An In-Depth Look at the Social Gaming Industry’s Performance and Prospects on Facebook

Facebook, and social gaming, appears to be a vastly different place for game developers today versus just a year ago. While social gaming visibly grew at astounding rates through 2009 and into early 2010, producing massive successes like Zynga, growth seemed to suddenly stop in the spring of 2010 as Facebook began limiting the viral channels that made big gains possible.

Since then, Facebook itself has repeatedly changed the rules that app developers play by, and has increasingly forced usage of Credits, a virtual currency that skims 30 percent of in-game sales when used, leading some developers to conclude that Facebook is now too difficult to work on.

Growing a game on Facebook is certainly more difficult today than it was in 2009. However, the view that succeeding is too difficult, and that growth has ended on Facebook, is belied by the experience of savvy developers, and hard data about Facebook apps from our AppData tracking service.

Our own view of the Facebook market considers each facet of the market separately. Here’s what we’ll cover below, in brief:

  1. Overall audience size for large developers has declined on average, but this is not necessarily cause for concern
  2. Small and medium-sized developers are steadily growing
  3. Good game design is increasingly important and effective
  4. Monetization is improving in several ways

Large Developers

Before we can look at the performance of games across all Facebook developers, we should split out data for what were considered the “top 5” developers on Facebook in early 2010: Zynga, Playfish (now part of Electronic Arts), CrowdStar, Playdom (now part of Disney) and RockYou. This is because views that Facebook’s heyday has already ended are largely based on the performance of this handful of companies.

The trouble for these developers began last March, when Facebook made the first of several viral channel changes that would end their fast-paced growth:

The above table is not an entirely straightforward measurement of how any of the five developers listed is doing, since MAU / DAU measurements alone don’t directly predict revenue; CrowdStar and RockYou also lost significant amounts of traffic from non-game quiz and gifting apps. Even so, only Zynga is arguably doing about as well as it was in early 2010, and only with the massive success of its brand-new game CityVille. Its four competitors lost 30 percent or more of their DAU, which is the best publicly-visible predictor for success.

If Zynga, with over $500 million in venture capital, can’t continue growing on Facebook, what chance do smaller players have? This question has clearly resonated with the wider community; many Facebook developers are now shifting their attention to smartphone games, and investors have by and large ended their investment in pure-play web-based social gaming.

In our view, however, the market still offers healthy opportunities. Expectations were distorted by the outsized success, over just a year or two, of Zynga and its peers. Before the social gaming boom, it typically took several years to build successful companies; now that the “boom” is over, this reality has resumed. The fact that more players of Zynga’s size have not popped up in less than a year of Facebook’s matured social gaming market is neither remarkable or distressing.

This view proceeds from real market data, which we dive into in the following two sections.

Small and Medium Developers

We first found evidence that the social game market was growing for small- and medium-sized developers last September, when we looked at a dataset of 250 Facebook games using AppData. The nascent trends that we discovered at the time have continued as we’ve updated our data. (Note that you’ll need to be an AppData Pro subscriber in order to access full categorized historical data.)

Three brief notes on methodology. First, we’re again measuring daily active users (DAU) here, which (along with other sanity checking) is the best public indicator of healthy engagement. Second, the specific games measured change from month to month; the list includes only the top 250 games for each given month, with a natural churn of older titles slipping off the list and newer ones taking their place. Finally, these users are non-deduplicated, meaning that one person can be counted as a DAU for more than one game; however, since such power-users often monetize well, that is not a problem for our purposes.

The first trend is a flattening of growth for the social game market as a whole. The chart shows one significant uptick at the end, caused by CityVille:

From here, it would be an easy guess that if the “top 5” developers considered above are uniformly declining but the market shows a plateau, some other group is experiencing growth.

To measure this growth, we simply remove games by the top 5 (again, these are Zynga, Electronic Arts, CrowdStar, Playdom and RockYou). This leaves us with a set of about 175 titles, which do show gains:

Note that the above chart, and the two that follow, show a dip at the end, unlike the top 250 chart. This dip is a predictable effect of Christmas, when growth slows for all social games, and is (we think) only temporary; we’ll check again when we record the numbers for February. Still, the chart shows growth of about 23 percent over the course of a year, and 40 percent from the low point in May 2010.

