Congratulations to Zynga and, in particular, my friends there (Zynga prices its IPO at $7 billion valuation). This is the dawn of a new era for the social game industry.
Category: General Social Games Business
Tales of Social Game Industry Demise are Greatly Exaggerated
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.
What Social Game Companies Can Learn from Organized Crime
There was a very interesting, and entertaining article in the November 2011 issue of the Harvard Business Review about what businesses can learn from organized crime. Without restating the article (I recommend you read it), I thought it would useful to apply the lessons for the benefit of social gaming companies.
Use the news to create opportunity
In the HBR article, they point out that criminal groups are very effective at scanning the macro-environment and capitalizing on what they find. Major events, both locally and globally, are great opportunities to build interest in a social game, create new monetization opportunities or improve virality. By tying into news events, a social game company can leverage all the interest and buzz around a current event. These events can range from a big sporting event (e.g., World Cup or Super Bowl) to a big news item (a lost drone, the European debt crisis) to a natural disaster (the Japanese tsunami). With a big positive event, there are opportunities to sell special limited edition virtual goods or creating particularly compelling wall posts and other virals. In the case of a disaster, social game companies in the past have increased engagement (and benefitted victims) by donating the proceeds of special virtual items. For some reason, this practice seems to have ebbed recently.
Outsource to specialists
Rather than doing everything internally as in the “Godfather” days, modern organized crime has created a loosely affiliated cooperative network (think freelance thugs or hackers). For social game companies, there is a great opportunity to move their user acquisition to agencies (such as TBG), to have contractors help analyze their data, to generate more revenue by using international publishers (such as Plinga and Pixonic), etc. Rather than find a team of several hundred, with (at least) some of them not being the best in the field, you can outsource multiple functions to great partners.
Cash isn’t the only incentive
Although criminal organizations pay well (or at least that is what I hear), one of their strongest recruiting tools is the thrill tied to their activities. While deploying a new content pack may not release as much testosterone as robbing a bank, by creating a challenging environment for your employees where they feel they belong goes a long way to retaining your top performers and attract others.
Exploit the long tail
Global criminals reap big profits by executing small operations repeatedly. Rather than trying to create the next Cityville, think about building an iOS app that can repeatedly reskinned (maybe capitalizing on a current event). Another option would be a niche Facebook title that can then be launched in territory after territory, social network after social network. The point is that rather than going for the huge win, look at creating a series of small successes that may be easier and in the long term more profitable.
Collaborate across borders
Think of Al-Qaeda and how it works with splinter groups across Asia and Africa. In the social gaming ecosystem, there are many opportunities to partner with other companies to increase global revenue. You can find a French, German or Chinese game company and generate revenue by licensing your game to them for their territory. Conversely, you can look to foreign companies to acquire content you can then publish in your home market to augment your product line-up (and generate more revenue and traffic). You can even partner with a competitor who may have a presence in a market that is not in your focus to bring your product there. Organized crime, and organized business, is littered with entities that compete in one region while cooperating in others.
As I mentioned, the underlying article in HBR is really eye-opening and provides a great framework for building a social game company. I hope some of the opportunities I highlighted above help social game companies build their business (without knee capping anyone).
Effects of Drop in Zynga’s Valuation
I was not planning on writing a post this week (working on some big projects right now) but the news today that Zynga will price its IPO with a valuation between $5.9 and $7 billion (Zynga … IPO at a $5.9 to $7B Valuation) was just so important I felt I need to write something. First, I don’t want to disparage in anyway what Mark Pincus achieved. It is an unbelievable achievement to build a multi-billion company in about three years (it took me over 15 years to sell a company at a fraction of this value). Less than one percent of one percent (if that) ever comes close to achieving this type of success.
Why I wanted to blog today was that this valuation represents less than 50 percent what many people thought Zynga would be valued at only a few weeks ago. More importantly, as I blogged about a month ago (The Effects of the Imminent Zynga IPO), Zynga’s IPO will have a far reaching effect in the social games industry; and this change in valuation will now have a similar effect.
