This guest post is written by Jeremy Liew, a Managing Director at Lightspeed Venture Partners where he focuses on investments in gaming, internet and consumer enabling technology companies. Jeremy is co-producing the Social Gaming Summit next Friday, June 13th, at UCSF Mission Bay. Most of the companies mentioned below will be presenting. This post comes a year after venture capitalist Susan Wu wrote a guest post on virtual goods.
The last few years have seen a transformation in the consumer internet world as online media has evolved into social media. Many new social media companies have shot to tens of millions of users very quickly, including Facebook, MySpace, Digg, Yelp, YouTube, Slide, RockYou* and Flixster*. The trends that have driven the growth of these Web 2.0 companies include:
- Dramatically reduced development costs and cycle times, which have led to highly iterative product management
- Dramatically reduced marketing and distribution costs as CPC advertising, viral growth and social network platforms have replaced Superbowl ads and distribution deals with portals
- Easier monetization due to the proliferation of ad networks
As the game industry embraces web games, multiplayer games, and social games, we are seeing these same trends emerge. Web games and multiplayer games are well understood. Social games however, are a newer phenomenon.
Social games are not just multiplayer games. In social games, existing social relationships add context and motivation to the gameplay. Social games are more fun to play with people you know than with anonymous strangers. Examples of social games include Friends for Sale*, where you had better buy your girlfriend back from that guy who has been hitting on her at the gym, (fluff) Friends, where if your BFF feeds your pet, you are compelled to reciprocate, and Power Challenge, where you can’t let your team’s loss to your fraternity brother’s team go unavenged.
Even single player games can become social when the right infrastructure for community and social interaction are built around them, including high score leaderboards, achievement badges, challenges and simple message boards, as Kongregate, Addicting Games, MiniClip and MindJolt are demonstrating.
The gaming industry is now starting to experience the same trends that the online media industry has experienced over the last few years:
Dramatically reduced development costs
Lazard estimates that Halo 3 cost $30m to build. Rockstar says that they spent $100m to make Grand Theft Auto 4. While both have been wildly successful games that sold over 10m units each, these are big numbers to spend on development. A new generation of lightweight web games is now being created at a fraction of these budgets, and these games are being played for free by millions of users. Games like Zynga’s Scramble, Social Gaming Network’s Warbook and Stardoll (originally Paperdoll Heaven) were all originally launched on less than $100k and all have entertained millions of players.
Of course these free games can’t compare to the complexity, quality or polygon count of Halo 3 or GTA 4, but they do provide entertainment to their players, and they are all evolving and improving over time. Because all these games live in the browser, they can be constantly updated and refined as game designers watch their players’ usage patterns. They give players more of what they like, and cut out gameplay that players don’t like. Teams are small and development is fast and iterative in reaction to player feedback.
In the extreme, users generate the game rules themselves. Some users in online communities and immersive worlds including Dogster, Habbo Hotel, Gaia and IMVU have gone so far as to create games on their own, ranging from dance parties to plays to petting zoos to quiz shows.
Dramatically reduced marketing and distribution costs
Halo 3 spent an additional $30m on marketing, mostly offline. GTA 4 blanketed the billboards of San Francisco as part of its massive launch. These marketing budgets are akin to the Superbowl ads of the early 90s internet companies. Yet CPC and CPA based advertising have been as much a boon for gaming companies as they have for other online businesses. With more games playable inside a browser, or easily downloaded over a broadband connection, games like Go Pets Live, Nexon’s Maplestory, and Three Ring’s Puzzle Pirates have become experts in success-based online player acquisition.
Furthermore, Games have exploded virally on the social network platforms. On Facebook alone, three games (Texas Hold’em, Zombies and Friends For Sale*) have more than 8 million players (installs). Five of the top ten Facebook apps (by daily active users) are games; Owned, Friends for Sale*, Texas Hold’em, (Lil) Green Patch and Scrabulous. This is a direct consequence of the social games phenomenon. Social games are more fun to play with your friends, and social networks are an ideal environment for killing time with friends. As a result, they have been able to very efficiently ride the distribution channels that the social networks provide.
