The Mysterious Revenue Gap

One of the big questions with people looking at social games is, “sure they have lots of people playing, but how much money do they really make?”  The amazing thing is, there’s actually data available on the web to answer this.  For once entrepreneurs and other game developers aren’t left completely in the dark trying to figure out what they may reasonably make on their game.  And this data identifies not only a great revenue stream, but an interesting gap.

It turns out that the question isn’t whether these games are making money – the question is, why aren’t they making significantly more?  In fact there are similar games making as much as 5x or 10x more than social games currently are.  So why the gap?

First, a bit of background.  Most social games are different from earlier online games in that you can play for free, and they don’t make money by showing ads.  In general ads and games don’t mix well, since they’re each vying for the user’s focus moment by moment.  Most social games make 10% or less of their revenue from typical ad sources.

So the way these free games make money is by selling virtual in-game items.  This is a model that has long been established in Asia, but which has only gained ground in the US and similar markets in the past few years (and here’s a hint: it didn’t start with social games).  The gist of this model is that most people never pay anything, but those who do pay enough to make these games (highly) profitable.

This revenue is typically measured on a monthly basis in terms of revenue per active user.  Most social games appear to have an Average Revenue Per User (ARPU) in the range of about 20 to 25 cents per user per month.  We know this from sources such as the terrific interview with the CEO of Playdom in December 2009 (pdf doc – see text version on Jeremy Liew’s blog), where he was forthcoming about the company’s revenues being in just this range among many other topics (highly recommended reading).  See also the analysis of Playdom’s and Zynga’s revenues done by Eric von Coelln on his blog and on Inside Social Games.

20-25c ARPU means that if you have one million people playing your game each month (as the top 100 or so games on Facebook do – per www.appdata.com; note that this number grows every month) then you’re probably making revenues of about $200K to $250K per month.  If you’re running a small studio, that’s not bad.  And given that compared to “traditional” games these require relatively small teams and budgets and have healthy operating margins, some companies have become highly successful with the revenue from just a few games.

And yet: other numbers indicate that things could be even better.  In June 2008, before the gold rush in social games had really begun, Jeremy Liew wrote on his blog about the revenues being significantly higher – as much as 5-10x higher – for games that are in many ways similar.  He was writing about free-to-play massively multiplayer online games (MMOGs): also online, typically browser-based, but with deeper gameplay and more of a niche audience.  Even setting aside the outlier in his post (Second Life, which is not much like the games we’re talking about here), several other familiar MMOGs and virtual world games – Club Penguin and Habbo, for example – show revenues in the range of about $1.20 to $1.40 ARPU.  What’s especially fascinating about this post is that several others with first-hand knowledge of these games and their revenues commented, adding further weight to this ARPU range as attainable by browser-based “casual” MMOGs (and in some cases indicating that deeper-niche products have much higher ARPUs, as much as 10x these figures!).

So why the disparity?  Why do free-to-play MMOGs make 5-10x more per user per month than successful social games?  Is this simply a matter of mass market vs. niche market?  Or is it possible that developers of social games and MMOGs have things to learn from each other – increasing engagement and conversion on the one hand, and encouraging a truly broad audience on the other?   Is it possible that in the coming evolution of social games we could see ARPU figures of over a dollar with the audience reach of hundreds of millions of players?

Here’s my bet: social games are still effectively in their infancy in terms of gameplay and social engagement.  The leaders in this field (not necessarily the largest companies) are continuing to experiment with what works and what doesn’t.  And in many ways, they are re-covering ground first covered by MMOG developers over a decade ago, albeit in a way that is palatable to millions instead of thousands of players.

The current generation of games relying on broadcast game-spam, appointment gameplay, roping in your friends, and largely single-player experiences aren’t going to suddenly leap up by a factor of two, let alone a factor of five in their conversion or overall monetization.  But clearly such leaps can be made – if we provide players with the kinds of experiences that engage them at more than a superficial level, more than just “join my gang” or “harvest my crops.”

I think that MMOGs, while deep-niche products, continue to point the way for what’s next in games, just as they have for almost fifteen years.  That doesn’t mean we’ll all be playing men-in-tights fantasy games, but that the same forms of gameplay and social engagement that made those games deeply engaging can be brought to the mass market as well – and very profitably too.

What do you think?

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18 Comments on “The Mysterious Revenue Gap”

  1. Jared Says:

    This is the exact thing that we saw with After the Dead. We just did not have the advertising budget nor long burn time to make it big with it. The ARPUs were actually much higher, I firmly believe that was due to a better game design. Unfortunately it burned hot bright and QUICK, and then was done. Oh well. I learned a lot from that experience.

