronger than financial benefits of being a VIP.

By replicating these practices, social casinos can reduce VIP churn and improve their lifetime value to the company.

What Real Money gaming can learn from social casino

Although Real Money casino is a larger business, in many ways it is less sophisticated than social gaming. For many years, Real Money casino operators could succeed by getting a stable product in front of customers. With LTVs upward of $400, they had significant margin of error in user acquisition and product features. Conversely, social casinos continuously had to optimize all facets of their business to continue growing. This optimization has led to the development of many features and tactics that can benefit Real Money gaming.

Progression

Providing progression serves many valuable purposes in games. First, it gives people a reason to play, they want to keep moving forward. Even in Real Money gaming, studies have shown over 65 percent do not play to win money, thus progression will appeal to the majority of these customers.

Progression also prevents churn. Loss aversion is a very strong driver of behaviour, people do not want to lose something they already have. The endowment effect also explains that they will also overvalue it.

In addition to reducing churn, progression increases engagement. Players want to complete as many levels as quickly as possible. If there are outstanding levels, they will want to reach them as they will want to finish everything open.

Progression also is a strong monetization driver. Candy Crush is a great example of a game genre that did not monetize but by adding progression King.com was able to create a billion-dollar franchise. Progression prompts players to want to keep playing even when they are out of chips, so thus depositing more, and to play at higher stakes, increasing their bet size.

In the Real Money casino world, where players will often jump between casino offerings to capitalize on the best promotions, progression creates loyal and valuable customers.

Social features

Social features are another strong behaviour driver that has largely been perfected by free to play games. Social interaction is a core value for customers, driving success across many industries. While many features satisfy base needs, social interaction appeals to a higher need and thus people are willing to pay more for it and less likely to give it up. The success of Big Fish Casino, and more recently Huuuge Games, shows how social features can create a unique and very profitable market position. Outside of the casino space, Clash of Clans is a great example of social features driving billions in revenue.

There are many different types of social features that Real Money casino operators can implement, with some of the most successful including:

Guilds or clans, where players join together to overcome challenges or compete with other groups.
Group challenges, so players have to team together to win rewards.
Chat, to enable players to interact with each other.
Customizable and useful player profiles, so players can know more about other players.
Social shares to unlock gifts.
Personalized videos, so players can share their gameplay with friends.
Team competitions, where players form teams to get higher scores (which could be chips won) than other teams.
Synchronous slot game play.
Social lobby, so players know they are not playing alone.
Visibility into where friends and other players are winning.
Player review of games and slots, similar to Amazon.
Referral program, so your players can also be your evangelists.

Some of these features will work better in certain products than others but a mix of these features will not only create bonds with your players but amongst your players.

UIUX

Social casino developers provide a much cleaner and smoother user interface (UI) and user experience (UX) than real money gaming companies. Players can quickly start playing and there is virtually no learning curve. It is easy to navigate in the product, take advantage of offers and understand every offering. Real Money, conversely, often overwhelms the customer with choice, increasing the cognitive load. This problem is not only in the lobby but in the products, betting options are often very complex and confusing. Overall, social gaming companies create an experience much more consistent with customers expectations in 2019.

In-product VIP

While Real Money gaming companies are great at hosting and managing their VIPs, social game companies are much better at giving them incentives and rewards in product. Virtually all social casinos have an in-game VIP system, where the more VIPs play, the more privileges they earn. This type of automated system provides continuous reinforcement and reminds VIPs why they want to remain in their favourite product.

Events

Within the past year, social casinos have become very adept at creating events that boost engagement. It could be the December Challenge or the Race to the Mountain Top, but in effect it is a collection of challenges and specialized content that is available for a limited time. Often the player has a chance to win an item(s) that is only available by completing the event and will not be available again, creating an incentive both to participate and to visit the game regularly (so they know about the events). These events also break the monotony of playing the same games repeatedly. Finally, they can provide an incentive to try new slots or mechanics.

The most successful social games are now running at least one event daily and this practice can be replicated in the Real Money world. A regular schedule of events increase loyalty, engagement and monetization.

