Below is a provocative post written by Daniel James on his astute blog, The Flogging Will Continue. James, CEO of Three Rings, presents a shrewd, detailed analysis forecasting the future of social gaming. If his predictions materialize, how will the gaming industry react?
Merry New Year, righteous reader! As promised, here are a few predictions for the online games business in 2010. Facebook and ’social games’ were the big story and virtual goods driver of 2009, and we spent a fair bit of 2009 struggling to create our own social games network and chasing Facebook glory, so that’s my focus.
1. Facebook will peak. I think we’ll see the flattening and beginning of decline in Facebook active audience (outside of some international territories, which may be enough to keep the overall active user numbers trending upwards in 2010, but with a shift to a more international and lower-revenue audience. There just aren’t many more people left who havn’t made a FB account, and people will start to churn out in significant numbers. Don’t get me wrong; Facebook is lots of fun and very sticky indeed, but there’s nowhere to go but down from a point where ~50% of the adult population are active users.
2. Facebook games have peaked. It may be that things pick up after the holidays, but a quick perusal of all the top Facebook games shows the same pattern — daily active users (DAU) topped out in mid-December with the viral changes. The holiday lull took another bite and it looks like things will bounce back from that, but overall I believe we’ve seen the peak of DAU usage.
3. Facebook will mandate exclusive use of FB Credits. We’ll see a cruel thinning of the proliferating payment providers as Facebook takes control of payments on its platform, marginalizing or eliminating by mandate all other solutions. Few complaints from developers, as conversion will improve and there’s a general feeling that ‘yet another’ payments solution is not going to move anyone’s dial. This assumes that Facebook integrates all kinds of localized payment options (SMS, prepaid cards, etc.), which of course they will given their shifting audience.
4. Virality will decline and may cease to be the major force on the FB platform. The changes that Facebook has started to implement will continue into 2010, causing a reduction in virality overall. Facebook is well-established as a great environment to acquire customers and generate revenue. By dialing down the viral component the platform will become less attractive to new developers who lack funding, but it’s not clear that Facebook cares. New apps, in any case, have more opportunity to grow under the radar, bending the guidelines to get a jump-start. Facebook may also address discoverability directly; for example by treating the ‘games channel’ more like a mobile carrier deck and editorially promoting titles.
5. Facebook takes ~50% of game revenues. The payment component is a part of Facebook taking back its rightful share of game revenues on its platform; the massive reduction in virality will be the other key component, driving paid acquisition models and more revenue for Facebook from ads, game placement, etc. Social games’ have been a bonanza because they’ve fed greedily upon FB’s extraordinary user acquisition machine, exceptional openess, and generous viral features, without necessarily returning a lot back to Facebook Inc. or the net user experience of most users. I think Facebook will change that in 2010, and I think they are quite justified in doing so. Successful social games can operate with 60%+ net margins, I think Facebook would quite like the lions share of that.
6. Investment in games continues at a lower rate. There will be a reduction in investment into the category as the hoped for all-boat-floating bonanza of a Zynga IPO does not occur in the first half, if at all (hence the DST $180M with liquidity to employees and perhaps investors) and liquidity prospects for competitors become more evidently muddy. There will be more acquisitions of social games companies by video game publishers and media companies, but I doubt that any will reach the heights of the Playfish deal unless Zynga gets taken out by Activision or a big media company. Early stage and scaling investments will continue as long as small teams continue to produce hits. The question is; will small teams continue to be able to produce hits?
7. Zynga still wins the big game, but doesn’t take all. Zynga will remain the dominant player, but not necessarily for the reasons that people assume (funding, cross-promotion, aggressive cloning). Zynga will continue to win because they have built a powerful learning machine that, as the environment changes, will continue to optimize relentlessly against that environment. They are very good at indentifying what people want, albeit if they make the first stage easier by copying winning game styles, and then bringing highly optimized product to the largest possible audience. I have trouble seeing their larger competitors (EA/Playfish, Playdom, other new big entrants) institutionalizing these skills sufficiently to beat them. I like Crowdstar’s ’small, fast, profitable’ approach. That said, I believe the market will fracture, with more ‘big niches’, and I don’t think Zynga’s model will work as well — it won’t be so clear what to clone, and there won’t necessarily be enough money in these smaller niches to support the costs of Zynga’s approach, which requires big hits to work, especially in a reduced revenue environment thanks to FB taxes.
8. Sophistication will increase as Facebook games become more ‘really social’, playing to the strengths of small, agile game developers. I think by the end of 2010 we’ll start to see a broad spread of more genuinely social MMO-like games, each with smaller audiences (related to Farm/Pet etc. call it ~5M MAU) take a combined big chunk of FB revenues. Those games will get harder to copy, both because they are more sophisticated, but also because they don’t get big enough to be sure dial-mover for a larger company. For us and smaller companies like us, there will be lots of opportunity to create games with small or mid-scale success, becoming highly profitable in the process. Some of these games will be acquired or funded to large-scale success, but I begin to suspect that many of them will be implicitly niche titles.
9. A lack of any ‘new platform’ to flock to post-Facebook, the iPhone having too many games, too small an audience, an opaque distribution channel, and limited customer willingness to purchase virtual goods. Apple will ship a fabulous iPhone-based tablet, but until discovery is much improved (i.e. one is not reliant on the Apple deck) and pricing sorts itself out, I can’t see the iPhone/iTouch/iTablet platform as an attractive place to try to build a business.
10. The console and traditional video game business continues to decline. Price cuts may help the consoles, but overall I see the continued decline of traditional retail-sold video games as inevitable, particularly if the economy does not recover robustly or declines.
11. The Internet is the new Facebook As a consequence of the above a lot of small and large developers may start or resume pondering how to execute on the open web, not necessarily a friendly customer acquisition environment, but at least genuinely open, transparent and pretty much a level playing field. FB Connect will play a part in this, but as soon as you break the psychological safety net of ‘I’m just Facebooking’ by moving people off-site, I think you reduce significantly the customer acquisition advantages of Facebook. This direct to your customers on the Internet stuff is back-to-basics for us.
12. The apocalypse does not arrive, but the economic and political picture of 2010 is not pretty, either. The US economy and the dollar will continue to decline. Although catastrophe has been averted, it’s not clear to me how robust growth will resume. The ability for the US government to fuel growth by printing money has to be limited, not least by the patience of treasury bill holders. For now the house of cards totters on, but I don’t think it will be a return to exciting prosperity this year. The various intractable situations with failed states, political quagmires, interminable war and greedily self-perpetuating oligarchy will continue, but so will the cracks continue to show in at least the latter. I believe and hope that we will continue to be lucky and avoid a nuclear confrontation or other major man-made calamity. In the US the mid-terms will be brutal, doubtless cementing the ineffectuality of government, and in Britain there will be regime change. I remain optimistic that the world is becoming a better place, and I think there’ll be lots of good news in 2010, but I’m finding that hard to predict on a global scale beyond continued inexorable trends towards greater connectivity between people, more sophisticated and open trade, and the march of technology towards liberating us from our earthly constraints.
My resolution this year was simple; to make an improvement every day. So far that’s meant buying a giant iMac for the living room and resolving not to let small things annoy me, so I feel that’s progress already. Have a great year!
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