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Facebook Q3 delivers, shows a hint of mobile October 24, 2012

Posted by David Card in Uncategorized.
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Facebook reported solid results for its third quarter. Its ad revenue growth outpaced Google’s, as I expected it would, and Facebook showed that it can make at least a little money off of its mobile users. The market (over)reacted favorably, just as it had over-expressed its concern.

Ad sales were up 36 percent year over year, to $1.09 billion. Mobile advertising represented 14 percent of the total. Some observers think Facebook might even be able to command higher ad pricing for mobile than for its web advertising. Facebook is now probably the number two seller of mobile advertising, after Google. All that shows, really, is how immature mobile advertising is, and how search-dominated it’s likely to be for the near future. Facebook’s real money comes from its website, and it still needs to work on proving to brand advertisers that social media is effective.

And although Facebook’s payments revenue grew year over year, it is down sequentially. Nearly all of that comes from Facebook’s cut of virtual goods sold by social games. Zynga, Facebook’s biggest source of payments, is between hits, and struggling a bit.

A social gaming manifesto August 13, 2012

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Zynga is in turmoil. Since its IPO, its stock has cratered, attracting public exposure of company morale problems that may be more than pockets of dissent. The company reorganized senior management, leading to the departure of its COO, veteran games exec John Schappert. Its emerging mobile strategy has failed to impress.

Zynga is the biggest fish in the social gaming pond, but videogame giant Electronic Arts is right up there on the charts, along with relative newcomers like King.com and Wooga. Disney never made much of Playdom in casual games, but its “Where’s my Perry” looks like it might be an iOS franchise. With increasing competition, it’s worth understanding whether Zynga’s troubles are unique to the company, or whether it is social gaming itself that is struggling.

Is “social gaming” a misnomer?

Tadhg Kelly, a game designer blogger, is on the money when he notes that most social gaming isn’t actually very social. Many so-called social gamers are just taking a quick break of time-wasting fun without necessarily involving a human opponent or collaborator. While there are unique characteristics to the current generation of social games – callouts to friends for help, integrated status updates – many are the natural successors to the kind of casual games like “Bejeweled” that have been around as long as the web. (And had paper-based predecessors before that.) In many ways, social networks are just a new vehicle to promote and distribute casual games.

Based on GigaOM Pro’s spring 2012 survey of U.S. online adults, social gamers and casual gamers have a lot in common. Twenty-five percent of online adults are monthly users of casual games – that’s a figure that hasn’t changed much over the years. Those casual gamers tend to be middle-aged women (61 percent female) and only 14 percent of them play multiplayer games like “Worlds of Warcraft.” Survey respondents who said they played games on social networks had similar demographic and behavioral characteristics. These social gamers make up about 15 percent of online adults and also skew female (60 percent) and middle-aged. Over half (58 percent) play casual games and 13 percent play multiplayer games. Thirty-six percent of mobile phone-owning social gamers play mobile games and 38 percent of casual gamers do so.

Social gaming strategies

Today, Zynga has built a billion-dollar business off of casual games built on Facebook’s social network platform. The company is metrics-driven – perhaps to a fault – in its effort to engineer games for frequent, casual usage, viral promotion, and virtual good sales to a relatively small number of heavy users. But there’s little evidence that those heavy users are classic hardcore videogamers or players of multiuser role playing games, so expanding into those genres probably won’t scale.

Casual gaming is a mature business in the U.S. Zynga and its social games competitors should follow these principles:

  • Manage the portfolio. It’s impossible to predict hits, so like other entertainment companies (movie studios, record labels) social games companies must manage a portfolio of titles, and jump on the ones that take off. Not every hit will be a franchise for sequels and spinoffs, so the key is launching lots of titles on a regular basis, doing as much analysis of them as possible, and vigorous cross-promotion.
  • Cultivate multiple revenue streams. Zynga has mastered virtual goods, but it needs to be more aggressive on sponsorship and in-game advertising. In fact, virtual goods-bartering shows a lot of promise as a sponsorship means. Facebook has enabled game and content subscriptions. That’s worth experimentation, but subscription may appeal more to hardcore gamers.
  • Build out the platform. I’ve given Zynga perhaps more credit than it deserves for starting to build its own platform. Successfully deploying APIs for technology and promotion to third-party game studios could help smooth out the ups and downs of the hits business, but only if social games platforms can generate revenues from licensing, advertising, or promotion fees.