First, almost every other social game company has now seen its valuation drop fifty percent. As I said in the blog post, once Zynga is public it will be a measuring stick for all other social companies, either ones trying to go public also, those looking for a suitor or those raising capital. Investors, acquirers, etc., will base valuation on Zynga’s multiples. Given that Zynga’s growth, revenue and profitability has not changed dramatically in the last few weeks, the drop in valuation means that other social games companies will now face much different price-to-earnings and price-to-sales (or projected earnings or sales) ratios.
Second, Zynga’s IPO will probably have an even greater effect on the social gaming M&A environment because of the lower valuation. While I already expected Zynga to cut back on acquisition post-IPO, they will have less currency to make acquisitions now. For example, if they value a potential target at $100 million and want to acquire them for stock, they will now have to provide twice as much stock as before (or that they were probably even offering three months ago). Thus, Zynga will have to negotiate “better” deals or cut back on acquisitions to avoid diluting too much.
Third, this will have a significant impact on publicly traded companies that have social media efforts. For example, the value of EA’s social media operations was also effectively cut in half by the change in Zynga’s valuation (so my guess is there is no cheering in Redwood City). Analysts have built into EA’s stock price a valuation for the social gaming operations (e.g., Sims Social, Madden) largely based on Zynga’s multiples, thus it should have a very significant weight on EA’s stock price.
Related to the above, publicly traded companies now will be much less enthusiastic (about half as enthusiastic, I would wager) to add social gaming to their portfolio. It won’t have the same impact on their valuation. Thus, we’ll not only probably see less acquisitions (or ones at lower valuations) but even internal investment in social gaming will drop (thus lowering the demand for talent).
These are only a few of the effects from the drop in valuation but as I hope this post highlights it will be far-reaching across the social games industry. What an interesting time we live in.
My Favorite Posts
My Favorite Posts
Given the Thanksgiving Holiday, I will not be putting up a new blog post today. Instead, I went through and found my personal favorite posts (yes, pretty egotistical that I have favorites, but again, it’s my blog; I can do what I want ☺). Here goes, from the first one being the one I felt was the most insightful:
- The Platform Challenge for Social Game Companies (post on how to optimize ROI when choosing what social networks and platforms to develop for)
- No Winner Yet in the Social Gaming Space (although a relatively short post, I am sure we are going to continue to se a lot of leadership changes in the short- and mid-term)
- The Need to Move Beyond Performance Marketing in Social Games
- My Definition of Distance (a framework for social game companies to create an international strategy)
- Collaboration Part 2 (how to use collaboration to grow your social game company)
- The Answer to the Talent Shortage (How Social Game companies can overcome the difficulties in finding good talent)
Also, although I do not feel these were great posts, they seem to be the two people visit most:
Use Analytics for Good, Not Evil
When social gaming started to take off, many people in other parts of the game industry were very excited about finally having an opportunity to create a game that responded to all players’ needs. By using analytics, there was the hope that we would take feedback from the player to improve a game continuously and thus optimize the player’s experience.
Business intelligence (BI) is an incredibly powerful tool and could be used to increase the gameplay experience exponentially. Instead, most social game companies primarily use analytics and other BI tools largely to manipulate customers. Rather than trying to see what would enhance the player’s overall experience, these tools are used to determine how to get an extra $0.05 or have them send one more wall post. As the analytic tools become increasingly sophisticated, most of these new capabilities are focused on better controlling player behavior.
While there is a role for using analytics to improve areas such as monetization, the bigger opportunity is creating a more compelling, engaging and entertaining experience. If a game became increasingly compelling and enjoyable, monetization, virality and engagement would all follow (assuming it was properly constructed). Yet, we have the tail wagging the dog in that these areas are driving the evolution of the games, with little concern about the overall enjoyment of the player.
While the focus on “manipulation” may work in the short term (and please investors or stock-holders), it is not the way to grow a superior, long-term business. Very few industries—beyond the used car business, banking, US airline industry and a few others—are built around continually tricking your customers. Those that are either rely on discrete purchases where you do not need repeat customers (e.g., used car sales) or government regulation that keeps out most competitors and thus prevents new entrants that offer superior service (e.g., banking). You can trick some of the people some of the time, but consumers are not stupid and will gravitate to stores, games and services where they have a great experience. Long term, Amazon and Nordstrom outperform Overstock and Kmart. My point is simply that you should be using your analytics to create the next social gaming equivalent of Amazon, not Kmart.
