• Save
Inside virtual goods: the future of social gaming 2011
Upcoming SlideShare
Loading in...5

Inside virtual goods: the future of social gaming 2011






Total Views
Views on SlideShare
Embed Views



0 Embeds 0

No embeds



Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.


11 of 1

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
Post Comment
Edit your comment

    Inside virtual goods: the future of social gaming 2011 Inside virtual goods: the future of social gaming 2011 Document Transcript

    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7!!Inside Virtual GoodsThe Future of Social Gaming 2011By Justin Smith and Charles Hudson www.insidevirtualgoods.com mail@insidevirtualgoods.com Version 2.0 | Release Date: 16 November 2010 !2010 Inside Network, Inc. Unauthorized duplication or redistribution is expressly prohibited by law.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 5!!About the AuthorsCharles HudsonFormer VP Bus. Dev., Serious BusinessCharles Hudson was the VP of Business Development for Serious Business, aleading social games developer on the Facebook platform, until the company was acquired byZynga in March 2010.Prior to Serious Business, he was formerly the Sr. Director for Business Development at GaiaInteractive, a leading online hangout for teens. Prior to Gaia, Charles worked in New BusinessDevelopment at Google and focused on new partnership opportunities for early-stage productsin the advertising, mobile, and e-commerce markets. Prior to joining Google, he was aProduct Manager for IronPort Systems, a leading provider of anti-spam hardware appliancesthat was acquired by Cisco Systems for $830 million in 2007. Charles holds an MBA and BAfrom Stanford University.Justin SmithFounder, Inside NetworkJustin Smith is the founder of Inside Network, the first company dedicated toproviding news and market research to the Facebook platform and socialgaming ecosystem. Justin leads Inside Network’s Inside Virtual Goods and AppData researchand data services, and serves as co-editor of Inside Facebook and Inside Social Games.Prior to Inside Network, he was formerly Head of Product at Watercooler, one of the leadingapplication and game developers on the Facebook Platform. Prior to Watercooler, Justin wasan early employee at Xfire, the largest social utility for gamers, which was sold to Viacom in2006. Justin holds a degree in Computer Systems Engineering from Stanford University.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 9!!RightsUnauthorized duplication or redistribution of this report is expressly prohibited bylaw.Please contact us at mail@insidevirtualgoods.com with licensing questions. It’simportant that you respect the copyright terms in order for us to be able to continueour work. Thank you for purchasing this report.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! :!!Table of Contents!"#$%&%(&) """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *+!*"#,-&#.%/012(/3#/4#5/6(70#879(3: """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *;! <-72#(=#5/6(70#879(3:>""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""*?! @72170#,&3=(/3=#A&2)&&3#5/6(70#879&#B&%&0/C&=#73D#5/6(70#@&2)/E#F0724/9="""""""""""""*G! 5/6(70#879&=#7=#7#H3(I1&#879&=#8&3& """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""*J! K#A(&4#L(=2/M#/4#2-&#N7O/#.7=#(3#5/6(70#879(3:""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""*P# "#$!%!&!()!*+#$,+-.!"#$ ////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////01! "#$!%%!&!()!"2)#3)45)!67!8$+9!:+;-#+<=-+64 /////////////////////////////////////////////////////////////////////////////////////////////////////0>! "#$!%%%!&!()!?+;)!67!-()!@+3!A!$49!-()!B)-C6#D!E69),//////////////////////////////////////////////////////////////////////////////////00! Q&M#R-73:&=#(3#2-&#5/6(70#879(3:#S73D=67C&#(3#TU*U """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""T+! "#$!%*!&!()!86;-&*+#$,+-.!"#$///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////01!T"#5/6(70#879&#B&%&0/C9&32#73D#B&=(:3#F/6&==&= """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" TG! 521D(/#R/9C/=(2(/3 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""TV# 59700#73D#N&D(19#B&%&0/C&= """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""TJ! S7:&#B&%&0/C&= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+U! F0724/9#5&%(6&= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+*! B&%&0/C9&32#RM60&#,(9& """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""++# B&%&0/C(3:#W736-(=&#,(20&= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+J! "FG$4;+64!8$5D;!&!E$7+$!H$#;!<.!I.43$/////////////////////////////////////////////////////////////////////////////////////////////////////////////1J! #=)!K)#+$,!&!E6<;-)#;!0!<.!8,$.962 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////1J! @#$49)9!+-,);!7#62!E$L6#!:)M),6G)#;!&!"K8B!N!O6,,)3)!6C4!$49!-()!"P!K=G)#;-$#;!Q+4)=GAR! X/0&#/4#,&=2(3:#73D#N&2(6= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""";*! N102(YF0724/9#B&%&0/C9&32 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""";T!+"#5/6(70#879&#B&=(:3#73D#B&=(:3#N&6-73(6= """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" ;?! X&=/16&#N737:&9&32#73D#5(91072(/3 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""";G! 879Z0(3: """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""";V! R7&27E(3: """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""";V!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ;!! R7=170#73D#K67D&""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""";J! NN$#73D#L7D6/&""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""";J! R72&:/M#R/%&7:&#4/#N7O/#W76&Z//E#B&%&0/C&= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""";J! W7=2#W/00/)&=#%=#!33/%72/= """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""";P! !32&00&62170#F/C&2M""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""?*! A1(0D(3:#879&=#)(2-#,-(D#F72M#!F """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""?T! ,-&#!9C/2736&#/4#,&9C072&=#73D#.3:(3&=""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""?;!;"#N/3&2([72(/3 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" ?V# L/)#B/#5/6(70#879&=#N/3&2([&>""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""?J! *+#-=$,!S669; //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////TU! P9M)#-+;+43///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////TJ! N/3&2([72(/3#X72&="""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""G*! :)7+4+43!)#2;V!N49)#;-$49+43!-()!N;)#!P5W=+;+-+64!$49!O64M)#;+64!X=44), /////////////////////////////////Y>! !!!!!"#$%&""()*%"% /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////Y0! !!!!+,&$-")*%"% //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////Y0! !!!!+-".#")!"-"/0")1")*%")2+!1*3 /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////Y1! !!!!+-".#")!"-"/0")1")1.4$/#)*%")2+!11*3////////////////////////////////////////////////////////////////////////////////////////////////////YA! !!!!5$6"&$7")8.90")25:83 ////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////YT! Z6C!:6!K65+$,!S$2)!:)M),6G)#;!E$4$3)!()+#!@=;+4);;);[////////////////////////////////////////////////////////////////////YT! E64)-+$-+64!?$-);!67!]).!K65+$,!S$2)!S)4#);///////////////////////////////////////////////////////////////////////////////////////////////YY! !!!!!;9")19.4$/#)<.7"%)./()=>.(,;"=)?$/$@??A%//////////////////////////////////////////////////////////////////////////////////////////Y^! !!!!B$709.&$;/)./()C$&4@D0$9($/#)<.7"%//////////////////////////////////////////////////////////////////////////////////////////////////////////////////YU! !!!!1"&)<.7"% /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////^R! !!!!1;E")<.7"% ////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////^>! !!!!8$&0.9)<$6&% //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////^1! !!!!+,.(")<.7"%//////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////^T! !!!!F.&$/#GH9$&$/#)<.7"%/////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////^^! Z6C!Z$;!E64)-+$-+64!O($43)9!_M)#!-()!Q$;-!`)$#[ ///////////////////////////////////////////////////////////////////////////////////^U! O64;=2)#!:)263#$G(+5; //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////UR! H($,);!+4!K65+$,!S$2); //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////U0! !9C762#/4#W76&Z//E#R&D(2= """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""J;! S6$,;!$49!@)4)7+-;/////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////UA!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! <!! O($,,)43);!$49!O6;-; ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////UT! :)M),6G)#!K)4-+2)4- ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////UY! %2G$5-!64!8$.2)4-;!"56;.;-)2 /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////UU! F7M9&32#N&2-/D=#A&7ED/)3""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""JJ! N49)#;-$49+43!_77)#;!$49!-()!_77)#!O64-#6M)#;. ///////////////////////////////////////////////////////////////////////////////////////////UJ! !!!!:I")A66"%)C;/&;-"%4 ////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////UJ! !!!!A66"%)$/)B;,$.9)<.7"% //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////J>! !!!!J/,".%"()C;7K"&$&$;/L)./()&I")J7K.,&);6)C"($&%////////////////////////////////////////////////////////////////////////////////////////J0! :+#)5-!8$.2)4-;/////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////J0! !!!!F$",&)1.47"/&)?"&I;(%)D".E(;M/)$/)B;,$.9)<.7"%////////////////////////////////////////////////////////////////////////////////J1! !!!!F$",&)1.47"/&%)-%)A66"% ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////JA) E6<+,)!$49!P,-)#4$-+M)!:+#)5-!8$.2)4-;////////////////////////////////////////////////////////////////////////////////////////////////////////////JT! !!!!?;N$9")1.47"/&% ////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////JT! !!!!1"@1.$()C.(% ////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////J^! !!!!O"M)1.47"/&)1;-$("% //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////JJ! S(4&2(9&#701&#/4#5/6(70#879&#F07M&=#]S,^#Y#<-72#B/#<&#Q3/)>"""""""""""""""""""""""""""""""""""""""""""""PP! Z6C!:6!:)M),6G)#;!E)$;=#)!Q*[ ////////////////////////////////////////////////////////////////////////////////////////////////////////////////////>RR! Z6C!Q643!:6!8,$.)#;!K-+5D!P#6=49[ /////////////////////////////////////////////////////////////////////////////////////////////////////////////////>R>! H()4!+4!()+#!Q+7)5.5,)!:6!N;)#;!E64)-+)!@);-[ //////////////////////////////////////////////////////////////////////////////////////>R>! K)$;64$,+-.!$49!E64)-+$-+64!Q+7)5.5,);!+4!K65+$,!S$2);////////////////////////////////////////////////////////////////////////>RA! @$44)#!P9M)#-+;+43a;!?6,)//////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////>RT#?"#R1=2/9&#K6I1(=(2(/3#73D#N7E&2(3:"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""*UV! ,-&#X(=&_#W700_#73D#]F72(70^#X&Y(=&#/4#(70#K6I1(=(2(/3 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *UJ! !9C762#/4#W76&Z//E#F0724/9#R-73:&=#/3#(70#B(=2(Z12(/3"""""""""""""""""""""""""""""""""""""""""""""""""""""" **U! B)C;!X))9 /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////>>R! %4M+-$-+64;b?)W=);-; ////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////>>>! B6-+7+5$-+64; /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////>>0! R/==#F/9/2(/3""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" **T! Q$#3)!:)M),6G)#;!M;!K2$,,!:)M),6G)#;/////////////////////////////////////////////////////////////////////////////////////////////////////////////>>0! 8=<,+;()#;!$49!B)C!(+#9!8$#-.!O#6;;!8#626-+64!B)-C6#D;////////////////////////////////////////////////////////////////>>1! F7(D#K6I1(=(2(/3"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" **;# X$5)<66D!P9; ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////>>T!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! =!! (+#9!8$#-.!X$5)<66D!8,$-76#2!P9!B)-C6#D; ///////////////////////////////////////////////////////////////////////////////////////////////>>Y! O6;-!67!O=;-62)#!P5W=+;+-+64!$49!Q* /////////////////////////////////////////////////////////////////////////////////////////////////////////////>>^! K#S//E#72#8/)2-#73D#B&67M#/4#879&=#S7136-&D#(3#TU*U """"""""""""""""""""""""""""""""""""""""""""""""""""""""""" **J! $44YW76&Z//E#F/9/2(/3 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *+T# @&2)/E#5272&:M#73D#.6/3/9(&=#/4#5670&""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *+T!#G"#TU**#N7E&2#5([&#73D#,/C#B&%&0/C&#X&%&31&#.=2(972&=""""""""""""""""""""""""""""""""""""""""""""*+;# TU**#5/6(70#879(3:#N7E&2#5([& """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *+?! ,/C#B&%&0/C&#X&%&31&#.=2(972&= """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *+G! I.43$ ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////>1Y! 8,$.7+;( ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////>AR! 8,$.962//////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////>A0! O#6C9K-$#//////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////>AT!5&62(/3#!!#Y#,-&#W121& """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""*;V!*"#W76&Z//E#F0724/9#R-73:&=#73D#2-&#X&072(/3=-(C#A&2)&&3#W76&Z//E#73D#KCC0(672(/3#B&%&0/C&= """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""*;J! !9C762#/4#F0724/9#R-73:&="""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *;P! W76&Z//E#F0724/9#F/0(6M#73D#2-&#S$S7CC=#.`79C0&"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *?U# B&%&0/C&=#73D#KD%&2(=(3:#5C&3D """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *?*!T"#,-&#W121&#/4#W76&Z//E#R&D(2=#73D#2-&#R-73:(3:#N/3&2([72(/3#S73D=67C& """""""""*?T! !9C762#/4#W76&Z//E#R&D(2= """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *?+# $44&=#73D#F&4/9736&#KD%&2(=(3:""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *?;! X/0&#/4#K02&372(%&#F7M9&32#5M=2&9= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *??!+"#<-72#B/&=#2-&#.9&:&36&#/4#2-&#A(:#;#N&73#4/#59700#73D#N&D(19#5([&D#B&%&0/C&=> """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""*?V! 8/)(3:#701&#/4#R/==#F/9/2(/3 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *?J! N7E&2(3:#73D#R1=2/9&#K6I1(=(2(/3 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *?P! W/9#R/)D527#2/#Q7Z79"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *GU!;"#$44Y@&2)/E#879&=#)(2-#W76&Z//E#R/33&62""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""*GT! ($5#B&%(6&= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *G+!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! >!! K3D/(D#B&%(6&= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *G;! $C&3#!32&3&2#73D#W76&Z//E#R/33&62""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *GG!?"#<(00#K3/2-&#F0724/9#$2-&#,-73#W76&Z//E#.9&:&>""""""""""""""""""""""""""""""""""""""""""""""""""*V*! 8//:0&""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *VT# NM5C76&""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *V+# ,)(22& """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *V;# !32&372(/370#5/6(70#@&2)/E=#]R-(37_#a7C73_#X1==(7^""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *V;! R7=170bNN$#F/270= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *VG! 80/Z70#F/270=c#d7-//_#N5@_#73D#$2-&= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *VG! N/Z(0&#5/6(70#@&2)/E(3:#F0724/9= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *VV!G"#R/9C&2(2(%&#X&=C/3=&#(3#2-&#A/7D&#N&D(7#73D#879&=#!3D1=2M""""""""""""""""""""""""""""*VP! R7=170#879&#B&%&0/C&= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *JU! R/3=/0&#879&=#R/9C73(&="""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *J*! R7=170#NN$=#73D#(2170#</0D= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *J+! N&D(7#R/9C73(&= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *J;!V"#!3%&=29&32#S73D=67C&"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""*JG! &321&#R7C(270 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *JV! NeK#73D#!F$#S73D=67C& """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *JP!!!!"#KCC&3D(`c#R/9C73M#!3D&` """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""*PT! ?U#R1Z&= """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# ?*"6/9"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# G)7%&= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# K#A(2#S16EM"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# K62(%(=(/3 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# KD@&62/ """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# KDF70/ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# K&(7#879&= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# K97[/3 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# K/0 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# KCC0& """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# KCC0(4(& """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+#!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ?!! KCC=2(C""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# KE7D(19 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# K27( """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# K1/7#W&(32""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# A&Z/ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# A(:W(=-#879&= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# A(:C/(32 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# A076E-7)E """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# A/E1"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P+# A//M7- """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# A/M77 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# A/E&3#A10Z#521D(/= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# R74f"6/9 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# R7=170#R/00&62(%&""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# R(&#879&="""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# R/)D527 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# B&@K """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# B(:(270#R-/6/072& """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# B(:(270#5EM#,&6-3/0/:(&="""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# B(=3&M""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# .0&62/3(6#K2=""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# .S.g """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# W76&Z//E """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# W(%&#N(312&=""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# W(&3D=2& """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# W13[(/""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# 879Z(2"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# 879&B1&00 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# 879&L/1=& """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# 879&0/42 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# 801 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# 8N8#.32&27(39&32""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P;# 8//:0&""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?