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iPad games are a big opportunity June 28, 2012

Posted by jeremyliew in games, games 2.0, gaming, ipad, tablet.

I posted recently about discovery being the challenge in gaming. This is very true of mobile gaming where the level of noise is very high.

I think that iPads, and tablets broadly, present a current opportunity for game developers. According to Pew Internet Life, one in three Americans owns a tablet or ereader as of January 2012. Many publishers acknowledge that tablets are going to be very important gaming platforms. John Ricatello, CEO of EA, recently said that iPad is EAs fastest growing platform. Says the International Business Times,

Reuters reported Gonzague de Vallois, senior vice president of publishing at Gameloft, saying: “The iPad is the fourth step in the gaming evolution. The first being the microcomputer, the second being the game console and the third being smartphones.”

Even Microsoft, with it’s new Smartglass product, acknowledges that the iPhone and iPad will be important gaming platforms.

Yet today, there are far fewer games built specifically for iPads. Discovery is substantially easier for iPad than iPhone as it is less crowded. And even most “HD” iPad games are simply upresed version of the iPhone game. Yet tablet gaming has the opportunity to be quite different to phone gaming:

  • Longer session times
  • More screen real estate for display
  • Multi-touch and other more complicated gestures more feasible
  • Opportunity for co-op and competitive play with another person sharing the same device

If the tablet is fundamentally an entertainment device that lives in the living room (versus the phone being a utility device that lives in the pocket and is frequently used out of the home), then you would expect different use cases to emerge, and different games to address those use cases. There is a window where better products can lead to better discoverability. I expect this window to close over the next 18-24 months.

Who do you think is doing the best job of optimizing the tablet gaming experience?

Discovery is the problem in gaming June 11, 2012

Posted by jeremyliew in games, games 2.0, gaming.

In 2009 I wrote a guest post at Industry Gamers about why social gaming is so attractive to investors, where I talked about the three key elements oin gaming: Development, Distribution and Discovery. Basically, I compared circa 2009 social games to AAA games and said that they were cheaper to develop (a few months and a few hundred thousand dollars), distribution was virtually ubiquitous (since they could be played in browser versus bought in a store and played on a console or high end PC) and discovery was free through viral growth instead of driven through heavy marketing campaigns. I concluded that this dynamic, which allowed a startup to take multiple “shots on goal” with a venture capital investment, was what had brought renewed investor interest to gaming, an industry that had largely been financed by publishing deals.

Much has changed since 2009, and browser (including social) and mobile games are the two hottest areas in gaming right now. But I think the framework of Development, Distribution and Discovery is still a useful lens to view the industry

Development costs have gone up since 2009, as has production quality and game quality. Many of the circa 2009 social games were more focused on growth than retention, and in many cases more focused on “satisfaction” than fun. This has changed dramatically. Game design has improved, as has design and art. This has caused development costs and timelines to increase, but generally but less than an order of magnitude. Good mobile and web games can still be built for a budget in the low single digit millions range and below, and in under a year.

Distribution continues to be easy, but it is no longer free. In 2009, there were no facebook credits and 360M people used Facebook. The iPhone app store had been around for a year or so, but there were less than 10m iphones in use. Today, there are 1bn smartphones (including Android), 900M people use Facebook every month, and in all cases you pay a toll to the platform. But gaming companies do not compete on distribution, it is a level playing field.

The outcome of easy development and distribution has been a massive explosion in the number of games available. For both mobile and Facebook, games are the most popular category of apps. In a world as crowded and noisy as this, Discovery has become the bottleneck.

In 2009, viral growth through invitations and notification were the way that Facebook games could get discovered. As these channels became better policed, discovery moved to the feed. Today, even the feed is no longer a reliable driver of discovery.

For mobile, charting is the primary mode of discovery, and this led to widespread app store manipulation.

