2011 Consumer Internet Predictions December 3, 2010
Posted by jeremyliew in 2011, advertising, Consumer internet, Ecommerce, ltv, mobile, predictions, social games.22 comments
Once again Lightspeed is going on the record with some prognostications for what the future holds. Before I try gazing into my crystal ball to see what 2011 will bring for the consumer internet industry, let me first see how I did on last years predictions:
1. Social games overflow out of Facebook
Grade: C+. While the amount of social gaming on other social networks, especially the Asian networks, has significantly increased over the course of the year, the vast majority of social gaming still takes place on Facebook. While Farmville.com now has 6M UU/month, this is still only 10% of the number playing Farmville on Facebook.
2. Brand advertising starts to move online, boosting premium display, video and social media
Grade: A. The recovering economy has really boosted brand ad budgets in 2010, with online ad spend back to setting records again. Automotive and CPG in particular are both seeing significantly increased online budgets. The online video networks are doing terrific business, and even Yahoo is benefiting from increased brand spend, seeing revenue growth for the first time in a while. Many brand advertisers are spending their experimental budgets widely in social media as they attempt to figure out how to promote themselves through Facebook, Twitter, Foursquare and other platforms. The key driver of this renewed confidence from brand advertisers is better measurement of brand metrics that can show the impact of online advertising beyond clickthrough.
3. Direct Response Advertising becomes ever more efficient
Grade: A. According to Adsafe, approximately half of display advertising inventory is now moving through exchanges, Demand Side Platforms (DSPs) and realtime bidding platforms, with another 23% moving through Facebook’s self service ads. These platforms are rapidly commodifying a lot of “low quality” ad inventory, enabling the use of data and targeting to find the best use of this inventory, and thereby creating a very efficient marketplace. Direct response advertisers have benefited the most from this transparency.
4. Finding money and saving money online
Grade: B-. Saving money online has been a real driver of ecommerce growth in 2010. The breakout categories of 2010 are Local Deals (Groupon, Living Social* etc), and Flash Sales (Gilt, RueLaLa, HauteLook, Ideeli etc), and both are squarely aimed at helping consumers save money. Finding money online (principally online lending) has not seen the same level of explosive growth in the US, although in Europe and India there has been real growth in microlending (including “pay day loans”) from companies ranging from Wonga to SKS Finance. I think we’ll see more from the online lending space in 2011, so I may just have been too early on that part of the prediction!
5. Real time web usage outpaces business models
Grade: B-. Twitter continues to grow in usage, overtaking Myspace to become the third largest social network in the world. Foursquare and Gowalla have grown too, but off of much lower bases, such that only 4% of internet users currently use a check-in service. Facebook also joined the Location Based Services (LBS) party this year, enabling Facebook places, which some speculate is getting 30M users already. Last year I speculated that monetization would be hard for these businesses since CPM models have traditionally been hostile to user generated content, and local ad sales is an expensive and difficult proposition. But these companies have innovated new monetization models. Twitter, through its Promoted Tweets, Promoted Trends and Promoted Accounts, is not selling media on a CPM basis, but rather selling attention, and the early returns suggest that brands are willing to pay for more attention. Similarly, the check-in services are attracting experimental budgets from national retailers as well as forward thinking small businesses who are eager to attract new customers into their stores, and reward regular customers. While the revenue numbers may not be huge in 2010, there is certainly promise to the business models that are developing on these platforms.
Overall for 2010, I figure a B average, a little worse than last year. But there is always grade inflation when you grade yourself, so let me know what you think. Now, on to my predictions for 2011:
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1. Putting fun into ecommerce
In 1995, when Amazon was founded, e-commerce was like the proverbial talking dog. It wasn’t about how well the dog could talk, it was amazing that the dog could talk at all. The first generation of ecommerce sites were focused on functionality, getting the dog to talk better. We got everything from price comparison engines to aggregated user reviews to one-click checkout. These early innovations were focused on optimizing the “workflow” of shopping to get users into the checkout as quickly as possible.
