Can Games Still Succeed on Facebook?

With Facebook’s star game developer Zynga in the middle of its IPO process, some speculate that the Facebook games market has reached its peak and is no longer showing enough growth to justify betting on launching new social games for the platform.

This conclusion is generally based on three types of assumptions. The first is that games are now too expensive to make for Facebook to bring in healthy profit given that the level of quality in art and design has risen along with user acquisition costs, plus a 30% fee taken out of Facebook Credits transactions. The second is that games only have a window of two months to hit a peak reach with users before an inevitable decline begins, which leads many to believe that all a game’s resources and pre-loaded marketing are banking on a single point in time. The third is that all Facebook games must have a predetermined set of features in order to appeal both to the broader market — which is perceived in the coarsest terms as a “35-year-old housewife” — and to the unpredictable whales (players who spend hundreds of dollars in-game per month as opposed to just a few dollars at most).

The first can be backed up by some examples from the 2011 season of social games — which included high production value titles like The Sims Social, CastleVille and Gardens of Time — as well as by the fact that Facebook cut back on the viral channels that made early games grow so quickly, thus forcing developers to rely more on advertising now than they did in 2009. This creates a situation where developers spend more now on creating games and advertising them than they previously needed to, which eats into profits. The second and third assumptions, however, are harder to substantiate with empirical evidence.

We know based on data collected by Inside Virtual Goods and multiple case studies of traffic patterns in our AppData traffic tracking service, for example, that many social games do see the most growth in their first three months. We also have, however, notable cases where that initial growth period exceeded three months or the initial growth period didn’t begin until well after the game had launched. We also know based on data collected by Facebook and by several game developers in self-funded surveys that the primary audience for social games isn’t necessarily women 35 and older, but men and women from 18 to 35.

In short, yes, there are higher barriers to entry on the Facebook games platform now than there were a year ago. But that doesn’t mean the market for social games has stopped growing.

Why We Can’t All Be Zynga

Zynga is a developer that had the right idea at the right time with the right set of favorable circumstances to produce massive viral growth on the Facebook platform. The developer built its empire on simple, compelling game mechanics like harvesting crops or playing poker and then set about acquiring talent and intellectual property at a rapid rate to sustain that growth with new game releases and technology upgrades to improve the user experience.

But it’s not 2009 anymore and the Facebook platform has changed. For one thing, there’s less access to viral channels for social game developers. For another, Facebook is expanding in international markets where the potential audience for social games already has expectations of quality, content, and monetization practices. Lastly, there is more competition both on the Facebook platform and off now than there ever has been for free-to-play game developers.

Two years ago, a potential Zynga rival could release a city-building game or a restaurant industry sim within weeks of Zynga’s own entries into those genres and both games would experience growth (Zynga usually seeing quite a bit more thanks to its extensive cross-promotion network and possibly some help from Facebook). This is no longer a viable growth strategy for social games as many of the major Facebook genres — farming, city-building, crime, pets, and restaurants — are well and thoroughly saturated. This also goes for companies that make “reskin” versions of their own game, changing the setting or characters of a game that is still the same game concept underneath the hood.

How We Still Make Money

While developers can’t expect to grow like Zynga, they can at least hope to monetize like Zynga and potentially even monetize better. Whether it’s Zynga or not, a developer is always looking at the core equation: User Lifetime Value (LTV) > cost per install (CPI) = profitable game. While CPI is largely out of the developer’s control because virality and advertising depends on what channels Facebook makes available, the LTV of a user is something that developers can impact directly by monetizing their games in ways that differ from what Zynga has done.

Based on regulatory filings, we know that Zynga made over 5 cents in “average bookings per user,” which is the amount of virtual currency purchased by a user in a day, in the financial quarter ended in September. Most of Zynga’s virtual goods sales in the bulk of its games are based on premium decoration items and components for completing quests or building objects. These items go for anywhere from one or two premium currency units to 50 at between 10 and 14 cents per currency unit.

Note: Zynga also has a low CPI because they’ve already amassed a large network of players and don’t need to spend money to gain more.

As we say, however, the market is changing. There are game types out there, like the strategy combat genre, where users are paying for item types that provide protection from other users, or a distinct combat advantage (e.g. speeding up repair times on structures that produce combat units). In these games, the price of the item is more expensive than Zynga’s average item price (maybe $7 for a turret compared to $5 for a decorative banner), but players are more compelled to spend it based on the nature of the game itself. Monetization in these games is particularly compelling in cases where a player’s base can be completely destroyed, but instantly rebuilt for a small fee (say, 30 cents) at multiple re-builds a day. Even casual and sim titles are experimenting with new virtual good types that add game modes or interactions — like game tickets that allow for a week’s worth of unlimited play in Tetris Battle for $5 or Sims Social bed items for sleep and sexual interactions that go for $12 or more.