The largest games in the set above include a dozen titles with over a million daily active users, like Millionaire City , Monster World and Car Town – all of which were launched after Facebook made its spring changes that impacted viral growth. In all, the top 25 games excluding the “top 5” includes 22 different developers, all of whom have enough DAU to succeed if their users are well monetized (more on this in the next section).

We can get a final, and most impressive, look at growth by considering games 26-175 on our list from AppData, which takes us from titles developed by growing medium-sized companies down to very small developers:

In the past year, DAU traffic to these titles has more than doubled. In other words, more developers than ever are growing. Among the full top 175, excluding the top 5, the number of games with over 100,000 daily active users rose from 67 last February, to a peak of 107 right before Christmas.

It’s Not the Size of the Boat…

One measure of success that can’t be easily shown in the above graphs is relative profitability of games. Most companies keep this data close to their chests; however, ARPU (average revenue per user), for different games can vary widely, even within the same genre.

Understanding of the correct methods for monetization has varied widely between developers. However, some early examples of games that were finding more success at monetization began to appear in 2010. One example was Millionaire City, the successful city-building game by Digital Chocolate.

As a genre, city-builders have sometimes struggled to make much from their users. By contrast, Millionaire City has at times enjoyed an average revenue per user (ARPU) of several times what normal sim-style games make, according to our sources. The reasons for the game’s better monetization likely lies in fundamental design choices. Millionaire City was able to combine a strong virtual currency system, competitive elements and a clear theme and story, in contrast to the rather bland design of most city-builders.

Other sim games that have led the way in their theme and design have also done well. For example Baking Life, another of the big successes of 2010, was the first baking-themed game on Facebook, and has had better than average ARPU, we’ve heard.

The advantages extend beyond monetization, of course, as games with more unique themes and strong design fundamentals have also attracted more players. In 2010, titles like Nightclub City, Monster World, Car Town, Crime City, Ravenwood Fair and Monster Galaxy all stood out, both attracting more players and, in most cases, making more money than competitors.

Putting effort into theme, story and “fun”-based design would seem like a no-brainer to any traditional game development team, but the social game industry is still learning how to combine those characteristics with its heritage of virality and metrics-based design.

Some developers are also doing quite well with purely competitive, or “hardcore”, games. Kabam is well known for its success with Kingdoms of Camelot, but there are also less-known games like Wild Ones that benefited early on from player vs player mechanics. But for the most part, developers are still learning how to combine competitive gameplay with higher user numbers.

The ongoing shift at some developers to a newer, more creative model is in plain sight. CrowdStar, for instance, is still one of the top developers, by playerbase and revenue, on Facebook. However, its older generation of games, including the hits Happy Aquarium, Happy Island and Happy Pets, all made generally lower ARPU, we hear.

As the first company to sign up to use Facebook Credits exclusively, CrowdStar signed away up to 30 percent of its revenue, plus, in all likelihood, another 10 percent or more for the promotional Credits that flooded Facebook’s economy early on. We’ve thus seen CrowdStar change its strategy significantly this year. Not only did the company switch CEOs and lay off some workers, its last two titles have also been RPGs with their own unique personalities and competitive elements, It Girl and Mighty Pirates.

Risks and Rewards

Despite some clear trends, we can’t necessarily describe what the next hits on Facebook will look like. However, we can make some predictions about life on the platform.

One is that developers should continue to improve monetization, and not always as a direct result of game design. As players become accustomed to playing games online and paying for virtual goods, they become more likely to spend real money. In our most recent Inside Virtual Goods report, which covers the future of social gaming in much more depth, we predict a reasonable increase in ARPU/ARPPU in 2011, and growth of the US-based virtual good market to $2.1 billion.

