The Social Internet

While I thoroughly enjoyed my time as a Wall Street analyst, compliance issues hampered my ability to blog on SecondShares.  Now that I’m back angel investing, I look forward to sharing thoughts and analysis on the social and mobile companies I refer to as “Social Internet” companies.  Just as the siloed internet companies disrupted the offline leaders (e.g. Amazon v Walmart), Social Internet companies that are BORN social, will disrupt incumbent firs internet leaders.  I first outlined my thesis in the only real thought piece I wrote a year ago.  I now update those thoughts in a deck “The Social Internet“.  While the deck is meant to be given live (which I love doing, as it’s such a fun dynamic topic to discuss), a lot of value can be derived by reviewing the slides.   Enjoy the deck, share it, and I look forward to future posts.

This Week in Social Gaming

From the time we began tracking the social gaming sector in April 2010, the three largest developers in terms of aggregate MAUS have remained at the top.  Zynga has extended its lead growing users 7% since we began tracking in April 2010.  We also note, two weeks ago, John Schappert, left his position as COO of Electronic Arts to join Zynga.  Schappert had been at EA since June 2009.

Of the developers, Wooga has made the most significant increases, growing another 25% from last month and ascending to the fourth spot powered by the success of Bubble Island, Monster World, and Diamond Dash.

Figure 1: Change in MAUs Since April 2010 for the Top 10 Facebook Game Developers

Source: Wedbush Securities,  appdata

Of the top ten titles, Zynga has developed seven with its Cityville capturing almost twice as many active users as the number two title, Zynga’s Farmville.

Figure 2: Zynga Boasts 7 of top 10 Gaming Titles

Source: Wedbush Securities, appdata

 

Another notable occurrence in the Facebook app ecosystem is the emergence of the dating app by Badoo as the second biggest application on the Facebook platform, with over 57 million monthly active users (MAUs).  When Badoo ascended to the number two spot last month, passing Farmville in terms of MAUs, it became the first time in over a year that Zynga apps didn’t control the top two spots.

Badoo was on a trajectory to likely surpass Cityville and become Facebook’s largest app had Facebook not worked with Badoo to alter some of the more viral elements of the app.

 

Figure 3: Badoo Dominates Non-Gaming Apps

Source: appdata

 

THIS WEEK IN SOCIAL GAMING – 4-15-2011

After the meteoric rise of Cityville in December 2010, and post the holiday season, Monthly Active Users (MAUs) for the Top 10 Facebook game developers trended down for two months, but March saw an MAU increase of 2%, to 432.3 million.

From the time we began tracking the social gaming sector in April 2010, the three largest developers in terms of aggregate MAUs have remained at the top.  Of this group, however, only Zynga has experienced MAU growth since April, which is largely due to the success of Cityville and its 89 million MAUs.

 

Source: developer analytics, Wedbush Securities, Inc.

Cityville remains the most successful social game ever, peaking at over 100 million MAUS, and is off only 11% from its peak (against an average of almost 45% for the other current top games).  Texas HoldEm Poker remains the most enduring of all social games down only 5% from its peak.

Source: developer analytics, Wedbush Securities, Inc.

One other success story is Wooga which, powered by the success of Diamond Dash, Monster World and Bubble Island, has eclipsed Playdom as the fourth largest game developer.  Playdom’s decline, after being purchased by Disney in July 2010, highlights the risks that large media companies face when acquiring social assets of which they have minimal understanding.

Source: AppData.com

THIS WEEK IN FACEBOOK

Facebook Dominates Social Networking Landscape, Surpasses 250mm Mobile Users

Facebook’s dominance of social networking is on full display in the below chart recently released by Pingdom which shows every social network with over 1 MM daily visitors.

 

We expect Facebook’s membership to continue to grow, particularly in the less saturated demographics (55+) and in countries with lower penetration.  But we also believe that there are massive opportunities for other networks that either offer a unique communications platform (e.g. Twitter), or meet vertical needs (e.g. LinkedIn for work, Badoo for dating).