    The first social game dev to make a game that is addictive as Farmville, has deeper actual game play… they will make money hand over fist. I would try it myself, but my art budget after After the Dead is non-existant and that is not going to make for a compelling game. 😉

    Like

  2. irk Says:

    Make things you can exchange for pennies….
    And enable a purchase of money in a universal bank for micro economies.
    Memberships on dedicated MMOs are one thing but social gaming should have a prepaid phone feel to buying currency and rocking worlds. It would make things easier to have both a recurring AND a prepaid model.

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  3. Peter Liu Says:

    I’m with you on that bet. Once social gaming goes beyond social networking, we’ll see more engagement. We may not have a choice.

    Like

  4. David Gregory Says:

    I would argue that its not just design holding back these social online games, but technical things. Infrastructure, gameplay bugs, and a lack of a GOOD mobile “second gameplay interface”.

    If I detect a lack of quality and don’t see “frictionless input into the game”, I will not buy virtual goods in said game — because I don’t believe in the long term viability of the game/platform. I have to see the value of the transaction in the moment.

    I’m curious how much Jane average facebook game player cares about this stuff tho. Maybe I’m not a good guage of this, since I do this for a living and understand what’s behind the curtain.

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  5. arpu math Says:

    Great article, one small thing to note, when social game companies are talking about ARPU (average revenue per user) they can mean a few things:

    monthly revenue / MAU (monthly active users)
    monthly revenue / DAU (daily active users – averaged for the month)
    daily revenue / DAU (daily active users)

    In F2P MMOs, they ALWAYS assume the number of active users on rolling 30 day (ie. MAU) basis. So their ARPU calculation are:

    monthly revenue / MAU

    In the Playdom interview, the $0.25 ARPU was calculated as monthly revenue / MAU so it’s fair to make a comparison to MMOs.

    Heads up because there are cases where social game devs talk about ARPU differently:

    http://europe.casualconnect.org/content.html#buzzwords
    -> Kevin Xu talks about a $3 ARPU for his newest RTS (Lords Online) ==> monthly revenue / the average DAU for that month.

    http://www.insidesocialgames.com/2010/01/22/video-social-gaming-executives-predict-the-future-of-the-industry-in-2010/
    -> Daniel James talks about a $0.05 ARPU for most “good social games” ==> daily revenue / day

    Daniel also mentions a $0.20 ARPU (daily rev / dau) for Puzzle Pirates as comparison.

    Hope this helps!

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  6. Mike Sellers Says:

    Good points. Monthly revenue / MAU is what I see most often, but as you point out there are exceptions. And of course there’s the difference between ARPU and ARPPU, looking at only paying users, where the numbers are necessarily much higher.

    Daniel’s $0.05 to $0.20 for daily ARPU / DAU tracks the same gap as you’d expect. The question is, is this because of mass-market vs. niche products, or is there an opportunity here to drive up ARPU with better game design, monetization design, and engagement?

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  7. arpu math Says:

    re: The question is, is this because of mass-market vs. niche products

    That’s a great question, one could argue that as games get more and more users, the “law of large numbers” takes over and drags the ARPU down.

    That being said, if you look at IGG’s Lord’s online, it’s a product with some great retention / monetization mechanics and that puts them on the higher side closer to the $0.20 daily ARPU.

    Though perhaps BECAUSE of these new mechanics it’s attracting a more “niche” hardcore audience.

    Or maybe it’s correlation and not causation :).

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  11. Golergka Says:

    I worked on several online games as a game designer, both on client-based, web-based and social. Whkle you’re right about much higher ARPU in hardcord games, there are two thibgs to consider. First, in ARPU calculations the newbies, playing the game less then a particular period of time, because this metric better shows monetization potential of the game, and won’t be affected by marketing decision to buy a lot of traffic, for example.
    Second, while the hardcore games do have higher arpu, they have a much higher registration costs and worse conversions. In same games, the cost of a user, who’ve played the game for a whole week can go as high as $20. So, in the end, the ROI can be very similar.

    Like

  12. Quora Says:

    What is the average ARPU (average revenue per user) for a social game these days? Today?…

    Hi Eric: the hard-core information is an estimate based on conversations with people in the gaming industry. There was suppose to be a footnote on that figure, but it didn’t show up on Quora! Keep me posted if you hear anything new on this figure. In …

    Like

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