From the monthly archives:

May 2010

For some unknown reason, Facebook has stopped updating application statistics, which means we can’t give or weekly Facebook/Zynga update regarding what games and developers are gaining or losing Monthly Active Users.  While this is problematic for SecondShares, it must be more more of an issue for the game developers that depend on Facebook to understand how their games are faring relative to others in the Facebook gaming universe.  Facebook has not given any reason for the stoppage, and there is much speculation, with the most often reason sited being tech resources moved to address the privacy issue.  It could also be that Facebook has simply decided to no longer release the data for competitive or privacy reasons.  In any case, for the moment, Facebook is keeping mum on the issue.

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Yet anther great new site recently launched recently called FanPagelist.com that highlights all the top Fan Pages in total, and by category (e.g. Actors, Athletes, Musicians…).  It’s great reviewing who’s Facebook  Fan Pages are hot ( Vin Diesel is the top actor, Lady Gaga is the top living musician, Michael Jackson the top Musician dead or alive), and who is decidedly not so hot (Tiger Woods is only the 9th most popular athlete in the world ).   Interestingly, two of Zynga’s games (Texas Hold ‘Em and Mafia Wars) are the most popular Fan Pages of all.  Below are the top 25 Fan Pages and the Fan count.

Other interesting tid bits found after a quick review of the stats.

While Barack Obama is the dominant politician (8.4mm Fan pages), the second most popular is Michele Obama (1.8mm fans), handily beating John McCain (564k), Mitt Romney (324k).  Poor Al Gore has only 39,000 fans.

Rinaldo is the top athlete in the world (4.1mm), followed by Roger Federer (3.4mm), with the top American athlete Michael Phelps (2.9mm) coming in third.  Once again, Kobe (2.4mm) is beats LeBron (2.0mm), with Maria Sharapova coming between them (2.1mm).  On the team front, the Yankees (1.4mm), beat the Red Sox (1.1mm), the Lakers (993k) beat the Celtics (643k), and the Cowboys (5999k) beat the Steelers (577k).  On the league front, the NBA (2.3mm) crushes the NFL (453k), and the NHL (414k).

Michael Jackson (12mm) crushes all musicians, followed by Lady Gaga (7.3mm), with Justin Bieber (4mm) at #7, but with a bullet, having grown by 11k so far today, more than 5k fast than the second fastest growing musician, Lady Gaga.

On the news front, CNN (886k) has finally found a place where they can beat Fox News (606k) and ESPN (572k)

I’m particularly impressed by some of the brands (Coke 5.5mm and Starbucks with 7.2mm) and products (Oreos with 4.5mm and Skittles 4.5mm) that have drawn big crowds to their fan pages.

Go the the site and check it out.  It’s a lot of fun!

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Listening to last weeks webinar by SecondMarket.com really highlighted all the obstacles that remain to the emergence of a vibrant  secondary market for private shares.  A market exists, and it’s growing nicely, as evidenced by the 20%+ monthly growth in transactions on the SecondMarket.com platform this year:

However, to put SecondMarket’s monthly volume in perspective, Google trades$70mm worth of shares  every 15 minutes of every trading day.  While the growth is impressive, it’s off a miniscule base.

SecondMarket set up the call to dispel myths that surround the secondary market.  To address the issues in as unbiased a fashion as possible, the webinar consisted of a panel of “experts” including Keith Rabois from Slide, who has traded shares on the SecondMarket platform; Sujay Jaswa from the VC firm NEA, and Chip Lion from the law firm Morrison & Forester.  The panelists were joined by SecondMarket CEO Barry Silbert.

The first issue addressed by the panel was why the markets exists to begin with.  The most basic answer was to give liquidity to founders, investors an employees who are involved with companies that are experiencing elongated exit periods.  The accompanying chart provided by SecondMarket shows that the average IPO now takes 10 years compared to just five years five years ago.  In that environment, the secondary market solves the liquidity issue faced by all the players in the ecosystem.

