Social Gaming Plunge Levels Off In june

The negative impact on social gaming providers from Faceboo’s changes in notifications and requests imposed in March finally seemed to have slowed in June, with total monthly active users (MAUs) of the top 10 game developers dropping by a little over 1% from May levels to 415mm in June month-to-date, after falling 9% in May.

We were very interested to read Mark Zuckerberg’s thoughts on the changes in a recent interview on Inside Facebook where he said that:

“There are two ways that apps get usage that really define the character of the application. One way is viral distribution – spreading to new people. The other is re-engagement. Early on, the viral strength was so much, but there were really no channels for re-engagement. So people were using viral channels to reengage people, and you basically had apps that were growing very quickly, and their best way to get a good user count was to get new users and churn through them. That really optimizes for apps that are very viral instead of apps that are high quality and that people want to reengage. So we intentionally weakened the viral channels recently, and intentionally strengthened re-engagement with emails, so that there will be better apps. It’s going to be a long process, but I think it’s going reasonably well.

One of the things we did recently was re-balance around games. A lot of users like playing games, but a lot of users just hate games, and that made it a big challenge, because people who like playing games wanted to post updates about their farm or frontier or whatever to their stream. They want all their friends to see their updates, and they want to get all their friends’ updates, but people who don’t care about games want no updates. So we did some re-balancing so that if you aren’t a game player you’re getting less updates.”

As a result of this “re-balancing,” since reaching their peak in mid-April, as the Facebook changes were being implemented, total MAUs have fallen over 11%, with virtually every developer seeing a significant fall off:

This large drop off comes amid the emergence of several new hits for the social gaming providers.  Most notable, Zynga’s Treasure Island was the fastest growing game in the history of Facebook, reaching over 20 million MAUs in just three weeks.  However, the entire life cycle of games appears to be compressing, as Treasure Isle peaked just seven weeks after its introduction, and over the subsequent six weeks, Treasure Island has lost over 20% of its MAUs, including a 2mm MAU loss just last week.

Treasure Island hasn’t been Zynga’s only new hit.  More recent, Zynga introduced Frontierville, which has already surpassed 11 million MAUs after just three weeks, but these new hits haven’t come close to offsetting the losses among all the other Zynga games:

It’s interesting to note that the game with the best staying power is Texas Hold’ Em, a classic poker game that was likely the easiest for Zynga to build, and is the most basic of all of Zynga’s games.

The social gaming providers are hopefully finally at the point where things will level off from the Facebook changes, such that growth can begin anew.  We’ll keep you posted.

Lou Kerner owns 50% of this social media site, SecondShares.com, and owns shares of Facebook (private company) and is employed by Wedbush Securities (www.wedbush.com). Wedbush Securities is a registered broker-dealer and member NYSE/FINRA/SIPC. Wedbush Securities makes a market in the publicly-traded securities mentioned herein and its Equity Research Department provides research coverage of Electronic Arts. The information is neither intended to be a complete record or analysis nor a solicitation of an offer to buy or sell any security mentioned herein. This information is obtained from internal and external sources, which is believed to be reliable; however, no guarantee of its accuracy can be made. Additional information is available upon request.

Playdom Announces Expansion In Europe

Playdom has raised $43 million to date and made six acquisitions, including Acclaim Games, and has just announced their intentions to expand into Europe. They plan to create localized versions of their game titles such as Mobsters, Tiki Resorts and Big City Life in French, Italian, German and Spanish by the end of this year.

The first game to be localized is Bola, the 41st most popular application on Facebook according to analytics firm AppData. In aggregate, Playdom has more than 38 million monthly active users (MAU) and is headquarters down the street from Google in Mountain View, with studios in Francisco, Calif.; Seattle, Wash.; Eugene, Ore.; Chapel Hill, NC; Buenos Aires, Argentina and in South Asia.

Zynga has 50 games with over 8 games with 1 million or more daily active users (DAU) and 11 ames with 1 million or more MAU. By comparison, Playdom only has 22 games and 1 game with 1 million or more DAU and 9 games with 1 million or more MAU. So putting an emphasis on European and international users may be the right strategy to grow their reach and compete with Zynga.

