In the most recent post in our China social games series, we saw that China’s social game developer landscape is marked by high barriers and a payment structure that favors large social network platforms over individual developers. Today, we examine the financial incentives for developers in that market, and look at why developers of all sizes are looking beyond China for growth.

Low ARPUs and High Social Network Fees

While some developers are viewing Facebook’s impending Credits rollout and revenue share with apprehension, Chinese developers have been dealing with the revenue share question for years. China’s social networks take a cut – a generous one – of all revenues earned by social games on their platforms. These share rates are highly unfavorable toward developers, with some social networks reported to be keeping between 50% and 70% of all third-party app revenues.

On China’s social networking platforms, the number of visitors to apps is high and daily active users (DAU) are comparable to some of the most popular games on Facebook. The developer Five Minutes’ Happy Farm is seeing around 23 million DAUs while Zynga’s FarmVille is currently enjoy 27 million DAU according to our most recent numbers from AppData. Despite these promising traffic numbers, the average revenue per user (ARPU) remains very weak. One source reports that a game with 100,000 DAUs will bring in around $5,000 USD per month. That would calculate out to around $0.06 / DAU / month. For reference, many games on Facebook are making under $1 / DAU / month, with a few of the stronger games surpassing the $1 threshold.

Why are ARPUs so low? It’s not because Chinese users are strangers to virtual goods. As we noted in this series’ first installment, China’s overall virtual goods market is on its way to becoming a $5 billion market in 2010, while the U.S. virtual goods market is on track to becoming a $1.6 billion market, according to our research for Inside Virtual Goods: the Future of Social Gaming 2010.

A $5 million market from virtual goods alone should be nothing to complain about, but much of this revenue will be generated from virtual goods outside of social games by businesses like QQ’s extremely popular instant messaging service. It’s not because of high payment friction either. In fact, one insider we talked to told us the following about payments:

“Payment is actually BETTER than on Facebook and FB apps, with LESS friction. On RenRen you can already buy RenRen Beans, which are used across applications, like Facebook Credits plan to be.”

What we do know is that few in this industry understand the specific reasons why ARPUs remain low in China’s social games. Developers we’ve spoken with have cited a variety of explanations, from low transaction values, high volumes of non-transacting users, the relative newness of the social gaming trend in China, and the different audience it appeals to (as opposed to traditional gaming, which appeals to a different, ‘hardcore’ audience with different spending habits). Whatever the reason, the low ARPUs and high share rates with social networks have some Chinese social game developers setting their sites on new, more promising markets.

What’s Coming in 2010, and What It Means for the U.S. Market

It’s obvious from both our conversations and from observable movement in the China social games industry: Chinese social gaming has abundant developer talent and creativity. If the social gaming ecosystem in China is as stifling as some are indicating, then what will be the alternate outlets for this innovation?

We expect we’ll see two directions of expansion for the developers in China’s social gaming ecosystem. First, talent acquisition activities will increase. For example, as part of EA’s Playfish deal, it inherited the latter’s sizable Beijing office and the considerable developer talent there.

Second, we can expect more Chinese developers to begin moving into other markets, especially the U.S. We previously commented on the growing number of Chinese developers on the Facebook platform; as players in the Chinese social gaming start hitting the bounds of that market, we expect entrance onto platforms like Facebook and Japan’s Mixi to accelerate dramatically. Beijing-based Rekoo is already among the top ranking social apps on Mixi in Japan, with its Sunshine Ranch game drawing 3.8 million users, or around 20% of the networks total users.

These are natural transitions for Chinese developers outgrowing their home market. As source puts it, “Since the games are not a whole lot different [between] West and East and entry barriers are low, it is a reasonable move for Chinese social app developers to launch on Facebook, MySpace and even on Japanese, Korean or Russian social networks. The difficulty remains to “culturalize” the services and do proper community management, as those games are not ‘products’ but really ‘services.’”

All this is good news for Facebook — its platform is seeing an influx of Chinese developers, and we expect that trend to continue this year. These developers are bringing in their experience and abilities, likely resulting in more high-quality apps. We also expect these developers to have a relatively favorable view of Facebook’s platform regulations and payment cuts, because they’ve endured months or years of far less favorable rules and share rates in their home markets.

It’s also good news for the big publishers looking to acquire top developer talent. Finally, the Chinese social game developer diaspora will have important implications for payments companies and other service providers catering to developers – they’ll soon find themselves with a new set of potential clients to win over.

