Tuesday, August 17, 2010

Coke, Pepsi, and Zynga (and Margins)

Zynga is now the third most valuable gaming company in the world, with a valuation of $4.66B according to SharesPost. This ranks just behind Electronic Arts and its valuation of $5.36B. The market leader is of course Activision Blizzard, coming in at $13.44B. Zynga has already lapped Nintendo ($3.16B), ye olde company that conjures up more warm game memories than perhaps any other. How long before Zynga laps EA? How long before the maker of FarmVille and Mafia Wars becomes more valuable on the open market than the maker of Madden and the Sims? How is it even possible? Margins. Which have been estimated at 30%.

Look at the financials of EA and Activision. I'm seeing razor thin margins for both. Keep in mind too that both companies pull in ~$4B of revenue annually, an estimated six to seven times what Zynga pulls in.

Of course, it's not all about margins. The long bet is that Zynga will continue to grow its top line. But the margins, the free cash flow - investors notice. They notice that FarmVille didn't take $100M to make like WoW, or many years and >$100M to make like Star Wars: The Old Republic. Zynga's games are lean, the rewards vast, and the margins high. Trust me - investors notice. To wrongfully paraphrase Obi-Wan, "these are margins you are looking for."

Thursday, July 29, 2010

The Bootstrap: Facebook Passes Even More Costs Onto Developers

Over poker and beers last night, a developer and colleague of mine was wondering why no one in ye olde blogosphere has written about this. So here I am, about to run my mouth.

Facebook is attempting to get developers to use their currency, Facebook credits. (Facebook takes a 30% cut of all money used to purchase these credits, but more on that later.) Facebook is also trying to get users to adopt this new currency. Their latest scheme is a wide grant/seeding of nearly every user 10-25 credits. Here's the rub: When a user pays in free/imaginary/government-cheese credits, the cost is borne by the developers. Long story short: If Joe User pays with free credits to play your app, you get nothing, nada, zip.

In July so far, we've been paid in 7% free credits, so we haven't been hit very hard. I imagine other apps may be hit harder, especially the more popular apps. However, it's quite possible that Zynga, CrowdStar, et al. have a special arrangement with Facebook to get paid on this.

This could really hurt the smaller developer in the end. While CrowdStar's Peter Relan is right, that credits do offer a certain liquidity in the Facebook economy, does Facebook really need to pass along more costs to the developer?

Back to costs, and Facebook's 30%. There has been a bit of hubbub regarding the fee structure. People are crying "But PayPal and CC fees are only 5%? Why is Facebook charging 30%?" Well, those fees are 5%. But PSMS fees are usury, somewhere in the 50% range. And considering 70% of Facebook's audience is international --- where paying via PSMS is much more common --- I imagine that Facebook is taking a large hit via mobile. (Though I wonder what kind of sweetheart deal they've arranged for PSMS...) My initial estimation was that Facebook was incurring ~15% in fees, maybe 2% in fraud, with the rest being the gravy.

But of course, Facebook passes the fraud onto the developer as well. From section 4.4 of the Credits Terms:

"You will be liable for all Chargebacks relating to transactions we learn about within 90 days of the transaction."

Thanks, Facebook, for squeezing every last penny.

Monday, June 14, 2010

"Begging As Gameplay"

This is an incredible post regarding "Begging As Gameplay":


Tuesday, June 1, 2010

The Perfect Storm That Created Zynga

In 2009, a Great Window was left open by Facebook, and the Big 4 (Zynga, Playfish, CrowdStar, and Playdom) took incredible advantage. This window included two very important vectors of communication between application developers and Facebook users: notifications and feed posts. The Big 4 built their respective empires to incredible heights while the brass at Facebook sketched a plan to ease back on these viral vectors. And ease back they did. Developers know that when Facebook killed notifications for games, it was a mere minor bump in the road. Most of their viral leads were coming from invites and feed posts anyway. The killer change, however, was when Facebook shrunk the size of feed posts. The overwhelmingly large (and potentially disruptive) feed posts were a key viral vector during the Great Window that Facebook closed shut in November. Since then, major apps have floundered, their MAUs flattening and then declining. What's the big picture in the current Facebook universe?