Here’s an interesting point, in the last 29 days Zynga lost 7 million DAU according to AppData, which is more than 8x the size of Playdom’s total DAU. So the question is, how much of an impact can this expansion into Europe really have for Playdom?  We’ll see.

If You Build Farms, They Will Come? Second Life Is Restructuring To Become More Social

Linden Lab, the company that owns and operates Second Life, has announced today that they’re laying off 30 percent of their staff, labeling the move as “restructuring” and “reconfiguring”.

Their new strategy is to make Second Life more of a browser based experience, like Farmville, eliminating the requirement for users to download software. Second Life will also be available on “social networks” (basically they’re building a Facebook app), so it becomes more social.

Although their new strategy is three years late, it probably not too late. As of August 2008, Second Life had approximately one million active Residents with 40-60 concurrent users at any given time. Linden Lab was founded in 1999 and they’ve raised $19 million to date, so it seems a bit surprising that its taken them this long to make the switch to social gaming. According to their press release, since inception Second Life Residents have logged more than one billion user hours and generated more than $1 billion in user-to-user transactions.

It will be interesting to see their browser based version of Second Life and if the move can revive the business.

Metrics That Matter For Social Gaming Investors

This post is written by Guest Author Byrne Hobart, a marketing consultant at NYC-based Blue Fountain Media. Blue Fountain Media helps clients with website design & development, online marketing, graphic & logo design and more.  In this post, Hobart explains in detail the metrics driving social gaming companies like Zynga and Playfish.
Traditional investment analysis tries to boil a company’s value down to some simple numbers, like earnings or free cash flow. On a slightly more advanced level, some industries have particular ratios that give a more detailed picture of a firm’s operations—in insurance, for example, the “combined ratio” measures a company’s operating efficiency; in trading, income divided by Value at Risk shows whether or not a firm is making safe bets.

In social gaming, the relevant number is different ratio: the company’s churn rate compared to their viral coefficient.

Churn rates are familiar to anyone who has analyzed a subscription-based business like cable television or phones: the churn rate is the percentage of customers who will stop using the product in a given month. In social gaming, that means the percentage of users who will stop playing a given game in a month. From the analyst’s perspective, every new customer is a rapidly ticking time-bomb; they’ll get bored fast, and move on to another game. Some social games have churn rates of 50% per month, or more; if their revenue per user is $5, and the churn rate is 50%, the expected value of each new user is $10 ($5 + $2.50 + $1.25… technically, you would discount these future values based the time-value of money, but since the relevant numbers are in the first few months, it’s not worth it).

The viral coefficient is in some ways the opposite of the churn rate: it’s average organic growth rate in users in a given month. If 100 Farmville users are likely to cause five of their friends to join in a given month, that’s a viral coefficient of 1.05.

Combine these two numbers, and you have the “Expected user-months per new user”—for each user, the total number of months you expect to be played by that user, plus the people they recruit.

In the case of a 50% churn rate and a viral coefficient of 1.05, this means each new player is expected to generate 2.10 months of play time. At a viral coefficient of 1.10, that number jumps to 2.22. At a churn rate of 40% instead of 50%, and a coefficient of 1.1, the number of player-months per new player is 2.92. Keep in mind that these increases can be multiplied by the game’s average monthly revenue per active user. In other words, a bump in player-months per new player adds directly to revenue, at a gross margin of basically 100%.

One thing this illustrates is the strong economies of scale in the social gaming industry. Zynga can afford to invest millions of dollars in making Treasure Isle marginally more addictive; going from 2.10 months of play to 2.92 months of play on a userbase in the millions will more than pay for itself. And the techniques a company develops in one game can be easily applied to others (while the biggest games are months or years old, the biggest launches are more recent).

