Interview with CEO of Serious Business January 6, 2010

In December I posted an interview with the CEO of Playdom that Atul Bagga, the gaming analyst at the investment bank ThinkEquity, recently conducted. Atul interviewed the CEO of Serious Business, Siqi Chen. Serious Business is also a Lightspeed portfolio company. The transcript gives some info on Serious Business’ revenue/DAU, conversion rates, demographics, and revenue split between digital goods and advertising.

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Atul Bagga, ThinkEquity (AB): Please explain your business and why should investors care about Serious Business?

Siqi Chen, Founder and CEO, Serious Business (SC): We are one of the oldest developers of social games. Our largest game is Friends For Sale, which we launched around six months after Facebook platform was opened, which has about one million daily active users. Over the past two years, we’ve grown from a two-person operation in my apartment to a 30+ person team working on Friends For Sale and two new games.

AB: Who’s your target customer?

SC: It varies widely by game. On average it is the Western customer, 25 to 35 years old with a large amount of disposable income. Our geo and demographic distribution generally matches to Facebook. But in terms of the revenue contribution, the majority of our revenue comes from the U.S., France, and Vietnam.

AB: Vietnam?

SC: It’s really hard to predict where you’re going to get viral, and depending on the month, we may explode in different countries. We’ve been doing well in Vietnam over the past half a year or so.

AB: What is your business model and what is the break up of revenue between virtual goods, advertising, and how do you see this breakup trending over the next couple years?

SC: Almost 90% of our revenue comes from virtual goods, although we do some branded advertising with partners like AppSavvy and AdNectar. Out of our virtual goods revenue, 90% comes from direct payments.

AB: Seems like that indirect or offer-based revenue is a very small part of your business. Is it because of the recent controversy in the business?

SC: Indirect or offer-based payments have always been a small percentage of our revenue. We have worked hard to make sure that percentage mix increases in favor of direct payments. We think it is a lot more sustainable when someone likes your game so much that they pull out a credit card and pay you. People have become more comfortable with the idea of paying for games on Facebook, and we’re working to get as close to 100% in direct payments as we can. The reason why we still have offers is that a large portion of our international users don’t have credit cards or don’t have the capability to pay us directly, so offers are a way for them to be able to still buy virtual currency.

AB: The offer providers claim that games that use offers would see about 20% lift in their conversion rate. Is that consistent with what your experience?

SC: That is probably true if you talk about conversion rates, but that doesn’t necessarily translate into the same percentage growth in revenues. The revenue you get from these users is very small relative to people who are paying you directly.

AB: How do you see the advertising revenue growing?

SC: Advertising used to be a large portion of our revenue, and in absolute terms, we have been growing this revenue stream through campaigns like McDonalds or Oakley. But over the long term, it is not our focus. We want to increase the proportion of revenues we get from direct payments rather than advertising. The way I think about advertising as a publisher is that you’re basically selling the chance of a user leaving your site; you want to be in the business of getting the users to come to your site and being able to monetize that. So strategically, this is something we want to move away from.

AB: Can you talk about the monetization potential of social games versus highly immersive MMOs and the difference in the types of items—expression versus functional?

SC: What makes social games work is that these games are viral, socially distributed games with universal appeal in theme and mechanics, whereas MMOs are usually focused on hardcore gamers that monetize much better. So the ARPU is lower on social games, but we make it up in massive volume.

AB: Can you share some of the metrics of your business—ARPU, conversion rate between paying versus non-paying user?

SC: In the case of Friends For Sale, conversion rate is about 1%, which is really low. And out of the people who pay for the game, we extract most of our revenue from users who pay us thousands of dollars and in some cases tens of thousands of dollars at a time. Our blended ARPU works out to about $0.45 per DAU per month.

AB: Can you give us some sense of how big this market could be?

SC: It is probably around a billion dollar-plus today. If you look at the trends, more people are spending more of their time on social networks. If you believe that this is how people are going to spend a large percentage of their entertainment time over the next four to five years, then you could argue that the market is just getting started on a path of explosive growth.

AB: What are the key competitive differentiators for Serious Business, and what is difficult for others to replicate?