For companies like Zynga, the launch of a new product doesn't involve an advertising blitz via Facebook ads. It involves an advertising blitz within their own private space on Facebook, their other products. Zynga has many destination sites within the master site of Facebook, and they advertise their other games there. It's called cross-promotion. And it's incredibly effective. The 75M people who played FarmVille last month? They all saw ads for Mafia Wars and FishVille, every time they logged in. To be sure, Zynga still advertises their games. But probably at a loss. Rumor has it that Zynga uses their impressive profits and capitalization to bid up advertising rates to crowd other players out of the market.

And that's the salient fact of the current market: Now that Facebook has squashed the effectiveness of viral vectors, without a huge installed base, it's difficult for minor players to gain traction. The only way to build a game to great heights is with capital for advertising, or with a brand. Let's examine these possibilities.

Say you're a venture capitalist and a young CEO wants to start (or expand) her social games company. She has a couple of great new games in development, and needs a capital infusion to advertise these products and build up an installed user base. Do you, the VC partner, take that bet? Probably not, and your partners probably won't let you anyway. We haven't see mountains of venture money being poured into the Facebook social games in the past two quarters, and we probably never will, for this very reason - it's not a very good bet.

The other possibility is that Lucas Arts goes to Indie Developer and forms a partnership to release a Star Wars game on Facebook. This is somewhat likely. Smaller studios sometimes win the right to develop hot IP like this. But it's rare.

And that's why we will never see another Zynga, or Playfish. The window is closed. The Big 4 have their installed audiences and can launch new products and advertise to them directly. (Of course, it's not out of the realm of possibility that Facebook could outlaw cross-promotion, but that's another story.)

Monday, May 17, 2010

Find Me - Navigating Value in Location-Based Services

Any time I see rapid, mass adoption of a service, I immediately think of product/market fit. Take Mint. It filled a gaping hole in the personal finance market, a market virtually untapped by developers with a proper sense of UI design. It solved people's problems. Users suddenly couldn't live without it. It grew very quickly to a remarkable level and viola, big payday.

One key aspect of Mint's success was the retention of their users. Their core value proposition was clear, and it had lasting value. Think of it in reverse. If Mint was a fun diversion, a fad that went out of style, its user adoption curve would have flattened very early and then dropped off. This happens with Facebook games all the time. I should know. I saw it happen.

The past year we've witnessed the fast rise of Location-Based Services. Well, they're games right now, not much of a service because they don't provide much value in their current state. I'd like to focus on the complex value propositions that they are navigating, that of their customers and of their vendors.

Part 1: Value for the Customers

Go the destination sites of Gowalla, Foursquare, and My Town. Only Gowalla is advertising any payback for playing their game. And it's vague, in the guise of "Enjoy Rewards." These rewards are not yet monetary finally showing signs of real value. They're the bragging rights of enjoying mayorship in the game, or earning a badge as a regular. The concept, the promise, the aspiration is that one day you'll get a coupon, a free beer, or even earn velvet rope treatment. But we're not there yet. In fact, we're not even close. Unfortunately, as Dave McClure says, the games are bullshit. The games --- with the payoff currently emotional and not yet monetary --- don't have lasting value. Without lasting value, we may see the user adoption curve flatten and fall.

How do we get to a real payoff? Serious biz dev. They have to sign up companies incredibly fast to start giving out real payoffs incredibly fast. Why? Because the novelty of being the mayor of the Elbo Room wears off. Users will want actual value.

There's a critical difference between Gowalla and Mint. Mint developed a business model (commissions from financial offers) that worked. Had it failed, their users wouldn't have cared. The service itself is the value proposition. And it has lasting value. They would have stuck it out as Mint developed plan B. For Gowalla, like Dave said, the game is bullshit. The value is in the payoff. They have no payoff yet. They better find it soon.