Finally, quantifying this number can also show a company when it makes sense to start spending money to acquire new users. There’s a reason Zynga can afford to blanket Facebook in ads—once they’ve figured out the average value of buying one new user, they can fine-tune their bids to maximize profitability.

A more robust model would also consider the total size of the market. Even a massively popular game like Farmville can eventually reach all the people it’s able to reach; while it might take several Farmville requests before a given user signs up, but after a certain point they’ll be desensitized. Thus, a site with high virality and high churn will peak faster and fall faster than a site with low virality and low churn, simply because it will be seen, used, and then discarded by more of its total audience.

(It’s likely that the narrower a game’s target audience is, the lower its virality and churn rate are. Tens of millions of people play Farmville, Zynga Poker, and Treasure Isle, and they get bored of it quickly. But a niche game like Fashion Wars will not get shared as aggressively, but will provide deeper interactions between the friends who do play together.)

There is a wide range of actual values that can make a game a winner, for example:

  • A game that spends $5 to acquire a user with a 50% churn rate, a viral coefficient of 1.05, and revenue per user of $5 will earn about $5.52 in profit per user acquired.
  • A viral site with the same revenue per user, but a viral coefficient of 1.2 and a churn rate of 20% would earn $51 in revenue for each new user acquired (this kind of math explains why Groupon can spend so much on Adwords and Facebook ads).
  • A site with revenue per active user of $5 and a churn rate of 40% with no viral characteristics will lose money paying $13 per new user.
  • A more traditional subscription-based business with a lower churn rate and a very modest viral coefficient is also worth considering. For example, TheStreet.com’s monthly churn rateis 3.8%. If their viral coefficient is 1.005, and their monthly subscription averages out to $80, their expected revenue per subscriber is $856—in the first year alone. But viral effects account for only $23.15 of this, meaning that TheStreet won’t significantly benefit from enhanced viral effects.

When social media companies start to go public, I believe that investors should call for them to prominently disclose these numbers. Giving investors an idea of how viral a product is, and how high its churn is, can tell them how quickly to expect it to grow, how soon it will peak, and whether or not they should expect the company to lose money early on in a race to acquire customers. In the case of a viral, low-churn game, it’s irresponsible not to run at a loss early on in order to acquire players. But once a game starts to peak, and the churn rate increases while the viral coefficient approaches 1, paying for growth becomes a similarly poor decision.

Social gaming companies have shortened the fuse and narrowed the range of outcomes for subscription-based businesses. Someone operating an online game can use simple measurements like viral coefficients and churn rates to determine exactly where they’ll earn the most money. A traditional game company (not to mention a phone or cable company) could spend years trying to determine the average value of their customers; for Zynga and the rest of the industry, knowing this information is almost automatic. For their shareholders, disclosing this data will make it easy to tell whether the company’s growth represents free cash flow in the future, or merely an impressive number of users in the short term.

Will Cost Per Installation Save Facebook Applications?

This post is written by Guest Author Hussein Fazal, CEO at AdParlor Inc.  AdParlor is a performance based applications advertising network focused on CPI (cost per installation).  In this post, Hussein highlights some of the points in AdParlor’s recent white paper that discusses the marketing challenges application developers face as Facebook continues to remove viral channels.  You can read the full white paper by downloading it here.

As SecondShares has previously discussed, many application developers have seen a recent decline in user growth as Facebook cuts back on viral channels.  Application developers must now allocate larger marketing spends to purchasing installs.  It has been estimated that a $3 million budget would be required to launch a successful game to 1 million DAU’s.

Purchasing application installs is becoming increasingly competitive.  Understanding the different types of installs available for purchase is just the beginning.  Really understanding deep user targeting, market conditions, application saturation and other variables can have a very significant effect on the ROI an application developer receives on their spend.  Efficiently purchasing Facebook installs can bring savings of up to 40% per user! For many developers, this is the difference between having a profitable application, and company, or not.