At rates like these, it’s not hard to imagine that there are games on Facebook right now that regularly make around or just above $1 per user per day — and many of these with more than 100,000 daily active users. The big question is, how high is the CPI variable in the profit equation?

Facebook’s First Role: Keeping Down Costs

Facebook is well aware that it’s responsible for the success of social games on the platform more so than the developers themselves. Aside from creating and maintaining the platform itself, Facebook is also the primary arbiter of discovery and growth for new games and now it has the added responsibility of preserving game economies through the strength of its platform currency, Facebook Credits. Based on Facebook Credits revenue gained via in-game transactions and Facebook ads purchased by game developers, social games could make up a significant portion of Facebook’s revenue.

Note: Facebook couldn’t be reached for comment on the breakdown of revenue, but for the sake of a rough sketch, assuming that Facebook Credits revenue hits $1.2 billion this year and 30% of that was collected from social games (even though Credits wasn’t officially mandated until July) and that Facebook hits the estimated $4 billion in revenue, that’s $360 million — or 9% of revenue just from in-game transactions. 

Facebook is also aware that it created a monster by allowing social game developers near complete freedom in the early days of the platform, once opened to third party developers. Spam apps and abusive use of the viral channels led Facebook to cut back on those tools dramatically in 2009 and 2010. This led to consternation in the developer community, which only swelled when Facebook made Credits integration mandatory across all apps. Facebook has tried to smooth things over through developer outreach programs and restoring some of that lost virality through features like the canvas app ticker and via new algorithmic discovery that sometimes surfaces social game activity to non-gamers in the site-wide live app ticker.

As for future growth on the platform, Facebook seems to understand that it needs to do more to produce growth for social games both through ads and organic means. On the ad side, Facebook recently increased the total number of display ads on pages from four to six and has introduced sponsored ads and recommendation surveys into the canvas app ticker. As for organic growth and discovery, former Inside Network Editor Eric Eldon points out over on TechCrunch that Facebook has been making changes that expose a higher volume of social game notifications than we saw over the summer and fall of 2011. The social network also seems to be experimenting with exposing new games based on players’ current game preferences — for example, showing us a friend’s arcade puzzle game activity when we frequently play a particular puzzle game instead of showing that same friend’s strategy combat story. Lastly, by launching a mobile platform that allows for cross-device play between smartphones and PCs, Facebook has made it easier for developers to enter the mobile market and find more growth there.

On their own, these changes might not be enough to get new social games to that arbitrary 100,000 daily active user mark mentioned above without developers having to spend on ads. But Facebook still wants to social games to succeed, we can expect to see it doing more in 2012 to spark organic growth, which in turn offsets the cost of user acquisition.

Facebook’s Second Role: Supporting New Game Types

As for what Facebook can do for games themselves, it’s all about improving the tool set available to developers. This means both cosmetic and small-scale features, like achievements and highly detailed game story content, as well as larger infrastructure changes that can support new game types, hyper-localized versions of games, and games that run off-platform while leveraging a deep Facebook Connect integration. For example, two years ago, it would have been impossible to imagine Facebook supporting a synchronous competitive multiplayer game. Now, we have those and first-person shooters, and even rudimentary racing games. We also see support for apps in new emerging languages that goes beyond mere translation and into actual game adaptation. In the next year or so, it looks like Facebook could even support large-scale synchronous MMO role-playing and combat games, which are both proven free-to-play genres in international markets like Asia and Europe. We also expect Facebook Connect integrations to become more sophisticated in a way that allows developers to simultaneously launch games both on Facebook and on their own sites — similar to what it sounds like Zynga is planning with Project Z (a.k.a. Zynga Direct).

Where Does the Growth Go? To the Right

As the social games industry matures, we’ll see fewer growth trajectories like this:

And hopefully begin to see more like this:

A sustainable social games business that hinges largely on Facebook is indeed still possible, but it depends on the ability of the developer to conceive, launch, and monetize a game on a reasonable budget and on the evolving nature of the Facebook platform itself. We can’t all be Zynga, but that’s probably the best news of all. A private developer has more freedom to try new things in an emerging market than a publicly traded one.