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Why Zynga's Profits Plummeted

Posted by , in Game Monetization 10 October 2011 - - - - - - · 828 views

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Gamasutra dropped a bombshell report on Monday that Zynga, just ahead of their planned IPO, had reported a 95% drop in their year-over-year profits from $27.2 million to $1.3 million. The social gaming juggernaut continued to lose momentum in all major categories: its total revenues grew only 15% last quarter versus 24% in the previous quarter. Its virtual goods sales and ad revenues were down 4% from the prior quarter, and their total daily active user count across all games also dropped 4% from 62 million to 59 million. Has Zynga lost the interest of its users, or are market trends eroding Zynga’s core revenue streams?

This question prompted lively debate amovsang the tech and gaming communities. GamePro reported that Zynga attributed its decline in profits to some factors that did not necessarily indicate trouble. For one, in 2011 Zynga did not launch a new game before Empires and Allies, which was launched March 31st, so they claim to have not yet fully realized the revenue from that game. Second, they blame higher than normal spending on hiring, acquisitions, and international growth. Third, supporters point to the loss of Zynga’s “free” viral marketing when Facebook enacted new policies to combat spam. And last but not least, there is Facebook’s decision to force all developers to adopt its Facebook Credits payments system and the associated 30% tax.

While all of these things could eat into Zynga’s profits, they don’t explain why their daily active user (DAU) numbers are starting to drop. A former Zynga employee responded to a Hacker News thread about this topic by highlighting the many market trends that are eating away at Zynga’s core business: massively successful Facebook games. The commentator believed that the decline of Facebook’s web traffic was a key component of this trend; however, this decline has since been challenged by multiple ratings agencies. Furthermore, many argue that the users that are leaving Facebook are the least engaged users, while Zynga’s hardcore daily players are certainly some of the most engaged.

The commentator also argues that Zynga’s games are higher quality than ever, and they are in the process of creating titles that appeal to midcore and hardcore audiences. Alongside these efforts, Zynga is going to great lengths to secure partnerships with major brands, including Lady Gaga, American Express, and Capital One. However, even with with all of the work that Zynga is putting into increasing the quality of their user experience, they have still sold less virtual goods and are losing their most valuable players. So what’s the missing piece of the puzzle?

Virtual rewards don’t engage and entice players like they used to.

And why should they? Players are paying real money for something with no actual value, and they can never get that money back. The gimmick has lost its novelty, especially as virtual goods have become a commodity across games of all skill levels and platforms. As games start to merge the virtual and physical worlds and become integrated with every aspect of our lives, why would users still be interested in a virtual sword that is literally worthless?

The future of gaming is in the real world, and the future of play is with real money. Providing a tangible reward for the real time, money, and effort that players put into a game will make games more engaging and fun. Players will find it much more appealing to be able to play for and win real-money that they can cash out, turning their favorite game into a lucrative hobby.




The Problem With Virtual Goods

Posted by , in Game Monetization 05 August 2011 - - - - - - · 641 views
virtual goods, games and 3 more...
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Making a business out of a game is hard work. It takes great design, unique mechanics, creative marketing and some serious dedication to build a successful game. Turning this successful game into a business requires all of the above, plus a large amount of users that are willing to give you their money. And, if you want to give away access to your game or app for free, as many game makers now do, you will need an even larger number of total users to derive your paid user base from.

Today, virtual goods have become a common way to monetize a game, and while it may have become a very lucrative business for early comers like Zynga, it is not a good business to be in now. If you look at Zynga as an example of a successful virtual goods-based game company, the outlook is pretty grim for an up-and-coming game developer. Even before the 30% Facebook Credits tax, Zynga only makes an average revenue per user (ARPU) of approximately $1.21 because only a small percentage of their total users actually pony up their hard-earned cash. Zynga’s business is only possible because of their tremendous scale, and many of the methods that they used to reach that scale are no longer available. Some methods are subject to first-mover advantage, such as Zynga’s first successful game, Texas Hold’em Poker (aka Zynga Poker), which was the first poker game on Facebook and gave them huge group of users to market to for future games. Other methods are no longer available, in the case of the aggressive Facebook messaging tactics that Zynga employed early on that are no longer allowed by Facebook.

The chance of a company recreating Zynga’s success in the social gaming market is made even slimmer by the tremendous advantages of scale that Zynga enjoys, especially when Facebook helps Zynga
meet monthly unique user targets for its games. Due to the low average revenue per user (ARPU) of many social games, game studios with small player bases are severely limited in their ability to scale their game and their business. It is difficult for studios to grow their user base through marketing efforts because the cost of user acquisition is so high relative to their value, especially in the short term. And it is difficult to produce a game of comparable quality to the social gaming giants with a small staff. Last but not least, the virtual goods-based games space is over-saturated with thousands of companies chasing the same user base.
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Instead, game studios should look for new ways to monetize their games. One method that already generates incredible revenue from each user (up to 300X more than virtual goods per player per month) is real-money play, and a new category of gaming is being created that combines the best aspects of real-money gambling and social gaming. This new category called Social Gambling Games (“SGG”) will disrupt both the gaming industry, where ARPU is typically very low, and the gambling industry, where many of the popular game mechanics are in need of socialization. We believe that the next Zynga will come out of the unclaimed Social Gambling Game space, and that the companies that are early to this space will have the same first mover advantage that lead to Zynga’s success within social gaming 1.0.

