Are the glory days of social casino over? Probably!

by Lloyd MelnickSeptember 10, 2019September 8, 2019

While revenue in the social casino space continues to increase (a streak that has not been broken since the first days of Zynga Poker and Slotomania), dark clouds on the horizon have started to dampen the enthusiasm. Most social casino companies would not publicly disclose that they are expecting growth to slow (or reverse) but unspoken indicators are bearish.

Stagnant player growth

The greatest threat to the social casino industry is that the user base is not growing. Over the past couple of years industry revenue has continued to increase but active players has remained virtually stagnant. The revenue growth has been driven by certain companies (particularly Playtika) becoming increasingly adept at growing revenue per customer, especially among their VIPs. At some point, however, social casino operators will hit a ceiling as VIPs cannot and will not spend more.

Actions show that the top companies do not believe in the space

While no social casino operator has publicly warned about the challenges they are facing, their actions speak more loudly. Playtika, the largest social casino company, acquired Seriously last month, after acquiring Wooga last year.

Huuuge Games, the biggest success story in the social casino space in the last three years, launched a publishing arm. Critically, it is focused on hypercasual and traditional social games (such as Traffic Puzzle) rather than social casino. Given how involved Huuuge is with social casino, if it expected tremendous growth it would almost certainly be focusing its efforts to further increase market share in this space.

The public markets are also talking

While social casino operators are showing how they look at the industry through their actions, the public markets also show how investors view the opportunities in social casino. The first pure play social casino IPO, SciPlay (the social casino operations of Scientific Gaming), has seen its share price drop from $16 when it went public in May to $10.35, losing over 30 percent of its value.

From 2015 to 2017, virtually every Zynga’s earnings call highlighted its social casino division. Initially, it focused on the growth of its slots products (primarily Hit It Rich!), which was largely the only bright spot for the company. Not only did it tout the success of its slots products, but the big IP licenses it was signing for future products (such as Willy Wonka). The calls then incorporated Zynga’s success with Poker, which experienced a renaissance. Very noticeably, over the last year, Zynga has downplayed or even ignored the role of social casino in its growth projections. In part, this is due to the success it has experienced with recent acquisitions (and the struggles it has experienced recently in the social casino space), but it also highlights that investors are not very receptive to initiatives in the social casino space.

Again, actions speak louder than words. While investors are not perfect (The Big Short, anyone), they are focused on optimizing return and look across a broad spectrum to find the best opportunities. The lack of appetite for social casino shows that investors no longer think social casino is easy money.

The other looming risk

Another cloud dampening the prospects for social casino is real money gaming. The US is disproportionally important for the social casino industry, it derives a much higher percentage of total revenue (over two thirds) than other areas of the video game industry (which derives over 50 percent of revenue outside the US). While there are too many factors to determine causality, the US is the only major social casino market where real money online casino is largely illegal. Thus, many customers who would normally play in a real money environment can only get their online casino experience through social casino.

Eventually, as real money casino play becomes legal in more US states, it represents an existential risk to the social casino industry. This risk is not an immediate one, legislation has to be approved on a state-by-state basis and I do not expect a significant number of states to approve legislation until 2022-2023 at the earliest (sports betting is a very different phenomenon). Investors and companies, however, do look beyond the next few years to determine their best opportunities and real money gaming is an acute part of that equation.

What social casino companies should do

First, innovate. While it sounds trite, innovation is the key to revitalizing the sector. The industry (and many other parts of the game industry) has been driven by copying what is already working, trying to do it a little better and continued optimization. They are thus relying on fewer players to generate more revenue. Coin Master is a great example of how a company can generate hundreds of millions of dollars in the social casino space by breaking the mold and creating a casino product for new customers. Finding Blue Ocean opportunities using casino mechanics can reverse the dynamics threatening the industry.

Second, embrace Real Money gaming. While Real Money is a risk, it is also potentially salvation. Land based casino companies largely resisted social casino for years (one particularly reactionary one still does) only to find that customers who also play social casino have a higher lifetime value. MGM’s relationship with Play Studios (MyVegas) has driven millions of dollars of value to MGM, displayed by MGM’s increasing its support (actions speak louder than words).

While the relationship between social and real money online has not yet been proven, the size of the opportunity should generate more attention from social casino operators. Real Money online gaming, a $54+ billion industry, dwarfs social casino. If social casino companies can learn how to capture a portion of that revenue (and player base), it can exceed greatly the growth rates of the past.