Today, game quality is an ante, but discovery is the differentiator. We see a few strategies work repeatably for at scale discovery in the current environment:

  1. Cross promotion to an existing base. Game publishers with a lot of Facebook or mobile install bases are able to make their user base aware of new releases in a free and scaleable way. Zynga has repeatedly made use of this approach to launch its new games at real scale.
  2. Sequels. Publishers with a hugely successful hit game can often milk the IP with subsequent releases. Rovio has done this repeatedly with Angry Birds. With the game market being so noisy and confusing, most players will give a sequel a shot if they enjoyed the first game.
  3. Borrowing IP from another media. Much like a sequel, gamers will respond to a brand they recognize. This can be IP from another gaming platform (Bejeweled Blitz, Zynga Poker, Sonic the Hedgehog, Sims Social) of another medium (Hollywood Squares)
  4. Paid acquisition. Smartphone and Facebook both have relatively efficient markets for paid installs at this point. If a game monetizes better than others, it can pay more for a new player than others can, and it can find its audience through paid channels. This requires excellent monetization. Kixeye, a Lightspeed portfolio company, has followed this approach with great success.
  5. Get featured by the platform. This is hard to do. Infinity Blade benefited from a lot of promotion from Apple, in large part because it changed peoples perceptions about what was possible for an iPhone game. This drove a lot of users for the game, despite its relatively high pricepoint. Getting featured by the platform is hard to plan for, and can take a combination distinctiveness, something in your game that also promotes the platform, business development expertise, and someone simply taking a shine to your game.

Many of these are not useful strategies to startups since they are only available to larger companies who have already seen success. But we still see new games break through, get discovered, and race up the charts. This can always happen to great games at any time. But it relies on luck, and luck is not a strategy.

What is your strategy for discovery?

Congrats to Playdom and Disney! July 27, 2010

Posted by jeremyliew in games 2.0, playdom, social games, social gaming.

As reported today, Lightspeed Portfolio company Playdom is being bought by Disney for up to $763M.

Congrats to both parties, as well as to John, Dan, Ling, Chris, Rick and the rest of the Playdom team!

Lessons from the leaders – Engagement in social games May 11, 2010

Posted by jeremyliew in game design, game mechanics, games, games 2.0, social games, social gaming.

On Friday I moderated a panel at the social gaming summit featuring speakers from Zynga, Playdom, Playfish and Crowdstar on the topic of engagement best practices in social games. Socialtimes has a brief writeup of the session:

Social gaming giants tend to focus on hits. An under performing game can be a cause for concern and even shutdown in some cases. Mark Skaggs jolted the crowd by stating that Zynga aims for a 60% same-day repeat engagement of a newly released game but their core focus is on long term retention of around 30%. Zynga manages to attain 1.5 million DAUs on the first day, upwards of 3 million DAUs at times. Zynga’s game Mafia Wars saw signs of stagnation in players repeatedly doing jobs and diversified the experience by adding an array of places players could visit, instilling adventurous emotions in the adventurers.

Sebastien emphasized engagement as a key point of focus for their games along with mass appeal. Sebastien also discussed Playfish’s shutdown of one of their previous games Quiztastic, stating, “one of the ways to create engagement in Quiztastic is through highly relevant content that’s only relevant to a narrow set of friends. However, it turned out to be massive engaging for the active contributors but not others.” Another game Playfish shutdown was Minigolf Party because too much was being demanded of the players. The panelists agreed, concluding that a balance is necessary to engage a mass-audience.

Christa brought in her unique perspective as CFO of Playfish, commending the rapid success of their game Social City. She attributed growth to additions of surprise mechanics – specifically random animations that rewarded users with an aesthetic and delightful experience, encouraging them to return frequently for more.

Since I was moderating I wan’t able to take good notes, but here are some of the other points that were made on the panel:

Appointment Mechanic (also known as farming mechanic) suits the casual gameplay style of social games and brings people back. Good to offer different timeframes of “harvest” to match way people play the game, typically in multiples of two hours. Four hour timeframe good for players logging in at beginning of day, lunch and end of day. Two day timeframe good for players who play primarily at work who need to deal with the weekend

Whether you apply a “hard” penalty to the apppointment mechanic (e.g. crops wither, no reward) or a “soft” penalty (e.g. collection bucket full, no incremental reward above cap) depends on the style of gameplay.

