Inside Social Games

Jeremy Liew, Managing Director at Lightspeed Venture Partners, has been thinking about social games for a long time. Recently, he moderated a panel at Web 2.0 Expo San Francisco called Games 2.0 (slides here). During Web 2.0, I spoke with Jeremy about his vision for social gaming and how he characterizes the space.

Inside Social Games: Jeremy, you’ve been writing about social gaming for longer than most. What’s your vision for the growth of this space?

Jeremy Liew: I don’t have a vision really - that’s not my job. VCs are better critics than writers. I just want to do a decent job of recognizing great visions when I see them.

If you look at churn rates on social applications, most of them just do not have enough to keep users engaged. As a whole, games offer a meaningfully lower churn rate - meaningfully better retention - allowing the shape of that curve to be better.

The low cost of viral user acquisition, greater long term user retention, and interesting but not yet proven opportunity for digital goods monetization decouples you from the math that it takes to get revenues from high volume, low CPM page views, like we see in so many other applications.

Inside Social Games: So where are we in the evolution of social gaming?

Jeremy Liew: I think we’re pretty early in this. SGN and Zynga are delcaring victory, but a lot of innovation is yet to come.

It’s not an accident that the biggest games on Facebook are not owned by SGN or Zynga: Scrabulous and Friends For Sale have been growing independently.  They’ve been baking virality directly into the game mechanic, not layering it on top. They’re developing game mechanics that are native to social networking environment - not just using social networks as a distribution channel. This has only been going on for a few months, and so it’s clear to me that there’s still a lot more opportunity to optimize that.

There is big opportunity in the continuum of users from the casual (that don’t even realize it’s a game) to the hardcore (who are needed to make the digital goods opportunity work).  Social networks offer a new opportunity to move people up the curve.

Inside Social Games: How does developing games for social networks differ from traditional game development?

Jeremy Liew: It’s called Games 2.0, but it’s more like Games 8.0 or Games 9.0. If Web 2.0 is being driven by much lower development costs, then the same thing is true for games on social networks.  Instead of spending $30M for months of development and shipping jewel cases, now you have two guys coding for a weekend - several orders of magnitude lower.

In traditional game development, you’ve got to think the game mechanics all the way through before you ship. For example, you’ve got to map out the first 60 levels and then design the AI for the more significant bosses, etc. But now, you can develop games incrementally - launch fast, launch early, and iterate a lot.

In terms of marketing - Web 1.0 was all about Super Bowl ads, now it’s about variablized CPM/CPC.  The same thing is true with games.

In terms of distribution - In Web 1.0, you had to negotiate a complex multi-million dollar deal with AOL. Now, you just build a web app. The same is true with games. Before, you used to have to negotiate to get shelf space with Best Buy. Now, there are social networks.

In terms of monetization - In Web 1.0, you needed big sales forces. Now you’ve got ad networks that variablize the cost of ad sales.  You had to pay $60 to play Halo 2, but free to play games with monetization through premium features, digital goods, and advertising reduce that barrier significantly.

All this makes me think that there will be new valuable companies created through this disruption. It’s not going to be EA and Take Two who are going to do it. If Web 2.0 is about the social web, then Games 2.0 is about social gaming.

Inside Social Games: Two of the early players in this space, Zynga and SGN, want to create distribution channels for other game developers. Do you think that kind of distribution will be important for developers launching their games?

Jeremy Liew: Mark Pincus [Zynga CEO] is on the record saying you can’t just rely on virality, you’ve got to support your efforts with marketing.  But the biggest games haven’t spent a dime on marketing (Lil Green Patch or Friends For Sale). So I don’t think you have to find more distribution channels, but there’s no shame in it.  There’s always going to be value for distribution - it’s hubris to expect things will only grow virally. Zynga and SGN are smart to help people get to a stage where they can grow virally.

Inside Social Games: So finally Jeremy, where are you turning your attention these days?

Jeremy Liew: Well, there are a bunch of guys importing free to play MMOGs from Asia. And if you believe that free to play with digital goods is the way this is going to go, like I do, then there’s a bunch of infrastructure challenges ahead.

What’s clear is that kids don’t have credit cards.  Gaia has kids just mail in gobs of cash, but that’s not a scalable solution. It’s an infrastructure problem - and it’s not just a problem on Facebook, it’s general to digital goods.

And tuning digital goods economies is actually a very non-obvious problem.  If you get it wrong in the beginning, you’re doomed, and you may not know it for 6 months.  This can only be learned through experience - you can’t hire someone who just knows how to do it.