How To Succeed In The Coming Social Gaming Explosion
Despite the frenzy of excitement in response to the May 2007 launch of the Facebook platform, the early revenue story was not encouraging. It took awhile for social game developers to figure out the non-trivial challenges in applying the virtual currency lessons of their free-to-play brethren to an entirely different space. And the resulting revenues are now looking very nice indeed thank you very much. Moreover, and perhaps more importantly, there is growing agreement on what the overall business model is, how it works, and how much money can be made from it. Experimentation, innovation, and optimization are ongoing but the core value chain is operational at scale and a handful of notable success stories are driving the hype cycle.
When compared to the maturation rate of free to play gaming off the social networks, the speed at which social players have emerged and settled into natural roles is exceptional. Over five years after the introduction of the first virtual currency games in the US, only now are publishers, analytics, payments, and secondary market players starting to gel into a functional ecosystem. The difference of course is cheap distribution. As bandit Willie Sutton quipped when asked why he robbed banks, “that’s where the money is”. The social networks have been validated to be where the customers are. To be fair, there are plenty of customers and money locked up in the walled gardens of the major online game and media portals. They’re just not easily addressable by third party developers in a very profitable manner.
Despite the rough economy, venture investors continue to not only fund online gaming startups, a handful of funds are starting to focus on them exclusively. With access to capital, the advent of a functional ecosystem, and scalable model, senior Web and video game talent has been streaming into social gaming. In combination with the continued growth and standardization of the platforms themselves, the global recession has given most consumers a new found appreciation for stretching their entertainment dollar resulting in a near perfect storm for social gaming adoption.
The flip side of proving out the model however is that now everyone wants in. Cloning is already commonplace and production values are rising quickly. The number and types of titles will increase dramatically before year end. Demographic focus is narrowing. Additionally, the percent of Facebook users already using applications stands at 95% and the number of active users per app is on the decline. New growth therefore will only come from adding new users to the platform, increasing the per user application attach rate, and/or taking user time away from something else. In short, it is about to get very competitive.
Taken together, the emerging dynamics of the space necessitate a steep increase in operational sophistication. Success in the coming social gaming explosion will be defined by the ability to adapt to these operational challenges. They are:
Smarter virality requirements. As discussed in my last post, the platforms will protect the efficacy of the social graph at all costs. It is their golden goose. This means that “dumb virality” based on friendly spam will increasingly decrease in utility. Successful companies will be those that can create and optimize viral loops based on a stronger correlation to user benefit - aka “smart virality”.
Rising costs. In addition to the higher production costs needed to underwrite the creation of competitive products, significant improvements and investments in support, infrastructure, and marketing will be required.
- Service - Social games, like all Free To Play games before them, are largely monetized via an ongoing direct relationship with the player. Customer service is a key component of retention in that equation and few companies are executing well in this area right now.
- Billing - Taking money from online customers can be maddeningly complex. Free To Play game operators often support between 50-100 different payment options around the world. Understanding the footprint, margin, and fraud profiles of each is important in employing them to maximum effect. Until universal currencies emerge, social game companies will need to invest in billing expertise to keep pace with different user payment profiles.
- Infrastructure - Given the viral nature of the platforms they are on, break out social games can drive massive amounts of traffic in short periods of time. Being able to ride these traffic waves in a cost effective manner is essential.
- Marketing - Even smart virality is not sufficient on its own. Advertising and other promotional tactics are definitely a required part of the mix for most titles. Personnel and budgets are just the baseline cost in this regard. Learning to market effectively in a highly social context is a constant and iterative process with fluctuating ROI.
- Fraud - Outwitting scammers in a service environment is a multidisciplinary effort cutting across game design, payment method expertise, community management, customer service, and billing business rules. Learning the ropes in this arena can be expensive - especially at scale.
- Analytics - Whether built in-house or licensed from a third party, insight into the player experience is pivotal in optimizing acquisition, retention, and monetization.
Greater competition. As alluded to above, the wash of talent and money into this rapidly changing space could drive competition toward a red ocean state. It probably won’t happen this year but I would not be surprised to see a flavor of it by the end of 2010. At which point title failure cases will multiply and a clearer line will likely begin to be drawn between developer and publisher roles. Quality content will be still be king but, access to the customer will grow more hotly contested and come with a commensurate cost structure.
Downward pressure on CPA offers. The offer ecosystem that many social games rely on is on thin ice. Incentivized lead-gen imploded once in the Web 1.0 days and the seeds for Implosion 2.0 are in the wind. The offer providers are well aware of this however and are working heroically to ensure that their advertisers continue to see value by reducing rates on offers that become targets of abuse. This dynamic writ large over time will result in erosion of payout rates to game operators. Successful games will be those that have a strong direct payment strategy in addition to offers.
Metrics obsession. Funnel optimization including conversion at each step of customer interaction from first touch all the way out to lifetime value is metrics-driven. Obsession over this data set will be mandatory DNA for all companies in the space but especially those with publishing ambitions.
Talent war. It may seem counter-intuitive to talk of a talent war when so many experienced people are out of work. However, the skills that drive this niche are extremly specialized - Flash developers, metric geeks, social game designers, live team managers, virtual economy and item merchandising experts. Understanding of and bench strength in most of these job classes is shallow in the industry.
Wild cards. It is still a young category. There are a number of moving tectonic plates that could go bump, causing untold effects.
- Platform taxes - The large Western social networks have kindly opened up for free over that past few years in order to build a developer community which would in turn help them grow their audience. They are under no obligation to let the free ride continue indefinitely. Running a social network can be expensive after all. In Japan for example, Mixi recently launched their application platform with a 20% cut for themselves built in. The platform holders are the corner stone of the value chain and it seems likely they will come for their taste eventually.
- Market capacity - The amazing growth of the past 24 months somewhat obscures the fact that somewhere out there is an upper limit for each and every title. There are those that argue the first generation of social gaming product has already hit it and is now plateauing - perhaps even churning through massive numbers of users just to maintain current position. How far you can go with a given title remains a bit of a question mark. Revenue forecasting and SKU planning are complete WAGs in comparison to more mature markets.
- Platform stability - Social engineering is tricky business. The platforms must carefully balance the needs of developers and users against their own agenda. To date, this has resulted in a bit of a moving target for developers causing redesigns and missed deadlines. To the degree this is business as usual, developers will need to allow for platform-driven slippage. Console, handheld, and mobile game developers are used to dealing with 1st party platform holders who shift the firmament from time to time - Web folk perhaps less so.
- Identity systems - Extending their reach to cover more of the Web via identity systems would appear to be at the core of future growth strategies for the social networks. It is is also a potential revenue stream. How this will affect overall user growth on a per platform basis is up for debate. Moreover, the ROI of off-platform efforts via the identity systems remain unproven and speculative. Watch this space.
It is my opinion that the next generation of successful social games will be those that understand the above landscape and craft strategies to meet it.
-Shanti
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