The secondary market decreases pressure on companies to exit as it enables the companies to address the liquidity issues that exist.  Yelp was cited as an example fo a company that had partaken in the secondary market to “stay private a little longer”.    In addition, staying private is becoming a more attractive options than going public given the financial and management burdens associated with Sarbanes-Oxley.

Understanding why the market exists is easy.  Understanding why the market is still so small starts to address some complicated issues.  The lawyer on the panel, Chip Lion, made a valiant effort to address the legal issues, but the complexity is daunting.

Under Section 5 of securities act of 1933, in order to be traded, securities need to be registered, UNLESS there is an exemption.  There are two common exemptions in the secondary market, Rule 144 (and 144A), and Rule 4- 1 1/2.  Both rules address a long list of issues including how long the securities need to be held before being re-traded, exclusions for “insiders”, the sophistication of the investors, and the information required of the company to provide upon request.  If you click on any of the links above, you’ll get a sense for the complexities.

In addition to the regulatory legal issues, there are legal issues as a result of the terms set forth in the companies financing documents.  Most VC backed companies terms include a “Right of First Refusal” or “ROFR” that needs to be waived or given the time to expire.  There are also often co-sale agreements giving the other shareholders the right to sell shares to the acquirer.  As time is the enemy of any deal, these terms cause friction in the market.

Silbert highlighted how SecondMarket has a 15 person department to comply with all the rules.

The daunting legal issues are coupled with a current marketplace where companies look wearily on private market transactions.  Company fears highlighted by the panel included:

  1. Employee De-Motivation – If employees monetize their wealth, there is a fear they will be less motivated to drive the company’s performance.  .
  2. Spread between options value and preferred shares – If a secondary market transaction place a fair market value that is higher than the Board has set, it could increase the price at which new options can be granted and deter an company’s ability to raw top talent.
  3. Confidentiality – A new shareholder could demand to see financial information the company would prefer not to disclose.
  4. The Rule of 500 – If a company has over 500 shareholders, they are required to file information as if they were public.

Some companies, including Facebook, have reportedly already limited employees ability to sell shares unless “a window opens”.   Interestingly, restricting current employees’ ability to sell creates the incentive to leave a company, as ex-employees often have far greater flexibility.

SecondMarket believes that these issues can be addressed by having more of a “structured” marketplace, where companies identify one broker (e.g. SecondMarket), who can address all the legal issues and help structure liquidity programs that meet the needs of all the different parties (most notably the companies).  While that may address many of the companies concerns, it seems to us to put other constraints on the market.  Having a company force a broker on both a buyer and seller isn’t how the public market works, as parties want to choose their own brokers.  So by definition, a closed system will decrease the price received by the sellers at it decreases the pool of potential buyers.  Also, a closed market just doesn’t smell right.  But if it does address the concerns of the companies, and if the companies are the gating factor to growing the market, maybe it is the best path to grow the market?

At the end of the day, we believe the market is best served by being as open as possible.  For employees struggling to make ends meet, it’s a tough pill to swallow to be told by your company that you can’t sell share or you have to sell them in a window or in a closed system that will decrease the prices.  I think enlightened companies that give their employees the most freedom will emerge, all else being equal, as the preferred places to work.   In fact, companies should embrace the secondary market as a way to increase employee happiness and retention.   One company we’re familiar with is planning to let their employees sell their shares, but the proceeds will be put in escrow and be drawn on by the employees on a monthly basis over four years.  Guess what, the employees are going to be thrilled, as it will meaningfully increase their monthly take home.  Both retention and productivity are sure to increase.  Finally, the company will also ask the employees to defer raises for four years, as in effect, they will be receiving very meaningful pay increases through the stock sales.  Lower costs are great for all shareholders.  Sounds like a great win/win/win.

That genie is clearly out of the bottle, as employees are increasingly aware of the secondary markets available for selling their shares.  Companies should embrace the genie, not try to stuff it back in the bottle.   Interestingly, SecondMarket mentioned on the call that they will be leveraging the secondary market to provide liquidity for their employees.  Maybe they can be the poster child they’ve been searching for?