April 20 | San Francisco

As we announced two weeks ago, Inside Social Apps 2010, our first conference on the future of monetization on social platforms, is happening April 20th in San Francisco, one day before Facebook’s official “f8″ event. We’re excited to see all of the developers from around the world that are planning to attend!

In addition to the initial set of 20 confirmed speakers at Inside Social Apps 2010, we’re also excited to announce three more speakers today: Keith Lee, Co-founder and CEO of Booyah, Ron Hirson, Co-founder and SVP Product at Boku, and Lisa Marino, CRO of RockYou. They will be joining our full list of speakers listed below.

• Atul Bagga, VP Equity Research, Games, ThinkEquity
• Adam Caplan, VP Virtual Currency, Super Rewards / Adknowledge
  
• Renata Dionello, Chief of Staff to the CEO, eBay, and former Director of Consumer Business Development, PayPal
• Eric Eldon, Editor, Inside Facebook & Inside Social Games
• George Garrick, CEO, Offerpal Media
• Vikas Gupta, CEO, Jambool
• Sebastien de Halleux, Founder and COO, Playfish
• Ron Hirson, Co-founder and SVP Product, Boku
• Nick Lawler, Managing Director, Maverick Capital
• Keith Lee, Co-founder and CEO, Booyah
  
• Vish Makhijani, COO, Zynga
• David Marcus, CEO, Zong
• Lisa Marino, CRO, RockYou
  
• Dave McClure, Investor, Founders Fund Angel and fbFund Incubator
• Rex Ng, Co-founder and CEO, 6waves
• Jason Oberfest, VP Social Applications, ngmoco
• Mark Pincus, Founder and CEO, Zynga
• Shervin Pishevar, Founder and Executive Chairman, SGN
• John Pleasants, CEO, Playdom
• Keith Rabois, VP Strategy and Business Development, Slide
• Peter Relan, Executive Chairman, CrowdStar
• Justin Smith, Founder, Inside Network
• Kavin Stewart, CEO, Lolapps
• Jay Weintraub, Founder, LeadsCon

More speakers and a full agenda will be announced shortly.

Finally, a limited set of “early bird” tickets is now available through Friday at a special price of $279. This price will change after Friday, and space will be limited, so we encourage you to register now.

Inside Social Apps 2010 – April 20th in San Francisco

Three years after the Facebook Platform launched in 2007, what started out as sheep throwing and vampire biting has quickly become a profitable billion-dollar industry. Today, social games monetizing through virtual goods have quickly become one of the hottest sectors of technology and entertainment, both in the US and around the world. Where are social apps going, and who is leading the way?

Inside Network is proud to announce our first conference on the future of monetization on social platforms: Inside Social Apps 2010, happening April 20th in San Francisco, is bringing together the world’s leading entrepreneurs all in one place to discuss the future of social applications and games monetizing through virtual goods.

This will be an in-depth one day event geared toward developers on Facebook, MySpace, and the iPhone, senior executives, and investors. At Inside Social Apps 2010, founders and CEOs of the top social gaming, mobile social gaming, payments, and virtual goods infrastructure companies will be tackling the key issues facing the industry. We’re hosting it one day before Facebook’s “f8″ event in San Francisco, so this will be an excellent opportunity to learn about the key issues facing the future of the Facebook Platform and beyond before Facebook’s official event.

Register Now

A limited set of “early bird” tickets is available through Friday at a special price of $279. This price will change after Friday, and space will be very limited, so we encourage you to register early.

From all of us at Inside Network, we hope to see you on April 20th in San Francisco!

San Francisco-based social game developer CrowdStar has meteorically risen to #2 on the AppData DAU charts over the last several months, surpassing Playfish and Playdom and now second only (albeit distantly) to market leader Zynga. As you may imagine, there are folks interested in the social gaming market who might be taking a look at acquiring the company.

We’ve been hearing a bunch of rumors in recent weeks, but the latest rumor published by Bloomberg this morning is that Microsoft is in the mix, and may be valuing CrowdStar at $200 million. (CrowdStar Executive Chairman Peter Relan will be speaking at our upcoming Inside Social Apps 2010 conference April 20th in San Francisco.)

The Bloomberg report says a deal is not imminent, and that CrowdStar is considering taking private equity funding as well.