Plot can also help drive engagement and retention. This can be both plot secondary to gameplay (Easter eggs in the game, animations that change over time) or primary to gameplay (e.g. Mafia Wars/Mobsters narrative arc).  Players come back to find out what happens next.

Special Events can drive engagement, which sometimes translates into increased retention. These special events can be both in the game (e.g. the Weekend of “superberries” on Farmville, which added 3 million DAUs for a week and an incremental 1.5m DAUs permanently) and outside the gmae (e.g. the Taylor Swift dress in Sorority Life the day after the AMAs).

Real Life relationships, love, flirting and friendship, can drive special actions which support long term engagement. e.g. Pet Society and Restaurant City drive tens of millions of virtual roses, and many real roses, to be exchanged on Valentines Day.  Friends For Sale (launched by Lightspeed portfolio company Serious Business, now part of Zynga) is the prototypical example.

Low latency is important. When users have to wait a long time for pages to load, they leave.  This can be improved both by optimizing web ops, as well as by modulating the complexity of graphics etc based on browser and OS type.

DAU and DAU/MAU (Stickiness) are highly correlated. The causality arrow flows both ways.  It isn’t enough to just build a good game, nor is it enough to get frequent posts to the feed. Both need to be balanced, and feed posts need to be “reasonable” from the point of view of a user. You need to understand and accept the motivation of the post.

Viral channels are now more about engagement/reactivation than about growth.

Key metrics are 1 day, 3 day, 7 day retention, then long term retention. 1 day retention target is 30-60%, less than 30% and you may not have a fixable game.

If you were there and had other important points that I missed, please add them in comments.

We estimate Zynga revenues around $270M in 2009 and $240M in 2010 YTD May 3, 2010

Posted by jeremyliew in games 2.0, social games.

This also appears as a guest post on Techcrunch


There has been a lot of speculation about Zynga’s revenue. Last week Business insider said:

Zynga, the social gamesmaker behind Farmville, has a revenue run-rate around $600 million, a source close to the company tells us. Another source confirms that Zynga is doing well over $1 million in revenue a day.

Businessweek says:

More than 120 million people play Zynga’s online games. Employee headcount has almost quadrupled in the past year, to 775. Revenue for the three-year-old company should surpass $450 million in 2010, according to two people who have been briefed on its financials.

We thought that we would estimate Zynga’s revenue ourselves by looking at publicly available info. Here is what Linus Chung and I did:

  • Focused on only top games on Facebook
  • For each game, pulled DAU numbers on first of every month since 1/1/09 from Developer Analytics.
  • To get the average DAU for each month, took the average of the first of the month and the first of the following month. So for March, the average DAU for the month is the average of DAU on 3/1 and DAU on 4/1.
  • Inside Virtual Goods published a monthly ARPU range (low and high end) for each game genre. In general, we used the average of low and high, with some exceptions:
    • For virtual gifts, we used the high end: $0.50. This only affects Friends for Sale.
    • For simulation games (e.g., CafeWorld, PetVille), we used the low end: $1.00. These games have been wildy popular in terms of users. We assumed that the recent increase in users results in lower monetizing users being added.
    • For poker, we used the low end: $2.00
    • For FarmVille, we estimated ARPU at $0.50 due to its scale
  • Mapped each game to its game genre, and multiplied average DAU each month with the ARPU.

This estimate is likely to be inaccurate for many reasons, notably (i) the coarse estimates of revenue/DAU (rounding to the nearest 50c), (ii) the low end of range estimates for many of Zynga’s most popular games, and (ii) the fact that we ignore revenue from MySpace, Zynga’s websites, and mobile. None the less, it shows some interesting results:

Again, note that these are all estimates. However, our estimates show that revenue ramped fast over calendar 2009. The H1 ramp was driven by Poker and Mafia Wars, and the H2 ramp driven by Farmville, Cafeworld and Fishville. Our estimates show that revenues have been flatish since the beginning of 2010, with a decline in older games compensated for by the launch of Treasure Isle.

Feel free to see the details and play with the assumptions yourself – the spreadsheet is here. It is a read only Google Doc so that your changes won’t affect others who are later to check it out, but you can download the spreadsheet to change assumptions. Note that there are four tabs to the spreadsheet (at the very bottom of the page). To download, click File–> Download as –> Excel.