#!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 76!! 8&&""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# 85@ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# :<700&2""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# L7CCM#.0&9&32="""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# L&Mh7C """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# L(? """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# !3R/99 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# (<(3""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# Q7Z79 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# Q7(`(3UU*"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# Q/3:&:72& """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# Q/327:&32 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# S$S7CC=""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# N&2/:79&= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# N(6/=/42 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# N(3Da/02 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# N(`( """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# N5@ """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# NM5C76&""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# @&)=#R/C/72(/3 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# @&`/3"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# 3:9/6/ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *P?# @(32&3D/"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# $N8F$F """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# $E12 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# F7C7M7#N/Z(0& """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# F7M9&32F(3 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# F7MF70""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# F&7312#S7Z= """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# F07MD/9""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# F07M4(=2 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# F07M4(=- """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# F07M5C73"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG#!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 77!! F/:/ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# F/CR7C#879&=""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# ih/3& """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# X&70#@&2)/E= """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# X&E// """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# X&3X&3#b#g(7/3&( """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# X(`2M"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# X/6Ed/1j """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# 56/&0//C """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# 58@ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# 5-73D7 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# 507=-E&M""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PG# 50(D& """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# 5/6(708/0D """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# 5/9&2(6= """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# 5/3M """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# 5C/3=/F7M""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# 5199&0(:-2 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# 51C&#X&)7D=#]KDE3/)0&D:&^ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# 51C&=/3(6KD=""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# ,7:&2 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# ,&36&32 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# ,-&P """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# ,-&A/2- """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# ,/E&3KD= """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# ,(70F7M """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# ,)(22& """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# (76/9 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# (`(9/ """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# Q/327E2& """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# <//:7 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# d7-//"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# h(Ch7CF07M"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV#!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 75!! h/3: """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# hM3:7 """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" *PV# #!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 79!!I. Overview!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7:!!1. The Evolution of Social Gaming!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7;!!What is Social Gaming?For a market that is less than three years old, defining what is and is not a socialgame can be a challenging exercise. We define social games as games built anddesigned for distribution on or using social networking relationship data to drivediscovery, distribution, and gameplay. By and large, social games tend to focus oncasual gameplay mechanics and have focused on monetizing engaged users by sellingvirtual goods directly to consumers.The rapid growth in social gaming has been driven by a few powerful forces. First andforemost, the migration of users to social networks as places where they spendsignificant amounts of time interacting with friends, consuming content, and beingentertained has had the effect of aggregating very large audiences of connectedindividuals looking for new ways to be entertained. Second, the operators of thesesocial networks have made the data about social relationships between and amongusers available to developers building applications on top of their networks, allowingdevelopers to utilize this data when designing games and social experiences.Access to this data is important for two reasons. One, for the first time, it allowsdevelopers to build games that pull in information about a players friends and socialrelationships and use that information as a core part of game play. For example,social games can use social graph data and friends lists to create in-game content andcharacters using a players actual friends. Many top games use this content as amechanism to make games more engaging, personalized, and social. Second, access toa social graph allows games to spread quickly on social networks as players are able toeasily invite friends to play games, publish information about game achievements,and discover new games using the communications infrastructure provided by socialnetworks. This combination of the growth of social networks as engagementaggregation points and the communication and distribution tools these platformsprovide are core factors driving the growth of social games.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7<!!As the definition of social games has expanded to include everything from gamesplayed on social networks to games that rely on communities or social networks as acore part of gameplay, there are a few core elements that a game or service shouldhave to be considered a social game: • Use of social graph data - To be considered a social game, the game must make use of social graph data. That social graph data can come from a third party social network such as Facebook or a private social network accessible to that developer. • Gameplay designed for short session length - Social games generally focus on relatively bite-sized chunks of content which can be consumed in fairly short sessions. This design decision is driven largely to mirror and take advantage of the high frequency of short visits pattern that characterizes the way many users interact with the underlying social networks themselves. However, some genres of "hardcore/mini-MMO" social games are now designed to engage users in longer sessions, more similar to traditional online games that offer deeper and more targeted content. • Free-to-play games monetized largely by virtual goods - By and large, social games are free for users to play and generate revenue using virtual goods.Natural Tensions Between Social Game Developers and SocialNetwork PlatformsGiven that most social games live on social networks, there are some natural tensionsthat exist between developers building applications and the companies responsible foroperating social networks: • Policing developer customer acquisition techniques - There is a constant tension between the application developers, in their desire to communicate!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7=!! with existing users and acquire new users, and social network operators, who want to minimize any potential unwanted communications from application developers to end users. Developers frequently push aggressively to take advantage of all of the communications channels provided by platform providers (notifications, invites, newsfeed items, and email) and platform providers crack down on what they see as abusive behavior. At the same time, platforms enjoy the increased distribution and engagement that a vibrant developer community generates. Given the importance of social distribution for many social games, this tension has spillover effects; often times the aggressive actions of an individual developer can impact all developers ability to use a given communications channel. • Access to the social graph data - One of the other key tensions between application developers and social network operators is data ownership and usage. Social networks have quite a bit of data about their users, including social relationships, age, gender, interests, and a lot of other data that application developers would find valuable for both advertising targeting and for having a deeper understanding of who plays their games. Naturally, social networks see this data, and the ability to utilize it, as a competitive advantage. Social game developers and social networks are in a constant battle as to what level of access social games developers will have to that data and how they will be allowed to store and utilize that data on an ongoing basis. As we go into further detail below, this is still an area of contention, given the recent Facebook/Lolapps policy enforcement example.A final question still looming over the space currently is the question of how truly"social" the current crop of social games actually is. There are two core ways in whicha game can be social. It can live on a social network and utilize data about people, orit can be a game that is truly enhanced or perhaps only possible when played withfriends or using information about your friends. Some have argued that the currentgeneration of successful social games are much more focused on single player!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7>!!experiences that live on social networks as opposed to games that actively utilizesocial networking data to build games that only make sense in a social context. Whileit is true that we have seen many examples of games that are single playerexperiences distributed on social networks, we have also seen abundant examples ofgames where social relationships among players are key to gameplay. As the spacecontinues to evolve, we expect there to be continued debate about this topic.Social Games as a Unique Games GenreAt first glance, social games have quite a bit in common with traditional casualgames. Both categories of games are focused on games that appeal to a wideaudience, have easy to understand game mechanics, and feature relatively shortsession times. However, there are three key differences between social games andtraditional casual games: • Customer acquisition model - Many traditional casual game play sessions happen on focused game portals, on PCs or laptops, or mobile devices. By and large, the model for casual games customer acquisition is to drive users to a destination site where they can consume casual games content, paying more to acquire the game than it cost the developer to acquire him or her through a marketing channel. On social networks, the model is quite different. Instead of trying to find users on the open Internet and drive them to a destination site, the goal is to build games where the users already are. By existing on social networks, games need to figure out how to attract users where they already are as opposed to finding a way to drive users to a new destination site. • Importance of social distribution - Second, unlike traditional casual games, social games are distributed using social networks. This can take one of two forms. One form is the use of viral marketing techniques on social networks, taking advantage of the connectedness available by having insight into the!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7?!! relationships between and among people. This has often taken the form of invite systems, newsfeed postings, and user-to-user notifications The second form is paid customer acquisition on top of social networks, which does not take advantage of the relationships between and among people but does instead take advantage of social networks as attention aggregators. • Business model - Traditional casual games tend to rely on either advertising or paid downloads as the primary monetization model. Social games are, for the most part, free to play games that monetize selling virtual goods.The three features noted above are key to understanding the rapid growth of socialgames. First, because these games live on social networks, the games are able toreach an audience that is much larger than what other web-based games companiescan reach. The reason is clear - social games are built where the users already areand dont rely on driving users to play them. Second, the free price point allows usersto experiment with and test out new games with little risk. Free discovery and trialgets more users engaging with the game and growing the overall audience. Last, theability to tap into the social graph means that friends can share interesting gamesthey discover with their own network of friends and associates with minimal friction,rapidly increasing the speed at which a game can reach a wide audience.A Brief History of the Major Eras in Social GamingFor an industry that is barely three years old, social gaming has gone through anumber of distinct epochs where the competitive balance, key success factors, andmarket opportunity shifted and upset the status quo. The history of the space canroughly be broken down into three "eras" since the Facebook Platform launched in May2007: First, the virality era; second, the emergence of paid distribution; and third,the rise of the "Big 4" and the network model.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 56!!Era I - The Virality EraWhen Facebook first launched the Platform in 2007, it honestly didnt know whatkinds of applications would become popular. In many cases, Facebook said that itwanted to encourage educational and business productivity tools, but socialentertainment applications like SuperPoke, Fun Wall, Zombies, and the like quicklybecame predominant.The early versions of the Facebook Platform were a petri dish with few rules. In thisrelatively unconstrained environment, the early leaders managed to succeed by takingadvantage of wide-open, unrestricted notification channels, "forced" invitations(where users were required to invite their friends to the application to access it), andotherwise aggressive "viral" tactics (we put viral in quotes because in reality, many ofthese applications werent truly viral, they were simply spammy). Developers weremostly interested in growing their applications user bases as quickly as possible -knowing that eventually, Facebook was sure to clamp down on them.During this phase, most developers were building their businesses around variousforms of advertising. Very early on after the launch of the Platform, a CPI (cost-per-install) advertising market formed. Many criticized this space, saying it could onlypossibly last so long, but it has remained a secondary revenue model for severaldevelopers even today. Many other developers partnered with agencies to createbranded application experiences, but these remained fairly limited. A few of thelargest developers, like Slide and RockYou, even built their own sales teams to sellbranded application integrations directly, sometimes alongside Facebook.Toward the end of the Virality Era, however, it became clear that games were goingto become the dominant genre within the social app ecosystem. As games matured,they began to make initial forays into virtual goods. Early developers like GreenPatch, SGN, Zynga, and Serious Business were some of the first to experiment with!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 57!!the virtual goods model.Era II - The Emergence of Paid DistributionIf 2007 was the "wild west" of the Facebook Platform, 2008 was the year thatFacebook clamped down on the noisiest distribution channels, forcing gamedevelopers to adapt by developing more engaging content. Around this time, MySpacealso launched its application platform for developers, though with a much moreconservative approach to viral channels - for example, while app users could invite upto 20 friends at a time on Facebook, on MySpace they could only invite 1 at a time.This made it significantly harder to grow through the "organic" channels on Facebookand MySpace. As a result, paid acquisition became a much more important part of thegrowth equation for social game developers.During this time, we saw the first wave of companies (such as Playfish and Zynga)beginning to raise money to scale their teams, development capabilities, and paidacquisition efforts. Developers also got a clearer sense of the economics andmonetization of different genres of games, enabling funded developers to spend moreon acquisition for games that monetized well. Zynga and Playdom did this especiallyaggressively to establish larger footholds and grow their user bases.One other necessary ingredient for the emergence of the paid distribution model wasthe discovery that some top social games were monetizing at impressive rates. Inparticular, the first generation of social RPGs, namely Mob Wars, and the firstgeneration of poker games, namely Zyngas Texas Hold em Poker and Playdoms PokerPalace, began generating millions of dollars per month. Known economics aroundthese two genres had two important implications. First, developers now had gameswhere the cost acquiring users through paid channels was less than the projectedlifetime value of those acquired users. Second, the revenue from these games was!