Key takeaways

The strength of both the Real Money Gaming and social casino businesses suggest they both have many lessons to offer.
Social casino companies should focus on adding even more content than they do currently (in part by using third party content they do not have exclusively), create an ecosystem based on cross-sell, try game mechanics from Real Money gaming (sports, virtual sports, live dealer), try to engage male players, create more unique new player offers and replicate the high-touch VIP programs found in real money.
Real Money casinos can improve their profitability by adding progression mechanic, social features, more simple user interface and user experience, in-product VIP programmes and daily events.

Saving millions on meetings

Most people hate meetings but they still waste hours upon hours of not only their time but colleagues time on them annually. I always like to work between Christmas and New Years because I get more done than I feel I typically do in a month. I realized this year that the reason for the much higher productivity is that I am not spending most of every day in meetings, often ones with questionable value. If you add the cost (wages) from my wasted time to that of all the other people who are not optimizing their time during meeting where they are not deriving or creating value, there is an opportunity to increase significantly your team or company’s operational efficiency.

Based on this realization and having read Meetings Suck by Cameron Herold, I developed some policies that I recommend you replicate:

Delete all meetings once a year (easiest in January) and then only reschedule the ones you need and only with the people you need to attend. This is a strategy I wrote about in 2015, that I stole from a top-five game company, that company now is one of the two or three largest in the US.

Talk, don’t meet. Sometimes a quick conversation can resolve items without needing a meeting.

Ensure everyone invited needs to be there. If someone is on there phone during the whole meeting, it is less that person’s fault than the meeting organizer who brought in someone who was not needed.

Let people opt-out. If somebody says they do not want to attend a meeting, respect their wishes.

Prepare before a meeting. If you are going to be reviewing financials or KPIs, have the analysis complete and know what you want to discuss. Nobody wants to sit around watching you work on a spreadsheet during a meeting

Have people arrive early. Everyone should be early for meetings so that they can stay on time. You and your colleagues should get to the meeting five minutes early so that people can settle and be ready at the start time. By starting late, you are wasting money having people just sit around.

Schedule meetings for 25 minutes. That will allow five minutes to get to the next meeting early. Abandon one hour (or longer) meetings, so that the meetings stay focused. It is better to schedule a follow up than have an extra 30 mins that people feel they have to fill. Only schedule 55 minutes when you are confident you will need all 55 minutes,

Share an agenda with all attendees. Share an agenda for meetings a few days in advance and allow people to opt out if there is no business relevant to them being discussed. If you use Outlook or a similar organizer, best to put the agenda in the invite.

Include a timetable. With the agenda, include a timetable so people can attend for the part of the meeting relevant

If you make these changes, you will be surprised at how liberated you feel. Meetings will take on improved importance, making them more interesting to you but also to your colleagues. Everyone will benefit from better meetings.

Key takeaways

Improving efficiency from meetings can save your company money, significant savings can come from reducing the wages lost by people attending meetings that they do not contribute to and do not derive value.
Start with a clean slate, delete all meetings and only add ones you need, and invite the people who need to be there.
Reduce meetings to 25 minutes so you can start on time (and arrive on time for the next meeting) and share an agenda and timetable before the meeting.

Why Activision and EA have dropped over 40 percent

Both Electronic Arts and Activision have plummeted more than 40 percent from their 2018 heights and the underlying causes provide important lessons for other game companies. An article in Barrons, Electronic Arts and Activision Are Struggling to Survive a Fortnite World, highlights the key causes.

Look at the competition holistically

Many companies are focused on the competition but they fail to define the competition properly. While your direct competition can have the biggest short term impact by increasing marketing or adding a new feature, your entire business can be disrupted by a company that you did not realize is a competitor.

Netflix views Hulu and Amazon Prime as their primary competitors, and then the broadcast and cable networks. It was, however, Fortnite from Epic that had the biggest impact on Netflix last quarter as consumers shifted their entertainment focus from television to the massively popular game. The failure of Netflix to anticipate this competition from a non-traditional competitor has left them unable to respond promptly, adding more scripted content does not negate the appeal of a game like Fortnite.

As the article shows, it was not just Netflix who misread the competition, as it was a key driver for EA and Activision’s decline. These companies were focused on each other (as well as the other console games coming to market) and did not anticipate a free to play gaming changing the ecosystem so dramatically.