Mobile might be different. Judging by the survey data, there’s reason to expect a similar number of mobile gamers will be high-spending “whales.” But that’s not proven yet, and apps stores are establishing a model of low-priced games rather than virtual goods. So mobile revenue experimentation is a must.

Question of the week

How can social gaming companies transition into mobile gaming?

“Unleashed” Zynga shows steady progress July 2, 2012

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The leader in social games hosted a “Zynga Unleashed” event last week where it showed a few new games and sketched in a little more of its platform, mobile and publishing network strategies. Market reaction amounted to a dismal, collective “meh.”

It’s been less than nine months since Zynga started to hint at the strategy that would launch its next stage of growth and reduce some of its dependency on Facebook. Last October Zynga began to talk about its grand vision of “Project Z” and “Zynga Direct,” and, in fact, the company is showing steady progress in implementing that vision. Third-party developers and Zynga competitors would be wise not to discount Zynga’s momentum. Last week, Zynga discussed its:

  • zCloud infrastructure. Zynga has built its own truly scalable infrastructure that it invites third-party game studios to use, both for core technologies and cross-title promotions. Zynga teased the idea of a new API for more backend services to come.
  • “Zynga with Friends” network. The infrastructure will support multiplayer game play and social communications across Facebook, mobile and web-based games. Zynga added three new developer studios for a total of nine on its platform.
  • Mobile distribution. Not only is Zynga becoming a web-based game publisher/distributor, but it aims to do the same on mobile devices. Atari joined four other game companies in signing on.
  • New titles. Zynga expanded its own portfolio of games across a handful of genres. There weren’t any obvious blockbusters, but Zynga showed a teaser trailer for a much-enhanced Farmville 2.

Adding growth opportunities

Together, these initiatives show how Zynga is slowly but surely building out its business and adding growth opportunities. It’s still tightly wedded to Facebook for audience growth and payments infrastructure. But it has started to show traffic growth on Zynga.com. More important, Zynga is trying to ensure that it doesn’t have to count on Facebook as a mobile distribution platform. That’s a good thing, as most observers, including Facebook itself, see mobile as one of the social network’s biggest challenges.

Zynga didn’t re-invent the games business. What it did was build a billion-dollar company off of existing consumer behavior at the expense of portals (MSN and Yahoo in particular) and other game companies. There has been a stable casual games audience – middle aged and female – since the dawn of the consumer web. That same 25 percent of U.S. online adults play social or casual games regularly, according to GigaOM Pro’s Q1 consumer survey. Zynga has mastered the narrow premium piece of that market, and is well-positioned to continue to dominate the virtual goods market GigaOM Pro forecasts to reach $4.3 billion in 2016, and even use it to tap into different “currencies,” like barter and ad-viewing.

Smoothing out impact of hits

Like most entertainment businesses, social games are driven by hits. By becoming a distributor and publisher of games from other studios, Zynga can flesh out its portfolio with potential big hits. It’s nearly impossible to predict blockbusters; disciplined companies manage a portfolio and franchise the winners. Franchise-related merchandise will likely pay off better than TV spinoffs.

Zynga is actually more like a TV network than a TV studio, though the analogy of fine-tuning titles rather than depending on opening weekend blowouts is apt. Like Zynga, the big broadcast networks have “owned and operated” studios and stations, with affiliates to expand distribution. Zynga hasn’t gotten that reciprocal distribution yet. And another thing it hasn’t pulled off – that the networks excel at – is to sell advertising effectively. In fact, Zynga is actually showing on its web games some ads that were sold by Facebook – the first hint of a Facebook ad network everyone has been expecting. Right now, Zynga’s not being aggressive in building out an ad platform (richer formats, sponsorships, targeting), but it could do so, or acquire some key parts. That’s more likely than Zynga getting into gambling, with all its regulatory headaches.

Question of the week

Where are Zynga’s best growth opportunities?

Zynga’s Project Z could be the next big game network October 17, 2011

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Social gaming star Zynga hosted its first-ever press event last week, where it showed a handful of new games and dropped big hints about a “Zynga Direct” strategy that could ease the company’s dependence on Facebook. Zynga didn’t give a timeline or details about “Project Z,” but it is building a gaming destination site, and potentially offering platform services for other developers. Does Zynga want to be a game distributor rather than just a studio? It sure sounds like it, so let’s examine how that might play out.

Building a gaming network would benefit Zynga in two ways: It would give Zynga more control of its own destiny, and it would smooth out revenue swings that depend on releasing a constant flow of new hits.

