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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Tags: ARPU, games, MMOG, social games

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