inside virtual goods
TRANSCRIPT
Inside Virtual Goods The Future of Social Gaming 2011
Excerpted from the full report by Justin Smith and Charles Hudson
www.insidevirtualgoods.com
Version 2.0 | Release Date: 16 November 2010
©2010 Inside Network, Inc.
Unauthorized duplication or redistribution is expressly prohibited by law.
How Do Social Games Monetize?
Today, social games primarily monetize through the sale of virtual goods,
though there are also a few advertising-supported models some social game
developers are trying. In this section, we take a look at each of the key ways
that social games are driving revenues, and what the future holds for each.
Virtual Goods
One of the biggest trends the social networking industry has seen over the
course of the last three years is the rise of social game businesses built on a
virtual goods model. Virtual goods are in-game items that users purchase for a
variety of reasons, ranging from functional items like power-ups to decorative
items like avatar accessories, and represent over 90% of revenues earned by
leading social game developers today.
As the social platforms have matured, so have the game developers. Today, a
significant number of talented designers and producers from traditional game
studios have joined the self-taught viral ninjas that were able to get even the
most primitive games into the hands of millions of users to create substantially
more engaging experiences. Now, designers are optimizing game play,
missions, quests, and viral incentives with virtual goods monetization in mind
from the beginning. This degree of design optimization is leading to higher
numbers of paying users and higher revenues per paying user than we've seen
since social networking platforms launched.
Monetization Rates of Key Social Game Genres
When thinking about monetization rates of social games, one useful way of
slicing the market is to categorize games into genres that share similar game
mechanics and, thus, monetization profiles. However, of course it's important
to remember that within any category of social games there are a variety of
factors that need to be considered when estimating ARPU. For example, niche
games that are serving a highly engaged but smaller audience might have lower
revenue per user numbers than the largest games which are serving tens of
millions of users around the world. These ranges are intended to be used for
directional guidance on what monetization rates for healthy social games are.
Finally, one note on units: the numbers below are in terms of US dollars per
daily active user per month ($/DAU/month). Some developers prefer to think in
terms of dollars per daily active user per day - to get that number, simply
divide these numbers by 30.
1. Role Playing Games and “Hardcore” Mini-MMOs
Above: “Kingdoms of Camelot” by Kabam
Role playing games, like many of the mob-themed or sorority-themed games on
Facebook and MySpace, are the closest descendants to the original rudimentary
viral Facebook games like Zombies and Werewolves. Whereas in games like
Zombies the whole game mechanic was based on recruiting friends, now the
"mob" mechanic is heavily based on collective achievements. In addition, as
2010 has progressed, more “hardcore” mini-MMO games like Kingdoms of
Camelot from Kabam have emerged that engage a smaller albeit more devoted
audience and monetize well. Although social RPGs are asynchronous, they
increasingly include real-time elements to game play. Many of these games
have both higher ARPPU and percentage of paying player rates compared to
most other genres.
These games are monetized through a variety of types of virtual goods. Most
common among them are in-game items like tools or weapons that allow
players to save time and progress through the game more quickly. Because
these games are increasingly complex, involving many individual and collective
sub-quests, the variety of items that are sold today is much greater than even a
year ago. The most common type of item that users purchase in these kinds of
games is energy, followed closely by time. Purchasing functional items,
particularly limited edition items, is becoming a meaningful chunk of revenue.
This concludes the excerpted portion of Inside Virtual Goods: The Future of
Social Gaming 2011. Learn more about the full research series at
http://insidevirtualgoods.com.
