Games as services, games monetisation, Mobile games

The promiscuous hardcore gamer: Does new survey data showing social is killing casual add up?

October 2011

As the ways that games are made, distributed and monetised transform some parts of the industry, change may finally have reached the bastion of the retail industry, the console gamer. New data on gamers’ playing and purchasing behaviour claims that many console gamers are spending time and money on social games. Is this data credible and what does it mean for console games studios, their route to market and platform choices?

The data from Kabam and ISG’s recent survey appears pretty stark. 82% of US ‘hardcore’ social gamers surveyed said they are console/handheld gamers with 360 the most popular platform closely followed by Wii. Of these, 78% said their spending on console was static or in decline and 88% said their console gaming time would stay flat or diminish, as a direct result of social gaming. In contrast, nearly 60% of the ‘hardcore’ sample said their spending on freemium social games would increase and nearly half expected to play more on social.

Two other recent surveys reinforce the findings. The (largely hard-core) gamers’ community Raptr measured top games’ share of playing time for its 10m players and found that the 4th largest franchise, after Call of Duty, World of Warcraft and Halo, was Zynga’s ~Ville titles, more than all the remaining core games franchises combined. Another survey, by RockYou and Interpret, found that 50% of 2,000 social gamers polled own consoles. While 2/3 of these companies have considerable vested interest in showing to investors how they are stealing market share from consoles, and some of the data needs a pinch of salt, one cannot avoid the emerging picture of changing consumer behaviour across multiple platforms.

 

Some of Kabam/ISG’s survey’s conclusions are a little too black and white. Despite August’s sizeable 34% fall in US software sales year on year, it’s becoming apparent that Nintendo in particular and sales in certain genres like music have taken much of the hit. Retail sales data for 360 and PS3, while not immune to falling sales and prices, appears considerably more buoyant and, while it would be a minor miracle if 2011 retail games sales hit 2010 levels, it seems highly unlikely that social is killing console, as some have interpreted, because it’s clearly not a zero sum game. In this peak sales season, it’s quite possible hardcore gamers’ expenditure on both retail and social gaming could grow at the same time. Some publishers are even trying to target them twice with the same franchise e.g. Dragon Age 2/Dragon Age Legends.

 

The hardcore social gamers profiled in Kabam/ISG’s survey are mid-core gamers on other platforms, or perhaps hardcore on Wii. Their demographics are not those of classic hardcore console gamers because they’re too female and Wii is too prominent. But these surveys do provide detailed evidence of a new promiscuity in many console gamers’ behaviour. Platform-usage stats in the ISG/Kabam data reveal a mid-core console gamer playing heavily on PC (79%), Wii (55%), 360 (54%), Smartphone (42%), PS3 (39%), handheld (36%) and tablet (15%) in the last 12 months. This demographic has started to use Facebook as a serious games platform, playing for many hours at a time and spending hundreds of dollars. Freemium content such as power-ups, extra resources and time-savers are popular and expenditure is on the rise.

 

Although some hardcore social games companies are spending millions per month on Facebook advertising, many are not, and overall players are clearly responding to new marketing techniques. Multiple hours on social networks every day exposes these mid-core players to marketing from social games companies sent to them by their own friends. These messages intrinsically link the social value of their friends with the value of free items redeemed on response. It’s the difference between a publisher’s marketer telling you ‘Go out and buy this game because it’s great’ and a friend saying ‘Play this game with me now for free and get this cool stuff’. They might look like a wall of spam, but friends’ recommendations within the context of specific games can be intrinsically valuable and highly effective marketing vehicles.

 

With social maligned, muzzled or at the very least misunderstood by the console platforms, none have mounted a clear defence against this changing customer behaviour. Nintendo in particular, its plate already brimming with market fears, appears to have grounds to be worried by the promiscuity of its players. Perhaps it’s time for Nintendo to reconsider its ‘anti-social’ position and grasp the opportunity?

