Tuesday, October 27, 2009

Zynga's Doing it Old School: Showing Us How It's Done Edition




So remember when making games was fun. Schedules were measured on single year's calendar, budgets had fewer than US phone numbers and revenue had more? Zynga does and they are bringing those days back - with a vengeance. There is certainly no formula for finding success in ultra low budget games, it is even more amazing to hear of a game company which is churning out low budget cash cow games like jelly beans down a conveyor belt. Sure, it is "only a game company," but this game company, which is rumored to be preparing for an IPO, went from zero to well into the 9 figures in revenue - rumors place revenue between 150 and 250 million dollars - in two years and operates on margins - rumored to be 60% EBITDA - that would make any media executive cry.

If you have a Facebook account, you probably played, or received a post from a friend who plays Mafia Wars, Farmville or Zynga Poker. If you are not on Facebook, you probably never heard of the company. Which is odd, considering there are over 125 million people registered in the Zynga community. This is not just one of those dot com "ooh, look at all the eyeballs" companies with no revenue. They started cashing on on three revenue streams right from the beginning. Like a television show, Zynga makes money from advertising - about two thirds of its revenue. Unlike a television show, the other third of its money from selling digital objects through a direct relationship with its consumers. Ad dollars are earned through advertiser sponsored offers in which users can get virtual currency to buy virtual goods as well as traditional advertising. Digital objects on the other hand are pretty out there. People pay real money to buy objects that don't really exist. They vary from game to game, but purchases can be anything from poker chips, to carrot seeds, to cash, to tractors. Speaking at the Web 2.0 Summit last week, CEO Mark Pincus jokingly pointed to larger tractor sales than John Deere. As you may guess, it does not cost Zynga a lot to make more digital objects and there are no inventory or fulfillment issues. 99.99999999% margins on incremental units is nice. While the concept is old hat in Asia, and common in the world of massively multiplayer games, Zynga is the first company to really bring the "free to pay microtransaction," or "freemium" model to the United States in scale. Looking at one game provides an idea of the scale.

One of the Zynga's most popular games, Farmville, grew from 354 users on June 20 of this year to 56 million users today, 20 million of whom are daily active users. Each of the 20 million daily users logs on for an average of three minutes a day. While 3 minutes may not seem like a lot in a world where 20 million viewers watch American Idol on any given night, we have to realize it is kind of like Zynga broadcasts only the three interesting minutes of the show, every day. This is the part when American Idol makes money on the voting. It's a little better than that because there are no capacity issues, so everyone who wants to participate can, and pays money, and even better still because all the ad inventory for the show is compressed into three minutes. Sure it costs less to run an ad in Farmville, but it also costs orders of magnitude less to reach the consumer. In case that's not enough, the production cost of a game is purported to be low to mid six figures and the incremental cost of creating and releasing a new game object is close to zero. Players don't even have to wait for water cooler talk the next morning. As soon as your or one of your friends achieves a new level of success in the game - which is often - a message is sent to all connections telling how much fun you are having. Finally, we can't forget, Zynga makes advertising very attractive as they know the identity, demographic and regional information of every person who plays every day. Unlike American Idol or any form of broadcast entertainment, if the company wanted to, it could send an email to everyone who plays the game. Unlike Blair Witch, Paranormal or American Idol, this is not a one off. They pop out game after game and the growth curves are getting steeper. The community is so connected, and so rabid, it took only one week, for one of the newest games, Cafe World, to reach 10 million users.

Zynga is also joining the growing list of companies working to do well while doing good. The company ran a small test in Farmville to see if users could be encouraged to donate to important causes. In their "Sweet Seeds for Haiti" program, users purchased special sweet potato seeds, with 50 percent of the purchase going to Fatem.org and Fonkoze.org. Within three weeks the campaign generated a contribution of $487,500 to the organizations. The net cost to Zynga, was not even measurable and the profit and contribution were significant enough to feed over 500 families for a year.

Gamers look at what they are doing, and say they are not games or if they are, they suck. In reality, they are not games. They are social lubricants that give you a means and a mechanism to stay in touch with your the deepest of your contacts. And as games, they will certainly not generate the same type of "wow" as Uncharted 2, but, if they really do suck, I would like to be involved with something that sucks even only a portion as much as they do.

The company's ability to make money is obviously significant, the ability to clone success from game to game is enviable and the size of the audience generated without any type of license or boost from outside media is downright scary. They are the first company to really show us how to provide lucrative, entertaining content within a social network - and that they can do so very well without anything from traditional media.





2 comments:

Jussi Laakkonen said...

Keith, great article once again!

However, I do think you got the revenue split is incorrect. AFAIK Zynga's and all other social game provider's revenues come mostly from virtual good sales. Just look at FarmVille: there is hardly any advertising shown within the game (nor would any engaged player click on such advertising to go away from the app), but a ton of virtual goods to buy with real money (e.g. said tractors & the fuel for those).

TechCrunch on this:
http://bit.ly/2cQPxP

Social Gaming Summit 2009 referenced ARPUs for FB games at around $0,3-0,6 / month. ARPPUs are roughly 10x that (i.e. 10% convert to paying users). Vast majority of this is from virtual goods (and majority of that in turn from lead generation / CPA offers). There is no no way you could create display ads with that high effective CPMs or CPCs.

Keith said...

Thanks Jussi. My numbers actually came from Mark PIncus' speech at Web 2.0. While Farmville has no advertising, other games have a lot. There is also likely significantly more "bounty" revenue form advertisers at the beginning of a game, which may distort the revenue.