SC: We think there’s a big opportunity in moving away from essentially single player games that are socially distributed towards truly social games, games about meeting new people and keeping in touch with the friends you already have. We have had some success with Friends For Sale in that direction and learned a lot of lessons on how to get people to migrate from playing with their friends to meeting new people. This is something we probably know better than most people in our space.

AB: What is your growth strategy? Is it about publishing more games, getting on more social networks, or clocking ARPU?

SC: It’s a combination of all of (the) above. We have a few games under development, including our first flash game. We are also working on expanding the user base of our existing games. We had never had more than two engineers on Friends For Sale at a given time, and we are now investing more resources into that game as well.

AB: Can you elaborate on the games in your pipeline?

SC: We have one game called The Hierarchy, which is in public beta right now and the feedback has been very positive. We think of it as a next-generation entry in the social RPG space in terms of an interesting combat system, production values, and content. We are bringing in some traditional MMO mechanics to the social gaming space. The majority of our company is focused on our first flash game. I can’t talk too much about it, but we’re really excited about this project. We have a pretty solid team that came from Zynga and EA and Naughty Dog working on it, and will be launching it in the next quarter.

AB: You had mentioned that you were one of the first game developers on Facebook. What has been the constraint for growth?

SC: I think that the real constraint for growth is talent. We are about 32 people, and finding the incremental hire is becoming increasingly difficult. The competition around products is pretty high, but the competition around attracting great talent is even higher.

AB: Is there a reason that you have been only on Facebook and not on MySpace or other networks? What does it take to port your games on other networks?

SC: It goes back to the problem of finding great talent. With our limited resources, we need to pick our battles very carefully. Today, the best platform to develop for is still Facebook given its large market size and low friction of distribution.

AB: How do you view the recent and upcoming changes on Facebook?

SC: It has always been a challenge, and it will continue to be a challenge for developers. This is another in a long series of Facebook changes that Facebook has made to improve the health of the ecosystem, and it won’t be the last. You just have to roll with it like every one else in the space. We’ve been through it before, and I think that the ecosystem is going to come out stronger, as it has in the past.

AB: How do you see Facebook payments changing the social gaming landscape?

SC: I’m holding a wait-and-see attitude. There are two camps: one that thinks a 30% fee to Facebook is too high to be sustainable, and others who think that it will be offset by the increase in conversion rates through the standardization of payment methods on the platform. I don’t know which way it’s going to pan out, but I think the worst case will be a minor decline and the best case will be a significant improvement.

AB: How do you view mobile platform as an opportunity?

SC: We don’t think of mobile as a distribution channel. It is not nearly as efficient in terms of distribution compared to a social network. We tend to think about mobile as an additional access point and not as an additional channel of distribution.

AB: What is the typical lifecycle of game—time to develop, beta testing, growth, and maturity?

SC: We are very metrics driven in the way our company works. We closely watch certain metrics, and if the game doesn’t meet the bar, we will kill it. In terms of development, e.g., Hierarchy took two engineers for two months to get to a public beta stage, and it is probably going to be a three- to four-months process to get the metrics around revenue and engagement tuned.

AB: What do you see is big challenges for Serious Business over the next couple of years?

SC: Our biggest challenge is reaching the revenue scale that we need to compete with the larger players in the space. It takes only one large hit to launch a company, if you look at what Mafia Wars did to Zynga, Pet Society to Playfish. Our goal over the next year is to make sure we get that hit and then scale from there.

AB: Is the scale necessary more from the development side or from the marketing effort?

SC: It is mostly from the development side. If you think about it, we’re competing against a team of 80 over at Mafia Wars. So just being able to iterate quickly enough, collect enough data, and make sure you are adding things that users want is a really hard challenge because your competitor can do it 10 times faster than you through sheer mass.

AB: Can you give us some sense how big Serious Business is and how fast you might be growing?

SC: We are at 32 people. We were around 20 a quarter ago, so we’ve been hiring pretty aggressively. We are profitable.

AB: Where do you see Serious Business three years from now? Do you see yourself as a public company, as an independent company, or as part of a bigger platform?

SC: It is hard to say, we are just focused on making great games today. I do hope that in a couple of years we will have a few hits and become a very profitable and sustainable company.
AB: Thank you so much for speaking with us.