Key takeaways

- Despite growing every year since the first social casino products launched, the industry faces significant risks. There are highlighted by recent growth driven by improved monetization of existing players rather than appealing to new customers.
- Further corroborating this problem is how leading social casino companies are looking outside the space for acquisitions while investors are showing little interest in social casino.
- To combat these trends, social casino companies need to look for Blue Ocean opportunities (use social casino mechanics to appeal to new customers) and leverage the roll out of real money gaming.
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Why starting companies is habit forming

by Lloyd MelnickSeptember 25, 2014October 15, 2014

Earlier this year, I wrote about Nir Eyal’s great book, Hooked, and how it can help you create a product with great retention (e.g, something habit forming). What is particularly interesting is that one of the most habit-forming endeavors is entrepreneurship and building companies. The four principles of the Hook Model—Triggers, Actions, Variable Rewards and Investment—also show why entrepreneurship is so addictive.

Triggers

First, there must be a trigger. Triggers prompt you to take an action. In the case of starting a business, the trigger is seeing an opportunity. It could be waiting for a taxi that never arrives (probably the trigger for Travis Kalanick to start Uber) or going to a restaurant based on a critics review and getting a bad meal (possibly the trigger for Jeremy Stoppelman with Yelp). It is consistent at retail, you cannot find a good wine so you think about starting a wine store.

Actions

The next step in the Hook model is the action phase. The trigger, driven by internal or external cues, tells the user of what to do next. There are three ingredients required to initiate any and all behaviors:

The user must have sufficient motivation.
The user must have the ability to complete the desired action.
A trigger must be present to activate the behavior.

Continue reading “Why starting companies is habit forming” →

The secret to creating a hit habit-forming product or game

by Lloyd MelnickJune 17, 2014July 23, 2014

The hottest book in Silicon Valley currently is Hooked: How to Build Habit-Forming Products by Nir Eyal, and for good reason; it is an incredibly valuable book for building a business. As Eyal points out, amassing millions of users is no longer good enough. Companies’ economic value is a function of the strength of the habits they create. User habits become a competitive advantage. Products that change customer routines, where users become hooked, are less susceptible to attacks from other companies.

Users who continually find value in a product are more likely to tell their friends about it. Frequent usage creates more opportunities to encourage people to invite their friends, broadcast content, and share through word-of-mouth. Hooked users become brand evangelists: Megaphones for your company, bringing in new users at little or no cost.

Habit-forming products change user behavior and create unprompted engagement. The aim is to influence customers to use your product or play your game on their own, repeatedly, without relying on overt calls-to-action such as ads or promotions. Once a habit is formed, the user is automatically triggered to use the product during routine events such as waiting in line at Starbucks. Eyal uses the Hook Model to show how to create a product or game that become habit forming for users, that have a long term competitive advantage and are more likely to generate word of mouth.

The Hook Model

The Hook Model describes an experience designed to connect the user’s problem to a solution frequently enough to form a habit. Eyal defines habits as behaviors done with little or no conscious thought. The convergence of access, data, and speed is making the world a more habit-forming place. – Businesses that create customer habits gain a significant competitive advantage. It has four phases: trigger, action, variable reward, and investment. Continue reading “The secret to creating a hit habit-forming product or game” →

The best option left in game financing: growing your company

by Lloyd MelnickOctober 9, 2013October 18, 2013

I get many questions on how to raise money, and in the current business environment the best strategy is growing your business through cash flow. Institutional investors who are open to the game industry are primarily looking for companies that are at a later stage, have significant cash flows and customer bases and are already close to an exit. In fact, the venture capital environment has shifted for almost all enterprises, with a typical A-round (the first round of institutional investment) now primarily going to more advanced companies that already have traction. A few months ago, I wrote about Turning Your Customers into Venture Capital and the importance of that practice has been magnified in recent months.

You do not need investment to create a billion dollar company

I recently read Hamdi Ulukaya’s article in Harvard Business Review on how he grew Chobani (the Greek yogurt maker) into a $1 billion business without any external capital. This article drove home that financing from cash flow could not only be a way to create a nice, profitable lifestyle business but also create a billion dollar business that could IPO if it wanted to go that route. If you are not going to rely on a huge investment to build your company, though, you need to do everything the right way since you cannot just fall back on a big pile of cash. As Ulukaya wrote, “Too many entrepreneurs believe it’s impossible to scale a business without relying on VCs or other equity investors. That view is wrong. If I could grow a company from zero to $1 billion in less than a decade in a capital-intensive industry, many other businesses can too.”

The Business of Social Games and Casino

How to succeed in the mobile game space by Lloyd Melnick

investment

Stagnant player growth

Actions show that the top companies do not believe in the space

The public markets are also talking

The other looming risk

What social casino companies should do

Key takeaways

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Using track record when hiring

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Triggers

Actions

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The Hook Model

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You do not need investment to create a billion dollar company

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Suster’s suggestions

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