The last three months have seen a string of major investments and acquisitions in the social gaming ecosystem:

• In November, Electronic Arts acquired Playfish in a deal that could total up to $400 million.
• Also in November, Playdom raised $43 million in funding from New Enterprise Associates, company chairman Rick Thompson, Lightspeed Venture Partners, and Norwest Venture Partners.
• And in December, Zynga raised a whopping $180 million round led by Russian investor DST, who is also an investor in Facebook.

CrowdStar is in a strong position at the moment, and is known for running a very tight ship. “We want to be the most profitable social gaming company, not the one with the most revenue,” he told Inside Social Games in December.

Relan says the company plans to fend off Zynga by being very agile. “Every time they enter a category where we have gotten big,” he said, “we’ll launch an entirely new game within weeks.”

We’ll let you know as anything happens.

After Zynga announced its acquisition of Serious Business this morning, a couple of business development execs from the two companies have independently announced that they are leaving their respective firms to pursue new opportunities.

Charles Hudson, formerly VP of Business Development at Serious Business, said today that he is moving on to pursue new opportunities now that the acquisition is closed. Hudson is also the co-author of our Inside Virtual Goods market research reports, and recently sold his conference business to WebMediaBrands, where he remains a consultant.

“I’m very excited about what Serious Business and Zynga will be able to achieve together. Working with the team at Serious Business for the last year and a half has been a great experience and I’m really going to miss everyone over there. Having spent time with the team at Zynga, I’m really impressed by what they’ve been able to put together in a really short time and I walked away with a new-found respect for how well they’re operating and how they think about building and monetizing social games,” Hudson said.

“Ultimately, though, I wanted to be part of a smaller enterprise and be an integral part of starting something new. In addition to staying involved in my conference business following the acquisition that closed in December, I’m exploring a few great opportunities and should have something to announce later this spring.”

Bret Terrill, formerly Senior Director of Corporate Development at Zynga, told us today in Hamburg, Germany that he is leaving the company to pursue other opportunities, but has not finalized what those are yet.

“When I joined Zynga, I joined because I knew it was a company that was going to win,” Terrill says. “It looks like, for all intents and purposes, that that’s true. Having been through that process, I wanted to move on to other opportunities where I can be more impactful. I’m not sure what that is yet. At a company with 800 people, that opportunity gets smaller, and I just want to keep adding value.”

“Leaving Zynga was very hard for me. I think what I learned most during my time at Zynga was how to run a successful startup from Mark [Pincus] – you can’t get any better. Watching Mark and the management team has been fantastic. Mark always says life is too short to struggle – if you’re going to pursue something, you need to do it fully. I know Zynga will continue to dominate the industry. Zynga currently is larger than its next 30 competitors combined. My personal professional highlights working at Zynga were the MyMiniLife and Serious Business acquisitions. It’s too soon to see how [the SB acquisition] will go, but I wanted to go out strong.”

Terrill says he’s going to “brief vacation and see where my opportunities are, but I don’t know what those are yet.”

Social gaming giant Zynga has acquired Serious Business for an undisclosed amount, the companies just announced this morning. Both companies are based on San Francisco, and the Serious Business team has already joined Zynga at its Potrero Hill headquarters.

Serious Business has a very talented team and has built some hits, especially Friends for Sale, but it’s not huge. It has a total of 6.20 million monthly active users and 838,000 daily active users, according to AppData. The company previously raised $4 million from Lightspeed Venture Partners, which is also an investor in Playdom and RockYou. Serious Business’s founders, Alex Le and Siqi Chen, are both former employees of Powerset, a search company that Microsoft acquired in 2008.

Zynga currently has more than 68 million non-deduped daily active users on Facebook, according to AppData, making it by far the largest social game developer on the platform. We estimate the company brought in more than $200 million in revenue last year; it also recently raised $180 million from Russian investor DST.

Serious Business is not the first company that Zynga has acquired. Others include MyMiniLife, a smaller studio that has helped Zynga build popular simulation games like FarmVille, the Facebook app YoVille, and GoPets, a pet-caring game builder that appears to have helped work on the company’s PetVille game. The previous acquisitions were notable for their talent and strategic value to the Zynga product pipeline and that appears to be the case today.

Zynga’s other purchases have also led to new games, and we’re interested to see what results from the Serious Business team. Zynga filed 21 new game trademarks in December, so we’re expecting more, soon.

As social gaming becomes more competitive, we expect to see more smaller developers get acquired — either by larger developers like Zynga, or by other gaming companies.