 

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Games as services, games monetisation, Mobile games, Uncategorized

Hardcore social: Kabam

June 2011

This month, I’m returning to our series of profiles of games companies achieving great commercial success with innovative and rule-breaking business strategies. This time US social network games company Kabam comes under the spotlight, a studio that has grown phenomenally fast by  targeting what many have considered a non-existent and non-viable audience: hard-core Facebook gamers.

A few months back we analysed opportunities in hard-core social network games development, arguing this was a sizeable but under-served market. Kabam recognised this potential as early as 2009, taking a significantly risky but highly prescient gamble to move away from nurturing mass-market sports communities online and into niche browser-based strategy games. A quick peak at their changing user base suggests disaster. Before the 2009 launch of its first strategy title, Kingdoms of Camelot, Kabam (then called Watercooler) had 25 employees and its sports communities peaked at 26 million monthly active users. 15 months later and with the sports communities now largely gone, it has a quarter of the number of monthly users (7.2m MAU). Such a decline would be the kiss of death for many social games companies but Kabam now has 16 times the number of employees (over 400 and still growing).

What makes Kabam special is that this remarkable headcount growth has been underpinned by equally strong revenue growth, with the company remaining profitable throughout this hiring spree. Like most top social network games companies, Kabam wisely took advantage of the VC interest in all things social to raise around $40m in three rounds giving it a war chest to acquire and invest in new teams and games. These funding rounds graphically demonstrate the benefits of its strategic volte-face. Its valuation rose from$20m in October 2009 to reportedly a few hundred million dollars just 13 months later.

So how has Kabam achieved such a meteoric rise? Put simply, it has deliberately gone after an unfashionable audience largely ignored by other social network games companies, creating games specifically for them and nurturing a community around them. Where the average age of social network gamers overall is early-mid 40s and a comfortable majority are female, 70% of Kabam’s user base are male and aged 18-35. This demographic plays more (Kabam’s average session lengths are a multiple of Zynga’s) and, most importantly of all, pays more (Kabam boasts that its monetisation is market leading). Kabam has borrowed the best of multiple worlds: the heavily localised browser-based gameplay appeal of off-Facebook games like Travian; the viral propagation features of Facebook games like FarmVille; the commercial benefits of the aggressive freemium microtransaction business models used by companies such as Aeria Games.

The result is a portfolio of games offering deep, collaborative and competitive gameplay based on common hard-core strategy themes (fantasy, ancient Rome) whose communities are richly cultivated through regular content updates and special events. The games generate revenue through microtransactions which are used to buy largely gameplay-enhancing and frustration-reducing items and services. Premium cosmetic items are comparatively limited and Kabam makes use of lucky dip sinks (e.g. randomised item purchases), an increasingly common, if blatantly commercial, technique used by games companies to inject gambling elements into their game. Unlike most Facebook games developers, Kabam caters extensively to international users and most of its recent new users have come from outside the USA.

Interestingly, despite the success of its formula, Kabam sees its future increasingly lying outside of Facebook: on other social networks, mobile devices, its standalone portal and eventually console. Kabam’s new IP plans therefore now revolve around developing multiple SKUs and the resulting business model (and audience) diversification will clearly present it with a new set of risks.

Kabam’s success to date teaches us multiple lessons although two stand out for me. Firstly, developers should not be afraid to take a dramatic new strategic direction if the new direction has sound commercial footing. Secondly, a contrarian point of view is not necessarily an incorrect point of view; if you think there is an untapped market out there, why not go for it and prove everyone wrong? Kabam certainly did.

 

 

 

Games as services, games monetisation, Mobile games, Publishing

Chinese hordes – China buys into Western games companies

August 2010

This year China is likely to become the 3rd largest games producer in the world. A burst of acquisitions of US games companies by Chinese games companies earlier this year signifies the growing confidence and financial strength of the Chinese games industry and may herald a new phase in the globalisation of the industry. This month I’ll analyse what China’s meteoric rise into the top tier of global games territories means for the Western market.