This worked great for most internet users at that time because back then most internet users were men, and in general, men do not like to shop. They treat it like a chore, a necessary evil that would ideally be minimized and optimized to take the least amount of time possible. Then they could get back to doing something they enjoyed, perhaps playing video games, or watching football!
But a few years ago, that changed. There are now (a few) more women online than men. And in general, women tend to enjoy shopping more than men. Certainly more than playing video games, or watching football! If you enjoy shopping, you don’t want your “workflow optimized”. You don’t want to be rushed to the checkout as quickly as possible. Instead, you want to linger, to be delighted, to discover new things, to find great deals. You want shopping to be fun.
The Flash Sales sites and Local Deals sites both make shopping fun by offering deep discounts. This is the mechanism that they use to entice shoppers to buy something, even when they are not looking for anything specific. But discounts are not the only way to make shopping fun.
Sites like Modcloth make shopping fun through discovery. Modcloth highlights women’s clothes from modern, indie and retro designers. Because each item has limited supply, and selections are constantly changing, Modcloth builds an urgency that has users coming back frequently to see what’s new and to make sure that they don’t miss out.
Shoedazzle* makes shopping fun by democratizing the personal stylist experience. After users take a style quiz to assess their profile, they are shown a selection of shoes, bags and accessories that have been specifically chosen to match their taste. Each month they get a new selection of on-trend pieces that fit their profile. JustFab and JewelMint have subsequently launched with similar models.
More models keep popping up. Recently launched Birchbox focuses on sending cosmetic samples to its users to help them discover the perfect eyeliner or blush. Pennydrop is a Facebook app that lets users peek at discounted and constantly dropping prices on items and jump in to buy when the price is low enough.
All these sites play to the idea of making shopping fun. I expect to see more applications of these formats, as well as more new formats, all under this overarching theme. A little social shopping anyone?
2. Self-service ad platforms find their ceiling, and brand advertisers seek other avenues
As noted above, about half of display advertising inventory is now moving through exchanges, DSPs and realtime bidding platforms. Yet these platforms are only two to three years old. While perhaps only 10% of online ad revenue is currently flowing through these channels, the trend here is clear. Today, two thirds of online ad spending comes from direct response advertisers, and soon the bulk of these budgets will likely flow through bidded platforms such as these, including Facebook ads. Direct response advertisers move their budgets quickly to follow results, so this could happen within the next year or two.
Brand advertisers are also experimenting with bidded platforms. Each of the big ad agencies have their own trading desks. However, adoption on the brand side will likely be slower and far from complete. Many of the exchanges, DSPs and RTB platforms allow for bidding strategies that are easily optimized for click-through rates, but optimizing for brand metrics is much harder. Brands also care more about content adjacency and brand safe content, and these are harder to guarantee on an exchange type platform, where in some cases, ad impressions are traded several times before finding their final buyer.
In addition, exchanges by definition can only support standard ad units. Many brand campaigns incorporate custom elements, ranging from social media and other earned media components to custom microsites, site takeovers, roadblocks and other high impact units. These are often tied to specific publishers, and bundled into a broader media buy including standard ad units. Premium publishers depend on this sort of creative advertising to maintain the ad rates required to support the creation of high-quality content, and I think it is likely that this symbiosis between brands and premium publishers will continue to capture a large chunk of the brand ad budget. In fact, I expect to see a proliferation in custom ad units from the biggest and most premium publishers as they work to capture a greater share of brand budgets. Non-premium publishers that have reached the scale to become “must buys” are doing exactly the same thing. Twitter’s Promoted Tweets, Promoted Trends and Promoted Accounts, and Facebook’s Social Ads and Likes are all great examples of this trend.
3. Competition shifts from user acquisition to user retention
Today many e-commerce and subscription companies are growing very quickly through smart marketing. They are taking advantage of cheap media to cost effectively acquire new customers. As I’ve mentioned above, I think the exchanges will continue to make it easier for direct marketers to reach their customers. Facebook’s self service platform is still a relatively inefficient market, allowing savvy, analytical marketers to quickly and cheaply gain market share. However, in some categories (e.g. Local Deals) Facebook has quickly become efficient and there is already a “market price” for a new Local Deals subscriber. As more marketers take the plunge into Facebook’s platform, more categories will become efficient, just as Google became an efficient market over time for almost all keywords. Once this happens there will be a market clearing price for new customer acquisition across almost all categories, and smart marketing will no longer be as much of a differentiator.