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 55!!used to subsidize the development and marketing of other titles in those publishersportfolios.As a result, the social gaming ecosystem shifted in a couple of important ways. One,Facebook finally found a way to have a direct economic relationship with developers:ad spending to drive customer acquisition. Second, whereas in the beginning viralitywas the core competency of most large developers, customer acquisition began tobecome a core competency for some developers as well. This enabled developers whoadapted quickly to spend more intelligently to acquire the most valuable customersand build higher ARPU.Era III - The Rise of the Big 4 and the Network ModelBy early 2009, the "Big 3" social game developers - Zynga, Playfish, and Playdom -began to further separate themselves from the pack. As Facebooks viral channelstightened and paid acquisition got more expensive, the largest developers began toeffectively cross promote users of one game in their portfolio to another inincreasingly targeted ways. In this sense, the largest developers began to think abouttheir portfolio almost like an ad network, used to cross-match players with the gamesthey would best monetize in, and then later moving players from one game to anotheronce they got tired of playing the first one.Over the course of 2009 and 2010, the "network model" enabled increasingly powerfulways to launch new games. For example, Zynga used their network of traffic torapidly scale new games like FarmVille, Cafe World, and FishVille, driving severalmillion players to each in just the first week after launch. This was the first time themarket had seen such rapid, ad-fueled, and virality-fueled "overnight" mega successstories since the end of the Virality Era.The market also saw its first major acquisition of a social game developer by a!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 59!!traditional publisher, when EA acquired Playfish for up to USD $400 million inNovember 2009. In December 2009, Zynga raised $180 million more from a group ofinvestors, including Moscow-based Facebook investor DST, and Playdom raised a $43million round from NEA, Norwest, and Lightspeed. In July 2010, The Walt DisneyCompany acquired Playdom for $563 million, with earn-outs that could drive the totalpurchase price up to $763 million.Despite the challenges faced by small and medium sized developers, upstartdeveloper CrowdStar separated itself from the pack near the end of 2009. Thecompany leveraged its huge success with Happy Aquarium, the first application tosucceed in the fish genre (which largely grew virally initially, and later through paidacquisition as well), to build a small portfolio of games that at the start of 2010 wasrivaling the "Big 3" at the time. The CrowdStar case showed for the first time thatnimble developers who own an emerging category early could use that position toexpand and challenge the larger incumbents.!Key Changes in the Social Gaming Landscape in 2010Era IV - The Post-Virality EraThroughout 2010, developers have faced the increasing challenges of growth in aFacebook Platform world with both large entrenched players and decreased "virality,"or organic distribution. As such, the cost of user acquisition has risen, and developershave been forced to create more vertical content to engage users over time. What arethe biggest trends affecting the social gaming landscape as we enter 2011? • Significant Changes to Customer Acquisition and Distribution Channels. As one CEO put it, "In the first half of the year, our traffic halved, but our!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 5:!! monetization doubled." Facebook made several significant product changes in 2010, which caused problems for many developers and created opportunity for others. On the whole, developers saw traffic declines over the first part of the year, but growth returned in the second half of the year for many developers. As a result of the changes, distribution on the Facebook Platform has become more expensive, leading to an increase in investment in paid acquisition infrastructure and an increase in the importance of internal cross-promotion. Nevertheless, new developers with high quality studios are still producing hit games and bubbling up the social gaming charts. • Rollout of Facebook Credits and the Changing Monetization Landscape. In the second half of 2010, Facebook rolled out its Credits virtual currency to the largest social game developers on the Platform (it had been in testing with just a few developers since 2009), causing developers to make significant changes to their monetization infrastructure. With Credits, developers must use Facebooks platform-level paid virtual currency, instead of their own. The transition itself presents several awkward design challenges, but beyond the migration, developers must now adapt to a world with less control. Now, Facebook is the governing body for paid virtual currency, manages relationships with payment vendors, and controls design over portions of the user experience. Facebook is also taking a 30% transaction fee. Nevertheless, the promise of Credits is that it can expand the number of paying players and, eventually, revenue per paying player, beyond what developers have achieved to date. • Facebooks Continued Growth. Despite repeated press hoopla about Facebook privacy concerns and the character of Mark Zuckerberg as portrayed in the movie "The Social Network" about the founding of Facebook, Facebook continues to grow. Facebook grew faster than we expected in the US in 2010, and is increasing its presence throughout Europe, Asia, and South America. As a result, many international social game developers - some with years of!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 5;!! experience building virtual goods based businesses on Chinas social platforms - are moving onto Facebook. • Continued M&A Activity. In 2010, Playdom acquired several small developers, including Metaplace, Three Melons, Merscom, and Acclaim. Then, in July, Disney acquired Playdom in a deal that could top three quarters of a billion dollars if the earnout targets are met. Meanwhile, Zynga continued acquiring smaller developers. Despite concern amongst the venture community that the landscape is too challenging for new developers to grow, large developers and media companies across the globe continue to have interest in accelerating their own social gaming efforts through acquisitions.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 5<!!2. Social Game Development andDesign Processes!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 5=!!There is continued evolution around how social game developers are choosing toorganize themselves for game development. The dominant emerging model fororganization is the "studio model" whereby each game is treated as its owndevelopment studio, responsible for developing, creating, and growing each newgame. While every company has a slightly different process, there are some coreelements of the development process that are fairly common: • Identify a game mechanic or genre that appears interesting. • Begin a project with a small, tight team composed of 2-4 engineers and someone responsible for game design and product management. In some cases, one person might be responsible for both game design and product. • Establish some combination of revenue, traffic, and per-user monetization hurdles the game must clear as resources are added. • As the game becomes more successful, additional engineering resources are added; these engineering resources are added to increase the rate of feature development and release. The rate at which engineering and product resources are added are relatively similar to what is seen in other areas of software development; engineers are added at a more rapid clip than product people.Studio CompositionA typical studio is a cross-functional team with the following core components: • Art - Depending on the developer, art resources might be in-house or contracted out. Even in the case in which the art team is not composed of in- house people, most studios have art talent capable of managing a third party art team. • Product / Game Design - Depending on the company, the roles of game producer and product manager might be separate, with one person having!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 5>!! overall GM responsibility for the game, the integration of new features, and overall performance with one other person or team of people responsible for developing specific new features or determining exactly how new features should be integrated. In more advanced organizations, product managers can be supplemented with associate product managers or more junior team members. Titles here can become blurred, with a mix of terms like Game Designer, GM, Executive Producer, and Studio Head being used somewhat interchangeably across companies. • Revenue - Larger developers will often create a team or person dedicated to monitoring and optimizing the financial performance of the games under development. This can include everythng from managing company-wide relationships with payment providers or finding ways to take monetization techniques or mechanics that work in one game and applying them to other games in the companys portfolio. • Engineering - Engineering teams are responsible for developing the features responsible for keeping games up to date. Some companies organize engineering efforts in individual studios dedicated to particular games or genres while others treat engineering as a shared resource that is dynamically deployed across titles. • QA - For those who have investments in multiple games, a dedicated QA team or person might be assigned to a studio. • Payments - At the platform or studio level, someone must focus on payment integration and vendor selection. • Marketing - Whether centralized or in the studio, there is often a person dedicated to understanding both viral and paid customer acquisition.While each company has a unique organizational model, there are a few dominantmodels that have emerged:Small and Medium Developers!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 5?!!For small developers, or those who have 20 or fewer employees or fewer than 2million average DAUs across their portfolio of applications, the most typical model isto have the company focused on a single title or small number of titles. In essence, asmall company can best be thought of as a single studio or collection of smallstudios:Small Company Studio Model – The Integrated StackThe diagram above is designed to be a stylized view of how many small developersoperate. This is not to say that there are not shared components across studios or thateverything is completely isolated at the studio level. In even small studios, there area few components that are often shared, when present:!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 96!! • Metrics - To the degree the company has invested in its own metrics infrastructure, that work or development effort is often shared across multiple applications. Some small developers have chosen to build their own metrics infrastructure while others have chosen to license products from 3rd parties. • Revenue analysis and monetization - For small developers with more than one title, there might be a person responsible for staying on top of monetization across those games. • Art - Companies handle art in different ways. Some companies keep art in house, using in-house art resources. Other companies have in house art managers who do not produce art but rather manage outsourced or 3rd party art teams who work on a contract basis.Large DevelopersFor large developers, or those with more than 20 employees and at least 2 millionaverage DAUs across their family of applications, there are advantages to centralizingsome core functions and allowing studios to focus solely on creating successful games.Among developers who have achieved this scale, there is a generalized way in whichwork is divided between studios and core services:!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 97!!Each large developer chooses to split responsibility between service organizations andstudios in slightly different fashions. The above diagram is designed to highlight oneexample of how things can be organized. The overriding logic for moving this directionis that, at scale, it is better to allow studios to focus on making great games and tohave shared services teams that can take advantage of the learnings and scaleeconomies across games.Platform Services!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 95!!The bottom five layers of the stack above are often thought of or referred to asshared or platform services: • Technical Operations - Instead of having each studio responsible for server and network operations, scaling, QA, and the other technical plumbing required to support games as they grow, many publishers, especially those who have scale, create a centralized group responsible for providing shared services across all games. • Monetization Infrastructure - One way to gain efficiency across multiple titles is to have a centralized group responsible for evaluating, selecting, and integrating the payment options that will be integrated across games. This allows studio developers to focus on developing games and building features instead of integrating offer partners, mobile payment options, or other alternative payment solutions. • Customer Service and Community Management - At times, companies will centralize the customer service and community functions across games. The pros of this approach are that developers can support a wide number of users across many games with a centralized team. the downside is that you have less attachment between the customer service team and the studio itself. • Marketing - Companies engaged in customer acquisition, particularly paid acquisition, often centralize this function to take advantage of the opportunity to learn what works across games and studios and make the most use of shared learnings. • Analytics and Metrics - Last, there is advantage in consolidating the development, deployment, and collection of metrics data across games to make sure there is a consistent set of core metrics available across games and to get leverage of learning across games.One key way in which the largest developers do differ, however, is how rigidly theymaintain studio structures over the lifetime of games. There are several largedevelopers who are very liberal in reallocating developers and design resources on a!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 99!!frequent basis, as often as several times per month, based on the relativeperformance of games. In these cases, developers tend to be allocated away fromgames where there is relatively low performance, in terms of traffic or revenue, tothose who are doing better along those dimensions. There is also one large gamedeveloper that largely organizes the entire as one major studio, without rigid lines ofdemarcation across projects and treating the entire companys productive capacity asa shared resource to be allocated to the most promising projects.Development Cycle TimeIn the early days of social games, the most common development methodology was toquickly build and launch games when they have achieved some basic level ofplayability, with the bulk of energy invested once interest in the core concept wasvalidated by users. In 2010, the industry started to change. Developers, large andsmall, were spending more time building games that felt more complete prior tolaunch. While developers did continue to invest in post-release feature developmentto the same degree as before, the overall launch quality of games has continued toincrease and the number of games launched by the largest developers has decreasedin 2010 when compared to 2009.There are some likely explanations as to why this change has occurred. First andforemost, many of the most successful new games for 2010 were largely in thesimulation or resource management genre. The minimum viable version of thesegames requires more development than many of the text-based RPGs and other gamesthat were previously popular. As such, the pre-launch development timelines areincreasing, meaning that it now takes longer to go from concept formulation tolaunch. We estimate that the time from concept formulation to launch takessomething on the order of 3-4 months at a minimum.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 9:!!Second, the competitive dynamics on the Facebook platform have changed markedly,with the relative decline of viral or free distribution and the continued emergence ofpaid customer acquisition. In the previous era, the ability for all developers to acquirelarge amounts of traffic for free led to a lot of fast-follower behavior. For example, ifa given developer launched a new game in a new genre, the race would be on tolaunch competitive products quickly in an effort to catch up. This is no longer thecase. Without the ability to acquire tens of millions of users at very low cost (or nocost) using viral channels on the Facebook platform, the pressure to launch productsquickly for all developers has changed. That is not to say that there isnt strongcompetition among the top developers to make sure they have coverage in all of themajor genres. However, it is true that the lack of free virality has led to less desire tofast follow across the board.While not explicitly related to development cycle time, we have also seen adivergence in strategy, with some developers investing more energy and resourcesbehind a more modest number of new product introductions and others ramping upthe number of products they have in the market. Not all companies are following thesame strategy, though. For example, in 2010 we saw Zynga release and support twomajor titles, FrontierVille and Treasure Isle, as compared to four major releases in2009 (Cafe World, Petville, Fishville, and Farmville). Playdom, for its part, launched 9games in 2010 (Big City Life, Bola, City of Wonder, ESPN U College Town, Fanglies,Fish Friends, Social City, Tiki Resort, and Treetopia), compared to a much smallernumber of launches in 2009. For its part, Playfish introduced 6 titles in 2010 (MaddenSuperstars, Pirates Ahoy, FIFA Superstars, My Empire, Hotel City, and Gangster City)compared to a smaller number of major releases in 2009. Clearly some of the largerdevelopers opted for supporting a narrow set of titles while others opted for breadth.On a related note, one other interesting development in 2010 is that we saw socialgame developers actively shutting down games, as opposed to simply allowing them tocontinue to available to players with reduced investment in creating new content.Specifically, Zynga shut down Roller Coaster Kingdom in June 2010 and Street Racing!