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Zynga and Facebook announced a new five year agreement that will keep Zynga on the Facebook platform for the foreseeable future.  The deal comes on the heels of rampant speculation about Zynga abandoning the Facebook platform to avoid the 30% fees charged by Facebook when game players buy virtual goods with Facebook payments.  While terms of the deal were not announced, Zynga likely won some modest concessions from Facebook to remain active on the platform, but Zynga is likely to continue to aggressively pursue it’s own platform, Zynga Live, to lessen its dependence on Facebook. We expect to see significant Zynga Live announcements in the coming months.

We view the agreement as positive for both Zynga and Facebook as a severing of the relationship would have been a negative for both parties, so its good to see that cooler heads prevailed.

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Zynga’s total Monthly Active Users (MAUs) declined last week for a third straight week, and the pace of MAU decline continued to accelerate, with a total decline of 5.9 million MAUs, or 2.4% of Zynga’s massive total user base, which now stands at 238 million.  The MAU loss grew from the previous week’s drop of 4.2 million MAUs, and the loss of 3.1 million users the week ending May 1st.  Treasure Island remained the only major Zynga title to add users last week, although the 900,000 net adds was modest compared to the 6.7 million it added week just three weeks ago.     With 238mm MAUs, Zynga is now down over 5% from peak MAU levels reached mid-April.

Farmville, Zynga’s biggest game, was also Zynga’s biggest MAU loser last week, declining by 2.3mm MAUs last week, to stand at 75.5mm, and is now down by 7.7 million MAUs, or 9%, from its peak in early April.   However, Fishville is Zynga’s biggest decliner in terms of numbers of MAUs lost from its peak MAU count, having dropped by 9.6 million MAUs, or 37% from its peak of 26.2 million MAUs reached last December.   While Treasure Island still growing, Zynga’s seven other major titles are all below their peak MAU counts.  The chart below highlights the MAU decline from peak levels of Zynga’s major hits other than Treasure Island:

It’s critical to recognize that MAU declines are not unique to Zynga, as every major game developer but Mindjolt lost MAUs last week.  In addition, every one of the 11 major Facebook game developers we follow is off from their peak MAU levels reached over the last few months.  The MAU loss from peak levels range from Playdom’s modest 1.7% drop (due to the recent growth of Big City Life) to Mindjolt’s staggering 37% drop.  In fact the average MAU loss of 11% of the top 11 developers from peak levels is more than twice Zynga’s 5.2% total MAU decline from its peak.  As a result, Zynga has continued to grow its MAU market share of the top 11 developers, reaching a very impressive all time high of 53.5% this week, or 238 million of the total MAUs of 445mm of the top 11 game developers.   While the seven Zynga games highlighted above have lost a combined 31 million MAUs from their peak, Treasure Island has added over 27 million MAUs in the past six weeks.

We believe there are multiple factors driving the MAU declines being experienced by every major Facebook game developer.  There are seasonal factors, as people go outside more in spring than winter.  We estimate that Facebook’s gaming notification and gift request changes have impacted MAUs significantly more than the weather.  We also believe that new/smaller developers are taking an increasing share of new MAUs, with last week rapid growers including Family Feud by iWin (up 900,000 MAUs last week), Kingdom of Camelot from Watercooler (up 500,000) and Nightclub City by Nightclub City (up 400,000).    Finally, there appears to be some game fatigue occurring as well, as social games don’t yet engender the long term loyalty experienced by hard core games like World of Warcraft.

Current declines notwithstanding, we continue to believe that social gaming is emerging as the next major force in gaming.  However, we also recognize the social gaming industry remains in the early stages of its evolution, and the success of today’s leading social gaming companies like Zynga, EA, Playdom and CrowdStar will depend on their ability to evolve in this dynamic environment and provide gamers with ever evolving gaming experiences.  We also continue to believe that Zynga’s massive scale and the resulting inherent marketing advantages, positions Zynga to continue to drive new mega hits like Treasure Island and remain the dominant player in the social gaming industry.



