Extracting the premium from social games
Deloitte predicts that in 2012 revenue growth for the social games industry may slow to less than 20 percent. This compares to the period 2008 to 2010, when social gaming revenues grew 20-fold162. Slowing growth makes it probable that social games makers will begin experimenting with different business models. Shifting the mix to more advertising and less virtual goods looks likely, and at least some games companies are likely to move away from the hallowed “freemium” model and start charging for games up front, especially for those games with higher production values and complexity.
Social games are online games, typically played within a Web browser via a social network. They typically include light multiplayer elements and asynchronous (not real time) activity. The predominant business model up until now has been freemium: it costs nothing to start playing the game and there is no subscription to pay. Aside from advertising, monetization occurs when players pay for extra content, such as additional virtual artifacts or access to new levels of games.
Social games enabled the addressable market for video games to reach men and women of all ages: effectively anyone with a computer of any description, from a MP4 player and up. One sixth of social gamers are over 60163. The majority are female164. As recently as 2008, the traditional console game player was predominantly male, and aged 18-49165.
Due to their crossover nature, mass market audience, platform-neutrality, and low entry costs for players and developers alike, social games were expected to transform the entire industry. At first, this seemed likely: the easy-to-enter freemium revenue model coupled with social rewards166 rapidly proved a compelling combination for hundreds of millions of consumers.
However early growth numbers have proved difficult to sustain. By some metrics, and for some developers on certain platforms, the trend was actually negative in 2011167.The social games user base grew very little over the past two years168, even though revenues have continued to grow. Although the percentage varies across games and over time, it appears that only about one to three percent of those playing social games spend real money on virtual goods (known as the conversion rate169). Further, the core group of paying users, or “whales”170, already provides an outsize portion of social game revenues. 46 percent of one company’s revenue comes from the top one percent of users. This group may be reluctant to up its spend beyond the hundreds, and in some cases thousands of dollars invested per year in their virtual ecosystem.
Social gaming companies can also generate revenues from other sources such as in-game advertising, but at present virtual goods remain the largest piece of the pie. One large social games company gets only five percent of its revenues from advertising171, and even across the broader industry the average ad contribution appears to be only about 14 percent172.
If the audience cannot be grown, and users are reluctant to play, one approach for social games companies could be to increase the number of titles each user plays or the number of hours they spend on each game. But the average person is already spending almost eight hours per month on even the most popular social networks, and that number has risen only slightly in recent quarters173.
Another approach is to add another layer to the social games business model: pay. This may seem counter to the spirit of social games. But today’s leading social games boast ever higher production values and storyboarding. In other media, and in other gaming sectors, consumers are willing to pay for content that they previously received for free, especially if it is perceived as being of high quality. Pay TV is a prime example of this in traditional media, and in the games sector, enthusiasts already pay for access to massively multiplayer online role-playing games (MMORPGs), or to access the online services for consoles.
Social and casual games are likely here to stay, but it may prove challenging to increase their share of the total $63 billion global video games market significantly beyond its current two percent174, if the monetization model remains constant.
Social games’ path to higher revenue may lie in iterating the business model, and charging to play games. Revenue models for social games have been primarily dependent on three factors: increasing the installed base, usually measured as “monthly active users” or MAU; increasing the portion of users who pay for content; and increasing the amount that each user pays. All three approaches are valid, but it may now be the time to add a fourth approach – charging to play at the outset.
The social games sector should also learn from the console gaming industry. Developing strong franchises and quality sequels may not be cheap, but it can be very lucrative. The media title that reached $1 billion in revenues faster than any title in history is not a famous 3D movie about aliens… but a video game from a franchise in its eighth iteration and over eight years old175. It may be time for the leading social games companies to recognize the much-changed quality of their latest titles and charge for them.
Deloitte Canada, as referenced in videos, podcasts, or online materials related to TMT Predictions 2012, refers to Deloitte & Touche LLP, the Canadian member firm of Deloitte Touche Tohmatsu Limited.
162HIS Screen Digest News Flash: Zynga Preliminary IPO Filing Legitimizes Social Gaming Market, June 30, 2011, http://www.isuppli.com/Media-Research/News/Pages/IHS-Screen-Digest-News-Flash-Zynga-Preliminary-IPO-Filing-Legitimizes-Social-Gaming-Market.aspx
163PopCap/Information Solutions Group, 2011: http://www.infosolutionsgroup.com/pdfs/2011_PopCap_Social_Gaming_Research_Results.pdf
164PopCap/Information Solutions Group, 2011: http://www.infosolutionsgroup.com/pdfs/2011_PopCap_Social_Gaming_Research_Results.pdf
1652008 Sales, Demographic and Usage Data, The Entertainment Software Association, http://www.theesa.com/facts/pdfs/ESA_EF_2008.pdf
166Exposing Social Gaming’s Hidden Lever, Gamasutra, 8 November, 2011, http://www.gamasutra.com/blogs/TylerYork/20111108/8849/Exposing_Social_Gamings_Hidden_Lever.php
167An In-Depth Look at the Social Gaming Industry’s Performance and Prospects on Facebook, InsideSocialGame, 24 January 2011: http://www.insidesocialgames.com/2011/01/24/an-in-depth-look-at-the-social-gaming-industry%E2%80%99s-performance-and-prospects-on-facebook/
168Zynga Builds Its CastleVille Walls, As Its Facebook Traffic Flattens And Falls, TechCrunch, 27 November 2011: http://techcrunch.com/2011/11/27/towerdefense/
169Social Gaming Monthly, Thomson Reuters, September 2011, Rpt. 18160425 http://www.industrygamers.com/news/social-games-see-just-1-3-of-playersconvert-to-paying-customers-says-crowdstar/
170Zynga’s Quest for Big-Spending Whales, Bloomberg Businessweek, July 2011: http://www.businessweek.com/magazine/zyngas-quest-for-bigspendingwhales-07072011.html
171This Is Zynga’s IPO Road Show Presentation, Business Insider, 2 Dec 2011: http://www.businessinsider.com/its-out-this-is-zyngas-ipo-show-presentation-2011-12?op=1
172eMarketer, Virtual Goods and Currency: Real Dollars Add Up, July 2011 (includes PC-based social game revenues only.)
173Nielsen, August 2011: http://blog.nielsen.com/nielsenwire/online_mobile/august-2011-top-us-Web-brands
174IHS Screen Digest, IHS Screen Digest, DTTL analysis