Inside Social Games

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.