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After losing 3.1mm Monthly Active Users (MAUs) across its vast Facebook gaming empire two week ago, Zynga’s MAU decline accelerated last week with the loss of 4.2mm more MAUs.

While Treasure Isle continued its growth, the growth curve flattened significantly, adding 1.6mm MAUs last week after gaining an average of 6.6mm the previous three weeks.  Every other major Zynga title lost users last week, with Farmville (-600k), Texas Hold ‘Em (-600k), CafeWorld (-700k), Mafia Wars (-300k) Fishville (-600k) and YoVille (-500k) combining to lose over 3.8mm MAUs.  On a positive note, the losses from the six losing major titles decelerated from the previous week, when they combined for a total loss of 6.5mm MAUs.  The weekly loss totaled 1.7% of Zynga’s total MAUs, which now stands at 244mm, still dwarfing its competitors, the next ten which combine to total only 215mm total MAUs.

The second straight week of MAU losses comes on the heels of reports that Zynga is readying for a major battle with Facebook given the rise of Facebook Credits and its 30% fee structure, as well as Facebook’s elimination of notifications and Facebook’s pending Gift Request changes.  While Facebook’s changes in communications cuts down on the noise in users newsfeed, the elimination of the free communications/advertising is forcing the gaming companies to increase their advertising to drive usage.  As a result of these changes, Zynga appears increasingly focused on lessening its dependence on the Facebook platform.

While Zynga MAU loss accelerated last week, every other major developer but Playdom (which added a modest 300k MAUs last week) also lost MAUs last week, and Zynga’s share of the total MAUs of the top 11 game developers actually increased last week from 53.1% to 53.2%.  So if Zynga’s players aren’t leaving Zynga for the other major gaming providers, where are they going?

The lost gamers are either doing other things than playing games on Facebook, like taking advantage of better weather in the seasonally slower spring and summer months for gaming, or playing the games of smaller developers.   Among the many risks we highlighted in our original Zynga report was the risk of “branded” games coming to Facebook that come with a built in audience given the strength of the brand.  Case in point is the recent rise of the Family Feud game introduced in to the Facebook ecosystem just two months ago.  Family Feud grew its MAUs base by 700k last week to pass 4mm total MAUs.   While Family Feud doesn’t appear poised to enter the pantheon of top 10 Facebook games, where 17mm MAUs is required, the deluge of new gaming companies introducing games on the Facebook platform, including those with branded games, are likely to be increasingly meaningful in the Facebook gaming ecosystem.  All that said, we always caution readers to not read too much in to the weekly gyrations of MAUs, but rather use them as context over longer periods to divine the trends that will be meaningful in the long run.

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Zynga and Facebook At War?

May 7, 2010

Share While Facebook and Zynga should be the best of friends, as their relationship has been massively mutually beneficial, business relationships are like marriages, unless each party is willing to give 70%, they don’t always work out.  In this case, Facebook has ratcheted down the different channels Zynga historically used to advertise freely to the [...]

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Fred Wilson Supports Secondary Market For Private Company Stock Liquidity

May 7, 2010

Share Today Fred Wilson wrote about the nearly 1,000 point “Crash of 2:45PM” yesterday, and in his post he described the public markets as a fickle thing.  He went on to say: “I believe the secondary market where institutional private capital comes into the cap tables of startups and provides liquidity to founders, angels, and [...]

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NY Tech Scene Is Heating Up

May 6, 2010

Share Last month, NY based early stage VC  Roger Ehrenberg wrote a compelling blog post about the steps the NYC Venture scene could take to increase its relevance.  While I agree with most of his comments, my experiences over the last few weeks at both the NY Angels and the NY Tech Meet Up highlights [...]

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Tough Week For Zynga Could Get Worse

May 3, 2010

Share While Zynga’s Treasure Isle continued its ascent last week, adding over 4.2mm Monthly Active Users (MAUs)  to pass 25mm total, and become the 4th biggest game on the Facebook platform (passing Mafia Wars and Petville) every other major Zynga title lost MAUs for the week. Farmville had it largest weekly MAU decline, dropping 2.3mm [...]

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