If Zynga and Facebook are in a co-dependent relationship, Facebook has the upper hand. Zynga derives nearly all of its revenue from Facebook traffic while Facebook users spend only 10 percent of their time on apps in general. Facebook takes a 30 percent cut of the virtual goods Zynga sells — Zynga’s main revenue source — via its Credits program. And Facebook can control viral game promotions, though it has traffic guarantees built into its agreement with Zynga.

But blame a slight slowdown in Zynga’s recent growth on a lack of new hit titles, rather than Facebook Credits. Like other entertainment studios, Zynga must successfully manage a portfolio of titles where the business is dominated by hits. During Zynga’s recent half-year, franchise titles FarmVille, FrontierVille and CityVille produced $77 million, $71 million and $47 million in incremental revenue, while all its other games totaled $78 million of the growth.

At the press event, Zynga assured people that it wasn’t divorcing Facebook. I suspect Zynga will leverage Facebook platform services and APIs, rather than creating much new technology. Zynga promised that Project Z would incorporate core Facebook Connect technologies, and its brand new HTML5 gaming engine is optimized to support Facebook’s mobile strategy.

What could Zynga add to create a social gaming network? Here are a few ideas:

  • Game destination hub. Zynga could act as the central hub for games played on social networks or mobile devices. Like Xbox Live, it could build out arenas, leaderboards and cross-game contests focused on social gaming.
  • Promotional opportunities. Zynga offers other games an alternative to depending solely on Facebook’s ever-changing news feed. It could create a Google search-like ad marketplace or paid listings, options Facebook and the apps stores have resisted.
  • Game identity with connectivity. Zynga will give gamers a game-centric persona or identity that still leverages Facebook Connect. It will support new Connect features like Wants and Owns in a less cluttered real-time stream. Ultimately, Zynga could wean games off Credits by offering better rates and encouraging a virtual goods exchange.
  • HTML5 engine. Zyngs could license its new engine to developers, a practice common in videogames, or to ad agencies looking to build advergaming “branded entertainment” sponsorships.
  • Advertising. Zynga could offer richer advertising vehicles to developers than Facebook, and actually share the revenues with developers. It should offer sponsored genre channels and cross-game sweepstakes and couponing.

App stores aren’t any fun, and social networks are crammed with communications and other features. Today, big gaming companies rely on Facebook for their social games distribution. Electronic Arts might try to weave titles from its proposed PopCap acquisition into its sluggish Pogo.com site, but it runs its other social gaming acquisition, Playfish, like a studio. Disney’s Playdom hub hasn’t really gone anywhere. So if Zynga can demonstrate better promotional vehicles and revenue opportunities on its own social gaming network, developers will have to take notice. Competitive games notwithstanding, Zynga could instantly offer a better story for game developers than Google+.

Question of the week

What are Zynga’s chances at building a social gaming network?

How to Rate Network Effects in Social Media May 23, 2011

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Part of the excitement driving LinkedIn’s IPO last week comes from investors associating social media with network effects. You know, the principle that the value of a network increases dramatically with the number of its participants. That’s the engine that drove Windows and eBay, not to mention the public telephone network. Markets with network effects tend to have explosive growth and can end up with winner-take-all market share.

But not all effects are equal, and assessing the valuations and competitive positions of social media companies depends on knowing which network effects are actually at work and how those could play out.

Types of Network Effects in Social Media

Pascal-Emmanuel Gobry wrote a thoughtful piece on network effects last week for Business Insider; it includes some analysis on how companies focused on market niches eat away at generalists who benefit from network effects. And as Matthew Ingram notes, network effects can work go ways: For example, Facebook supplanted MySpace, which supplanted Friendster.

Looking closer, there are several different types of network effects that work in social media:

  • Core network effect utility: There’s a difference between economies of scale and the magic of adding connections to a network. Groupon is building a user base, a sales force and relationships with thousands of merchants, but until it uses its sales data to offer personalization, targeting and other marketing programs to merchants, it won’t achieve much beyond scale. Even then, once critical mass is achieved, additional connections don’t add as much.
  • Viral growth: LinkedIn and Facebook initially grew their networks the old-fashioned way: Users invited other users to join. Viral pass-along is a key growth driver for social commerce and games, but now services and apps can hitch a ride on existing social networks, leveling what was once a steep playing field.
  • Business model that reinforces the effects: Gobry’s wrong about Google. While there are minimal network effects for its search users, there are huge ones for its advertising network. Google’s $25 billion in extremely profitable search advertising depends on attracting advertisers to its dominant search audience and insuring a liquid marketplace via bidding and enforced relevance to create an unbeatable paid search business. Plus Google lets developers using its services and APIs tap into that revenue stream with minimal effort.
  • Participant lock-in: Technology platforms create positive business opportunities for developers. But they can also achieve customer lock-in for their originator by making those same developers dependent on APIs. End users can be locked in, too, via familiarity (e.g., the QWERTY keyboard) and data storage (e.g., contact info, photos, message repositories) that raise switching costs for members.