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 9;!!in August 2010. For its part, Playdom shut down Treetopia and Fanglies in 2010, aswell as a number of the games they had inherited after acquiring Lil Green Patch in2009. In the past, many developers had opted to allow games to stay active, so longas there was a sufficient player base spending enough money to cover operationscosts.Historically, one of the things that has really pushed the launch of new titles has beenthe discovery of new, interesting genres where small or established developers havehit on a new mechanic or theme that resonates with users. In 2010, the only notablemajor new genre that took hold was the hardcore MMO or MMO-lite genre of games,driven largely by companies like Kabam. For a large part of 2010, we have seen moreexpansion into the resource management and simulation genres and less focus onpioneering new genres. As such, some developers might be scaling back or scaling uptheir launch frequencies based on their interest in increasing their exposure to thosegenres. Also, we did see in 2010 several of the largest and smallest developers targetsports as a genre, with some modest success, especially around the World Cup 2010.While production costs are increasing, that does not mean that there is a direct oreven causal relationship between larger production budgets and increased success inthe marketplace. While there is a strong temptation to spend more money with theexpectation of a larger, more successful outcome, there is no clear proof that such astrategy will be successful. While the minimum costs of participation might beincreasing, that does not mean that spending incremental dollars beyond that willproduce market success.For those looking for concrete estimates of what it takes to enter this space fromscratch, we estimate that the basic cost of entry has increased substantially since lastyear. In 2009, we estimated that it cost roughly $250,000 to go from concept tolaunched product for a typical social game. A simplified model for what it would taketo get started in 2009 is presented below:!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 9<!! • Team of 3-5 engineers, 1 product manager or game designer, 1 UI / UX person, and art (outsourced or in-house) • Server costs to support development and post-launch scaling • Resources to fund the 3 month development cycle from concept to public playable concept • Budget for marketing and customer acquisitionAccording to conversations with leading developers, the cost of building and launchingsocial games has increased substantially. In conversations with some of the leadingdevelopers in the space, several mentioned that they have started planning fordevelopment and go-to-market budgets of $500,000 to $1 million per launch. Themarked increase in launch costs is being driven by two principal factors. First, thelonger pre-launch development cycle increases the amount of engineering, art, andgame design resources that need to be invested prior to launch. By and large, though,the increased cost associated with launching a game is the amount of money thatneeds to be spent to support paid acquisition at launch. It is not uncommon forcompanies to allocate launch budgets in the hundreds of thousands to support productlaunches for promising launches. This is not to say that every small developer outthere has access to those kinds of launch budgets to support every title or feelscompelled to spend at that level to support a launch. But the general trend is to seemuch more money invested to support customer acquisition at launch.To underscore the changing nature of leadership in the social games space, the tablebelow shows how the composition of the top 10 games has changed from January2010 to January 2011:!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 9=!! January 2010 November 2010 Monthly Active Monthly Active Game Game Users Users1. Farmville (Zynga) 75.4M Farmville (Zynga) 56.3M Texas HoldEm Poker2. Cafe World (Zynga) 30.3M 36.2M (Zynga) Happy Aquarium3. 27.7M FrontierVille (Zynga) 29.2M (CrowdStar)4. Fishville (Zynga) 25.2M Mafia Wars (Zynga) 23.4M Texas Holdem Poker5. 25.0M Cafe World (Zynga) 19.1M (Zynga) Quiz Planet6. Mafia Wars (Zynga) 24.4M 16.1M (CrowdStar) Pet Society (Playfish7. 18.9M Treasure Isle (Zynga) 14.4M / EA) Pet Society (Playfish /8. PetVille (Zynga) 18.0M 12.4M EA) Millionaire City9. ZooWorld (RockYou) 16.2M 11.9M (Digital Chocolate) Mindjolt Games MindJolt Games10. 16.1M 11.8M (Mindjolt) (Mindjolt)!Source: AppData.comAs you see in the chart above: 1. Zynga has 7 of the top 10 games, including all 5 of the top 5 and 6 of the top 7!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 9>!! 2. Of the "Big 4," Zynga has 10 of the top 25 games (40%), Playfish has 2 of the 25 (8%), Crowdstar has 3 of the top 25 (12%) and Playdom has 1 of the top 25 4%). In total, the Big 4 account for 16 of the top 25 (64%). 3. There are 13 different developers with a game in the top 25 4. At the end of 2009, there were 17 games with more than 10 million monthly active users; today, there are 12 games with more than 10 million monthly active users. 5. Of the top games today, 8 of the top 25 were not on the top 25 list as of the beginning of the year (Frontierville, Quiz Planet, Millionaire City, Games (GSN), City of Wonder, Nightclub City, Car Town, Kingdoms of Camelot).Overall, the change in the top 25 since last year paints a conflicting picture. At thetop of the list, the Big 4 continue to dominate the majority of the top slots in thechart. However, there are a number of small and medium developers who continue tobreak into the top 25 list of developers and launch games that achieve scale. Whilefew small developers have been able to crack the upper echelon of rankings, there iscontinued turbulence at the bottom end of the chart, with many new developersemerging to replace others on a regular basis.Developing Franchise TitlesOne of the emerging questions for leading developers who have breakout hit titles ishow to manage those franchises. In the console and packaged games space, this ismost often accomplished by serialization or by franchising titles. For example, sportsgames typically capitalize on franchise value by simply releasing a new, updatedversion of the title every year and selling it to the installed base of users. Thisstrategy has enabled titles such as the Madden franchise to achieve breakout successand to generate large amounts of revenue. A separate approach is to serialize based!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 9?!!on milestone release. For example, Gears of War, Halo, Call of Duty, Metal Gear, andFinal Fantasy release serialized new versions but not necessarily on an annual basis.In last years Future of Social Gaming report, we mentioned that leading developersare looking at ways to extend the lives of franchises that have large, establishedaudiences. Thus far, there are two models worth following:Expansion Packs - Mafia Wars by ZyngaIn lieu of creating a new Mafia Wars application, Zynga has chosen to expand theMafia Wars franchise by releasing geographically-themed expansion packs. Theseexpansion packs build on the core Mafia Wars gameplay but add additional content,storylines, and tasks for players to complete. The advantage of this strategy, intheory, is that it does not require the publisher, Zynga in this case, to re-acquire abase of users or bootstrap the application. The potential disadvantage, however, isthat Zynga is theoretically constrained by the gameplay mechanics that exist in thecore Mafia Wars experience; players expect consistency across expansion packs as itas an extension of the existing franchise.True Serial - Mobsters 2 by PlaydomThe alternative approach to the expansion pack model described above is to create atrue serial title. Mobsters 2 is billed as the first true sequel of a social game. This is astrategy more in line with the traditional games business. Mobsters 2 introduces somenew concepts and ideas from the original mobsters. The advantage to this model isthat it allows the publisher freedom to recreate the gameplay and address any coredeficiences or constraints that could not be changed in the original without upsettingthe base or disrupting game balance. The downside is potentially having to re-acquireusers to grow the application.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! :6!!While we saw some experimentation with this model toward the end of 2009, we didnot see many social games developers looking to franchise existing titles via expansionpacks or true sequels (with the notable exception of Mafia Wars). Increasingly,developers continued to focus on either continuing to stick with the existing titles andcreate new content or focus their energies on creating brand new titles. This is not asurprising conclusion. By and large, social games are much more like online servicesthan packaged games. The need to extend the lifetime of that franchise by releasingbrand new versions of the game is not a requirement; games can be kept fresh andinteresting by simply launching additional content and integrating new mechanics tothe game. The other challenge with launch serial titles is the prospect for having toacquire the installed base for the existing game. Given the increasing costs ofcustomer acquisition on the Facebook platform, the prospect of re-acquiring thoseusers is becoming an expensive proposition.Branded Titles from Major Developers - ESPN U College Town and the EASuperstars LineupOne area where there was considerable experimentation over the course of 2010 wasthe process of launching social games closely linked with well-known brands,particularly in the sports genre. Playdom released ESPN U College Town, whichappears to be modeled after its other city-building games with a tight linkage withthe ESPN brand. The game also leverages some of the college ties that many USFacebook users have to make the game more personalized. For its part, Playfish (EA)launched two titles, Madden Superstars and FIFA Superstars, to leverage the successof those respective brands as console and PC games. While each of those games hashad some success, neither has vaulted into the top 25 in terms of traffic. Its unclearas to what to make of the performance of these games - to date we have not yet seenone of these games breakout and achieve top game status but its not clear whetherthe objective is to get the game to the top of the charts, engage an existing audience!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! :7!!in a new way, or to learn and experiment with what works on social with existing IP.Given that these games were built on the back of very successful existing franchises,it’s not clear that the objective of these games was to maximize total audience orbuild a breakout hit. It is entirely reasonable to conclude that the IP holders werelooking for creative ways to engage their existing audiences on new platforms and innew ways, using known branded content as a mechanism.Role of Testing and MetricsMetrics and multivariate A/B testing have been key tools that have allowed socialgames developers to grow quickly and iterate on gameplay. The combination of adynamic platform like Facebook, the technical ability to implement and execute A/Btests, or experiments in which two cohorts of users are shown different versions ofsome portion of the game to see which one leads to higher conversion or monetizationand the presence of systems capable of interpreting the results of those tests hasenabled social games developers to learn more about their users and how theyreinteracting with games in ways that many other games genres cannot do.As useful as metrics systems and A/B testing are, there has been a marked change inthe way in which developers view the utility of such systems and data. In the earliesteras of social gaming, there were those who believed that metrics infrastructure andtesting along were sufficient for iterating ones way toward successful games. As moredevelopers have gotten access to quality metrics infrastructure and the ability toeasily and quickly deploy A/B tests, there is a more nuanced view emerging amongdevelopers. While these tools are important for developers to validate theirhypotheses and get feedback on whats working, they are not substitutes forthoughtful design and careful hypothesis construction.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! :5!!A good set of A/B tests and metrics capabilities can tell you how successful the thingsyou test are in terms of generating the desired outcome. However, these tools cannottell you what hypotheses to test, what to measure and track during the test, and thecorrect window of time over which to measure the effects.Over the course of 2010, developers continued to develop more nuanced views ofwhat to measure and how to interpret that which they are tracking. For example, if2009 was the year in which many developers became convinced that metrics were notenough to build a great game, 2010 was the year in which developers gained a moreappropriate understanding of what to track and how to interpret it. For example, thewidely cited MAU / DAU ratio, or the ratio of players who play on a monthly basis tothose who play on a daily basis, became cemented as a metric on par with averagerevenue per user (ARPU) and average revenue per paying user (ARPPU) whenunderstanding the performance of appointment-based games. In addition, there weresome new, key metrics that developers started to track, including "day two" returnrates for new users (the rate at which newly installed users return for a second visitafter installing the game), revenue per daily active user per day during launch as anearly proxy for monetization, and LTV calculations became much more standard andnuanced. While developers continue to view metrics as a key competency for successin social games, the breadth of metrics they’re tracking continues to evolve andchange as developers have a more complete understanding of player behavior andlifetime monetization.Multi-Platform DevelopmentSince the beginning of the emergence of social games, there has been a strongargument for developing multi-platform games. In the earliest days, both theFacebook and MySpace platforms were attractive places for social game developers tolaunch titles. Later, with the growth of OpenSocial, more social networks were able!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! :9!!to support social games. Of late, the emergence of the iPhone and Android mobileplatforms and tentative steps with launching social games on the open Internet haveincreased the number of options developers have in terms of pursuing audience.Presently, the Facebook platform is the dominant opportunity for social gamedevelopers. The reasons for Facebooks dominance as the social games developmentplatform of choice boils down to the four factors that most developers consider whenevaluating a potential platform: • Market size - How large is the audience on the platform and how quickly is it growing? • Customer acquisition costs - What does it cost to acquire a new user? What channels are available? • Developer "freedom" - How much freedom do developer have to market, acquire new users, communicate with existing users, and employ viral tactics? • Ability to monetize - Can developers monetize the audience?There is an additional set of questions that developers also need to answer when itcomes to pursuing a multi-platform strategy: • How burdensome will it be to support and maintain an application across multiple platforms? • At what point is a platform large enough to merit attention? • Should you offer the exact same game across all platforms?Its worthwhile to note that the questions above face all developers who are broadlyworking on games-as-a-service. In the packaged game world, the multi-platformquestion is generally much simpler. The cost and time required to port was largely aone-time expense per release - there was no need to keep the application compatibleand up-to-date as the underlying platforms develop. For games-as-a-servicecompanies, the ability to manage across platforms is substantially more complex and!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ::!!a likely reason why you see relatively few of them actively pursuing cross-platformstrategies. The relative merits of specific alternative social gaming platforms iscovered in greater detail in other sections of this report.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! :;!!3. Social Game Design and DesignMechanics!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! :<!!For a fairly young industry, there are some broad ways in which games are beingdesigned and developed. There are two potential ways to categorize the basicarchetypes for social games: • Underlying game mechanic or social motivator - One way in which to categorize the existing universe of social games is to group them based on the underlying game mechanic or social motivator that is at the core of gameplay. • Game theme or genre - The alternative way in which to classify games is by the theme or focus of the game.Ultimately, we feel the appropriate way to classify these games is based on broadcategories that encompass the core user activity in the game. We think it’s moreuseful to classify games based on major user activity categories as opposed to theme.For example, while we have many games focused on simulating real-world activitiessuch as the zoo, a restaurant, or a farm, they are all broadly about the same coreactivity; simulation and resource management. Increasingly, though, we are seeingmore games being built with a combination of game mechanics, making anyclassification scheme more challenging.Resource Management and SimulationResource management games are games where players are responsible for managing aset of available resources to achieve some goal. In resource management games,players are generally given a finite set of resources and some key choices anddecisions to make. Resource management games typically involve some element oftime pressure for both decision-making and responding to the competitive changes ingameplay. One of the key dynamics that makes resource management and simulationgames work tends to be some form of appointment mechanic, or tying key actions andchoices a user must make to a schedule of some sort. Examples include pets that must!