First, Shanda Games spent $80m acquiring Mochi Media in January 2010, then came The9’s $20m acquisition of a majority position in Red 5 Studios in March and most recently Perfect World took a majority stake in Runic Games in May for $8.4m. They represent the first three transactions in the Western games market by a sector that barely existed five years ago. Mimicking recent global economic trends, Chinese gaming and Chinese games companies have prospered in the last few years whilst North America and Europe have suffered declining retail sales and their largest indigenous publishers have struggled to avoid falling revenues and losses. China’s success has been achieved without material sales outside of Asia. This minimal global influence is clearly not going to last and these recent US transactions highlight one potential route into the Western market.

The Chinese online games market is expected to grow around 30% this year to reach $4.6bn and whilst the rate of growth may slow down, it still has considerable room for long-term expansion. China already houses the largest internet user base in the world (c. 400m) but this still represents less than a third of the population (vs. c. 75-85% for most Western countries). It has an increasingly tech literate, wealthy and middle class populace benefiting from a buoyant economy and rampant entrepreneurialism. Both the number but also the monthly and lifetime value of Chinese gamers is far from peaking.

From this fertile primordial games market have arisen hundreds of indigenous games ventures, around a dozen of which will generate over $100m in sales this year. The largest – online and mobile giant Tencent’s games business – recorded $300m in sales during its most recent quarter (overtaking THQ, Take 2 and Ubisoft). The next two, Netease and Shanda Games, are expected to reach $800m and $700m turnovers respectively in 2010. More impressive is the fact that almost all of these companies are not only profitable but massively so. 50%+ net profit margins are not unheard of. In addition to throwing off sizeable amounts of cash, many of these businesses have sought to bolster their balance sheets with IPOs and additional fund raising. Giant Interactive, a mid-tier publisher with just $200m in expected sales in 2010 currently has some $700m in liquid assets (more than the combined cash reserves of THQ, Take 2 and Ubisoft) whilst the top 7 have some $5.2bn to spend in aggregate. The $108.4m spent so far would appear therefore a drop in the ocean. There is clearly the capability but is there the appetite to make more purchases in the west?

The answer, for me, is a conditional yes. The West represents a huge, mature market whose player base is considerably more valuable than those found in China. However, unless there is a radical change in direction, Chinese companies are only going to be interested in network games businesses in the West; buying a traditional games developer or publisher would result in unwelcome earnings dilution, lumber them with business practices, technologies and infrastructure that are both alien and largely irrelevant to them. All three acquisitions this year were of network games ventures that complement the Chinese companies’ businesses. The Chinese companies will primarily seek to apply their capital and business know-how to Western-developed network games although we also expect more Chinese publishers to follow Korean publishers’ leads and establish North American and European operations to exploit their existing Chinese-developed IP.

I don’t believe Western expansion will be an investment priority for several years given the rate at which the Chinese and pan-Asian markets are growing. The Chinese hordes are amassing but there will be no invasion just yet. However, I expect to see sporadic additional acquisitions being made in the West as the Chinese flex their financial muscles, and use opportunistic acquisitions and investments to “learn” the Western market and build a foundation for future operations. In the longer term, the question of whether China will become significant to investors in the Western games market is, in my mind, more a case of when rather than if.

games monetisation, Mobile games

Is mobile gaming’s future social?

July 2010

Japan’s mobile games market has undergone a significant metamorphosis in the last few years lead by companies such as DeNA and Gree who have pioneered the concept of mobile social network gaming (MSNG), a fusion of Facebook games’ community functionality and viral gameplay and distribution mechanisms with mobile’s portability and ubiquity. Gaming on these services comprises avatar customisation and mini games infused with the sort of social virality found in games like Farmville. Also like Farmville, their revenue model is microtransaction-based and the market leaders are each generating hundreds of millions of dollars in high margin revenue per annum but from relatively small user bases (well under 20 million). So why has such an attractive business model not been replicated in our mobile games market where all good ideas are pilfered widely and with impunity?

The simple answer is that it is being replicated within the youthful smartphone gaming market but is being held back by a number of factors.