Easier monetization
The dominant model of monetizing games is still retail – selling crystal cases for $60 a pop. This presents a real barrier to game publishers, who have to convince a prospective player to fork over a substantial amount of money before she has even tried the game. Publishers have to generate demand, which is what led to the high marketing budgets for Halo 3 and GTA IV mentioned previously.
Now more game companies are experimenting with free to play games that make it a lot easier for a prospective player to try before they buy. These games monetize either through advertising or through virtual goods sales. Just as with online media, ad networks like Double Fusion, Massive and Mochi Media have made ad sales much easier for game companies, so that they can focus on their core competencies. Equally, virtual goods business models, well established in Asia, are starting to gain more momentum in the West as well. Habbo Hotel is reportedly doing more than $50m in virtual goods sales (mostly in Europe) and Nexon’s Maplestory is doing around $30m in virtual goods sale in the US. Companies like Acclaim, Stardoll and K2 Network are ramping their virtual goods sales in hot pursuit.
Future for social games
The trends outlined above are likely to lead to many new and valuable gaming companies. Let EA, Nintendo, Activision, Ubisoft and the like continue to fight for market share amongst hard core gamers. New social games startups, including free to play MMORPGs, social network games, web based games and single player gaming communities, are busy converting the much larger market of casual players into their customers.
Techcrunch readers interested in learning more about Social Gaming can use the code CRUNCH to get a 10% discount on tickets to the Social Gaming Summit.
* Lightspeed is an investor in Flixster, Rock You and Serious Business (which publishes Friends For Sale)
This social virtual gaming stuff is starting to make more sense. How much could it have cost to develop Facebook Gifts? Sponsors are probably lining up with open checkbooks to be the next sponsored item. Yesterday I got a Coors Light beer cap, and am proud to display it!
Another startup called “Beelya” (short for memorabilia, I guess) is selling and giving away limited edition virtual autographed memorabilia on Facebook… like trading cards, but all online. Apparently they have “authenticity” rights from the athletes. I bought a Brett Favre limited edition high school jersey for a buck. And, looks like Reebok is already offering autographed virtual cleats. What’s next!?!
what happens to his mouth?
Thanks for the info Eddie. I’ve never heard of beelya. I’m definitely looking forward to going to the Social Gaming Summit.
With an Indiana Jones smile like that, you can be sure he’s witty, self-confident, and excellent with the ladies.
“Games” like Friends for Sale, all the Slide shit, virtual gifts etc. have no depth and will sputter out like so many other passing fads. Real games like Texas Hold’em and Scrabulous should do OK.
This guy wants to do to gaming what he and his ilk did to the application business, drive a race to the bottom with shallow games that have no business model other than advertising. Hopefully sanity prevails in the game industry, where real work building quality titles, drives real revenues not dependent on the vagaries of click through rates. The gaming industry is the last bastion of “if you build it, they will pay”. The actions of people like Jeremy Liew will be looked back on the same way we now look back at the leveraged buyouts of the 80’s, driving a corporate fad that is unsustainable.
As more of these games are deployed as embeddable widgets, we are like, YESSSSS. Innovation in the widgetspace is so great for platforms like ours… we’re STOKED !!!!
http://www.metanotes.com
umm…
is it suppsed to be “Own” or “Pwn”….
i can’t tell if this is some game talk.. or the guy just didn’t hit the spell check???
thoughts?
MindJolt has started delivering multi-player games as well, starting with CastleWars, a turn-based card game. It’s well integrated with social networks Facebook, MySpace, Bebo, Hi5, etc… players from one social network actually interact with those on others in real time.
Not everything is single-player. See http://mindjolt...mes/castle-wars.
Quit playing dumb, Sam.
This ‘lightspeed guy’ has no clue and is about as savvy as my maid. Brand advertising may make sense, but there are lots of options for the big brands which will make it difficult to acquire market share.
I think we’re confusing “games” and other emerging social networking and community applications. We shouldn’t be putting SuperPoke or Facebook Gifts in the same category as Halo or Texas Hold’em. As long as online communities exist, emerging ways to communicate and entertain each other online will thrive. Think of it as replacing old-school “Thank You” cards and flowers (arguably of no more value than virtual gifts) with modern-day versions that better exist in today’s online world.
Oh, and advertising has been pretty effective on TV over the last half century. I don’t think building a viable business model on advertising is all that bad of an idea.
