The most popular social games on Facebook and other social networks are free to play. So… where’s the money?
Techcrunch recently published a ‘teardown’ of social games market leader Zynga, which estimated Zynga could be achieving a 30% net margin. This estimate is probably wrong in some of its details, but the overall answer is perhaps not wrong by a great deal. (I’ve done this kind of stuff myself, and I think being ‘perhaps not wrong by a great deal’ is pretty good.)
Of course, it’s not just a matter of build it and they will come. According to Facebook official statistics (on 18 May 2010), there were over 550,000 applications on the platform. It goes without saying that not all developers are profitable (or even revenue-generating). And, according to the ever-interesting AppData site, on May 18 2010 there were 68,867 Facebook applications with fewer than 10k monthly average users (MAU). And that’s only the ones they are bothering to track.
Interestingly, there seem to be even more small-userbase applications on Facebook than you’d expect based on Zipf’s law (which is a good predictor of the frequency distribution of a wild and wonderful range of natural phenomena, from city size, through to income distribution, earthquakes magnitude, and company size):
So, there are lots of plankton swimming in the sea – maybe even more than you’d expect. With your glass half full, you could attribute this to the perceived attractiveness of the medium. But it’s not all plankton out there. There are also some blue whales. As of May 18 1010, there were 24 Facebook applications with more than 10 million MAU, and, of these, 16 were games.
These (and other) top social games developers are extracting value from their users in a variety of ways, both direct and indirect:
- Playdom, who are on MySpace and to a lesser extent Facebook, get 70% of their revenue from direct user payments, and 10% from advertising, and 20% from ‘offers’ (according to Techcrunch, Nov 2009)
- Zynga, the Big Kahuna of social games developers, gets one third of its revenue from direct user payments, one third from advertising, and one third from ‘offers’ (according to Techcrunch Nov 2009) although since Zynga cross-promotes its own applications, it’s important to understand whether this advertising revenue is net or gross. (That said, a more recent BusinessWeek article claimed 90% of Zynga’s revenue came from virtual currency.)
- Serious Business, which was acquired by Zynga earlier this year, used to have a large proportion of revenue from advertising, but as of January 2010 was getting 90% of its revenue from virtual goods, and 90% of that from direct payments, aiming for 100% direct payments, according to an interview quoted by one of its VC backers, LightSpeed Venture Partners
- MoshiMonsters, a social game environment aimed at children, had 14 million users as of April 2010, and is growing revenue 20% per month and is ‘very profitable’, according to a recent news article. At present its main revenue earner appears to be subscriptions, which deliver premium membership privileges, but it is also looking at offering real-world goods (such as cuddly toys, and T-shirts), based on characters in its virtual world.
Overwhelmingly, the money developers make from direct user payments comes from the purchase of in-game credit which can be used to fund the purchase of virtual goods and services. Premium content subscriptions are also used, but are less common. They make particular sense for developers of games such as Moshi Monsters, where the ultimate end-user (aka ‘the kid’), is not usually actually the person who pays (aka ‘the parent’). In this case subscriptions lower the friction involved in the transaction, and also act as a welcome control on total expenditure.
There appear to be two main indirect methods of monetising game players. The first is the sale of in-game advertising space, which usually goes through a 3rd party broker (e.g., AdKnowledge). The success of this option relies on its ability to take attention away from the game. This has the potential side effect risk of weakening the user’s involvement with game. So, it does have some drawbacks. But it appears to be a welcome enough source of revenue.
In theory, the ads served up a side dish by a game could be so attractive they would actually reinforce players’ desire to play. However in practice this is rare, because of a lack of tailored inventory on the supply side and on the contextual delivery side. The potential exists to make much more sophisticated use of games as an ad medium, but the underlying logic of when and what to serve up to whom would have to be radically re-thought. Knowledge of people’s game behaviour, both contextual (‘oh zut, I just lost again!’) and characteristic (‘I am a hoarder and a risk avoider’), could potentially deliver a unique form of behavioural targeting, over and above that offered by other media. In practice, nobody on the creative or the technical side appears to be making the effort to design for this in a skilful way. Yet. (The same could be said of the targeting opportunities inherent in Facebook advertising, mind you. But it will come.) [Sez me.]
The second indirect way of making money from users is via ‘offers’, where another company, brokered by a third party, pays the developer when the user takes up an offer, and the user is rewarded for taking up the offer by in-game credits. These types of offers vary, and include participation in market research, or taking up a free trial. There was a lot of noise made by TechCrunch last year about scammy offers, which seems to have been quite effective.
All methods of making money rely on the developer having ‘enough’ users who convert in the desired way. (Even plain old advertising has its day of measurement reckoning these days.) A lot of craft and graft goes into engineering the timing and nature of invitations to convert.
Exactly what counts as a ‘large enough’ conversion rate is a much-cherished secret in this market. (TechCrunch claims Zynga is making 1-2%. ) All methods of making money rely on a large enough portion of the user base getting involved enough in the game world to spend, at the very least, time, and at the most money. (Sometimes lots and lots of money, as in the case of the over-eager 12 year old who ‘invested’ £600 in Farmville, maxing out his life savings and making his mother’s credit card glow in the dark.)
Exactly what people’s motivation for this is, is a very interesting question. I’ve previously talked about how social game environments can be pleasant, and how they grow by colonising existing schemas for communicating and exchanging social meaning. I think my analyses are right – but I also think that they don’t provide a full explanation of the compulsion to play.