On what basis then will winners pull away from the rest? Companies who are able to derive the highest lifetime value (LTV) from their users will squeeze out their competitors with a lower lifetime value. How can you improve LTV? There are three key factors:
- average revenue per user
- gross margin
- average lifetime.
The e-commerce and subscription based companies that pull away from their competitors in 2011 will find a way to differentiate themselves from their competitors on one or more of these dimensions.
4. Social games chase hardcore gamers
Notwithstanding Disney buying Playdom* this year and EA buying Playfish last year, Zynga is still the market leader in social gaming. Their enormous installed user base gives them a real advantage in customer acquisition cost over their competitors; their ability to cross-sell installs to their new games at zero cost allows them to get a new game to scale with much lower marketing spend then smaller competitors.
To combat Zynga’s might, the other social game publishers have to focus on games with a very high LTV. High enough that the publisher can afford to rely on paid customer acquisition alone to build a user base, and still make money. Kabam (once know as Watercooler) pioneered this approach with Kingdoms of Camelot, a relatively hardcore social game that is reputed to be doing low to mid single digit millions in monthly revenue from about 750k Daily Acitve Users (DAUs) – a monetization rate that is dramatically higher than the norm for social games. Other publishers have taken note, and I would expect more games aimed at the hardcore gamer market to emerge over 2011.
5. Year of the tablet
Smartphones transformed the mobile internet. Apps will drive $5bn in revenue in 2010. Mary Meeker presents some great insight into the future growth potential of mobile in her Web 2.0 Summit presentation, Ten Questions Internet Execs Should Ask and Answer.
The same thing will happen with tablets. While the iPad has the tablet market largely to itself this year, that will change dramatically in 2011 and beyond, just as Apple’s iPhone had the truly web-capable smartphone market to itself in 2008, but is now a minority as competition emerged from Android, WinMo7 and the modern Blackberry.
The key difference between these new platforms and the PC web isn’t mobility (although that is part of it), but rather that these devices are always on and always with you. However, use cases differ between the phone and the tablet.
Phones are with you all the time, in particular when you are out of the house and out of the office. The most popular genres of app fit well with this “on the go” usecase. Local information, “snacky” entertainment, music, games have all been killer apps on smartphones. Some web incumbents made the transition well, including Yelp, Flixster*and Pandora. Many new companies also gained ground on the phone through this disruption.
Tablets tend to live in the living room. They lend themselves more to leisure than PCs, and to more protracted content consumption than phones. Killer apps might include, video, music, games, and “reading”, broadly defined. Again, some web incumbents will make the transition well, but once again I expect to see new companies gain ground through this disruption.
What do you think will happen in 2011? This time next year ,I’ll look back to see how accurate I was. In the interim, stay tuned for more Lightspeed predictions in other tech sectors over the next few days.
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* A Lightspeed Portfolio company
Congrats to Playdom and Disney! July 27, 2010
Posted by jeremyliew in games 2.0, playdom, social games, social gaming.3 comments
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.6 comments
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.Tags: zynga
16 comments
This also appears as a guest post on Techcrunch
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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.3 comments
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.4 comments
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.7 comments
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.
Interview with CEO of Playdom December 16, 2009
Posted by jeremyliew in games, games 2.0, gaming, playdom, social games, social gaming.2 comments
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.5 comments
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:
DRAMATICALLY FASTER AND CHEAPER DEVELOPMENT
FRICTIONLESS DISTRIBUTION
FREE DISCOVERY
Read more about these three factors at my guest post over at Paid Content.