Another trend is increasing access to international audiences. As we recently pointed out, over half of CityVille’s 100 million MAUs are international players. Finding ways to accept payments from a diverse international audience is difficult, but luckily, developers will not have to handle this problem on their own; dozens of payment networks and publishers are rapidly growing, and Facebook Credits is also constantly adding to its list of supported payment methods used in various geographies. Since a large majority of users on Facebook are now international, developers have a significant opportunity to monetize hundreds of millions of new users opening up to them.

There are challenges. Returning to the example of Millionaire City, the game is Digital Chocolate’s one and only big hit; no matter how well it monetizes, it still has its limits. Having a single hit is not all too uncommon in the social gaming market, caused in part by the necessity of keeping a team of people constantly at work on games after they’ve launched. Some developers seem to be having difficulty getting past their first big game.

Marketing costs also continue to rise. Despite some predictions that Zynga, Electronic Arts and Disney would drive up ad rates on Facebook, pricing pressure is also coming from other industries that have found Facebook’s performance ads a relatively cheap way of reaching new clients. Any industry that can draw high lifetime values from users who click their ads – from merchandisers to online universities – can potentially outbid, and thus push out, competing social game advertisers.

The biggest challenge of all may be staying committed to producing new Facebook games while the fast-growing smartphone market is beckoning. However, the mobile market is still missing social elements and the sheer scale of Facebook. It also offers unique challenges around distribution and, if not on the iOS, payments.

Tomorrow at Inside Social Apps, we’ll be speaking to top players across the whole social gaming market, as well representatives of both Facebook and Google,. When we finish, we’ll have an even clearer picture of where the market is going.

For in-depth stats on applications and games on the Facebook Platform, check out our AppData service.

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Leave a Reply

9 Responses to “An In-Depth Look at the Social Gaming Industry’s Performance and Prospects on Facebook”

  1. tatsuke says:

    ” however, since such power-users often monetize well”

    Curious as to your source on research or data pertaining to this statement. Doesn’t seem intuitive either way.

  2. Kivi says:

    The golden days are gone:
    1. Today, if you wish to acquire 10K US user on Facebook per day, your cost will be $2.1/user.
    2. If you wish to acquire 10K Taiwan user on daily basis, your cost will be $3/user. Because the Chinese companies there will hire people to click on your ads, every 6 clicks gets you one user at $0.5 per click.
    Since there are no viral, you need to make $2.1 out of each user with your social game, I don’t think that’s gonna happen!!!
    Never!!!

    You might want to buy some Philopino players, yes, they are cheap, but they DON’T pay at all!!

    Go mobile, my friends!!! FB App, it has become a labor intensive, commodatized industry.

  3. ISA 2011: Live Blogging The Future of Social Gaming Panel says:

    [...] question: What about the article on Inside Social Games yesterday showing the rise of smaller developers even though larger ones have [...]

  4. ISA 2011: Small Developers Don’t Need to Sell Out Yet says:

    [...] what would happen next. Now there’s a lot of growth in the midpoint of the market, as we saw from the article on Inside Social Games the other day. We made some changes last year, and we’re seeing growth back in the [...]

  5. DPH says:

    To quote Hicks:

    “Game over man. Game over!”

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    [...] gaming is a fast growing and lucrative industry, but does that mean the largest player in the sector is really worth [...]

  7. Trip Hawkins Blog: THE DAU IS DOWN | blog.digitalchocolate.com says:

    [...] an otherwise good overview of 2010, this recent article from Inside Network missed the bigger picture and elements of cause and effect, which led to invalid conclusions. They [...]

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    [...] remember that the big trend in 2010 was a wide range of smaller games growing and figuring out how to monetize effectively, as we’ve covered [...]

  9. Grosse actualité pour les social games | MarketingVirtuel.fr says:

    [...] moyenne, c’est ce que révèle cette étude récente publiée chez Inside Social Games : An In-Depth Look at the Social Gaming Industry’s Performance and Prospects on Facebook. L’auteur de l’article met ainsi en évidence Millionaire City dont les choix de [...]

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