Part 2: Value for the Vendors

Why would Philz, who serves the best coffee in the world, offer me a coupon for checking in via Gowalla? What's in it for them? Why, the impression in the user stream, that's what. When I check in to Philz in the Mission, my Facebook and/or Twitter streams show this check-in to my friends. It's an ad impression. But it's not an ordinary impression. It's of incredibly high value. It's a trusted source. It might as well be a personal recommendation. Clearly Philz has a reason to incentivize this check-ins with special deals.

But that impression is, in its current form, fairly useless. For one, it doesn't integrate with Philz's Facebook page or Twitter account. It bounces to a Gowalla page which no small business owner is interested in maintaining. (Most are only now coming around to Facebook and Twitter.) With nothing but the check-in, these companies are just features. They're not a product. This leaves Facebook (and Twitter) a gaping hole to step in and bring a location feature to their already deep product. Yelp is already off to the races.

It will be very interesting to see how this plays out over the next year. These LBS companies are highly capitalized, so they won't simply fade away if numbers begin to flatten. They are going to have build a deeper product around location, and I don't think this is a wise investment considering the competition.

Graduating Grandma: From Parallel Play to true Social Gaming

I've never understood where the phrase Social Gaming originated. It's a meaningless buzzword of a phrase that engulfs everything around it and hides meaning deep within, like a scrum. And yet it's here and pervasive and we have to deal with it. But what does it really mean? Supposedly games played on social networks. But are these games truly social? What exactly is social play?

In my own head, Social Gaming means interactive, i.e. playing directly with, or against, other players. (Perhaps competitive/cooperative is a better term.) For me Social Gaming also entails synchronous play, or playing with others in real-time. MMOs fall directly in this category. Does anything on Facebook? Surely. Poker fits neatly into this category. However, Poker is perhaps the only successful interactive synchronous game on Facebook (currently). Also, to be fair, real-time is a bit stringent. We could certainly just as well go with turn-based games. Which leads us to Scrabble-like games. (Remember Scrabulous, er, Lexulous?) Note, too, that Scrabble-like game games usually monetize on ad revenue --- not virtual goods, as is the current trend --- and teeter on the edge between turn-based and asynchronous play.

But how are most games played on social networks? Via Parallel Play, as opposed to interactive play. And asynchronous, as opposed to synchronous play. Then why are these games called "social"? You know, other than the social networking part? Many reasons, but mainly two: Because we share our progress with our friends, and because we invite our friends to play alongside us. And of course, via these actions, by sharing and inviting, we unwittingly (at first) and then willingly (when we leave the cave) become free advertising vectors for game developers.

Not all successful Facebook games are strictly non-interactive. Take My Empire. We ask for help from our friends to build things, making these games Parallel Play + Light Interaction. Other games take interaction a bit further, like Mafia Wars, where you are part of a clan that you build with your friends and fight against others. But you're stuck in an asynchronous universe with multiple instances. It doesn't feel truly interactive. In general, most Facebook games are very limited in their social aspects.

Is there room for an interactive, synchronous game on Facebook, one with more mature, satisfying social elements? I should hope so, because we're running out of themes in the God Game genre. Nearly every skin --- from farm to fish to city to medieval --- has been released. I feel, too, that for a very large portion of the Facebook gaming audience, FarmVille or a similar God Game was their first online game. Ever. (An overstatement, but it's certainly the first game many people played every day, the first game to which they were committed. ) It makes sense that these games were the earliest successful games on Facebook, because they're easy, addictive, and casual. They don't feel like gamer games, because they're not. This gave grandma permission to play. Now it's time to graduate grandma.

What genre of game will grandma play next? Probably not FIFA soccer (though this move by EA makes perfect sense considering 70% of the Facebook audience is non-USA). Graduating grandma will come in baby steps. So probably not City of Eternals either. I suspect it will come in the manner of a simple MMO in an accessible skin that requires group play to complete missions. I'm biased, but it feels like Puzzle Pirates could be a winner here.