Play with the assumptions, and let us know what you think.

Congrats to Siqi and Alex and the Serious Business team February 11, 2010

Posted by jeremyliew in games, games 2.0, social games, social gaming.

As announced earlier today, Zynga is acquiring Serious Business. It is a good outcome for everybody. Congrats to Siqi, Alex and the rest of the Serious Business team!

Interview with Chairman of Crowdstar February 1, 2010

Posted by jeremyliew in crowdstar, games, games 2.0, social games, social gaming.

Last Friday Lazard analyst Colin Sebastian hosted a conference call where he interviewed Peter Relan, Chairman of Crowdstar, one of the newer entrants to the top tier of social games publishers. Here are the Lazard notes from the call, republished with permission from Colin:

LCM Online Game forecast

On Friday we hosted a conference call with Peter Relan, chairman of CrowdStar, which is one of the top social game companies with more than 60M monthly users, primarily on Facebook.  CrowdStar’s games include Happy Aquarium, Happy Pets, and Happy Island.

Facebook platform remains the core focus for social game developers. Mr. Relan indicated that distribution on Facebook remains the focus for social game developers given the platform’s scale, growth, and monetization potential.  The iPhone on the other hand serves more of a product extension for social games until there is more functionality to facilitate micro-transactions and virtual goods.  Regarding Apple’s iPad, Mr. Relan expects to migrate the company’s iPhone games to the new platform, while the larger screen will allow for a new breed of casual and social game applications.

Expect widespread launch of Facebook Credits. CrowdStar’s Happy Aquarium was one of the first social games to use Facebook Credits as a payment platform, and Mr. Relan indicated that FB Credits would launch throughout the site in the coming months.  The launch of FB Credits is expected to generate a sizeable take rate for Facebook in the 30% range vs. 5%-10% for alternative payment options.  However, CrowdStar expects that diminishing payment friction and increasing conversion rates will ultimately offset the loss in revenues.

Plenty of runway for growth for social game industry. Mr. Relan indicated that typically 1%-3% of social game users convert to paying customers, and the #1 paying demographic in Happy Aquarium is women aged 35+.  As a result, we believe that there is significant runway remaining for social games to grow assuming continued distribution growth (on Facebook, smartphones, browsers and other social networks) and increasing conversion rates in other demographic groups.  We currently forecast social game revenues (virtual goods, advertising and offers) to nearly double in 2010 to $1.3B worldwide.

Console properties may not be as relevant in a social game context. Mr. Relan highlighted that risk exists when attempting to migrate console game properties to a social game environment as the user demographics are very different.  Also, social game users care more about the social mechanics of a game instead of the depth and quality of game play, which is inverse to console game players.  Other than EA, we note that legacy game publishers have very little penetration in the social networking segment of the market and are likely to invest in these platforms this year.

Application fatigue is a key risk. Given the relatively simple game play, the sometimes fickle users, and the social dynamics of the game play, application fatigue is a key risk for social game companies unless companies focus more on innovation and game quality.   

Interview with CEO of Serious Business January 6, 2010

Posted by jeremyliew in games, games 2.0, gaming, social games, social gaming.

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.


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.

Interview with CEO of Playdom December 16, 2009

Posted by jeremyliew in games, games 2.0, gaming, playdom, social games, social gaming.

Atul Bagga, Gaming analyst with ThinkEquity, has published some great research on the social gaming space. He recently published an interview with the CEO of Playdom, John Pleasants. Playdom is a Lightspeed portfolio company and I’ve known John since we worked together at CitySearch in the mid-late 90s. The report requires an account with the investment bank ThinkEquity, but I’m reproducing the text of it here with permission from Atul. It has some interesting tidbits of information for people interested in the space, including revenue, employee count, paying conversion rates, ARPPU, ARPU, revenue mix etc.