Don’t Believe Predictions
It seems that every game industry trade show has a panel about the game industry in 2, 5, 10 years (e.g., “The Social Game Industry in 2020”). I find it interesting how many people actually focus on these sessions and make decisions based on the panelists’ prognostications.
More importantly, I think it is very dangerous to listen to these panels for anything more than the entertainment value. One of the basic laws of nature is that nobody can predict the future. From Bill Gates to Warren Buffett to Stephen Hawking, even the best minds are no better at consistently predicting the future than a group of apes. Some people will get lucky but that does not make them brilliant nor more likely to be right in the future. You can see this trend in almost any industry, from the financial (where the “top” analysts and fund managers are no more likely to beat the market than a random sampling of stocks) to retail (where top retailers repeatedly miss new trends) to gaming (What panelist five years ago predicted the rise of social gaming? I know I did not). Continue reading “Don’t Believe Predictions”
A Few Thoughts from the Social Gaming Summit
After a day and a half at the Social Gaming Summit, there were a few interesting takeaways that I wanted to share.
Opportunities Remain on Facebook
As I wrote a few months ago (my blog post), it is far too early to call the battle for supremacy in the social gaming space over. Julien Codorniou of Facebook made a great point in that of the top-4 Facebook game companies today (by MAU), two were not significant players at this time last year. Wooga (#3) was just gaining momentum while King.com (#4) did not release its first Facebook game until earlier this year. These company’s phenomenal success points to the opportunities existing in the space, where you can effectively go from 0 to top-5 in a matter of months.
Kiip is Cool
The best presentation I heard was from Brian Wong of Kiip. He, and Kiip, really get at the core of what advertisers need moving forward and it was quite interesting to see how social games can deliver on this. I had never heard Brian speak before and he was also one of the best presenters I ever came across. Made me want to work with Kiip just because I felt regardless of their offering he would make it a success.
HTML5 is Divisive
One of the more interesting side-shows here is the debate over HTML5. Several veterans, including the aforementioned Julien Codorniou, argue vehemently that HTML5 is the future and that we all should be using now or we are going to miss the next big thing. Others argue that it is a mess right now and not to even look at it for another year or so. For me, I am not convinced either way but will be devoting a lot of attention to HTML5 to see if it is right for fiveonenine.
A lot of other interesting presentations and takeaways but I think these three items are what I will remember most from my short trip to London.
Creating a Marketing Plan
On Tuesday, I blogged ( post on The Need to Move Beyond Performance Marketing ) that social game companies needed to create robust marketing strategies rather than rely solely on performance marketing. Today, I wanted to elaborate a little on what needs to go into the marketing strategy.
Although this may sound a little like Marketing 101, social game companies should look at product launches the same way virtual any other company that sells to consumers does. This process starts by creating a robust launch plan for every game. Although this sounds simples, in my 20+ years in the game industry, more times than not I have seen companies focus on marketing only after the a product launches, if at all.
The first step is to create a full launch plan for each game, preferably six months before launch but no later than three months before the scheduled launch date. I am not going to go into details here about how to write a launch plan as there are many great templates available online. The key, though, is for the launch plan to include the three components needed for success: pre-launch, launch, and post-launch.
In the pre-launch phase, the company needs to Research and Plan. Research includes consumer testing and customer feedback. With consumer testing, I am not referring to the testing that the product development team is doing to optimize usability, retention, etc. Consumer testing in the launch plan should be tied to the marketing aspects of the product, what features will resonate with customers, what name will be most effective, what demographics respond best to the game, etc. There are multiple ways to test, from mock ads and surveys on Facebook to focus groups. The other type of research that should be done in the pre-launch phase is consumer input. Examples of this would be speaking to your customers through forums or direct contact about features they would like to see, what would get them to monetize, etc. The planning phase is also critical prior to launch and should encompass the steps that need to be taken to an effective launch and when (i.e. what needs to be done launch minus 4 months, launch minus three months, etc), what resources will be needed (i.e. cash, people, agencies) and what are the goals (are you aiming for 1 million DAU, $100k/day in revenue or a different metric). If you do not know your goals, it is impossible to measure success.