Wait…what? “Buy a friend?” Are these games or are these:
http://www.instantaction.com
Most of the stuff cited besides a few like Kongregate aren’t really pushing the envelope from the tech side.
Just an FYI, for the confused non-gamers out there:
http://www.urba...ne.php?term=pwn
Have you been to iminlikewithyou.com lately? They have some great games over there. Most of them are based on classic games and have been updated to be multi-player. They are highly addictive. The site also has a social network built in. There was some weird idea of ‘flirting’ driving the social aspect, but it never made sense to me. The money is in the games. I think this company would be a good acquisition for Viacom/MTV or a similar media company. I believe it is built on XMPP and is super fast. Great time killer during lunch. Good stuff.
I develop what I believe is a fairly complex social game with subtle business simulations. The idea is that you start alone, as a new member of staff in the office, known as OfficeDebo.
The only real way forward in this game is to develop relationships and work together with other players on the game to achieve a common goal – and you can do so under the umbrella of your own “firm”.
The good relationships / social aspect means better pricing, so you are more profitable, experienced, higher leveled, etc. and thus eventually win the game – I have seen some people start all of a year late and still win it over all, because they are a “people person”.
Anyway, it’s just my stab at a social game. Been going for years now. Not exactly fresh news I must say.
We have got two people hitched and married though… that’s something!
http://www.officedebo.com
Along with games becoming more social they’re also becoming more “user-generated,” another major example of web 2.0 mixing with games. One just has to look at things like Sploder, Little Big Planet or our humble startup, Mockingbird:
http://playmockingbird.com/
They are going to lose a lot of money on social gaming. The CPMs are shitty and the monetization exists but is terribly low.
Is anyone of this really that new? I remember playing hearts on the msn gaming zone over 10 years ago, they has chat, leaderboards and other community features.
This obsession for Social Networking is getting truly ridiculous! For a change, let’s look at hard numbers:
– Rockstar has spent $100m to make GTA 4. Revenues were $310m on launch day and $500m during first week.
– Halo 3: $30m in dev costs + $30m on marketing. The game made $170m on launch day.
To put things in perspective: Facebook 2007 revenues were $150m. Poor Rockstar generated only 3.3 times more revenues in a week…
Jeremy Liew will have a hard time convincing us that games created on top of FaceBook and co can generate revenues approaching even a small fraction of the regular game industry.
If someone is going to be “pwnd” by social gaming, it will be myopic investors.
Great article Jeremy.
Martin – multiplayer gaming has certainly been around for a while, it in fact predates single player games (backgammon anyone?). I’m less concerned with how “new” it is and more excited about the prospect that more overt sociality on the Internet allows for more opportunities for social gaming. Most new trends are simply elements that has existed before, but because of a confluence of events it becomes possible for them to grow exponentially.
In this case the it is the confluence of opening up of your friends list, combined with monetization through virtual goods, combined with a avidly gaming population of teenagers and adults, combined with the current browser and broadband penetration. There is still plenty to figure out (it’s true that this is not a robust industry ac, but of course completely defined industries where a startup plays by the rules is where a startup fails), but it’s a very fun time to be building social games.
@ac nailed it. Look at the revenues of gaming versus the typical web 2.0 social crap Liew invests in. There is no comparison. Putting “social” in front of any category makes it a money loser, and social gaming is no exception.
I’m biased, but I don’t think that you can judge social gaming based on its current revenue because, as Nabeel hinted at, it’s an emerging market.
Games like Halo and GTA IV were built with teams of hundreds of people. But what happens when casual gamers turn into content creators? There are lots of companies developing tools for them to do just that. It’s doing for games what Blogger/WordPress/TypePad did for blogging, and what YouTube/MetaCafe/countless others did for video. Nobody could understand the future impact of this right now.
For those that don’t “get” how powerful social games are going to be, consider sitting in front of a 70 inch video TV screen playing a game of online “Clue” against family and friends spread out all over the world. You say, professor Plum did it in the Library with the Revolver. You hit submit and a video of the character doing as you guessed plays out on the screen.
You guessed wrong. The game continues as your little brother chastises you via a video chat widget that is embedded on the screen. Included in the videos of the re-enactments of the crimes are lots and lots of subtle product placements and ads drift in and out on the lower portion of the screen like todays watermarks on TV.