The first is, perhaps surprisingly, Apple. To all intents and purposes (i.e. revenues) smartphone gaming = iPhone gaming at the moment. Unfortunately, Apple’s prohibition of premium virtual currencies (a crucial component of the microtransaction business model) has prevented the development of the sort of MSNG revenue model employed so effectively in Japan.  It is a baffling strategic move by Apple that only makes sense if Apple is planning to introduce its own mandatory premium virtual currency system. Given that Apple is to launch a basic MSNG service (Game Center) later this year, this is, in my view, a distinct longer term possibility. This has not stopped the larger iPhone publishers such as Gameloft and ngmoco launching their own closed-platform MSNG services (which will complement Game Center) whilst a raft of open-platform MSNG services from independents led by OpenFeint and Scoreloop have brought the concept to the indie developer masses. Geo-location based leaderboards, Facebook integration, friends lists, challenges, notifications, avatars and achievements are the staple of these services but true microtransaction support remain conspicuous for its absence in most of their feature-lists.

Western developers must therefore turn to other platforms for the potential to implement a fully-featured MSNG service and herein lies the second barrier: although shipments of non-iPhone handsets dwarf that of iPhone, users of these platforms are not spending anything like as much money on games as iPhone users. Large installed bases are useless without an OS/app store ecosystem and user experience that is conducive to gaming – something Apple has excelled at and every other platform has simply failed to provide. Game discovery, recommendations, download and installation and, most importantly, payment are all problem areas of varying severity for other platforms. Android (v.2 and later) arguably gets closest to emulating Apple’s impressive precedent but it still has a way to go with making payment ubiquitous and low friction.

Despite this, we fully expect smartphone gaming’s future to be multi-platform and believe that the gradual improvements to the user experience being implemented by the other platform owners will attract both developers and paying users. Gaming is already starting to feature more strongly in other platforms’ app stores from Android, Symbian/Ovi and Windows Mobile to Palm and even Blackberry and non-iPhone games revenues are growing rapidly. We see these alternative platforms as playing a key role in the development of a Western MSNG market. The first major entrant into the Android MSNG market, Scoreloop, is already attracting 300,000 new registered players per week. Support for Android, and other platforms, will grow and we expect MSNG services to attempt to grow their social networks aggressively to reach the sort of scale which creates barrier to exit for users (i.e. where users have too much invested in one network to leave it for a smaller one). There is also a good chance that this will, itself, create another hindrance to the MSNG market’s growth: fragmentation. Without a single dominant network (as Facebook has provided for web-based social network gaming), a sea of incompatible MSNG silos will simply frustrate players having to replicate friends lists multiple times for multiple games. Whilst open, cross-platform MSNG services would appear the logical likely winners in all this, it is not stopping platform-specific or closed publisher MSNG services from continuing to be deployed.

The final barrier to the MSNG market taking off in the West is developer resistance to the implementation of freemium and microtransaction models. We believe that this inertia is widespread amongst smartphone developers already wedded to the “traditional” retail model despite its manifold shortcomings, the unequivocal success of microtransactions in other games markets and the early success of the first fully featured MSNG games such as ngmoco’s We Rule. We Rule, a freemium title clearly inspired by Farmville, used a light-weight variant of microtransactions and still topped the paid charts, represented half of all ngmoco’s daily usage and created havoc for ngmoco’s servers due to its popularity.

On Facebook, few games are launched which don’t incorporate social features; the commercial dynamics are simply too compelling. For similar reasons, we believe that the current trickle of Western MSNG titles will rise with increasing speed over the next couple of years as MSNG services’ social features become must-have for all major new releases to tap into their growing user bases and also to take full advantage of the microtransaction model.

Games as services, Mobile games

Freeing the iPhone

June 2010

There’s no question that the iPhone has had a huge positive impact on mobile gaming since launch in 2007. The iPhone market gaming is growing healthily and has attracted crowds of independents looking to go ‘direct’ (through Apple). As the iPhone market has matured, major potholes have killed many plucky start-ups. This potted history will evaluate whether the pitfalls outweigh the benefits.

