Inside Social Games

With daily active uniques in the double digits and revenues climbing toward $1 billion in 2010, social games are exploding in the U.S. But, in China, revenue from virtual goods has already grown into a multi-billion dollar business. Estimates hover around $5 billion USD in revenue for 2010 from virtual goods.

In fact, China’s biggest internet media company, Tencent, recently revealed that “internet value-added services,” or virtual goods, made up 78% of the company’s total revenue for Q3 2009. And that was no fluke – every quarter since early 2006 has seen virtual goods’ share of total company revenue steadily climb and stay far ahead of every other revenue stream for the company. Mobile and other telecom services (including premium content like ringtones) came in a distant second at 13%, while online advertising only contributed 9% to total Q3 2009 revenue.

As the market leader, Tencent’s success with virtual goods monetization likely indicates continued expansion and value for all players in China’s virtual goods ecosystem.

Does this mean those involved in the U.S. virtual goods industry can look to China’s successes as a promising prophecy of their own future?

Probably. More on the growth of social gaming within the U.S. virtual goods industry is available through the research report Inside Virtual Goods: The Future of Social Gaming 2010. Meanwhile, in China, virtual goods are still most popular outside of the social game experience. Tencent, for example, owes the majority of their staggering virtual goods revenue to their popular QQ instant messaging service. Not exactly a social game, the chat service is nonetheless a social experience where users express their online personalities with unique avatars and avatar accessories.

Virtual goods are a maturing multi-billion dollar industry in China, but we believe virtual goods in social games are just beginning their takeoff. Happy Farm by Chinese developer Five Minutes is China’s most popular social game, and is seeing around 23 million daily active uniques (DAU is the number of users who log in within a single 24 hour period, and currently the most accurate indicator of users’ engagement with a given application). Five Minutes’ Happy Farm is syndicated across RenRen-Kaixin, and 51.com, a few of China’s biggest social networks. As of mid-2009, the game is even on Facebook.

Other Chinese social networks, including QZone and Kaixin001, have launched their own ‘happy farming’ knockoffs, most likely developed in-house since neither network has yet opened its platform to third party developers. Notably, Happy Farm’s numbers are on par with Farmville’s current 27 million DAUs on Facebook (up-to-date stats courtesy of AppData).

Nonetheless, when compared to traffic, engagement, and revenues from the QQ instant messaging service, it’s clear that social games like Happy Farm still have much untapped potential. It’s precisely the wild success of virtual goods monetization in avenues like QQ’s instant messaging service that indicates that there is significant potential for virtual goods to make similar gains for social gaming in China.

Overview of China’s social networking services and app ecosystem

• The total social networking market in China is estimated at 124 million users.
• Major social networking services include: QZone (Alexa rank in China = 2), RenRen (Alexa rank in China = 14)+Kaixin (Alexa rank in China = 119) (both RenRen. com and Kaixin.com are owned by same parent company, Oak Pacific Interactive), Kaixin001 (Alexa rank in China = 9), 51.com (Alexa rank in China = 54), Xiaonei (became renren.com) (note domestic SNS copycat issues).
• Market share of top 5 social networking sites (SNS): QQ alumni (50%), Renren (37%), Sina Space (36.6%), 51.com (27.1%), and Kaixin001 (26.4%) (from China Internet Watch).
• Most Chinese networks promote online social networking as a reflection of real-world relationships. Each friend request is chaperoned by a prominent “Report a stranger” feature and a bolded warning not to accept requests from people you don’t know.
• RenRen-Kaixin and 51.com are the only two platforms to offer an open API to app developers.
• RenRen-Kaixin platform has by far the most active development with 448 active applications in its directory.
• Others like Kaixin 001 lag behind at 44 active applications.

A note on RenRen.com and Kaixin.com:

You’ll noticed that we refer to RenRen.com and Kaixin.com as RenRen-Kaixin. Both social networks, RenRen.com and Kaixin.com, are owned by the same parent media company, Oak Pacific Interactive. Users may log in to either social network with credentials associated with the other network. Both networks feature identical app directories and leaderboards, and both are open to third-party developers.

Finally, you may be wondering what happened to a popular social network called XiaoNei.com. In August of last year, parent company Oak Pacific officially changed XiaoNei’s name, which indicates ’school campus,’ to the more universal RenRen, which means ‘people’ or ‘everyone.’

A note on data availability:

Analysts still don’t know exact DAUs for most games because most platforms retain strict no-comment policies about their app traffic. Analysts do know that Happy Farm, China’s biggest syndicated social game, sees an estimated 27 million DAUs across the platforms on which it operates.