The top game companies in each of the existing major markets and platforms are in the chart above, but none are currently looking at Social Gambling Games. In our next blog post, we will show you how you can create the first great Social Gambling Game and dominate this new space. Betable is working on developing a platform for legally integrating real-money play into Social Gambling Games, and we believe that it will help game developers monetize more effectively and in a more engaging way. To stay informed and get early access, subscribe to our blog and follow @betable on Twitter today.

Sources: Zynga S-1, ZookyWorld (for cartoon), SimonMainwaring (for image)

Originally posted on Betable's blog under the title: The Problem With Virtual Goods




Why Zynga Is Leaving Money On The Table

Posted by , in Game Monetization 03 August 2011 - - - - - - · 956 views
games, gaming, infographic and 6 more...
Originally posted on our company blog under the title: Why Zynga Is Leaving Money On The Table

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Why Zynga Is Leaving Money On The Table


Zynga's revenue is expected to almost double from $597.5M to $942M in 2011, which according to Zynga’s S-1 filing is partly the basis of its $15-20Billion valuation, but the truth is, Zynga isn’t making nearly as much money as it could. In fact, I would go as far as to say that it’s chump change compared to the revenues it could generate with real-money gaming.

Zynga derives its entire revenue stream from the sale of virtual goods or the exchange of virtual goods for affiliate services. This new monetization method has rocked the gaming industry, and the titans of yesteryear are frantically trying to play catch-up by launching their own free-to-play games of all genres. And with good reason: the virtual goods market is expected to increase 40% in 2011 to $2.1B. Yet with users becoming more willing to invest their hard-earned cash into games, Zynga is still leaving a lot of money on the table.

One big reason why users are willing to trade real money for virtual rewards is touched on by Jesse Schell in his DICE talk. He believes that users logically feel like they are already invested in a free game because they have put so much time into it, so they are more likely to spend real money on their progress in the game. This famously addictive cycle helped Zynga create a multi-billion dollar empire, but even games that have been expertly monetized through these methods only brings in an average revenue per user (ARPU) of approximately $1.00#.

While an ARPU of $1.00 was good enough to help Zynga grow into a mega-company with hundreds of millions of users, it won’t be good enough for the next generation of innovative game studios. These studios don’t have a new, untapped revenue source to drive their growth and are fighting at a disadvantage against the mega-companies for the existing streams. A new, engaging source of revenue would help small studios stay competitive and grow their user base. Unfortunately, there hasn’t been a major new game revenue stream to take off in the gaming space since virtual goods. What new revenue stream will spark the next evolution in game monetization?

The most probable game changer is real-money play, or specifically the ability for users to ‘buy in’ for real money as they do now, bet that money on game outcomes, and then ‘cash out’ their winnings, which is NOT something they can currently do. This opportunity merges gambling and gaming, and would create an entirely new massive revenue stream for game developers. As Andrew Chen highlighted in his blog post about gambling vs. gaming, gambling games’ average revenue per user (ARPU) numbers are significantly (≥50x) higher than the ARPUs of the best virtual goods-based games. Also, gambling players have a much higher customer lifetime valuethan gaming players, and developers do not need to constantly create new content to keep them interested. Now that’s something that Zynga and smaller studios can get excited about.

So why hasn’t anyone broken into this space yet? For the majority of studios, the cost of pursuing this revenue stream is far too high. Acquiring a gambling license, which must be done outside of the United States, requires a tremendously large investment of both time (≥18 months) and money (≥$1M including all associated costs) that the majority of studios cannot afford. Game studios are usually much better off investing their limited resources into the virtual goods channel because those will monetize immediately, although relatively poorly. A mega-company like Zynga can afford the investments necessary to acquire the license, but they face serious legal hurdles, possible corporate restructuring and branding issues in order to do so. Even so, it may be worth the effort in the long term, but in the meantime, it leaves a serious market opportunity for a small game company to build games around real-money play.

It is safe to say that the next multi-billion dollar gaming company won’t be built by copying Zynga. It will be forged out of new game mechanics and revenue streams that engage the user more than ever before. And what is more engaging than a chance to win real money? All game studios need is a way to overcome the tremendous pain, time and expense of acquiring gambling licenses, which is where Betable comes in. Stay tuned.









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