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.

MAU for top 2-50 games on Facebook

MAU for top 2-50 games on Facebook. #1 is at 82.5M, or nearly 3x #2.

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.

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8 Comments on “One Winner or Many? How the Business of Social Games May Be Differently Different”


  1. […] PDRTJS_settings_1030345_post_404 = { "id" : "1030345", "unique_id" : "wp-post-404", "title" : "Social+Games+Business+Model", "item_id" : "_post_404", "permalink" : "http%3A%2F%2Fshaunkime.wordpress.com%2F2010%2F03%2F27%2Fsocial-games-business-model%2F" } At GDC this year, it was hard to avoid the new infatuation with social gaming on Facebook as a means to make money. Thus far, I haven’t been all that convinced. We heard the same thing a year or so ago about iPhone games and there are very few people making any sustainable living on games alone on the iPhone. This posting is about the closest I’ve seen to a rationale for why a company might seriously consider writing a Facebook game: One winner or many? how the business of social games may be differently different. […]

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  2. Daniel James Says:

    Mike, good post, much of it I agree with and find encouraging. Certainly with Puzzle Pirates we managed to hit this approximate level of success and sustain further development.

    However, I don’t get your ~$250k from 1M MAU number. That’s *very* high. Our experience so far with Facebook, with a well-monetizing app Bite Me has been ~$50k from ~50k DAU and ~400k MAU — so a bit less than half of your estimate — and we believe Bite Me is well above many contemporaries in $/day/DAU, perhaps though it has a lower tie-ratio DAU/MAU than Farm-like competitors.

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  3. Mike Sellers Says:

    Thanks Daniel. The $250K per 1M MAU comes from the rate of $0.20-$0.25 monthly ARPU per MAU, which comes from multiple sources (Playdom, an analysis done by Eric von Coelln, and other conversations — see my post here on the “revenue gap,” which also references Puzzle Pirates and the analysis of it and other free-to-play MMOs).

    This number also correlates pretty well with Lisa Marino’s more precise figures based on daily revenue per 1K DAU (I justed posted the math a couple of days ago here). By her numbers, the typical social game is making $10-$30 per 1000 DAU per day. At 25% DAU/MAU, that comes to about $0.15 per MAU per month – a little lower than $0.20, but within the same range given small sample sets.

    Your 50K DAU for 400 MAU is an engagement rate of 12.5%, half of the above estimate, and from what I can tell from cruising Appdata (and eliminating games that are early in their life when DAU/MAU is much higher), less than the 20-30% that appears to be about average in the top 200 or so games. OTOH about $50K per month for 50K DAU works out to daily revenue of about $33 per 1000 DAU ($50,000 / 50 [1K DAU] / 30 days), and that’s right at the top end of Lisa’s figure for what most games are doing.

    So one way to say this is your income per DAU is great; and if your DAU/MAU was higher, it would match the range for monthly revenue per MAU. However, the revenue per 1K DAU is more precise and I think overall more accurate in terms of forecasting.

    It’s very encouraging for me to see that your games fall in this same range, and that revenue in this range does not appear to require higher engagement rates that many developers are chasing.

    (BTW I would love to see a post by you on Everything in terms of an MVP project as it relates to its monetization.)

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  4. […] written here a few times about the business model for social games and why I think this is a very good area to be working in.  I continue to believe this is a large market in its early stages, with […]

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  5. Ken Says:

    We have a facebook game with about 50K DAU and 350K MAU that makes about $400K/mo, and we assume this is pretty good, so I didn’t find your numbers out of line at all.

    Our new game that is similarly sized is nearing $200K a month with rapidly increasing monetization.

    We very much fit the definition of a successful middle-tier company that is profitable, growing, and needs no funding. We’ll have a million dollars in the bank within a few months. That feels like more than a lifestyle business.

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  6. Mike Sellers Says:

    Ken, congratulations! It’s great to see such a clear example of a mid-tier company working so well. If you’re making a solid profit (banking profits is good!), paying your people, and are being able to make the products you want, that seems like a solid recipe for success to me.

    Don’t be surprised if you find VCs knocking at your door offering you money to take your business in new directions based on this success. You just have to decide if those are directions you want to move in or not.

    FWIW, and in no way detracting from your clear commercial success, 50K DAU / 350K MAU = a ratio of about 14%, which is supposedly on the low side of many current successful games. But there’s a lot of wiggle room — your 14% may well be monetizing at higher levels or more consistently, reducing the need for a higher ratio.

    Your DAU to monetization numbers show this, at least in terms of those I wrote about in another post: using Lisa Marino’s numbers, from 50K DAU with about $20 (average) monetization per 1000 DAU per day, I’d expect to see $30K/month. You said you’re making more than ten times that — more than $266 per 1000 DAU per day. Those are terrific numbers! Clearly you’re doing something right.

    Congratulations again on your terrific example and success!

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  7. Yoel Says:

    Hi Mike,

    thanks a lot for the very thorough article. Albeit a couple of month old I assume the figures still hold up.

    Question:
    I assume the ARPU stated above does not include the 10%-30% fee to the payment provider, e.g. Facebook Credits?

    If you deduct this and user acquisition costs which according to various sources are somewhere between $0.5 – $ 2.0 the picture looks a bit bleaker don’t you think?

    Especially in the light of recent changes at Facebook that doubtlessly drive virality down considerably, figure from RockYou floating around is to 0.7 for an average successful game the numbers are hard to achieve. (Granted the changes appeared after you published your post)

    So the question is can smaller developer still succeed here? Are we talking $200k per month or not closer to $20k-$50k by now? Deduct the cost of running a business (incl. salaries etc…) and there is not much profit left…

    Happy to be proven wrong, REALLY 😉

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  8. […] … I have to disagree with Anatolie Gavriliuc. I held that view myself (see my post at http://onlinealchemy.wordpress.c… among others), but I have to say the market has changed dramatically in the past year or so, and […]

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