Source: GigaOM Pro

As illustrated in the table above, here’s how network effects are shaping competition in selected social media markets:

  • Social graph: Though there are network effects aplenty, consumers tend to belong to multiple networks (Facebook, Twitter, Foursquare), meaning would-be data miners must target multiple data sources. And the industry is only just beginning to harness that collection of big data into reliable revenue streams.
  • Likes and log-in networks: Facebook was smart to hang Likes and Sign-ins off its Connect network, as each feature complements the others and assists in distribution; now LinkedIn and Google are trying to do the same. Bolting an ad network on top of those networks could provide missing revenue reinforcement.
  • Social commerce: As noted, most social commerce is more scalar than social. Without the additional services for consumers and merchants previously mentioned, single-market entry barriers and switching costs will remain low.
  • Unified communications: A cross-channel communications hub would sponsor habitual consumer usage. But so far, interoperability requirements have restrained the potential to lock in customers.
  • Social games: Many social games don’t depend on competition between users to be fun. Facebook’s distribution channel and cross-vendor virtual currency enforce interoperability — that’s good for growth but bad for Zynga’s or Playdom’s user lock-in.

Based on that framework, Facebook is well-positioned to build on its influence and add revenue streams. Its platform is a legitimate beneficiary of network effects, even in the face of competition from tech worthies (Google) and startups. LinkedIn has a solid business, but its platform aspirations remain just that: aspirations. Besides viral growth and some network utility, it’s not clear that other social networks (Twitter, Foursquare, Instagram) have network effects behind them.

Question of the week

Where are the real network effects in social media?

Where Will Zynga Go Next? February 21, 2011

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Last week began with stories that social game maker Zynga was raising $250 million at a valuation north of $7 billion. By the end of the week, the company was close to raising twice that, at a $10 billion figure. But bubble talk aside, why would anyone think Zynga was worth that much?

“Gamification” is an early contender for this year’s buzzword, as companies apply game mechanics to businesses as diversified as media, shopping and job hunting. Zynga is the most prominent exemplar of social gaming. Bing Gordon, who used to head marketing for Electronic Arts and is now a Zynga investor, says Zynga combines four disruptions in one: social media, analytics, alternative payments and apps ecosystems. And Zynga may only represent the tip of the social gaming iceberg.

Why Zynga Dominates Social Gaming

Zynga says 45 million users play its social games on a daily basis. Building off Mafia Wars and poker, the company has delivered a consistent string of hits with franchise titles like FarmVille, and spun off even more successful sequels like CityVille.

Its games run primarily as apps on Facebook, where it dominates the apps charts. Zynga coexists successfully — if a little uneasily — with Facebook. When Facebook changed how games could access its news feed, Zynga had to find other customer acquisition tricks. Now it combines lots of Facebook advertising with aggressive cross-promotion. When Facebook required apps companies to adopt Facebook Credits as their currency system, Zynga integrated the one it had built for itself.

Another factor in Zynga’s success is its multiple revenue streams. Most of its estimated $850 million in sales comes from selling virtual goods like power-ups and farm critters. But the company is growing an advertising business based on sponsorships, and even has licensed accessories.

Competitors abound, but so far Zynga has fended them off. Disney has struggled to master social gaming even after acquiring Club Penguin, and traditional videogame leader Activision doesn’t want to get in the business. Electronic Arts does, via its Playfish acquisition, but only 20 percent of its revenues are online or digital.

What’s Next for Zynga?

Here’s what Zynga’s likely to do to maintain its momentum:

  • Expand its distribution channel: Zynga will add complementary channels to Facebook. It has signed up Yahoo and may be working on establishing its own site. A Zynga gaming hub would help in launching more mobile games and might even attract third-party studios.
  • Improve its advertising platform: Others are experimenting with offers as virtual currency “cash,” and Zynga hasn’t done much with in-game product placement. I’m skeptical that its customer data is useful for ad targeting yet, so an analytics play may require Zynga to deliver different styles of interactivity via quizzes, other entertainment formats, or shopping.
  • Create an affiliate network: if Zynga creates a gaming hub, it could achieve and track that needed variety of activities. Likewise, its virtual economy could embrace other kinds of goods, both digital (music, books, videos) and otherwise (offers, affiliate e-commerce, coupons).

