One Winner or Many? How the Business of Social Games May Be Differently Different
In a recent Technorati post, “The End of Social Gaming As We Know it?” there’s an interesting quote from Keny Yager at MorrisAnderson: “I think we are still in the wild, wild west of the social media experiment. There is going to be one winner and 100 losers.”
I hear this kind of thing a lot. The first part is certainly true; the games industry is in a period of fast expansion and evolution — breathtaking even for an industry used to rapid change. The second part seems to be based on a lot of industry history, where there’s typically been a king-of-the-hill reality: for those games depending on retail sales, the top few make all the money, and the rest go begging. In MMOs, there was a broader base – at least prior to World of Warcraft, back when crossing the 100K player gap meant you were successful.
But there’s good evidence that social games (as a broad category) are different right down to the structure of the marketplace – they’re not just different as games, they’re differently different, requiring a new way of looking at design, development, production, funding, customer relationships, and overall commercial success. If you look at social games developers from the point of view of a standard (venture) investor, then there are likely to be one or a few big winners – companies with billion dollar valuations. But that misses most of the picture, like the proverbial iceberg.
In a commercial sense, winning means you make money. You live to fight (and sell) another day. Hopefully you make a lot of money – then sell the company or (rarely) do an IPO, and then turn around and start another one or invest in someone else’s. It’s the Circle of Life for our times.
Losing means you don’t make money. You close down, let your employees go, and turn out the lights when you leave. No one wants that.
In between is an uncomfortable twilight zone of not quite ever making it or not making it; many companies hang here for years. There are also “lifestyle companies” that make enough money to pay their founders, but don’t accrue any real value. And there are “boutique companies” that typically do some narrow thing very well (like game development – contract after contract) and may be highly paid, but don’t become really self-sustaining with a broad base of customers.
But I wonder if we aren’t seeing a new niche emerge for many companies producing social games given the extremely long fat tail that’s emerging there. Looking at the top games on Facebook as a snapshot (courtesy of AppData), there’s an expected if rough Pareto curve with a steep slope rounding out to a very long tail. The top game of course is still Farmville (Appdata link) with 82.5M monthly active players. If you want to say there’s only one winner, there it is (well, and Zynga behind it). But if we set that one aside, we see another large group with about 10M-30M MAU – the next 15 games fit in that category. The next fifty or so games all have 2M-10M MAU, and the next forty or so have at least 1M MAU.
This means that there are over a hundred games currently – the number grows each month – that are bringing in enough revenue to be sustaining: 1M MAU is roughly $200K-$250K per month, or about $2.4M to $3M annually. Keep in mind that each of these games costs 10% or less of a “traditional” game to develop. That puts the development budget in the range of a few months revenue ($250K-$1M), and they can often be operated with profit margins at or exceeding 50% with easily available off-the-shelf software for monetizing player transactions.
From the IPO-or-die point of view there may only be “one winner and a hundred losers,” but from the developers’ point of view there may be dozens or hundreds of “winners” – companies that become self-sustaining with a portfolio of products, a broad customer base, and steady growth. Unless you’re bent on empire-building, what’s not to like?
Now it’s true that compared to Zynga’s rumored/reported revenues in excess of $250M in 2009, or Playdom’s revenues in excess of $50M, the numbers of the others in the top hundred or so are small potatoes. But these numbers also mean is that if a developer can create a game that does moderately well – say, 400K MAU, which puts them in the top 200 Facebook games (and believe me, you likely haven’t heard of any of those) – then they have a very good shot of being a bona fide free-standing company, no longer dependent on funding from a publisher, angel, or venture capital firm. Having done that (and it’s not trivial, but it is doable), this sets such a company up for creating a second game, third game, etc., gaining efficiency and revenues with each step.
And then, who knows? Not to get too rosy, but this could lead either to a smorgasbord of acquisitions by big companies with fat wallets, a sort of re-balancing of the overall industry (followed shortly by a new wave of startups and angel funds from the cashed out founders of the former companies), or it could lead to a new normal in the industry: a crop of small developers finally not going through continual feast and famine cycles, not vying for investor or publisher funding (or taking it when it makes sense rather than in a defensive manner), and being able to innovate quickly in our fast-changing market. Creative and production barriers remain, but the historically more troublesome and more external barriers of funding, sales channel management, and revenue collection have been disintermediated away.
Where does that lead? I don’t know. But it looks to me like this current phase we’re in will continue to not just change the industry players, but to change the goal posts, how we get to them and how we think of them. The emergence and eventual maturation of social games will enable — and require — us to be differently different.