Today, AdParlor has released a white paper intending to educate application developers on purchasing Facebook application installs. Some highlights include:

- In terms of user retention, engagement, and monetization:

  • 1 Facebook Ads install =
  • 3 Banner Ads Installs =
  • 30 Incentivized Ads Installs

- Click Through Rate (CTR) and Conversion Rate (CVR) are the two golden metrics that contribute to the Cost Per Install (CPI) equation. Your CPI can vary up to 400% based on how well you can control them.

  • The top 6 factors which influence CPI pricing on Facebook Ads are:
  • Country Targeting
  • Creative
  • Target Market
  • Flow from Click to Conversion
  • Application Saturation
  • Market Conditions

Read more here:  http://www.secondshares.com/wp-content/uploads/2010/06/Purchasing-Facebook-Application-Installs-Everything-you-need-to-know.pdf

David Kirkpatrick Video Interview – Author of “The Facebook Effect”

We had the opportunity to sit down with David Kirkpatrick, the author of “The Facebook Effect” for a 35 minute interview a few weeks ago.  The book’s subtitle, “The Inside Story of the Company that is Connecting the World,” is about Facebook’ss history and massive global impact. David’s been writing about technology and the Internet since 1991, and the book is much anticipated  around the world.

The interview is about 35 minutes long, and all worth listening to. But if you want to search for a particular topic, below the video is a brief Table of Contents:

David Kirpatrick Interview – Author of “The Facebook Effect” from SecondShares on Vimeo.

Minutes 0 – 3 : David’s background and the impetus for writing the book
Minutes 4 – 10 : Who David talked with including his interaction with Mark Zuckerberg, VCs, competitors and predecessors
Minutes 11- 15 : The book, how Facebook has evolved, how the company will make money and transform the world
Minute 16 : Social gaming and Zynga
Minute 17 : Yuri Milner, the Russian who has spent more money ($500mm) than anyone else on Facebook shares
Minutes 18 – 22 : The privacy issue
Minutes 23-25 : Search, Google and the social graph
Minutes 26-28 : How much is Facebook worth and when will it go public
Minutes 29-31 : Particulars on the book
Minutes 31 -33 : Who bailed to early, who comes off bad in the book
Minutes 34 – 36 : Final thoughts

Social Gaming Says Good Riddance To The Month Of May

Facebook’s changes in notifications and requests, which eliminated a significant amount of free advertising enjoyed by social gaming applications, had a major negative impact on Zynga and most of the other major social gaming companies driving large losses in Monthly Active Users (MAUs) in May:  :

The only one of the big four to eke out a gain in May was Playdom, due to the rise of the soccer team application Bola and the village building game Treetopia.   Zynga lost more than 10% of their gamer base as every single one of Zynga’s major titles lost players in May:

The MAU loss for Treasure Isle was particularly surprising given the games massive growth in April, during which Treasure Isle added 25 million MAUs.  The rapid raise and subsequent decline highlights the compressed life cycle of games on the Facebook platform  Where Farmville took about 9.5 months from start to peak, Treasure Isle appeared to peak less than 2 months after its introduction.  That trend does not portend well for monetization of social games on Facebook, as game players tend to spend more money on virtual goods after they have established a presence in a game.

The$64,000 question s how long the decline will continue for the social gaming sector on Facebook?  If we look at the pace of decline, it accelerated the first few weeks of May, and seems to have leveled off at a 2.4% weekly decline the last few weeks.  That number will eventually recede as the loyal gamers who are less dependent on notifications and requests will become larger percentages of the remaining gamers pool.  However, the coming summer months are the seasonally slow for gaming of all types.  So it appears likely the declines will continue through June.

Given the changes at Facebook, we believe that growth for Zynga and the other social gaming companies will increasingly come from platforms other than Facebook.  Zynga’s recent partnership with Yahoo brings a new platform to potentially drive growth.  In addition, Zynga’s own sites, including Farmville.com (the 382nd most trafficked site on the net according to Alexa.com) and the stealth, thought much anticipated Zynga Live portal, bring hope for renewed growth.

However, until these new initiatives are able to take root for Zynga and other game developers, we anticipate the dog days of summer will not be kind to social gaming companies.