Additionally, it is notoriously difficult to obtain accurate stats on Chinese internet properties, and what is out there is often self-reported or, occasionally, compiled by state-run agencies. We relied primarily on Alexa rankings for the social networks mentioned in this article. The service is not always accurate and should be read as rough estimates.

Virtual goods are huge while social games have room to grow

What kinds of games are the biggest hits? While there are plenty of significant cultural differences between Chinese and American consumers, when it comes to social games, it appears that there are more similarities than differences. We love farm games. We love fish games. We love pet games. And, by “we,” we do mean the universal ‘we’ that is interchangeably American, Chinese or nearly any other social network user around the world.

Farm games, particularly Happy Farm, dominate the leaderboard. We’ll get into specifics by platform in later posts. Suffice it to say, for now, for American developers already familiar with proven social game mechanics that promote virality and addictiveness, Chinese audiences are not far out-of-reach.

If there are now more internet users in China than anywhere else, and China’s mature virtual goods market dwarfs the $1.6 billion we’ve recently estimated for the U.S., then how can there still be room to grow in social gaming? Quite simply, all but one of China’s biggest social networks have closed platforms, a decision that has dramatically limited the number and types of applications available on these networks. In China, other types of online games have been, and are still, very popular. Do Chinese internet users prefer more traditional online game experiences to social games for cultural reasons then?

We don’t think so. As noted earlier, RenRen-Kaixin and 51.com are China’s only social networks that have opened their APIs to third party developers. RenRen-Kaixin boasts a healthy 448 active applications in their directory. Several of these applications enjoy DAUs in the multimillions, and more still are inching their way up to one million. By comparison, Kaixin001, another of China’s major social networks (not to be confused with RenRen-Kaixin, with no ‘001′), has just 44 applications in its directory, all developed in-house. While QZone and Kaixin001 have made attempts to replicate popular games in-house, their app directories contain only a few dozen applications overall, and these include non-game apps as well.

While existing social games don’t yet feature extensive in-game communication or other more social features, Chinese users seem happy to communicate with other players via game-related message boards and through the social network’s standard communication channels (inbox and chat). According to Kai Lukoff, in-game chat is likely coming soon. Games on the social networks already leverage user’s social connections far more than other types of online games; as developers build in additional social features, games will attract – and retain – more users.

There’s one more reason why China’s already popular social games still have more room to grow, and it also happens to be one major similarity between China’s social gaming ecosystem and that of the United States. Social games appeal to a vastly different demographic – young, professionals who aren’t your typical hardcore ‘gamers.’ Most of these users are under 30, many of them work office jobs with constant internet access, and more of them are women than men. Sound familiar?

What’s Coming In 2010

The current market for virtual goods in China is a massive 4 times larger than in the United States, but is mostly fueled by virtual gifting on networks themselves, avatars for instant messenging services, and other forms of online self-expression outside of social games (customizable rooms or personal ’spaces,’ wallpapers for mobile and web).

How large is the market for virtual goods within social games? While revenues aren’t yet publicized by Happy Farm’s developer Five Minutes, Chinese audiences have demonstrated strong willingness to purchase virtual goods elsewhere in online entertainment. With Happy Farm’s high engagement numbers on RenRen-Kaixin, the dozens of copycat games it has already inspired, and the sustained popularity of social games as a genre, otherwise closed social platforms like Kaixin001 and QZone are taking notice. In 2010, more of China’s major social networks will likely recognize the potential of social games developed by fast-moving third party publishers, and social games as a category will grow even more rapidly.

With so much promise in the social gaming segment, will there be many new entrants? Probably not, but there will likely be more consolidation as successful developers grow in funding and size. December 2009 saw Happy Farm developer Five Minutes raise $3.5 million from Draper Fisher Jurvetson and Sunshine Ranch developer Rekoo raise $1.5 million from Infinity Venture Partners.

Finally, observers have already commented on the self-expressive nature of virtual goods on Chinese social networks. In 2010, we expect social networks to expand on self-expression by layering on even more social features, and this time through social games. As game developers refine their grasp of the game mechanics that enable maximum stickiness, users will likely see features that encourage more social interactions at a deeper level of sophistication.

In the next post in this series, we’ll take a closer look at the top apps on the RenRen-Kaixin platform. RenRen.com and Kaixin.com are two of China’s biggest social networks both owned by Beijing-based media company Oak Pacific Interactive that are seeing enormous traffic to their shared app directory. Stay tuned!