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

John Pleasants, CEO, Playdom (JP): We are in the social gaming space, which is defined as online games that live primarily inside existing social networks. Our products are a combination of games and social interactivity and it’s the hybrid of the two that makes them differentiated from traditional games that tend to be more immersive and generally more focused on production qualities, graphic capabilities. Social gaming is a free-to-play model, so it attracts a broad demographic of people. There are now hundreds of millions [of] people playing social games, and as a category, social gaming is still in infancy. So it’s a disruptive model. Relative to traditional gaming, this model has lower cost of production and higher returns, because you can very quickly capitalize on your user base, and it’s a live service, so you change and evolve your product over time. You don’t have the risk of spending a lot of money and time building a product then shipping it and hoping people come. You’re mitigating all of that risk in the traditional entertainment model, and hence, we have a superior model for entertainment, production, and distribution.

AB: Can you explain how do you make money—virtual goods, advertising, what could be the mix between these different revenue streams and how do you see it trending over a longer term?

JP: We are primarily a virtual goods model. People acquire items in order to accelerate in a game or to unlock new parts of the game and limited edition items. That represents 90 percent of our revenue. Between five and 10 percent of our revenue comes from advertising. I think that the revenue mix will always be dominated by direct consumer payments.

AB: How much of the virtual goods revenue comes from direct payment versus indirect payment and maybe if you can share your thoughts on indirect payment that lead generation offers, et cetera?

JP: A vast majority of our revenue comes from the direct payment. We want to have direct billing relationships with all of our customers. Offers can be a good thing for people who can’t or don’t want to pay but are willing to invest time or some personal information. Only about 15% of our revenue comes from the indirect payments. As long as the offers are clean, legitimate and transparent, they can be acceptable. But if they are less than transparent and manipulative, they don’t create a good user experience and they are not good for us.

AB: You mentioned that about five or 10 percent of revenue coming from advertising. What kind of advertisements are these—are these video ads, in-game ads, banner ads?

JP: These are primarily adjacency ads to our existing products. We’ve done a few things, sort of in-game experiences, but it’s rather limited. And advertising has not, to date, been a focus for us. We do not even have one person in our company dedicated to advertising at this time.

AB: If we look at the Chinese online gaming space, it seems like highly immersive massive multiplayer online games are better monetized than the casual games. And given that your games are shorter duration, more casual; what gives you the confidence about the ability to monetize these games?

JP: Well, it really all comes down to reach in different behaviors. You’ve got game room phenomena over in China and Korea, so people go in games rooms and play these online games. We don’t have that phenomenon here because we have a lot of personal computers in the home and people can buy downloadable games. In our markets we have 300-plus million people on Facebook alone, so that’s the equivalent of our game room. That’s where everybody has congregated and we’re simply going there and offering them a free model. While hardcore gamers, like a World of Warcraft have limited reach, games like a Maple Story or a Mobsters 2 or a Sorority Life game reach much broader demographics.

AB: Can you talk a little bit about who is your target customer.

JP: Target customer is anybody who lives inside the social networks, which these days feels like anybody. Facebook has users from 13 to 80 years old and it has equal distribution between men and women. Each of our game has a different demographic. Sorority Life appeals more to women; Mobsters 2 appeals more to men; Poker application appeals to a gaming or casino demographic. So if you took the aggregate of it, it’s broad-based and follows the populations of the social networks, with a primary target of 18 to 35.

AB: Can you give us some sense on how big this market could be and maybe if you could share some of your assumptions around market-sizing estimates?

JP: I think the western market is somewhere between $0.5-1.0 billion today and it can be $3-5 billion over the next three years. It’s growing more than 100 percent a year and all the metrics are moving in the right way. That starts with Internet penetration worldwide, followed by social networking penetration, followed by percent of users of social networks that play games, followed by percent of people who pay inside of these games, followed by how many games they play per month, followed by ARPU per paying user. Add it all up; they’re all growing and if each of those things goes up you know 20 or 30 percent or whatever the respective numbers are, it adds to 5-10x of the category over a three to four-year period of time.

AB: Can you share some of the metrics with us—typical conversion rate between playing users versus paying users; typical ARPU?

JP: It’s all over the map, but we see conversion in the range of 1-4%. Our ARPU per paying user tends to be about $20; but when you average it all in with all the non-paying people, it is about $0.20-0.25 cents per month.

