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Why Zynga Is Leaving Money On The Table

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[color="#808080"]Originally posted on our company blog under the title: Why Zynga Is Leaving Money On The Table[/color]


[font=Arial][size="5"]Why Zynga Is Leaving Money On The Table[/font]

[color="#595959"][size="2"][font="inherit"][size="3"][color="#000000"][font="Arial"] [/font][/color][/font][/color]
[color="#595959"][size="2"][font="inherit"][size="3"][color="#000000"][font="Arial"][size="2"]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 $15-20[/font][/color][color="#000000"][font="Arial"][size="2"]Billion[/font][/color][color="#000000"][font="Arial"][size="2"] 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.[/font][/color][/font]

[font="inherit"][size="3"][color="#000000"][font="Arial"][size="2"]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.[/font][/color][/font]

[font="inherit"][size="3"][color="#000000"][font="Arial"][size="2"]One big reason why users are willing to trade real money for virtual rewards is touched on by Jesse Schell in his [/font][/color][color="#000099"][font="Arial"][size="2"]DICE talk[/font][/color][color="#000000"][font="Arial"][size="2"]. 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#.[/font][/color][/font]

[font="inherit"][size="3"][color="#000000"][font="Arial"][size="2"]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?[/font][/color][/font]

[font="inherit"][size="3"][color="#000000"][font="Arial"][size="2"]The most probable game changer is [/font][/color][color="#000000"][font="Arial"][size="2"]real-money play[/font][/color][color="#000000"][font="Arial"][size="2"], 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 [/font][/color][color="#000099"][font="Arial"][size="2"]blog post about gambling vs. gaming[/font][/color][color="#000000"][font="Arial"][size="2"], 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 [/font][/color][color="#000099"][font="Arial"][size="2"]customer lifetime value[/font][/color][color="#000000"][font="Arial"][size="2"]than 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.[/font][/color][/font]

[font="inherit"][size="3"][color="#000000"][font="Arial"][size="2"]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.[/font][/color][/font]

[font="inherit"][size="3"][color="#000000"][font="Arial"][size="2"]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 [/font][/color][color="#000099"][font="Arial"][size="2"]Betable[/font][/color][color="#000000"][font="Arial"][size="2"] comes in. Stay tuned.[/font][/color][/font]


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