 

Also this week, Facebook had several major mobile announcements.  The announcement that got the most press was the revelation that Facebook had surpassed 250 million mobile users.

 

The second, and more meaningful, was the rollout of a major upgrade to its mobile platform (m.facebook.com).

 

On March 31st, Facebook announced:

 

“Today we’re excited to start rolling out a major upgrade to m.facebook.com that delivers the best possible mobile Web experience no matter what device you’re using. Previously, we solved this problem by building multiple versions of mobile Facebook: m.facebook.com for less feature-rich mobile devices and touch.facebook.com for touch devices.

There are two major problems with this approach:

  1. 1. We were limited by the lowest common denominator for each site. We couldn’t use JavaScript and had device specific file size limitations on m.facebook.com. Supporting a wide array of touch phones of varying quality on touch.facebook.com limited our ability to use modern CSS and JavaScript APIs.
  2. 2. Every time we launched a new feature, we had to build it multiple times across different code bases: once for facebook.com, then again for m.facebook.com, touch.facebook.com, and in native applications as well. Honestly, we weren’t very good at doing this, so certain features were missing on different devices.

With the new m.facebook.com, users with high-end touch devices will see a rich touch-friendly interface; for users with feature phones, the site will look and work great.”

The bottom line is that the world’s dominant social network has a keen appreciation for the global secular trend to mobile, and is operating its business accordingly.

As a Facebook spokesperson stated: “We think it’s important to provide an excellent mobile Web experience.  Now, whenever we launch new features on the mobile site, they’ll be available on any mobile browser, presented in the best possible experience. We’re excited to roll out the new m.facebook.com site to everyone over the next few weeks.”

Facebook Continues to Build Its Washington Presence

Undoubtedly, one of the major risks to Facebook remains government regulations.  Anytime a company gets as big and powerful as Facebook, the company attracts government scrutiny like moths to a flame.  Facebook clearly recognizes this.  In fact, Facebook’s COO, Sheryl Sandberg, is a former Clinton administration official, and Facebook’s General Counsel (Ted Ullyot) is a former clerk for Supreme Court Justice Antonin Scalia.  So it’s no surprise to see Facebook continuing to take the appropriate measures to make sure that Washington understands and appreciates their perspective, and is best able to place Facebook’s actions in the right context.

 

The latest rumored addition to the Facebook Washington team is Robert Gibbs, the former Communications Director for President Obama.  Gibbs would bring an intimate knowledge of Obama’s agenda as it relates to the regulatory issues facing Facebook, as well as strong relationships within the administration.   Obama is widely perceived to be a fan of Facebook.  One of Facebook’s founders, Chris Hughes, played an important role in Obama’s campaign by heading the Facebook Connect integration.  More recently, Mark Zuckerberg sat next to the President at dinner as part of a group of tech titans that dined with Obama in Silicon Valley.

 

While the fight over talented programmers gets the most press in the Valley, recruiting the right talent in Washington D.C. may prove a similarly important key to Facebook’s future success.

 

General Questions & Considerations of a Secondary Market Transaction

Guest Post by Mitchell C. Littman, Esq.

 

 

So, what is a Secondary Market Transaction?

A Secondary Market Transaction is a negotiated private sale of restricted securities of an Issuer whose securities are not publicly traded. Some transactions are effected directly from Seller to Buyer and in some instances one or both parties may be represented by a broker-dealer who may earn a commission on the transaction.

Who are the Issuers?

The Issuers that have attracted the most market attention have been social networking and technology firms that have chosen to remain private but that have (i) used equity and equity-linked reward systems in attracting and incentivizing employees and (ii) received private equity or venture capital investments from some combination of angels and institutional investors.

Who are the Sellers?

The overwhelming majority of Sellers have been founders or early-stage employees that have left the employ of the Issuer, though there has been some selling by early stage investors (primarily angels, rather than VCs who have tended to participate in follow-on rounds). Ex-employees have typically obtained their Shares through the exercise of stock options or by receipt of restricted stock grants.

What securities are they selling?