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! :=!!be fed at a certain time, crops must be harvested within a certain window of time,and bonuses or rewards that can only be earned at specific times of day. Two of themost popular genres of resource management games are restaurant games andfarming games. In 2010, we saw the emergence of a broad class of resourcemanagement games in the aquarium, frontier, treasure hunting, and zoo genres.GamblingSimilar to gambling games in the real world, gambling games on social networks arequite similar. Gambling games often mimic popular real world gambling games,namely poker, and allow users to compete with each other using virtual currency asthe core tool for wagering.CaretakingCaretaking games are fundamentally about users taking care of some pet, avatar, orother character. Similar to prior iterations of caretaking games (tamagotchi,Nintendogs), the primary motivator here is the idea of taking care of and nurturing apet or creature. The same motivations that make these games enjoyable are similarto what pet owners tend to enjoy. These games tend to have a few core attributes: • Nurturing - Most caretaking games provide some form or nurturing for the pet or avatar, be it care and feeding or some other form of interaction whereby the user takes care of some of the pet or creatures basic needs. • Social Interaction - Many games focused on caretaking involve some form of social interaction among the avatars or pets. This is often a core part of what makes the game enjoyable. For example, games such as Pet Society also!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! :>!! feature rich social layers in terms of player-to-player interactions, in addition to the user-to-avatar caretaking and nurturing. • Training - In addition to fostering nurturing, some games also encourage players to train their pets or avatars to improve their skill or effectiveness in the game.Casual and ArcadeThere are also classic casual and arcade games on social networks. Games such asScrabble, Uno, Bejeweled, and the Mindjolt arcade are all examples of classic arcadeor casual games that can be played on social networks.MMO and HardcoreOne of the key categories that grew in 2010. MMO and hardcore games are mostsimilar to web-based MMOs such as World of Warcraft and strategy games such asStarcraft. Increasingly, we are seeing developers continue to push forward in buildingstrategy and hardcore games designed to mimic the things that make those gamessuccessful on the web, but adapted for the Facebook experience. For example, gamessuch as Kingdom of Camelot for Kabam and Nanostars by Digital Chocolate areexamples of games that mimic the strategy and tactics of more hardcore games onthe Internet.Category Coverage for Major Facebook Developers!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! :?!!With all of these core mechanics, its interesting to note how the leading developershave started to converge in terms of product offerings. While they each started offwith different strengths and focus areas, each of the top four developers has movedto have offerings in most of the core mechanic categories that are working today. Insome cases, developers are doubling down and spending more time on those genreswhere theyre seeing the most success:Fast Followers vs InnovatorsBy classifying the games based on core mechanic and motivator as opposed to specifictheme, it becomes clear that many of the top publishers in the social gaming space!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ;6!!are attacking the same core set of known genres, albeit with different levels of effortper genre and different choices of theme and gameplay within that genre. Over thecourse of 2010, what we saw was a real movement toward an increased investment inthe resource management and simulation genre over the course by almost all of themajor developers included in this list.For any developer looking to launch a new game, there are three things that theymust get right to build a successful game: • Monetization - The game needs to be able to generate a meaningful amount of revenue per user and in the aggregate • Game concept - The game concept needs to be fun and enjoyable for a meaningful number of players • Distribution - Whether viral or paid, the game must have a distribution model that works for a given gameGiven these risks, the prospect of being a fast follower has historically beenattractive. Games with known, working game mechanics feel less risky because thecore game has been validated by someone else in the marketplace. That leavesdistribution and monetization as the two core unknowns to solve. The consequence ofa fairly constrained set of known mechanics and motivators, limited protection forintellectual property, and short development cycle times is the prevalence ofimitation or "fast following", in which the success of a new game brings in competitorswho build somewhat derivative titles. The degree to which these "fast followers" areinnovating or simply copying is a matter for debate. Whats clear, though, is thatdevelopers on leading social networking platforms are keenly aware of whats workingfor other developers and are eager to launch new games when some of the risk aroundthe content can be mitigated by a proven success.In 2010, there was markedly less attention and discussion about cloning or fastfollowing. To understand the decline in cloning activity on Facebook, its important to!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ;7!!understand what the social games landscape looked like when cloning was mostpopular. When developers were still experimenting and trying to determine whichsocial mechanics would work well, one simple shortcut was to copy something thatsomeone else was doing as a crutch to fully understanding game design. Second, in aworld in which distribution and customer acquisition was fairly inexpensive, it wasrelatively easy for a developer who was skilled in viral distribution or paid distributionto take a copied concept and achieve significant distribution. In such a world, thereturn to cloning was relatively high.Many things have changed since then. First and foremost, the resources required toclone many of the new simulation and resource management games is much greaterthan that required to clone some of the more basic text-based RPGs and other simplegames. The newest, most popular games require more work to become viable, alonger pipeline of art resources to keep them fresh, and often have more complicatedgame mechanics that can be difficult to fully copy. Second, with the increase incustomer acquisition costs, it has become much more difficult to quickly scale a gamewithout existing traffic or a marketing budget. As such, the overall costs of cloning,both in terms of development time and distribution costs, have both increased andlikely made cloning less attractive on average.Intellectual PropertyIts worth making a note about the state of intellectual property in social games,particularly on the Facebook platform. To date, there has been little regard forintellectual property developed by other social gaming developers. This issue is morecomplicated than most people assume. On the one hand, many of the most populargames and game genres on the Facebook platform are not truly new - there were petsgames (GoPets), restaurant and cooking games (Diner Dash), and farming games!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ;5!!(Harvest Moon), both on other platforms and in other countries before they becamepopular on US social networks.At the same time, however, there have been a number of game publishers who havepushed the envelope in terms of developing games that are derivative of gamesproduced by others. The space has already seen a number of high-profile lawsuits,including Dave Maestris lawsuit against Zynga over Mob Wars and the lawsuits Zyngahas launched against competitors they feel have built derivative games or otherwisemisappropriated their intellectual property. For the time being, it appears that thedevelopers are tolerant of other developers building games that are reasonably similarso long as that new game is not built using stolen code, art assets, or specific know-how obtained by some means other than studying whats publicly available.Despite the claims about the fundamental lack of respect for intellectual property,simple cut-and-paste attempts at copying successful games have not proven to yielddefinitive success. For example, despite the known economics and popularity of themafia genre of social RPGs, there have only really been two true breakout hits in thespace since the core game become well-understood: Mafia Wars and Mobsters. Despitethe popularity of farming games, only a small handful of developers have been able todevelop, launch, and market successful games in the farming or resource managementspace as well. Simply knowing that a game is successful and popular is not sufficientto enable a fast follower to duplicate the success of someone else who has achievedsuccess with a similar title.Building Games with Third Party IPOne of the other major questions facing social games developers is whether or not itmakes sense to license third party intellectual property to release games featuringbranded content. To date, most social games developers, save a few, have avoided!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ;9!!developing games that incorporate third party IP. This is largely due to two things.One, while there is a well-established precedent for licensing third party IP inpackaged games, licensing is a bit more challenging for social games developers inparticular and games as a service developers in general. Whereas packaged gamesproducts are effectively finished once theyre launched, games as a service aredynamic. As such, there is risk on both sides. For developers, there is some risk inbuilding a game based on third party IP. Because games as a service do not have afinite lifetime, building a game that will operate as a service using someone elses IPrequires some assurances that the developer will have ongoing rights and access tothe IP in question.Second, there is the question of how revenue should be divided. For most developerswho also release their own intellectual property, any third party developmentprojects must compete with internal resources and projects. Whereas first partygames are fairly high margin, splitting that revenue pie with another party makes thebusiness significantly more challenging. Overall, the business case for publishers whohave robust first party publishing arms makes it difficult to accommodate third partylicensing deals.There is one area where we have seen meaningful progress in terms of makingbranded intellectual property work. There has been a very marked increase in thenumber of games built with intellectual property from game shows and knownentertainment brands having some level of success on Facebook. There appears tohave been a marked change in the willingness of developers to work with existingbrands as well as the willingness of brands to work with developers to bring theirtitles to Facebook. There have been a handful of notable early successes already.Backstage and iWin, in conjunction with Freemantle, were able to launch and marketthe successful social version of Family Feud on the Facebook platform. Ludia andFreemantle were able to successfully launch the Price is Right game on Facebook aswell. Finally, GSN has had some early success in driving the growth of a social gamesportal that incorporates many well known brands, including Wheel of Fortune. There!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ;:!!are a number of reasons why the game show category has likely been successful inachieving growth in the branded content: • Brand Recognition Improves Marketing Efficacy - One reason that the game show category might be showing really great uptake is that advertisements for known offline or TV properties likely convert really well for the audience of users who are familiar with those game shows from their youth or days spent watching TV. Seeing an advertisement for agame based on a known TV property is likely going to generate a higher click-through rate than new games from unknown developers, especially within the demographic segment most familiar with the IP. • Known Game Mechanics Familiar to Targeted Segment - The other key reason that these games might be succeeding is that they largely mimic the gameplay, rules, and style of their TV equivalents. Making games that have a high degree of fidelity when compared to their TV counterparts makes onboarding relatively easy and makes it easier for new players to engage.In the short term, there are not any major reasons to expect the economics ofbuilding games with branded content to change, either for the rights holder or thesocial games developer. There is one notable exception. As was mentioned before,both Playfish (which is now part of EA) and Playdom (now part of Disney) are able toexperiment with branded integrations as there are no complications in terms ofstructuring business terms; both companies are part of the same entity that owns theIP in question.The Importance of Templates and Engines!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ;;!!In the world of PC games, there is a long history of developers building new games ontop of top game engines like the Unreal engine. For many traditional game publishers,the idea of building core "engines" that can be utilized to build a family of games,with multiple skins or themes built on top of the same core engine is an appealingdevelopment opportunity. However, social games have not yet shown that they are asamenable to skinning and re-theming as traditional PC shooters have been. Forexample, Zynga has had a number of social RPGs, broadly referred to "X-Wars" gamesthat utilize a similar set of gameplay concepts and technology components.Nonetheless, only two of those core games have proven successful - Mafia Wars andVampire Wars. The other X-Wars clones that Zynga has created, all of which cover awide variety of themes and genres, have failed to engage and retain large audiences.While there have been social RPGs built on common infrastructure by leadingcompanies such as Playdom and Zynga, broad based cloning by reusing commonengines and using simple re-skinning has not prove effective.The reason that simple re-skinning is likely not successful as a strategy is thatsuccessful social games combine both a strong mechanic and a good theme. A goodchoice of theme is important because social games are distributed socially - it isimportant that the game, the art assets, and the theme are content that users feelcomfortable sharing with their friends on social networks. Second, the choice oftheme often impacts audience size. The more general the theme, the larger thepotential audience. This is not to say that there isnt value in developers reusingcommon components, libraries, art assets, or viral techniques from similar games - itsjust that simple reskinning on top of a common engine has not proven to be aneffective strategy thus far.In mid-to-late 2010, we saw another resurgence in experimentation with templatizedengines to build multiple titles in a common family. It appears that several of thePlaydom city-building games, including City of Wonder, Social City, and ESPN CollegeU, were built with at a minimum shared components and potential the same coreengine and technology. In similar fashion, it appears that Digital Chocolate has built a!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ;<!!number of derivative games on the same engine that powers Millionaire City. Whilethis most recent set of clones has achieved more success than the last set of attemptsto use a common engine, it is too early to declare the strategy successful.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ;=!!4. Monetization!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ;>!!How Do Social Games Monetize?Today, social games primarily monetize through the sale of virtual goods, thoughthere are also a few advertising-supported models some social game developers aretrying. In this section, we take a look at each of the key ways that social games aredriving revenues, and what the future holds for each.Virtual GoodsOne of the biggest trends the social networking industry has seen over the course ofthe last three years is the rise of social game businesses built on a virtual goodsmodel. Virtual goods are in-game items that users purchase for a variety of reasons,ranging from functional items like power-ups to decorative items like avataraccessories, and represent over 90% of revenues earned by leading social gamedevelopers today.As the social platforms have matured, so have the game developers. Today, asignificant number of talented designers and producers from traditional game studioshave joined the self-taught viral ninjas that were able to get even the most primitivegames into the hands of millions of users to create substantially more engagingexperiences. Now, designers are optimizing game play, missions, quests, and viralincentives with virtual goods monetization in mind from the beginning. This degree ofdesign optimization is leading to higher numbers of paying users and higher revenuesper paying user than weve seen since social networking platforms launched.The best way to understand the value of different types of virtual goods is to getinvolved in the experiences that are driving sales. But here are a few key categoriesthat are important to understand to fully follow the discussion:!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ;?!! Functional Virtual GoodsFunctional virtual goods are items, power ups, boosters, or other in-game goods thatprovide a player with some functional benefit within the game. Examples offunctional virtual goods include more powerful weaponry, the ability to earn virtualcurrency or experience points at a more rapid rate, energy or health packs to extendplay sessions, or any other good that provides the player with a functional benefitwithin the game. Decorative Virtual GoodsDecorative virtual goods are items that allow a user to customize his or her onlineexperience to make it more personal. The primary driver for decorative virtual goodspurchases tends to be self-expression. Examples of decorative virtual goods includeavatar clothing items, decorative home goods for virtual spaces, customized profilebackground, and virtual gifts. ConsumablesThe term consumables covers goods that do not confer a lasting, ongoing advantageto a player. For example, a health or energy pack in a game confers health on aplayer only until that health has been fully utilized. Following the depletion of thehealth from that health pack, the user must purchase a new health pack in order toenjoy additional benefit.Advertising!