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*Lightspeed Venture Partners is an investor in Playdom
Web based free to play game nuggets from GDC Europe August 21, 2009
Posted by jeremyliew in game design, games, social games, viral.1 comment so far
Worlds in Motion has coverage of comments from senior figures from Zynga, Playdom and Gameforege speaking at GDC Europe about the free to play game market:
Gameforge co founder Kerstig noted:
Gameforge was formed in 2003 by Kersting and his partner Alexander Roesner as a developer of free-to-play browser and client-based MMOGs and has since released 15 MMOG titles in over 50 different languages. Their games have attracted over 85 million players worldwide and have nearly one million users playing at any one time…
“The challenge for publishers is to make it as easy as possible to get their games to gamers” says Kersting. Online distribution is a much better choice for both developers and users for numerous reasons – the cost of distribution “is close to zero”, access to media is easier and “the customer wants to get what he is looking for as easy and fast as possible”, according to Kersting….
He says gamers buy virtual items “for faster game progres, to enhance their gaming experience” and due to “vanity” — “so that they can say ‘I have the biggest house, garden etc.”
De Loayza from Zynga gives some tips on social game design:
The exec explained that the San Francisco-headquartered Zynga now has 15-20 million active daily users, which compares favorably to existing websites like EA’s Pogo.com, which gets a similar amount of visitors — but every month, not every day….
The Zynga exec noted that simplicity is the key to success for many social games. In fact, he said: “Make it less game, more social,” and it’s important to “focus on traffic as much or more as gameplay.” He cited a successful title like Kickmania, where the gameplay is a simple as ‘kicking’ a friend on a network, with leaderboards and other things layered on top. He also noted that often, the more straightforward mechanic is the better.
There are some particularly good viral-related game mechanics, says De Loayza, with gift giving being a particularly good way to alert other users and get them to join your game. He cited PopCap’s Bejeweled Blitz as a notably interesting example of competition as a viral mechanic, where users can team up to compete and win prizes.
In addition, crew mechanics on more standard ‘spreadsheet games’ like Mafia Wars, where adding friends to the game gets you to level up, can be a major growth factor. As for notifications, which are the way social network games communicate with your users, “use them as much as possible,” says De Loayza. He did acknowledge in the Q&A that what could be considered as ‘spamming’ does happen in the space, even as Zynga tries to keep their notifications useful.
How about the biggest mistakes you can make in the social network game space? De Loayza cited licenses, commenting: “I am not convinced that licenses necessarily work in this space… people just don’t seem to be that interested in it,” as well as linking to a destination site outside the social network, which “breaks the viral loop.”
Meretzhy from Playdom also had some tips on building virality and monetization:
He explained that the key issue of virality, or how to get your game to reach the widest possible audience, can be achieved using several popular mechanics. Game requests, active “wall-posts” and passive notifications are the favored methods where players are prodded to beat each other’s scores, join each other’s mobs or exchange gifts.
However, Meretzky pointed out that it’s not as easy as simply applying these mechanics: “Virality is made more complex by nearly everything falling outside of the terms of service,” making it necessary for a user to be in constant contact with the social networks.
Recently other methods have emerged to further the viral nature of social games.Farmville, Zynga’s hugely popular new Facebook game, uses a combined gifted invite method in its “lost cow” mechanic. When a cow wanders on to your virtual farm you aren’t allowed to keep it yourself, but can send it to a friend to get them started. This type of invite has a much higher acceptance rate than the standard message invite.
Another new mechanic brought in by Big Fish Games in their social game Restaurant Empire is the “be my employee” system, where you can task your friends with jobs in your restaurant. This system has two ways of hooking players: either your friends want to return the favor by employing you, or they want to seek revenge if you have given them a demeaning task. How do they get this revenge? By employing you in their restaurant to perform the same (or even a worse) job…
Meretzky was quick to point out though that, “monetization follows engagement.” In order for the player to start spending money in the game they must be very engaged and invested in it.
Meretzky detailed some of the way to get players to re-engage with a game, including login rewards, collecting stores of money that will not increase over a set amount, harvesting, and notifications of friends beating your high score.
He said of the high score mechanism that when you see a friend has passed you on a leader board, “the natural inclination is to jump right in and pass them right back”, clearly a very strong re-engagement technique.
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