AB: What is your growth strategy? Is it more about getting in more social network, clocking-up ARPU, or adding more games to get a bigger audience?

JP: Yes, the latter; more games, bigger audience. We have 15 games now and we hope to well more than double our size over the course of the next year. We have also acquired (Lil) Fram Life through our acquisition of Green Patch.

AB: Can you talk about your mobile strategy? Now that Apple has opened up its platform for in-game transaction, how does that change the landscape?

JP: We have our Mobsters product both online, as well as on the iPhone. We have booster packs that come off of that and that product is doing well for us. We have recently acquired Trippert Labs, which gives us dozens of applications on iPhone. Micro-transactions are an important part of this economy; it’s how it works, so I’m very excited that Apple is opening up their platform and enabling more Flash over time to live and exist inside the iPhone environment. Our games are live services and a consumer should be able to access them from any device they have, whether that’s a mobile device or a Notebook or a PC.

AB: Who do you think represents the biggest competitive threat for Playdom?

JP: Surely, Zynga and Playfish both are very similar companies as ours. Some of the independent developers can come up quickly and do nice jobs. Some of the big media companies are trying to get into this, foreign companies especially from China are aggressively moving into this space as well.

AB: What is the key source of differentiation for Playdom that is difficult for others to replicate?

JP: You have to make the products, and you have to know how to run a live service, and you have to have the infrastructure to manage the scale, which I think is one of our strengths. The other thing is that we’ve a very good combination of Internet people, gaming people, creative people, and live services people. You have to get the right blend of talent that can keep these things.

AB: Can you talk about the Facebook Credit? How does that change the payment landscape and what does that mean for a social gaming company like yours?

JP: I think that if Facebook were to create a universal payment system for a platform as large as theirs, I can imagine it would grow the ecosystem and drive conversion rates. Look at what happened to Amazon when they did 1-Click Ordering. I think it could have [a] material impact on our business.

AB: When you look out a couple of years, what do you see as the biggest challenges for Playdom?

JP: Our company has tripled in size in the last three months and when you’re growing like that, just staying high quality and high efficiency while driving absolute volume and throughput is a challenge. We are on a path to increase the size of our company by 5-10x in one year from a not-so-insignificant base. And in doing that you can create chaos or you can create a beautiful piece of art, that is the challenge.

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

JP: We have about 28 million users a month right now. We have about 220 full-time people, rapidly growing. We have north of $50 million in revenue this year. We are profitable.

AB: Of 25 million people that you mentioned, what’s the breakup between Facebook and MySpace?

JP: I’m guessing 60/40 on MySpace because we [have] 13 applications on MySpace and six on Facebook; but our revenue distribution tilts a little bit more toward Facebook.

AB: If you look out three years from now, where do you see Playdom? Do you see yourself as a public company, as an independent private company, or as a part of any bigger platform?

JP: We’re still a very young company with very big dreams and we’re trying to build a great self-sustaining enterprise. There are all kinds of things that could happen along the way. We’re not building the company to be sold rapidly. We’re trying to create IP. We’re trying to create a strong and lasting infrastructure. We can be a company that is worth billions of dollars by having hundreds of millions of revenue and having high profit margins. And mostly we’re trying to build great products that people love to play and enjoy playing and hopefully make their lives happier and meet more people and all the things that come from social gaming.
AB: Thank you so much for speaking with me.

Why the economics of social gaming are so attractive to investors December 1, 2009

Posted by jeremyliew in games, games 2.0, gaming, social games, social gaming.

In 2009 social gaming exploded onto the scene. EA bought Playfish for $300M+ just a couple of weeks ago, and Zynga and Playdom* both raised large rounds of financing this year. Traditional computer gaming has been showing steady growth for a long time, but not the tremendous growth that the leading social games companies have shown. What is it about social games that has enabled such a difference in trajectory over the last year? And why has it been startups and not the big established publishers that have led the charge. There are three key factors:




Read more about these three factors at my guest post over at Paid Content.


*Lightspeed Venture Partners is an investor in Playdom