Most sales are of Common Stock, though there have been some sales of Preferred Stock. Some Issuers have two classes of Common Stock – a class with super-voting rights and a plain vanilla class of Common Stock. In such cases, the vanilla class is invariably the security being sold. All such shares are typically deemed to be ‘restricted securities’ under applicable Federal and state securities laws.

Additional Hurdles to Effecting a Purchase and Sale: ROFR’s and Co-Sale Rights

In addition to the outright prohibition on Transfers, most Restricted Stock Purchase Agreements or Option Exercise Agreements include provisions granting a “Right of First Refusal” (a “ROFR”) under which the Issuer (or its designee), within a prescribed period of time after receipt of a Transfer Notice, may elect to purchase the Shares on substantially the same terms as those proposed in the Transfer Notice.

In some instances, particularly where the Shares to be transferred consist of Preferred Stock, other early stage investors in the Issuer may also have ROFR’s and/or Co-Sale rights entitling them to also sell Shares along with the Seller.

The exercise of any of these rights by the Issuer or another stockholder effectively derails the purchase by the Buyer.

Virtually all ROFR and Co-Sale provisions provide that, in the event the rights are NOT exercised, the Seller has a fixed number of days in which to complete the Transfer to the Buyer. In the event the transaction is not completed within the allotted time, any subsequent attempt at Transfer must once again pass through the ROFR and/or Co-Sale process.

Effecting the Purchase and Sale: The Stock Transfer Agreement

The core document for effecting the purchase and sale of the Shares is the “Stock Transfer Agreement” (also sometimes called a “Stock Purchase Agreement”) (the “STA”).

The typical STA contains:
• The principal terms of the sale, i.e., number of Shares to be sold, price and the like
• Representations and warranties of the Seller include Title to Shares; Absence of any lien or encumbrance; Power and authority to sell.
• Representations, warranties and covenants of Buyer include Power and authority; Sale was not effected through any public advertising or general solicitation; Buyer is taking for investment intent; Buyer is sophisticated and has sufficient access to information
• Buyer absolves Seller for any liability due to the fact that Seller may have superior information regarding the Issuer Buyer agrees to be bound by same restrictions as were applicable to the Shares in the hands of the Seller

Closing Mechanics

Assuming the ROFR is not exercised, the parties may proceed to a closing. Generally speaking, the Seller and Buyer execute and deliver the STA to the Issuer for its approval.

Seller delivers Stock Certificates to the Issuer or its Transfer Agent.
(Some Issuers actually require that all Stock Certificates be held in escrow by Issuer’s counsel to facilitate transfer in the event of a ROFR exercise. In that case, the other parties will only receive photocopies of the certificates.)

Once approved, a virtual closing is conducted, with the Purchase Price being wired by the Buyer to the Seller and the STA signatures and the opinion of Seller’s counsel being released to the parties. Subsequently, the Issuer issues a new Stock Certificate in the name of the Buyer.

About Mitchell C. Littman, Esq.

Mitchell Littman is a founding partner of Littman Krooks LLP and heads the firm’s corporate and securities department. His practice includes public and private offerings, broker-dealer and investment banking matters, secondary market transactions, venture and private equity capital investments and mergers and acquisitions

About Wedbush Securities Private Shares Group
The Private Shares Group of Wedbush Securities covers the growing base of privately traded securities, with an emphasis on those in the social media space. The mandate of the group is to build our trading network in all private shares, source deal flow in the space (including “initial private offerings”), and to build funds and create other alternative investment opportunities across private shares for our institutional and accredited retail clients.

Kabam: De-risking video game development

Guest post by Chris Carvalho, Kabam COO

Kabam is poised to disrupt the overall games market by leveraging the social Internet to create a game experience that keeps users engaged and by utilizing a free-to-play virtual goods model where consumers only pay for what they want once they have derived value from playing the game.

 

 

 

At the top of the funnel, Kabam’s games are discoverable by social tools that leverage relationships.  Kabam leverages the cloud-based nature of the social Internet to facilitate frictionless sign up and game initiation.  There’s no hardware required (just internet access), no software to load or download, no payment upfront (since we are a free-to-play model).  Simply point, click and you’re on your way to playing one of our games.