Outside of gaming, we have seen this phenomenon repeatedly, from the classic horse buggy companies that went bankrupt as they did not realize the impact of automobiles to the decline of retailers who were slow to respond to online shopping. Blockbuster focused on Hollywood Video and mom and pop video stores before realizing that Netflix was the real threat, realizing too late. In the 1990s, GM and Ford and Chrysler were so focused on competing with each other they all faced bankruptcy when Asian manufacturers gutted their market with a new breed of high mileage vehicles. Dell and Compaq were so fixated on providing better PCs at a more competitive price that they are now afterthoughts to Apple and Samsung.

The game and iGaming space is littered with similar examples. The THQs and Acclaims did not consider free to play a competitor until it was too late. Many land-based sportsbooks did not consider online a threat until they saw their businesses disintegrate. When Sega was looking at building the next Dreamcast, they focused on Nintendo and Sony, not Microsoft.

The lesson is the true threat to your business is not the competitors you recognize as competitors, but companies who provide an offering that your customers can use to replace yours, even if it is a very different product. By not realizing who your potential competitors are, you will not be positioned to retain your customers when they shift.

Franchises are not forever

The article points out how underperforming franchises have also negatively impacted Activision and EA. Destiny was one of Activision’s cornerstone franchises and as soon as Destiny 2 showed the franchise was in decline, the stock fell 12 percent.

Destiny is not the only example of a declining franchise pulling down its stock. When Zynga went public in 2011, Farmville and Zynga Poker helped drive a share price to over $12. As both “franchises” slipped, Zynga has struggled to remain relevant, with a share price about 65 percent lower than at its peak.

These examples show that franchises do not continue indefinitely on their own. You need to work at maintaining and growing them by keeping up with current customer needs, as well as anticipating shifts in the market place.

It also shows a growth strategy focused on acquiring franchises runs the risk of overpaying and failing. Almost by definition, you are buying at a peak because it is only a franchise when it is doing very well (then it is defined is a declining product). If the acquirer cannot grow the franchise, their large investment (and franchises do not come cheap) can crumble.

You need a pipeline of new products

The third lesson from the fall of EA and Activision is the need for a robust product pipeline. Given the risks of franchises declining, you need to have new products ready to replace them. As an analyst wrote in the Barron’s article, “the main issue [for Activision Blizzard] is an underperforming pipeline of games.” In EA’s case, the poor performance of its Battlefield franchise has left it with little to drive growth. Both EA and Activision have built their business by refreshing franchises, so when those fail, they have nothing to fall back on.

While the need for a pipeline of new products (for any industry) seems obvious, it requires a commitment, and not just money. This commitment often feels unnecessary when franchises are driving growth and revenue. Even if a company is willing to invest in new products, if they do not have a commitment from on top, it will still fail as their best people (marketing, tech, design, etc.) will be working on the existing franchise products. In a competitive industry (and every industry these days), your B team is not going to beat other companies who are focused on winning with new products.

What Activision and EA teach us

Rather than feeling sorry for Activision Blizzard and Electronic Arts (they are still valued at over $25+ billion each), you can learn from them to avoid the dramatic declines they have faced recently. Most importantly, when looking at the ecosystem and your customers, realize that customers are not simply deciding between you and your closest competitor, they are looking at the best use of their time. For a game company, that means not worrying about competing games (primarily), but Netflix, music, movies and other form of entertainment. You may create a better product than your competitor to find there is a much smaller market for both of you.

As you are anticipating your customers’ needs, you also need to anticipate they will be different, so you cannot rely on today’s franchises. You need a stream of new products that anticipate their new expectations.

Key takeaways

Activision and Electronic Arts shares have fallen more than 40 percent in the past twelve months, driven by a combination of misjudging the competition, relying on franchises and having a weak product pipeline.
When surveying and reacting to the competition, you must look beyond the direct competition and understand who else could take your customers.
While franchises are important revenue sources, you need to nurture them and have alternatives as they eventually will degrade.

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.

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What social casino can learn from Real Money gaming

Content is king

Cross-sell

New mechanics

New Audience

Offer driven user acquisition

VIP 3.0

What Real Money gaming can learn from social casino

Progression

Social features

UIUX

In-product VIP

Events

Key takeaways

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Look at the competition holistically

Franchises are not forever

You need a pipeline of new products

What Activision and EA teach us

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Playtika acquires Wooga rather than another social casino

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

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

What Q4 means for 2019

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Targeted demographic

Focused on one game mechanic

Better UIUX

More robust revenue model

High quality and tested

How to win

Key takeaways

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