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! <6!!Although the vast majority of social gaming revenues come from the sale of virtualgoods, there are a variety of ways that developers have tried experimenting withadvertising supported models. These generally fall into one of three categories:sponsorships, white label games, and branded virtual goods. SponsorshipsAlthough in-game advertising has gained some traction in MMOs and virtual worlds,there have only been a few examples of premium brands sponsoring social games. Oneexample is Procter and Gambles sponsorship of Playfishs Pet Society, in which case a"Great Escape Edition" mode of the game was heavily branded with Herbal Essencesadvertising.In 2010, we saw continued experimentation with sponsorship models. Zynga, whichhad largely eschewed the sponsorship model for most of 2008 and 2009, began toexperiment with a number of high-profile sponsorships in some of its largest, mostsuccessful game. In 2010, we saw prominent sponsorships from McDonalds and StateFarm in Farmville alone, which is a testament to the marketing opportunity thatbrands see in social games. It appears, however, that there has been a real change inthat developers and advertisers have been able to find business terms where it canmake sense to have sponsors in even the largest social games. White Label GamesSome traditional game developers have used social games purely as an advertisingvehicle to generate interest in or drive downloads of paid downloadable or retailgames. In these cases, MMO developers are lending their IP to developers of whitelabel social games. These developers have built templates for social RPGs that caneither drive revenues themselves (via the sale of virtual goods), or primarily focus onthe advertising goals at hand.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! <7!!One example is Ataris Cryptic Studios partnership with social game developer LOLappsto create a Facebook version of the downloadable MMO "Champions Online." In theFacebook version of the game, users are incentivized with in-game virtual currency todownload the MMO. Its a good example of ways traditional developers are partneringwith white label "product companies" like LOLapps to use social games as an engagingway to drum up interest on opening weekend. However, in what could be seen as asymbolic move for developers of this type, LOLapps has since decided to focus ondeveloping its own first-party IP. Branded Virtual GoodsFinally, advertiser-sponsored virtual goods continue to have a presence in many socialgames. Although conventional wisdom might lead you to think that sponsored itemswould naturally be less valuable to players, multiple case studies have shown that inmany cases users appreciate receiving branded virtual goods more than generic items.This is for precisely the same reason people value branded items in the physicalworld.In social games, however, advertiser-subsidized virtual gifts can provide asupplemental revenue stream, particularly in gift-heavy applications and games (andwhere flirting is common). For example, Zynga integrated branded virtual giftspromoting popular restaurant chain McDonalds in FarmVille in late 2010.Monetization RatesDefining Terms: Understanding the User Acquisition and Conversion FunnelThis report focuses primarily on the virtual goods opportunity for services where theuser is not required to pay a fee to access the content. As such, it’s important to!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! <5!!understand how publishers and developers go from the top of the user acquisitionfunnel to becoming a paid user: Registered UsersRegistered users is the term used to capture the total number of users who havesigned up for a given service, usually measured since the service’s inception.Generically speaking, registered users are generally the top-level funnel metric thatmost companies use to measure reach. In addition to registered users, many othercompanies may track and report the following metrics to give some sense for totalreach: • Client downloads - For games with a downloadable software client, publishers may report total client downloads or installs as a measure of reach. • Application installs - For social networking games, application installs are one rough proxy for cumulative reach. • Registered accounts created - For web-based services, the number of users who have registered for a service, often including an email address as a unique identifier, is often quoted as a proxy for reach. Active UsersMost publishers key their monetization metrics off of active users. An active user isgenerally defined as a user who has taken some meaningful action (logged into thegame, spent some period of time playing, generated a viral notification, etc.) oversome period of time. The most commonly used definition of an active user is a userwho has taken a meaningful action within the last 30 days, which are often referredto as 30-day actives or monthly actives.One notable exception to the 30-day active trend noted above is the world of gameson social networks. While games on social networks are often measured in terms ofmonthly visitors, daily active users (DAUs), is considered a more standard metric for!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! <9!!measuring the active user population. Given the high frequency with which usersinteract with the most popular social networking sites, measuring players who engageon a daily basis is a good proxy for engagement. Average Revenue Per User (ARPU)Average Revenue Per User (ARPU) is a shorthand term for comparing monetizationacross games and genres. The calculation for ARPU is fairly straightforward: ARPU = TotalMonthlyRevenue / ActiveUsersSimply put, ARPU attempts to capture the amount of revenue a game generates peruser over some period of time (typically monthly). While the actual calculation isstraightforward, not all companies or industry segments use the same number as thedenominator. For most companies in the social networking space, the denominator isthe average number of daily active users (as opposed to monthly active users). Forcasual MMOs and virtual worlds, the most common denominator is 30-day active users(users who have accessed the service in the past 30 days). For hardcore MMOs, thedenominator tends to be users who have logged in and played in the last 30 days.One other reason why ARPU is of particular importance to developers is that it is onefactor in determining the lifetime value (LTV) of a user. Typically, lifetime value iscalculated by taking monthly ARPU and multiplying it by the expected number ofmonths that a user will remain active. Calculating the average user lifetime isgenerally done using cohort analysis to determine the rates at which users abandon anew game to determine some estimate for average player lifetime. By using ARPU asan input to LTV, publishers are able to determine how much a typical user is worthand how much can be spent on marketing to acquire new users via paid acquisition.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! <:!! Average Revenue Per Paying User (ARPPU)Average Revenue per Paying User (ARPPU) is the last line of the funnel. As the nameimplies, ARPPU attempts to capture the amount of revenue generated per user whoactually engages in a purchase transaction and spends real money. Where as ARPUuses active users as the denominator, ARPPU uses the number of users who actuallytransacted as the denominator: ARPPU = TotalMonthlyRevenue / PayingUsersLarger developers sometimes focus on ARPPU on a daily basis at times given therelatively high amount of traffic they can send to a game in a short period of time.For instance, by heavily cross-promoting a game, or spending more on paidacquisition, larger developers can generate enough traffic to do meaningful ARPPUtesting quickly.For the reader, when you hear wildly divergent per-user monetization rates within thesame space or across spaces, make sure you are dealing with apples-to-applescomparison and not hearing about ARPU when you think youre hearing about ARPPU. Lifetime Value (LTV)One other reason why ARPU is of particular importance to developers is that it is onefactor in determining the lifetime value (LTV) of a user. Typically, lifetime value iscalculated by taking monthly ARPU and multiplying it by the expected number ofmonths that a user will remain active. Calculating the average user lifetime isgenerally done using cohort analysis to determine the rates at which users abandon anew game to determine some estimate for average player lifetime. By using ARPU asan input to LTV, publishers are able to determine how much a typical user is worthand how much can be spent on marketing to acquire new users via paid acquisition.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! <;!!How Do Social Game Developers Manage Their Businesses?Generally speaking, most publishers and game creators are most focused on growingtotal revenue for their games, using ARPU and ARPPU as ways to measure how therevenue is being generated. While ARPU is a convenient metric, optimizing ARPU isnot necessarily the optimal strategy. For example, if a game were generating $1 inARPU on 100,000 active users, that game would generate $100,000 in revenue. If thesame game saw ARPU decline to $0.75 but saw the audience increase to 200,000active users, the developer would be better off in terms of total revenue. Itsimportant to remember that ARPU is simply a mathematical calculation that dividesrevenue by active users; shrinking the base of active users is one way to increaseARPU and thats unlikely to be in the best interest of the game creator.The same can be said of ARPPU. As is the case with ARPPU, it is simply amathematical relationship between the number of buyers and the total revenuegenerated. The example above showing how a decrease in ARPU can be associatedwith an increase in total revenue is equally applicable to ARPPU.For most developers and publishers with whom we spoke, the chief challenge inexecuting the virtual goods model in the United States is increasing the number ofactive users who engage in purchase transactions. For publishers, the focus tends tobe on growing the number of players who engage in microtransactions and the totalamount of revenue generated, letting the math of ARPU and ARPPU settle where itmay.Recently, weve seen more developers launching games, observing monetization early,and determining how much money to spend on marketing based on that early data.Many developers are increasingly less intent on growing a major audience and thenfiguring how to monetize it, but instead are trying to determine how much audienceto buy or how heavily to cross-promote new games based on how well they monetize.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! <<!!In addition, some of the largest developers, particularly those who are using theirapplication networks for cross-promotion, are beginning to experiment withcalculating network-wide customer LTV, taking into count the fact that manyacquired players will play more than one game and might generate revenue acrossmultiple games.Monetization Rates of Key Social Game GenresWhen thinking about monetization rates of social games, one useful way of slicing themarket is to categorize games into genres that share similar game mechanics and,thus, monetization profiles. However, of course its important to remember thatwithin any category of social games there are a variety of factors that need to beconsidered when estimating ARPU. For example, niche games that are serving a highlyengaged but smaller audience might have lower revenue per user numbers than thelargest games which are serving tens of millions of users around the world. Theseranges are intended to be used for directional guidance on what monetization ratesfor healthy social games are.Finally, one note on units: the numbers below are in terms of US dollars per dailyactive user per month ($/DAU/month). Some developers prefer to think in terms ofdollars per daily active user per day - to get that number, simply divide thesenumbers by 30.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! <=!!1. Role Playing Games and “Hardcore” Mini-MMOsAbove: “Kingdoms of Camelot” by KabamRole playing games, like many of the mob-themed or sorority-themed games onFacebook and MySpace, are the closest descendants to the original rudimentary viralFacebook games like Zombies and Werewolves. Whereas in games like Zombies thewhole game mechanic was based on recruiting friends, now the "mob" mechanic isheavily based on collective achievements. In addition, as 2010 has progressed, more“hardcore” mini-MMO games like Kingdoms of Camelot from Kabam have emerged!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! <>!!that engage a smaller albeit more devoted audience and monetize well. Althoughsocial RPGs are asynchronous, they increasingly include real-time elements to gameplay. Many of these games have both higher ARPPU and percentage of paying playerrates compared to most other genres.These games are monetized through a variety of types of virtual goods. Most commonamong them are in-game items like tools or weapons that allow players to save timeand progress through the game more quickly. Because these games are increasinglycomplex, involving many individual and collective sub-quests, the variety of itemsthat are sold today is much greater than even a year ago. The most common type ofitem that users purchase in these kinds of games is energy, followed closely by time.Purchasing functional items, particularly limited edition items, is becoming ameaningful chunk of revenue.ARPU Range: A very good role playing game can achieve an ARPU of $1.00 - $2.00.2. Simulation and City-Building Games!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! <?!!Above: “Social City” by PlaydomSimulation games allow users to create, grow, and manage a virtual farm, aquarium,island, etc. inside Facebook or MySpace. The game dynamics of sim games blend real-time elements from pet games with strategy elements from traditional simulationgames like SimCity. For example, players must acquire money through crops orlivestock in order to upgrade and grow their farm. Farm games have been popular onmajor Chinese gaming platforms, but are just starting to take off in the US.In 2010, “city-building” or “civ” games emerged that advanced this subgenre further.City building was the subgenre that saw the most new activity from developers in thefirst half of 2010.Simulation games monetize through the sale of virtual goods needed to accomplish in-game tasks and achievements. Once users get invested in the game, theyre often!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! =6!!willing to buy items to accelerate their progress. The challenge is to keep theexperience compelling once a users farm, aquarium, or island gets big.ARPU Range: A successful farm game can see an ARPU of $1.00 - $2.00.3. Pet GamesAbove: “Pet Society” by PlayfishPet games inside Facebook and MySpace are like more social versions of virtual pets of!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! =7!!decades past. The game dynamic in pet games heavily revolves around timed events,meaning players must plan their interaction with the game into their daily schedules,much like they would feeding a cat or taking a dog for a walk. However, now thatthese games are in social contexts, they can also ask friends to cover for them whileon vacation.As you can imagine, developers of pet games have a variety of ways to monetizeengaged pet owners through virtual goods and services, ranging from virtual pet foodto virtual pet accommodations and hotels. Pet owners pay for these services becausethey get very emotionally engaged with their virtual pets.ARPU Range: Successful virtual pet applications can see an ARPU around $1.00.4. Poker Games!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! =5!!Above: “Zynga Poker” by ZyngaPoker games are some of the simplest games to understand on Facebook or MySpace.Because players cant take money out of the games, poker players play for the social!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! =9!!glory of a high ranking.As you may imagine, poker games monetize extremely well. Repeat customersaddicted to the gambling experience often spend hundreds of dollars per month onvirtual poker chips.ARPU Range: A very good poker game can achieve some of the highest ARPUs in themarket - sometimes, over $2.00 - $3.00.5. Virtual Gifts!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! =:!!Above: “iHeart” by MmkayGifting applications are some of the most common - and simplest - applications on theFacebook and MySpace platforms. Many social applications, like greeting cards,!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! =;!!bumper stickers, or video sharing apps, are based entirely around the virtual giftingmodel. In addition, several companies have created white-label virtual giftingplatforms that allow anyone to create their own virtual gifting application in just afew minutes.Virtual gifting apps are monetized through virtual goods by either premium items orsponsored branded gifts. In the premium case, you might be able to send a virtualdaisy to your friend for free, but a virtual rose might cost $1. In the sponsored case,you might be able to send a drink to a friend for free, or you might be incentivized tosend a Bacardi Rum with virtual currency. The developer makes money either way.Finally, it should be noted that Facebook closed its in-house gift shop in 2010, exitingthe direct-to-consumer virtual gifts business in order to focus on its Credits virtualcurrency. This means simple gifting functionality has been left to third party Platformdevelopers.ARPU Range: Successful virtual gifting applications can see an ARPU in the $0.25 -$0.50 range. Sales can be complemented with free branded items, which have lowerARPUs than items directly sold to consumers.6. Arcade Games!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! =<!!