Once signed in to a game, a player can invite existing friends from their social graph to play online with them, adding to their social interaction with current relationships.  Interestingly enough, it’s also common for players to make new friends within their game play experience and then incorporate these new relationships into their social graph.

 

 

 

Social tools have also enhanced Kabam’s ability to utilize alliances in games.  Users can join with over 100 other players to form alliances to play with and against other real people/alliances in real time.  Alliances can meet online in real time in one of our persistent worlds, establish strategies, assign responsibilities and then go execute their plan. We recently conducted a survey among Kingdoms of Camelot heavy users: 76% indicated “I have made new friends in my Alliance and enjoy playing with them” as the number one reason they play the game.

 

From a business standpoint, fostering this tight-knit community helps contribute to greater game engagement and player retention, which are the key variables in determining the business potential of a social game — the more involved a player is, and the longer they stay involved, the greater their potential lifetime value.

 

For a cost perspective, Kabam’s model takes significant risk out of the game development.  Retail games have a high cost of production and distribution ($20-$40MM is not unusual and costs for major titles are increasingly exceeding $100MM) and can take years before they are released. Once the game ships, the bulk of the work is done; the developer can only cross their fingers and hope they’ve produced a hit.

 

Conversely, Kabam games have a significantly lower cost of initial production ($1MM range) and take only months to launch.  Once released, the fun really begins.   Kabam continuously adds new features, optimizes game play, and makes fixes that are all informed by the players’ activity which can be monitored in real time.

 

Zynga’s Cityville Is Aggregating A Giant Metropolis, Becomes The First Game on Facebook To Pass 100 Million MAUs

Zynga’s CityVille surged past 100mm Monthly Active Users (MAUs) on January 13, just 41 days after its release, becoming the first game in Facebook history to break that milestone. Cityville become the biggest game in Facebook history on January 1, by surpassing the 83.7 million mark set by Zynga’s Farmville on March 11, 2010.  Cityville’s monstrous success is based on numerous factors, (quality

of the game, localization in six European languages), but none is as big as the cross promotion only available to Zynga with its current base of over 300mm total MAUs across all its games, more than 6X the size of CrowdStar, the 2nd largest aggregator of MAUs on the Facebook platform.  The cross promotion for Cityville runs the gamut from a big Cityville button that is displayed all the time while Zynga gamers are playing any other Zynga games, to your new neighbor on Farmville who provides links to Cityville.  Zynga also asks its gamers to help spread the word, including asking farmers to spread the word to their Farmville friends when playing Cityville.

Zynga’s Cityville crushed the growth of Zynga’s Frontierville, which was previously the fastest game to 20 million MAUs:


We estimate that more than 70% of Cityville’s users are outside the U.S., with the game a hit in both Asia and Europe.  However, while Zynga can get people to try the game, getting them to return and become regular users is more difficult.  The current ratio of people who logged on yesterday (as measured by DAUs – Daily Active Users), as a percentage of users who logged in to Cityville in the last month, is currently lower than the ratio for other Zynga games:

Based on the monstrous success of Cityville, total MAUs for the ten largest social gaming developers on Facebook hit an all time high this week at 490 million, up more than 25% since Cityville was introduced in December.

Finally, it’s interesting to put Cityville in to perspective with regards to the other 20 largest games in terms of MAUs in the history of Facebook.  Figure 9 highlights how Cityville is currently has about the same number of MAUs as total combined MAUs of the 3rd, 4th and 5th largest games ever.     Of the top games in the chart below, Happy Aquarium, at 7th largest, is the first not developed by Zynga (it ‘s a CrowdStar game).  Finally, as of the 15th, Zynga controlled over 60% of the total MAUs of the top 10 developers combined.



Cityville should accelerate the growth of Facebook gamers, which is already on a steep trajectory per the figure below, which highlights that over 37% of U.S. Facebook users 18+ are already playing games on Facebook, a 20% increase in just two months.