Now imagine this scenario where the characters to a new form of interactive game are “live” on a soundstage against a greenscreen and respond to the directions of player or player (crowdsourced)
We haven’t even scratched the surface with social games
Forget about revenues for a second and focus on the value of these apps: is a “zombie” app really worth something? How does “owning” XYZ on FB improve my life? These are mind-numbing apps for brain dead people. It’s sad we are even talking about it. At least Desktop Tower Defense wastes your time challenging your reaction times and strategic thinking.
@1 Eddie, when did showing a Coors Light beer cap on our homepage become important? Are you serious? Even the beer sucks.
As a developer, I’d feel ashamed to work on such useless crap. Like I said elsewhere, that’s like McDonald’s food. People eat it, sure, but it’s still shit. And don’t tell me they can choose, this is not about choosing, this is about *providing* something good.
Jeremy always has such an insightful perspective on the industry. If you’re interested in following the social gaming space, his blog is among the most important!
The only comment I’d have is that, by and large, this discussion misses the point.
The social network *is* the game. And most great games (thoughnot all) are also social networks – however thinly veiled.
In fact, most great applications (of any stripe) – at least those with stickiness and long-term allegiance – seem to have game design elements in them. These types of non-game games are called Funware, and the notion of baking game design & social media into everything is gaining a ton of traction:
http://ventureb...-game-industry/
It is my personal soapbox, of course, but I believe that what’s happening now with games and social media is the greatest disruption the industry has ever faced. In fact, I often refer to Facebook as gaming’s Napster….provocative, to be sure. But it’s certainly based in some hard evidence.
As a small aside, my experience has been that there’s a generational divide between people who view games using a strict construction and those that don’t. I’d love to know how old the “that’s not a game’ crowd in this thread are.
The real value in social games is that they are bringing games back to their original value delivery – facilitating enjoyable interactions among people. Before video games, single player games existed (e.g. Solitaire), but they were few and far between, and had limited appeal; however, multiplayer board/card/etc games were huge and a big part of normal people’s lives. It was only an accident of history and technology that single player games took over in the early days of video games. Technology has matured, and games are going back to their roots – all good, enduring games are fundamentally social.
To the people who pooh-pooh the economic viability of social games, I say just look at the value delivery. Sure, the great single player game experience of something like a GTA is terrific, but it pales in comparison to the value you get out of regularly playing nearly anything with a bunch of good friends. GTA is an impressive franchise, but compare it to WoW. Where there is value delivered, people will get paid. The low CPMs on social network games are just a function of the industry segment being in its infancy.
Leaders go where others won’t
See what others don’t
Think what others can’t
Do what others daren’t
That’s it. Really nice!
Thanks for this excellent article.
I agree with most of your points, and I am actually gonna pursue some projects in this area. This is becoming huge, wich means lots of $$$$$$ to creative minds.
Bookmarked for later analysis.
While there is a lot of hype going on, from someone at the front lines of social gaming, we’re seeing incredibly positive results in micro-transactions on social networks. I consider this an incredible opportunity space. Not only is this an emerging market for new game companies to grow big, but you get a chance to do some really innovative work at the intersection of social and gaming, and there is a solid business behind it.
Social gaming is truly the new black
Like is Jeremy the joker from Batman?
Like what the hell happened to his face?
Like shitty cpms in the gaming space. Like a total dead end.
Like I am totaly not into this guest. I would not put him in my next book.
As a front line person on an old school game portal, we’re trying to get into this space. The buzz right now is pretty crazy and so far the first movers Zynga, Games network are doing well. I have noticed that the quality of the games is not great IMO. If one of the big game developer houses (say oberon or bigfish) decided to make a go on the social net, the little guys who are finding room could get squeezed. It is an exciting time as there is a new land grab going on. Competition is good and I’m excited for what’s next.
Jeremy’s blog is a MUST read for anyone in the space. Thought I would help out and point to a couple more worth noting:
casualgame.biz
insidesocialgames.com
http://www.bretterrill.com/
Enjoy everyone.
Laurent
games.com
One thing all the haters in this thread seem to be ignorant of: if people are spending 4 hours a day/week on social gaming, the advertisers simply have to go after them there. Certainly this takes some time to establish, silly to judge immediate results.