Dangerous Curves and Social Games 2.0

I’ve 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 more people spending more on virtual goods in the past year, and with  at least one recent study predicting incredible revenue growth over the next few years. We’ve all seen the meteoric rise in this sector in the past couple of years, both at the top end in Zynga, Playdom, and Playfish (now EA), and in the medium-size and long-tail developers.

But recently, some of the shine seems to have come off this area. This is most clearly seen in the dropping MAU and DAU in the top social games — Farmville for example has dropped from a high of about 83M MAU in March to 66M today.   66M is still a number that no one else can touch, but it’s also a huge drop in a game that had been rising steadily.

And it’s not just Farmville.  If you look at the graphs for the top games that have been around for a while, rising continually (e.g., Texas HoldEm, Cafe World, Pet Society), each shows a peak and a subsequent fall-off.   Notably, this isn’t just due to the age of the game: some more recent games like Treasure Isle and Hotel City show the same dangerous curve at around the same time, even though they haven’t been around as long.  Some like Nightclub City show a rising MAU curve — but a daily users curve that has peaked, indicating that the trailing MAU indicator will show this soon too.  Still others, despite strong PR-backed launches in what seemed like good areas, have fared much worse from the start (indicating among other things how critical repeat play is to the success of these games).

So other than the fact that simply putting out a social game isn’t a license to print money, what does this mean?

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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.