The next phase of the launch plan is Launch. Key elements here are when and where, the promotional plan and customer support. First, the marketing team needs to work with the development team to determine optimal timing for launch. This may come as a surprise to most social gaming companies, but the best time to launch is not 30 minutes after the game is considered stable. Instead, the company should think strategically when would be the most effective time to launch and then coordinate development and marketing to build a successful launch. Part of this consideration will be whether to launch a robust product or a minimum desirable product. With the latter, you can get to market quicker and adjust but you are also more likely to have a game that initially does not satisfy your best customers as long as you would need to. When planning the launch, you also want to avoid launching when your largest competitors plan launches. For the same reason a studio would not release a kid’s movie the same weekend that Disney launches Cars 3, you do not want to launch your big social title around the launch of Castleville. You also need to decide where you are going to launch (and when tied to where). Do you launch initially in the United States or do you launch day 1 in fifteen languages to avoid clones coming to those markets before you do? Do you launch first in Indonesia or Turkey to get early customer data with lower user acquisitions costs so you can adjust your product and marketing mix or do you hit the US hard? These are all questions that need to be answered in the marketing plan.
Once these questions are addressed, you need to determine the media mix. As I wrote about multiple times, it is important not to rely entirely on performance ads. Instead, you should look at the same media options that other entertainment and consumer goods brands use. These options include television, web, social media (there are many ways to advertise beyond Facebook ads, including building campaigns around Twitter, Tumblr and Facebook pages and groups) and even print. This is far from an exhaustive list and also an opportunity for companies to be creative (rather than the lazy approach of just programming 500 Facebook ads).
Finally is the post-launch phase, where the key aspects are Measure, Analyze and Adjust. While these terms are probably familiar to most social game companies, the key here is to use them in regard to the marketing plan rather than product development. Social game companies should use analytics as religiously to measure the ROI of each aspect of its marketing campaign as they are in measuring game performance. Although more traditional advertising channels are more difficult to measure than Facebook ads, they are measurable. If you run television advertising, you can measure performance at the time of the ad versus three hours later (or performance where the ad is shown versus another region). With any type of marketing, there are ways to measure it, it just requires a little more work from your analytics team. Once the ROI of the various components are determined, you then must continually adjust your marketing mix to optimize performance and continue growing your player base.
As I mentioned Tuesday, I will be speaking on this topic Monday at the Social Gaming Summit in London. Although I may not be able to blog regularly next week, I will put up some further thoughts on marketing social games as soon as I can as well as my takeaways from the Summit.
The Need to Move Beyond Performance Marketing in Social Games
Next week, I am speaking at the Social Gaming Summit in London about moving Beyond Performance Marketing. I wanted to share the driving principle as I think it is quite important for everyone in the social game industry, from small start-ups to the largest players.
There are several reasons why relying on performance marketing (Facebook ads) is untenable for social game companies. First, the cost of Facebook ads for social games in the US increased 300% in less than two years. In January, 2010, the median CPC for a Facebook ad was about $0.50. In April of this year (the most recent data that I have), that number increased to $1.50, with several spikes where ads cost almost $2.50. This number is almost certain to continue increasing at a rapid rate, as Facebook ad budgets are projected to rise from $2.1 billion today to $8.3 billion by 2015. With budgets increasing at this rate and the cost of Facebook ads based on a bidding system, the increased demand (without an increase in supply) has to increase the cost of ads. Given that ARPDAU (average revenue per daily active user) is not rising at anything close to this rate, it will become impossible for most social games to justify spending significantly more on ads. Finally, for several Facebook games there just is not anyone left on Facebook to advertise to. Some of the major players have spent so much promoting their games through Facebook ads that all potential customers on Facebook are numb to the ads, they have either played the game or never will.
What this situation suggests is that companies need to find other ways of attracting and re-engaging players. The first step is for social game companies to create a robust launch and marketing strategy that encompasses not only performance marketing but a complete marketing mix. Given that almost every other industry – including other parts of the entertainment and gaming space – pursue a comprehensive marketing plan, it is logical that social gaming companies also evolve their customer acquisition strategies. Later this month, I will post some suggestions on ways to build out your marketing strategy.
The Business of Social Games and Casino 