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ==!!Above: “Mindjolt Games” by MindjoltArcade games also have clear analogies outside the social network environment.Inside social networks, these games primarily benefit from the competitive nature ofsocial leaderboards and challenges as friends vie to beat each others score.However, because these games are intrinsically casual, they usually dont monetize aswell as other, more engaging games with longer play sessions and cycles. Even thebiggest games, like Bejeweled Blitz, monetize very little when compared to othercategories.ARPU Range: Because arcade games play much more like traditional casual games, thevirtual goods revenue from these titles is often minimal.7. Dating/Flirting GamesDating/flirting games leverage the natural social dynamics of romantic relationshipsto create game-like experiences that monetize through virtual goods and gifts. Forexample, many of the "buy your friends" games create a notion of "owning" people asa way of flirting with them. In addition, some smaller social networks in the UnitedStates, like MyYearbook and Tagged, incorporate flirting features more clearly intothe core user experience than Facebook does (Facebook has a generic “Poke” feature,which can be used as a very basic flirting tool.)These games monetize as you would expect: by buying more people, and by creatingpremium virtual items that can be bought and given to other others as a way todeliver a meaningful message. Some of these applications are known to monetizequite well.Finally, it should be noted that advertiser-financed branded virtual goods (i.e. a!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! =>!!“Godiva” chocolate item that can be gifted) are quite common in dating and flirtingapplications as well. However, because these virtual items are often sold as value-adds and priced on a CPM basis, it can be difficult to draw the line between brandedvirtual goods and advertisements. Because these items generate a small minority ofrevenues for these applications, we have not explicitly broken them out in ouranalysis.ARPU Range: A successful dating/fliring game can see an ARPU of $0.50 - $1.00.However, like other gifting apps, free branded items have lower ARPUs than itemsdirectly sold to consumers.How Has Monetization Changed Over the Last Year?After virtual goods revenues inside social games exploded during 2009, observersbecame increasingly interested in monetization trends within the space throughout2010. In particular, weve received a lot of questions on whether there are increasingdisparities between the largest and smaller developers in terms of monetization.First, monetization rates have been improving, in general, over the last year, asdevelopers get smarter with content, merchandising, and promotions. In addition,because of Facebooks clamping down on viral features, developers have had to lookfor growth primarily through increasing revenues per player, as opposed to thenumber of overall players. "We spent the first half of 2010 growing as much aspossible because we knew the clamp was coming, and now weve switched toharvesting revenues from those users as much as possible," one leading social gamedeveloper says. However, much of the promise of Facebook Credits is that the overallpercentage of paying players should see a near term boost.In the long term, however, despite the potential boost in the percentage of payingplayers from Facebook Credits, developers must continue to improve revenue per!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! =?!!paying player. As the landscape gets more crowded with common genres of socialgames, products are getting more vertical - the question is which games will engagewhich people. As developers unlock new niches, ARPPU should go up (and LTV shouldfollow).In general, however, developers are continuing to figure out how to squeeze outincremental ARPU out of different segments of users in order to increase overallmonetization. In some cases, developers have divided their user base into hundreds orthousands of slices, each of which is optimized differently. Developers can thenoptimize games for certain audiences, or in the case of larger developers, optimizefor monetization across their entire portfolio.The disparity between large and small developers is still generally significant. First,there is the simple head count issue - smaller developers dont have GMs for differenttitles trading best practices, and thus miss out on the "network effects" of productiteration. However, not only are larger developers able to devote more energy tooptimizing the game dynamics for monetization in general, but as become just as ifnot more important, larger developers are becoming better able to identify andacquire higher monetizing users for their games. This is occurring both through crosspromotion and paid acquisition, but as well discuss more later, having a portfoliosignificantly helps larger developers better cross-match users to the games theymonetize best in over time. (Thus, we expect to continue to see continuedconsolidation in the space this year, as it remains generally challenging for smallerdevelopers to crack the upper echelons of the market.)Finally, some of the largest developers are thinking about monetization not onlyacross their portfolio of games, but also across their entire portfolio of propertiesacross all media. For example, how might LTV in a social game affect LTV for consoleproducts of that same franchise, or a related franchise, by the same publisher? Largerdevelopers are also starting to think about Facebook not as one monolithic platform,but rather as a series of countries, each of which requires their own focus.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! >6!!Consumer DemographicsAs you may expect, virtual goods consumers skew younger than the average socialnetwork user (though perhaps not as much as some may expect). Younger players aremore involved with social games, and thus are spending the bulk of the money onvirtual goods inside social applications.Geographic distribution is highly publisher dependent. While many developers andaggregators report as much as 70-80% of their customers are in the US, other largedevelopers report numbers as low as 40%. Overall, based on talking with manyindustry leaders, we estimate that although Facebooks audience is over 70%international, 60% of all virtual goods transaction volume on Facebook and MySpaceare by US customers (though for many, US customers drive over 80% or more of totalvirtual goods dollar volume). Remember, however, that demographics tend to be verygame specific.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! >7!!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! >5!!Whales in Social GamesWhile the term "whale" is used casually, we define a social gaming "whale" as a playerwho reports spending in excess of $25 per month on at least one game. That level ofexpenditure would be valuable and interesting to just about any social gamingdeveloper and would also represent a pretty significant premium over the typicalARPPU of $15 to $20 for top developers.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! >9!!As the chart below shows, the gender distribution of top spenders closely mirrors theoverall population of survey respondents, with 44% of top spenders being male (vs x%of the survey population) and 56% of top spenders being female (vs x% of the surveypopulation):Surveys we have conducted in previous reports this year showed that the typicalwhale concentrates his or her spending a small number of games, with most confiningtheir spending to 1 or 2 games. A small number of players spend a significant amountof money across a large number of games, but they are a distinct minority. This hasmeaningful implications for game developers. By and large, top spenders only spendon one or two games at any one point in time. Any "whale" or top spender a developeracquires might come at the expense of some other game.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! >:!!Impact of Facebook CreditsGoals and BenefitsThroughout 2010, Facebook steadily expanded testing its universal virtual currency forthird party application developers called Facebook Credits. We expect that by early2011, nearly all major social game developers will be either actively using FacebookCredits, or will have agreed to use and deploy Credits at some point in thefuture. The idea behind a platform-level payment layer and universal virtual currencyis powerful: Facebook should be able to provide more paying players, a more trustedand frictionless user experience, more liquidity, and more fraud prevention than anyone third party payment company.The overall goal of Facebook Credits is to unify all paid virtual currencies on theFacebook Platform into one that Facebook controls. Although some have been criticalof Facebooks desire to operate in this space and take a 30% fee from developers,overall we think it is healthy for Facebook and developers to have a more directeconomic conversation. For now, Facebook says it is reinvesting all of the feescollected through Credits back into the system, by building out its teams and systemsto manage the ecosystem and seeding the market to jump-start liquidity.In terms of user experience, Facebooks intent is to provide one single point offinancial contact for users. The goal is that by selling virtual currency under theFacebook brand, users will be more likely to trust and spend than they would withthird party developers they have never heard of. In addition, by partnering withpayment companies around the world, Facebook can aggregate the Credits purchaseexperience into one user interface, instead of the variety of experiences users had indifferent applications before. The hope is that the net result will be an increasingnumber of users converting to paying players.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! >;!!Challenges and CostsHowever, the fundamental concept of switching from a variety of third party virtualcurrencies to a standard universal currency three years after the Platform launcheddoes come with some costs to developers. First among them, of course, is the 30%transaction fee Facebook is collecting. This fee will have a significant impact ondeveloper (and Facebook) revenues in 2011 (other payment methods often previouslyintegrated by developers, like PayPal and credit cards, generally charge fees in the 5-10% range). However, while the fee is significant, it is generally in line withtransaction fees imposed by other platforms, like Apple. Nevertheless, the Credits feedoes significantly change the overall net to publishers picture.Aside from the Credits fee, switching from an independent currency to a universalcurrency does pose developers with the challenges of a decrease in control over theirvirtual economies. By carefully controlling the price and volume of currency in anapp, a developer can get more people spending more money, not unlike how centralgovernments control currency supplies in the real world. For example, games willoften promote their virtual currency through special incentives, like deals to buycurrency in bulk, at discounts, on a certain day. Or they might introduce new featuresor promotions into a game that put more virtual currency into the app economy. Thiskind of game-level economy control doesnt exist in the same way with Credits -instead, Facebook controls the overall Credits economy. Given the potential risks ofgoing directly to Facebook Credits as both a payments method and a virtual currency,individual developers are likely to exercise caution in the way in which they deployFacebook Credits in their own games. The safest course of action for most developerswould be to start by using Facebook Credits as a payment option and not remove theirown in-game virtual currencies until they have a better sense for how FacebookCredits performs for them.Finally, some developers are also concerned with what the switch in currency willmean for how breakage works. "Breakage" means that users pay for an amount of!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ><!!virtual money, but abandon it after a period of time, and thereby forfeit it to thecompany — outside of Facebook, this often happens with unredeemed gift cards, forexample. On Facebook, users will sometimes purchase currency within an app butthen, for whatever reason, never use it to buy virtual goods. This form of breakagecan account for a non-trivial portion of revenue in some applications. The concernhere is that Credits, if somehow mandatory, would replace the currency that usersbuy but don’t spend, thereby removing this revenue from developers’ balance sheets.Aside: Laws covering breakage differ between states and countries. For breakage onCredits itself, Facebook follows California law: If a user doesn’t access their accountfor three years, the company forfeits the money to the state, per its UnclaimedProperty Law (which is based on the common law doctrine of escheating). Developers,especially those based elsewhere, may account for breakage differently, per the stateand national laws where they are based. They may, for example, count the initialpurchase of virtual currency as revenue, and — entirely within the law — keep thebreakage for themselves.Developer SentimentThe rollout of Facebook Credits has been somewhat contentious, especially amongstlarger developers who have built direct payment relationships with millions ofFacebook users since the Facebook Platform launched in 2007. However, this shift willmake it easier for smaller developers who are just entering the market to reap thebenefits of the more popular games, which will drive most initial Credits adoption.(Although the checkout experience is seamless once users have purchased Credits,getting users to purchase Credits for the first time during an in-game payment flow isa significant barrier for many players.) In other words, Credits will make buyingvirtual goods more frictionless as players move from game to game.Many developers resent that Facebook is forcing Credits upon them, and are trying to!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! >=!!hold out as long as possible. Another complaint developers often voice is that theyarent reimbursed (paid) for the promotional Credits that Facebook is injecting intothe system for seeding/testing purposes - thats just lost revenue to the developer.(Facebook is seeding the market by giving many users small numbers of Credits forfree. When spent by users inside games and applications, Facebook does notreimburse the developer for these promotional Credits.) Finally, Facebook is noteating chargebacks - theyre passing them back to the developer for now. Thus, forCredits to be revenue neutral, the frictionless benefits would need to boost volume by40% to 45% on the top line to account for the 30% take.However, it doesnt appear that theyll have any choice in the matter, ultimately.Despite the frustration that these developers feel that theyre being forced to pay a30% tax and are losing control, we havent seen any real developer exodus from theFacebook Platform. Instead, more developers are still coming on board.The transition to Credits is intrinsically awkward for developers, who must re-worktheir games to be based around a new currency. This is not a trivial design challenge,and can take months to design, develop, and deploy. In addition, while Facebook saysit wants to add “hundreds” of Credits payments partners around the world in theupcoming years, it currently only has a few - meaning developers who adopt Creditsnow will experience a decrease in monetization amongst those user segments thatcannot pay with one of the payment methods Credits currently supports. Facebookalso launched its own prepaid cards in US retail stores late 2010 in partnership withGMG, which should help early adoption.Facebook is offering developers who adopt Credits promotional benefits as anincentive to increase the rate of adoption. CrowdStar, one of the largest developerson the Facebook Platform, made the commitment early to go “all-in” on FacebookCredits, and has received the most promotional benefit over time. Other developers,like Zynga, Playfish, and Playdom, have been slower to integrate Credits, but are wellinto the process now. However, while some developers (like CrowdStar) have chosen!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! >>!!to make Credits the name of the premium currency in-game, others have chosen tostill make Credits the currency you use to buy their premium currency - like the wayZynga currently does in FarmVille.Impact on Payments EcosystemIn general, the rollout of Credits is creating a shift in the value chain that is displacingmany third party payment companies that built significant businesses providingpayments for virtual currency in many Facebook games and applications. Some ofthese payment providers, like Zong, PlaySpan, and TrialPay, have established directpartnerships with Facebook, and are featured as alternative payment options inFacebook’s Credits purchase flow. However, other providers that are not included aspayment options for Credits are seeing significant revenue drops as developersmigrate to Credits. For example, Offerpal Media, one of the largest offer networks forsocial game developers over the last couple of years, recently laid off some of itsstaff, changed its name to Tapjoy, and pivoted to now focus on monetizing mobileapplications instead.Finally, some have asked whether Facebook is planning on building a payments systemitself (instead of just a virtual currency system). Currently, we don’t expect Facebookto compete with PayPal, credit cards, or the myriad of other payment providers. Theinitial and operational investment required to operate such a system is prohibitivegiven Facebook’s current size and goals, and Facebook would much rather firmlyestablish a virtual currency through which it earns 30% of gross volume on theFacebook Platform, as opposed to competing in the generally low-cost cut-throatpayments market, where fees are usually around 3% to 5%.Payment Methods BreakdownAlthough hundreds of game and application developers are monetizing through virtual!