How Others Can Respond

Social gaming has moved beyond critical mass into mass-media territory. There’s room for innovation from Zynga competitors like the gaming companies named previously, as well as companies like Google, MySpace, and others:

  • Without a hub, Zynga has to rely on advertising and cross-promotion. Consumers recognize the brands of entertainment titles and artists, not studios  — aside from Disney. That means others can build hubs, and/or use Zynga’s own distribution tactics.
  • Unlike previous online casual games, social gaming attracts both genders. Besides poker, there should be social gaming genres that appeal to hardcore-gamer guys but aren’t World of Warcraft. How about fantasy sports on social networks?
  • Likewise, someone should aggregate other time-wasters, and perhaps specialize them for women. GetGlue’s check-ins for watching TV shows, movies, and music could play here. And LivingSocial is missing an opportunity to integrate daily deals with its Facebook apps like Visual Bookshelf.
  • SCVNGR and, to a degree, FourSquare, mix location-based services with games around collecting things and leaderboards. They should add more rewards and loyalty programs, and explore other gaming experiences, like gambling and multiplayer competition.

Question of the week

How can companies compete with Zynga?

How to Reach Social Media Critical Mass November 8, 2010

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When it comes to consumer technologies, how big is big enough? When do they really start to gain momentum, and what happens when they do? These are questions of critical mass — the magical tipping point when user adoption starts producing that old cliche, hockey-stick growth that fosters sustainable businesses.

Last week, a new consumer survey by the Pew Research Center inspired many to ask those questions about location-based services, which, to-date have achieved only single-digit penetration of the online population. And while we have a little ways to go in considering how location can achieve critical mass, it’s worth considering just what defines it and how companies can achieve it.

Critical Mass Means Two Things

When a new consumer medium or technology reaches critical mass, two things happen: Adoption accelerates and new businesses or markets emerge. Historically, critical mass tends to occur when about 15 percent of households or users adopt the new technology.

VCRs illustrate the classic example of critical mass. In the early 1980s, U.S. household adoption of VCRs hit 15 to 20 percent. When that happened, a whole new business around home video rental was created. Blockbuster was born. Adoption accelerated and rental revenues flowed.

Social network usage showed a similar pattern. In 2005, social and professional networks like Friendster, MySpace and LinkedIn were used by fewer than 15 percent of the online population. Two years later, MySpace was generating more page views than Yahoo, and cutting billion-dollar ad deals with Google.

VCRs also illustrate another characteristic of products or services that reach critical mass: sometimes their core value proposition changes. While the original base of VCRs was sold for the purpose of time-shifting programming, their ultimate success came from a completely different utility. Time-shifting was attractive enough for the first 15 percent of households, but the ever-present blinking clock shows that home video rental was the VCR’s real killer app.

Social Media Technologies at Critical Mass

Location-based services have not reached consumer critical mass. However, other social media technologies that are reaching that point right now include:

  • Social gaming. Using Facebook as a launchpad, games like Zynga’s FarmVille and Mafia Wars have reached critical mass in the U.S. Unsurprisingly, they’ve become advertising and promotional vehicles for brand-name marketers like McDonald’s, and may finally prove the value of micro-transactions and virtual currency.
  • Micro-blogging. We’re really talking about Twitter here. Adoption is near or at critical mass. Some question whether Twitter will ever be truly mainstream, but it’s already gone from being tech- and social media news-only to celebrity-watching. Twitter’s just figuring out monetization, but feed-based user interfaces and news dissemination are two areas that micro-blogging has driven.
  • Social commerce. Groupon told me they have 15 million subscribers in North America, and that’s getting pretty close to 10 percent of the U.S. adult population. The daily deal aspect of social commerce is close to critical mass; cheap, effective customer acquisition by local couponing is about to arrive.

Things to Remember

A few other aspects of the critical mass concept bear noting:

  • Although it shares some characteristics, like rapid growth, critical mass is not the same as the network effect. Network-effect markets increase in value exponentially with adoption, and lend themselves to winner-take-all outcomes.
  • That seemingly magic 15 percent figure is based on the target market. Technologies can achieve critical mass and “in-market scale” within particular audiences based on things like geography, common interests and lifestyle.
  • That said, there are many markets that depend on absolute numbers of users. For example, major brand advertisers have little interest in audiences under 1 million, no matter how targeted they might seem.

Question of the week

What other tech markets are reaching critical mass, and which ones won’t?