Few games markets are more broken than Java mobile gaming. Most indie developers work for hire with no royalty upside, keeping them small and cash-strapped. Poor audience profiling means developers have little idea who they are developing for, resulting in copious games for boys when the average Java gamer is a woman in her mid-twenties. The cost of porting to thousands of handsets often outweighs initial development costs for publishers, driving down quality and game length. Hundreds of competitors on operator decks drove decreasing numbers of viable large publishers to pay ‘marketing fees’ for placement. Where Japanese operators triggered massive innovation by taking 30% of a transaction, Western operators take 40-50%, constricting the market. Consumers are overcharged for downloads, and buy Java games in brief spurts, shortening most games’ viable shelf lives. Below 5% of western mobile subscribers actually buy games, a figure gradually falling.

Enter the iPhone. Apple solved many of these problems by creating a desirable device with a great UI and a smooth buying experience. Low handset variation has largely extinguished porting. Development is easier and faster. The App Store dramatically increased discoverability, and Apple sensibly shares 70% with developers. They take no payments from publishers for placement, so the chart’s higher reaches feature many more original independent IPs. Most significantly, Apple entirely bypasses operators and ensures internet is bundled for free. Luckily iPhone’s predominantly male users love buying premium games apps made by boys for boys, and well over three times as many buy iPhone games versus Java.

The contrast between these two markets’ fortunes is stark. While Java declines, iPhone has reinvigorated a market that had got stuck at around $1bn in the West, and will take the lion’s share in future, despite having a relatively tiny installed base (only 5m in the UK). With so many old handsets still in use, Java gaming will linger on for several years yet, but it won’t be pretty.

iPhone had a bright childhood, abounding with breathless reports of bedroom programmers making millions, but in its first year, a number of early movers made substantial revenues from quick little games. By mid-2009, the App store passed 10,000 games and Apple’s tiny editorial and approval teams creaked under piles of new applications. Average unit sales, prices and returns for new IP were falling fast. Despite experienced work-for-hire studios like Distinctive reporting that any iPhone game costing over $40,000 would not break even, an arms race has been fought by studios raising production values over $1m to counter rising competition. Little studios reliant on premium app sales started to go out of business, while bigger studios started marketing heavily to keep their branded apps in the charts. The market now consists of a thin layer of big publishers and top-tier iPhone studios but few studios at scale below them. Older studios could port existing games to iPhone for low cost and still do well, but original IP struggles to be shine in a market with over 35,000 games.

Early mover ngmoco watched this change in the market with growing concern. Lots of low quality games at low price points felt like Java all over again. To make a business at the scale demanded by their investors, they calculated they needed a game in the top 5 all year round. The premium app market looked unsustainable before Apple’s abrupt U-turn to enable freemium, in-app purchasing. ngmoco went free in July 2009, acquiring several freemium studios and making their premium games free to drive users to two freemium products. These are monetised by selling virtual goods, advertising and offers, which are optimised by data mining. They radically changed production methodology to build only the minimum required to live test player retention levels and refine their game designs. ngmoco has even found way around Apple’s ban of 3rd party premium currencies by selling services not items. ngmoco estimates it makes 4 times more money from freemium than premium apps, and is thought to be grossing well over $1m / month.

While iPad steals media attention, Apple and Facebook have signalled mobile gaming’s future through recent announcements. Apple’s forthcoming Game Center is a social network platform that provides a viral marketing channel for studios to exploit players’ social ties. In parallel, Facebook has sneaked in reference to location-based services in its latest API, which means that mobile app developers like Foursquare may be able to map a Facebook Friend list to its mobile players’ locations.

Anyone who has read our previous columns will not be surprised to hear us saying that Free or social network gaming are exciting opportunities, but iPhone’s transition to these more sustainable, higher value commercial models could trigger huge innovation. Social gaming on iPhone will be held back until either the ban on 3rd party premium currencies is fully reversed, or Apple introduces its own currency, much like Facebook’s controversial Credits. Whatever happens, iPhone gaming has discovered a new kind of highly lucrative and socially relevant mobile game.