Table of Contents from the Full Report
I. Overview ........................................................................................................................................... 13
1. The Evolution of Social Gaming ................................................................................................ 14
What is Social Gaming? ............................................................................................................................... 15 Natural Tensions Between Social Game Developers and Social Network Platforms ............ 16 Social Games as a Unique Games Genre ................................................................................................ 18 A Brief History of the Major Eras in Social Gaming ........................................................................... 19
Era I ‐ The Virality Era ................................................................................... Error! Bookmark not defined. Era II ‐ The Emergence of Paid Distribution ..................................................................................................... 21 Era III ‐ The Rise of the Big 4 and the Network Model ................................................................................. 22
Key Changes in the Social Gaming Landscape in 2010 ..................................................................... 23 Era IV ‐ The Post‐Virality Era .................................................................................................................................. 23
2. Social Game Development and Design Processes .............................................................. 26
Studio Composition ...................................................................................................................................... 27
Small and Medium Developers ................................................................................................................ 28 Large Developers .......................................................................................................................................... 30 Platform Services .......................................................................................................................................... 31 Development Cycle Time ........................................................................................................................... 33
Developing Franchise Titles ..................................................................................................................... 38 Expansion Packs ‐ Mafia Wars by Zynga ............................................................................................................ 39 True Serial ‐ Mobsters 2 by Playdom .................................................................................................................. 39 Branded Titles from Major Developers ‐ ESPN U College Town and the EA Superstars
Lineup ............................................................................................................................................................................... 40
Role of Testing and Metrics ....................................................................................................................... 41 Multi‐Platform Development .................................................................................................................... 42
3. Social Game Design and Design Mechanics .......................................................................... 45
Resource Management and Simulation ................................................................................................ 46 Gambling .......................................................................................................................................................... 47 Caretaking ....................................................................................................................................................... 47
Casual and Arcade ........................................................................................................................................ 48 MMO and Hardcore ...................................................................................................................................... 48 Category Coverage for Major Facebook Developers ......................................................................... 48 Fast Followers vs Innovators .................................................................................................................... 49 Intellectual Property ................................................................................................................................... 51 Building Games with Third Party IP ....................................................................................................... 52 The Importance of Templates and Engines ......................................................................................... 54
4. Monetization ................................................................................................................................... 57
How Do Social Games Monetize? ............................................................................................................. 58 Virtual Goods .................................................................................................................................................................. 58 Advertising ...................................................................................................................................................................... 59
Monetization Rates ...................................................................................................................................... 61 Defining Terms: Understanding the User Acquisition and Conversion Funnel ................................ 61 Registered Users ........................................................................................................................................................ 62 Active Users ................................................................................................................................................................. 62
Average Revenue Per User (ARPU) .................................................................................................................... 63
Average Revenue Per Paying User (ARPPU) ................................................................................................... 64
Lifetime Value (LTV) ................................................................................................................................................ 65 How Do Social Game Developers Manage Their Businesses? ................................................................... 65 Monetization Rates of Key Social Game Genres .............................................................................................. 66 Role Playing Games and "Hardcore" Mini‐MMOs ......................................................................................... 67 Simulation and City‐Building Games ................................................................................................................. 68 Pet Games ..................................................................................................................................................................... 70 Poker Games ............................................................................................................................................................... 71 Virtual Gifts ................................................................................................................................................................. 73 Arcade Games ............................................................................................................................................................. 75 Dating/Flirting Games ............................................................................................................................................ 77 How Has Monetization Changed Over the Last Year? .................................................................................. 78 Consumer Demographics .......................................................................................................................................... 80 Whales in Social Games ............................................................................................................................................. 82
Impact of Facebook Credits ....................................................................................................................... 84 Goals and Benefits ........................................................................................................................................................ 84
Challenges and Costs .................................................................................................................................................. 85
Developer Sentiment .................................................................................................................................................. 86 Impact on Payments Ecosystem ............................................................................................................................ 88
Payment Methods Breakdown ................................................................................................................. 88 Understanding Offers and the Offer Controversy .......................................................................................... 89
The Offers Controversy ............................................................................................................................................ 89 Offers in Social Games ............................................................................................................................................. 91 Increased Competition, and the Impact of Credits ....................................................................................... 92 Direct Payments ............................................................................................................................................................ 92 Direct Payment Methods Breakdown in Social Games ............................................................................... 93 Direct Payments vs Offers ...................................................................................................................................... 94
