An estimated $7 billion in virtual goods was sold in China last year, and another $1 billion in the Western world. What gets me intrigued about this is the fact that the West is just getting started and we have 8.5X more gross domestic product (GDP) than China. That should generate enough buying power to suggest that when the West is comparable to the 2009 China market, it might be a $60 billion market in the West alone. At that point on a global basis, including all of Asia, the field would likely exceed $100 billion. And I have no doubt of this: I fully expect it to happen in this decade.
The hottest market for virtual goods in the West is Facebook, where Zynga blossomed in the last year. Many companies grew last year on Facebook from viral spread, but it made the customer experience on Facebook very “spammy.” And Facebook no doubt did not like the diverting of both the Facebook experience and the spoils of monetization. Hence, we have seen in the last few months a severe dialing back of notifications, invites, bookmarks and other app features on Facebook, the most dramatic of which went into effect on March 1, 2010.
So how’s the social game industry doing in this wake? Not so good: Out of the Top 25 publishers of social games with virtual goods, only two publishers increased their customer bases by at least 1 million customers since March 1 (Playdom and Digital Chocolate). In fact, we were the only two companies that expanded by at least 20%: Most of the others were flat or declined. Several publishers have lost millions of customers, and most of the games have declined in audience size.
The formula last year for social games was viral growth through aggressive spam, but that no longer works. This creates a fundamental need for richer games that are more entertaining and meaningful, that will sincerely motivate players to recruit their friends because they really want to play with them. That, for example, is how the entire fantasy sports industry of more than 30 million players got built. Same with the 40 million Pokémon fans and today’s 6 million active players of Magic: The Gathering, a half-million of which will play in tournaments this year. Going forward, it will be a challenge for many publishers to make games that are really good enough.
The spammy viral spread was also a free marketing department. With no more free ride, growth can only come from an efficient combination of legitimate virality and efficient marketing to help spread the good word. Again, as we look forward, many game companies on Facebook lack the financial resources to do enough advertising and lack the scale to cross-promote well. And even more of them have games that don’t monetize enough to justify the advertising in the first place. Maybe it didn’t matter last year when growth was free, but now it does.
One telling example of this trend is Playfish. They had five of the Top 10 games on Facebook in January of 2009, but it can be seen in hindsight that four of them were not going to monetize because they could not make meaningful use of virtual goods. As Playfish figured this out, they reduced product support and advertising for those four games and they all dropped out of the Top 10 within a year. By contrast, Pet Society had the right characteristics and they were able to grow it like a weed. It got the love, mushroomed in size and remained in the Top 10. As we look at trend data from early 2010, it’s gotten even tougher, and now, not even Pet Society is growing.
They’re not the only ones. Zynga is flat; Crowdstar, RockYou, Slide, Meteor, LOLapps and 6waves are way down. Most of Playdom’s growth is from two hot new games that they are heavily marketing. And these are the guys with cross-promotional scale; on a percentage basis the numbers are much worse for the little guys. At Digital Chocolate we have been pleasantly surprised that we’ve been the fastest-growing developer in recent months because it must be about the games, as we are not doing a lot of marketing yet. And we look forward to building cross-promotional scale that will make it easier for us.
Meanwhile, the release rate of new games has declined, as has the apparent abandonment rate of industry games that don’t have the right kind of lift-to-drag ratio. I think many companies are now going back to the proverbial drawing board, figuring out how to deal with the new business requirements.
Another issue that is emerging is a spirited game of “Platform Monopoly.” I see a lot of big companies in California that seem to be trying to actually build “Hotel California.” These are guys that already have Boardwalk, but want Park Place, and all the greens, too.
Many platforms have welcomed developers with open arms in recent years, proudly proclaiming offers of Statue of Liberty-caliber freedom and opportunity. Now developers are complaining and beginning to feel like Europeans in the early 1930s, not so sure about the guys that they voted into office and wondering if they should buy the explanations for increasingly suspicious actions. The platform operators don’t seem to realize that consumers are going to soon be demanding a SaaS model (software as a service) for more games and applications. They’re going to want access to their software services from all their devices, platforms, and networks they can get onto. The public is going to want to decide when, where and how they pay and play. They’re not going to be boxed in any more than they would have been with voice, email, browsing, SMS, and MMS, all of which began as platform walled gardens and became interoperable as a result of public demand.
Going forward, spammy isn’t going to cut it. Shallow gameplay isn’t either, or games that don’t monetize. Lack of funding for marketing will be another killer. Walled gardens and dependent on any one platform will be a business liability and a negative for consumers. The industry has a ton of potential but has to overcome these issues. The $7 billion spent on virtual goods in China last year should give us great hope, but let’s not screw it up.