Mobile and Alternative Direct Payments ........................................................................................................... 95 Mobile Payments ....................................................................................................................................................... 95 Pre‐Paid Cards ........................................................................................................................................................... 97 New Payment Providers ......................................................................................................................................... 99
Lifetime Value of Social Game Players (LTV) ‐ What Do We Know? ............................................ 99 How Do Developers Measure LTV? .................................................................................................................... 100
How Long Do Players Stick Around? ................................................................................................................. 101
When in Their Lifecycle Do Users Monetize Best? ...................................................................................... 101
Seasonality and Monetization Lifecycles in Social Games ........................................................................ 104
Banner Advertising's Role ...................................................................................................................................... 105
5. Customer Acquisition and Marketing .................................................................................. 107
The Rise, Fall, and (Partial) Re‐rise of Viral Acquisition .............................................................. 108 Impact of Facebook Platform Changes on Viral Distribution ..................................................... 110 News Feed ..................................................................................................................................................................... 110
Invitations/Requests ................................................................................................................................................ 111 Notifications ................................................................................................................................................................. 112
Cross Promotion ........................................................................................................................................ 112 Large Developers vs Small Developers ............................................................................................................. 112 Publishers and New Third Party Cross Promotion Networks ................................................................ 113
Paid Acquisition ......................................................................................................................................... 114
Facebook Ads ............................................................................................................................................................... 115
Third Party Facebook Platform Ad Networks ............................................................................................... 116 Cost of Customer Acquisition and LTV ............................................................................................................. 117
A Look at Growth and Decay of Games Launched in 2010 ........................................................... 118 Off‐Facebook Promotion ......................................................................................................................... 132
Network Strategy and Economies of Scale ........................................................................................ 132
6. 2011 Market Size and Top Developer Revenue Estimates ............................................ 134
2011 Social Gaming Market Size .......................................................................................................... 135
Top Developer Revenue Estimates ...................................................................................................... 136 Zynga ............................................................................................................................................................................... 136 Playfish ........................................................................................................................................................................... 140 Playdom .......................................................................................................................................................................... 142
CrowdStar ...................................................................................................................................................................... 145
Section II ‐ The Future .................................................................................................................... 147
1. Facebook Platform Changes and the Relationship Between Facebook and
Application Developers ................................................................................................................. 148
Impact of Platform Changes ................................................................................................................... 149 Facebook Platform Policy and the LOLapps Example ................................................................... 150
Developers and Advertising Spend ..................................................................................................... 151
2. The Future of Facebook Credits and the Changing Monetization Landscape ......... 152
Impact of Facebook Credits .................................................................................................................... 153
Offers and Performance Advertising .................................................................................................. 154 Role of Alternative Payment Systems ................................................................................................. 155
3. What Does the Emergence of the Big 4 Mean for Small and Medium Sized
Developers? ....................................................................................................................................... 157
Growing Value of Cross Promotion ...................................................................................................... 158 Marketing and Customer Acquisition ................................................................................................. 159 From CrowdStar to Kabam ..................................................................................................................... 160
4. Off‐Network Games with Facebook Connect ...................................................................... 162
iOS Devices ................................................................................................................................................... 163 Android Devices ......................................................................................................................................... 164 Open Internet and Facebook Connect ................................................................................................ 166
5. Will Another Platform Other Than Facebook Emerge? .................................................. 171
Google ............................................................................................................................................................ 172
MySpace ........................................................................................................................................................ 173
Twitter ........................................................................................................................................................... 174
International Social Networks (China, Japan, Russia) .................................................................. 174 Casual/MMO Portals ................................................................................................................................. 176 Global Portals: Yahoo, MSN, and Others ............................................................................................. 176 Mobile Social Networking Platforms .................................................................................................. 177
6. Competitive Response in the Broader Media and Games Industry ............................ 179
Casual Game Developers ......................................................................................................................... 180 Console Games Companies ..................................................................................................................... 181 Casual MMOs and Virtual Worlds ......................................................................................................... 183 Media Companies ....................................................................................................................................... 184
7. Investment Landscape ............................................................................................................... 186
Venture Capital ........................................................................................................................................... 187 M&A and IPO Landscape ......................................................................................................................... 189
III. Appendix: Company Index ..................................................................................................... 192