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! >?!!goods, only a very few of the largest developers have actually developed and managethe payment layer in house. Before Facebook Credits, a growing number of third partypayment service providers targeted social games developers to enable transactionsboth in the US and around the world. Since Credits has launched, and its clear todevelopers that Facebook will be the merchant of record for virtual goodstransactions inside Facebook, many of these companies have focused theirpartnership efforts primarily with Facebook itself.Inside social games, payment methods vary widely depending on the developer andoffer network. On the whole, direct payment methods as a whole generate more than70% of virtual goods revenues, through a variety of methods including credit card,PayPal, prepaid cards, mobile payments, and more. Based on our conversations withmany industry leaders, we estimate that offers (i.e. advertiser-financed transactions)currently generate 10 to 20% of all US social game virtual goods revenues, thoughsome developers don’t integrate offers at all, and a few developers report highernumbers. Offers have decreased as a relative portion of overall social gamemonetization since last year due to increased media coverage over offer scams.However, offers still remain a viable alternative payment method for many userstoday.Understanding Offers and the Offer ControversyWithin the world of social games, offers present a "free" option for players who dontwant to pay out of pocket for virtual goods or virtual currency. Instead, they chooseto accept an advertising offer, like for a trial subscription to Netflix or signing up for anew credit card, and the advertiser finances the transaction. There has been a lot oftalk about the offers space in the last few months, so lets take a closer look. The Offers Controversy!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ?6!!At the end of 2009, increased media coverage following the "ScamVille" series ofarticles on TechCrunch shed more light on the practices of many advertisersparticipating in offers. At its root, some offer advertisers were using deceptive ads totrick people into signing up for services they didnt want. One of the clearest cases offraud were mobile subscription services, which charged people $10 or $20 a monthafter they signed up for an offer to get virtual currency. As a result of the increasedscrutiny, offer companies added more significant internal checks to verify that theoffers they included in their system met certain quality guidelines. As a result, offershave decreased as a source of revenue for developers.Like other new forms of internet advertising in their early stages, even legitimateoffers still suffer from a lack of transparent reporting that can propagate throughevery middle man involved in matching ads to social game players. At their simplest,offer companies take advertising inventory from dozens if not hundreds of adnetworks, then display that inventory within “offer walls” that appear in the paymentpage on social games (an offer wall is usually just targeted ad inventory displayedwithin a window on a game). However, due to the many layers of intermediariesbetween advertisers and the publishers that end up displaying their ads, manyadvertisers dont have good visibility into where their ads actually appear, and howthey perform in different apps. This is one of the main reasons that advertisers havebeen slow to invest more in offers.Ultimately, the parties most able to enforce advertising policies are the platformoperators themselves. In this case, Facebook and MySpace: by placing the burden ondevelopers to run clean ads or face suspension, the platforms have the most leverageand the power to prevent a race to the bottom. In November 2009, Facebookannounced that it had banned offer and ad networks Gambit and Tatto Media fromserving ads on the Facebook Platform, joining Social Hour and Social Reach, whomFacebook banned earlier in the year. Following the banning of Gambit and Tatto,some people observed that while many developers and monetization service providers!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ?7!!had problems, the consequences appeared to fall on a relative few. If Facebookdoesnt stay involved enough to prevent bad ads from entering the platformecosystem, government regulators will ultimately get involved. Offers in Social Games!As you might expect, offers often function as "on-ramps" to get players engaged withsocial games, for people who dont want to pay cash the first time around. However,once players become more engaged with a particular game, they increasingly migrateto direct payments because the same user is usually unwilling to take more than acouple offers in a given time period, and users need more currency than offers canprovide to progress. For example, once a user signs up for a Netflix trial offer, thatuser is unlikely to sign up for other offers in the DVD rental space. Rather than givingpersonal information to more and more advertisers to take part in less appealingoffers, users who are increasingly engaged with a particular game choose to pay moredirectly.Before Credits, most publishers are surfaced direct payment methods via their offerpartners - only the largest and most sophisticated publishers (in general) focused ondirect integrations with payment gateways. Because of this, the offer aggregatoroften develops the optimization technology around which payment methods are mostsuccessful for different user segments within each game. For example, the aggregatormay choose to display a greater variety of mobile payment options to adults in Europeor Asia than adults in the US, while displaying more prepaid card payment options toUS teenagers than South American teenagers. The best payment methods often varywidely by location, age, and level of engagement.With the rollout of Credits, Facebook has become the payment aggregator, and hasthus displaced the pre-Credits function of many offer networks.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ?5!! Increased Competition, and the Impact of Credits!Managed offer networks saw tremendous growth in the US over 2008 and 2009, largelydriven by virtual goods. Offerpal Media (now Tapjoy) and Super Rewards (acquired byAdknowledge) were the largest companies in the space, but several companies,including TrialPay, Peanut Labs, Sometrics (which also has an optimization service),and others have been operating in the space since soon after the Facebook Platformlaunched in 2007. In 2009, the market saw an explosion in the number of offer wallproviders, including SponsorPay, SupersonicAds, TokenAds, Boomerang Networks, andgWallet. Many of these new offer providers are either regionally focused (hiringcountry managers in growing areas in Europe) or are ad networks bringing theirpreexisting CPA advertiser relationships to the market.The number of new players entering the space, combined with the switch to Credits,has made the market increasingly difficult. Some of the newer firms not listed abovehave already folded, and others (like Offerpal moving on to mobile) have chosen tomove on to other markets. By contrast, TrialPay has won the Facebook contract forbringing offers to Facebook users, allowing them to earn Credits by accepting dealsfrom TrialPay merchants -- no other offer networks are currently serving Facebookinventory. In general, Facebook wants to be very conservative with who it partnerswith in this area, in order to avoid any future PR problems related to offer quality.Nevertheless, we wouldnt be surprised to see Facebook experimenting with moreoffer partners over the coming year or two. Fundamentally, the future of this spacedepends on the managed offer networks ability to deliver both high quality offers andhigh quality leads while keeping fraud and customer service costs at bay.Direct PaymentsToday, the vast majority of virtual goods revenue comes through direct userpayments. Before Credits launched, developers had increasingly prioritized direct!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ?9!!payments over the last several months because they wanted to have direct billingrelationships with their users - in some cases, large social games are even buildingdirect relationships with the payment gateways themselves, removing the need forthird party payment services altogether. With the rollout of Credits, many of thesesame dynamics still apply to Facebook, who wants to establish as many direct billingrelationships with users as possible. Direct Payment Methods Breakdown in Social Games!When it comes to large payment platforms being used by Facebook and social gamedevelopers, PayPal still carries the day by a large margin. While Google, Amazon, andMicrosoft have each attempted to build third party payment systems/wallets over theyears, none have gained substantial market traction. With over 85 million activeaccounts in 200 markets around the world, PayPal has become an important paymentplatform for many game developers. PayPal accounts for over 50% of all direct in-apptransactions, followed by credit cards at 30-35%, and mobile and alternative directpayments at 15-20%. In general, many developers are reporting a slight increase inmobile payments during the last year, while the rest of the market has remainedconstant.The most disruptive aspect of using PayPals standard interface is that it takes usersoff the page into a PayPal flow, before returning them to the app or game tocomplete the transaction. Nevertheless, because of its distribution and low fees,PayPal still processes about 50% of all direct payments for virtual goods within socialapps and games.PayPal has also recently released new APIs that allow third parties to process PayPalpayments in a new widget interface - early pilot tests of these products are beginningto make their way into social games, and we expect to see more commonly in2011. (Facebook will also be including updated PayPal UI in the Credits purchaseflow.)!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ?:!!Of course, its important to note that payment method breakdowns generally varysignificantly from country to country. For example, Taiwan has a very big gamingculture, so virtual currency prepaid cards are more commonly purchased in retailconvenience stores than in other countries. Direct Payments vs Offers!One of the trends social game developers have seen over the last couple of years inthe virtual goods marketplace is the migration of users from offers to directpayments. Offers have somewhat of a reputation as an "on-ramp to monetization,"because there are usually only a few relevant offers that one can take that pay outlarge amounts of virtual currency.Top players in social games will spend tens to hundreds of dollars per month - at somepoint, the only way to get enough virtual currency to fund your playing habit is to usea credit card, PayPal, or mobile phone. So, almost by definition, games that succeedin growing ARPU and the base of paying users will tend to skew toward directpayments, as thats the only way users can fund their accounts. However, it should benoted that research surveys and local deals are types of offer that users have shownthey are willing to take repeatedly.This explains why offers represent a larger share of payments volume than directpayment methods in social games than other forms of online games. Social gamesgenerally have shorter play sessions and lower player retention than more "hardcore"online games. Thus, they depend more heavily on getting more people in the doorthrough viral growth, and these new players monetize well through offers. However,other online games depend more heavily on longer play sessions and higher retention,and thus have fewer new players entering the top of the funnel. Thus, they rely moreon direct payments over offers.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ?;!!Mobile and Alternative Direct Payments Mobile Payments!Mobile payment providers allow players to buy virtual goods in social games by billingpurchases to their mobile phone bill. In order to pay by mobile, the players entertheir phone number in the game, and a PIN number is sent to their device via a textmessage. Once that PIN is entered in the game experience, the transaction isauthorized and the carrier is billed. In Europe, mobile phone users are accustomed topurchasing virtual goods via prepaid mobile phone balances, but in the US, thesepurchases appear on users monthly bills. Zong and Boku are the largest players in theUS today.Worldwide, mobile payments are most popular amongst unbanked players. Throughoutmuch of Asia, and in many European, South American, African, and Middle Easterncountries, mobile is the most popular virtual goods payment method. In the US, onemight think that youth would be driving the growth of mobile virtual goodstransactions in the US (70% of teenagers in the US have mobile phones, according toPew).!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ?<!!However, market leaders say that in total only 25% of mobile payments in the US aredone by users under 18. Rather, about 30% of all mobile payment users are 18-25,another 30% are 26-35, and 15% are over 35. In other words, more players over 30 arepaying with their mobile phone in the US than teenagers. Why? Many virtual goodstransactions are very small impulse purchases, and these players would rather quicklyenter their mobile phone number than use their debit or credit card.Carrier fees on virtual goods transactions are still very high in the US - sometimes ashigh as 40-50%. One reason that many of the fees are still so high is that some mobile!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ?=!!payments providers go through SMS aggregators, who built their entire pricing modelsaround the ringtone business. As such, mobile payments are often delivered viapremium SMS and are hence subject to the same 50% take as other digital content.One way that developers get around this is to basically make points / currencyacquired via the mobile payments channel 2x as expensive as those purchased usingcredit card or PayPal - that makes a publisher revenue neutral when it comes to thechannel through which points were purchased.One other way to bring down fees would be for mobile payments providers to use SMSas a confirmation channel and use some other system (credit card, PayPal, etc) toactually settle the funds. You can think of using the phone number as the usernameand the SMS code as a second factor of authentication beyond a password. That wouldallow for much lower rates, but would mean that mobile payments would be billedoutside of the carrier billing infrastructure. Pre-Paid Cards!Pre-paid cards have become a significant revenue driver for many categories ofgames, including console games, subscription MMOs, and free-to-play games, and isstarting to see growth in the social gaming space as well. In the fourth quarter of2009, Playfish, Zynga, and Playdom all launched pre-paid card initiatives at popularUS retailers like Target and 7-11. Facebook launched pre-paid Credits cards in Targetin the fourth quarter of 2010. These cards can usually be redeemed for virtualcurrency. In general, we expect this to continue to expand the market opportunity ina meaningful way in 2011.The games segment of the pre-paid card market has seen compound growth in therange of 200% for the past two years, which is evidence of the untapped marketopportunity that these cards are unlocking. The total market opportunity for pre-paidcards across all free-to-play game categories represents approximately $200-250million in revenue, with compound growth rates of 50-100% expected for the!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ?>!!upcoming year. It is important to note that the majority of that pre-paid card revenueis being generated by free-to-play games outside of the social games space. With thelaunch of Facebook Credits pre-paid cards at major retailers, it’s likely that mostmajor social games companies will de-emphasize promoting and distributing cardsassociated with their own branded virtual currency in lieu of the Facebook Creditscard opportunity.The leading companies in the pre-paid card space domestically are InComm,Blackhawk, and GMG Entertainment. Pre-paid games cards as a way to pay for digitalentertainment really got their initial boost from the iTunes, card, which maderetailers much more aware of the market opportunity for selling physical product thatdrives the consumption of digital goods.There are three major reasons why pre-paid cards have been very successful forgames companies (and should be for Facebook as well). First, in-store pre-paid giftcards, allow younger players, many of whom do not have credit cards, bank accounts,or PayPal accounts of their own but do have access to cash to convert that cash or"allowance money" into a card type that allows them to spend money in-game.Second, these gift cards allow parents, grandparents, friends, family, and others topurchase currency on behalf of the player, opening up a gifting market for virtualgoods. Third, as these cards have started to succeed for retailers, publishers havecome up with interesting ways to drive in-store purchase. For example, somepublishers will offer users unique or rare virtual items for purchasing cards of aspecific denomination from a particular retailer. Others, such as Nexon, have actuallyworked with retailers to develop custom in-world experiences associated with pre-paid card purchases.In terms of economics, a publisher typically receives 70-80% of the face value of thecard, with the remainder going to their card partner and the retailer. In terms ofvolume, Target, Wal-Mart, and 7-11 are among the largest sources of distribution for!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! ??!!publishers who utilize pre-paid cards as a revenue source. As more publishers becomeaware of the opportunity that pre-paid cards represent, competition is heating up tosecure in-store distribution with the top retail outlets. As the demand for distributionand shelf space increases, we expect that publishers will need to continue to innovateand get more aggressive in working with retailers to create differentiated, specialmarketing campaigns that will drive more foot traffic to specific retailers. New Payment Providers!While many existing payment platforms are migrating to the US virtual goods market,some new payment services are being created too. Most of them are attempting tocreate a more frictionless in-game payments interface, while partnering directly withthe merchant acquirer and taking on the fraud risk themselves.Currently, these payment companies, like SocialGold (through its in-Flash securepayments widget) and PlaySpan (through its Spare Change acquisition) are offeringpayment widgets that allow developers to process payments in a frame so that usersnever leave the page. Users typically pay with credit cards, though integration withother existing payment methods like PayPal is also somewhat common.Many in the social game community are watching to see whether Google furthersdevelopment of SocialGolds payments tools (Google acquired Jambool/SocialGold inlate 2009). However, we believe Google is potentially more interested in SocialGoldsexperience managing and optimizing virtual economies -- and their ability to helpGoogle monetize digital content beyond games and across other platforms, includingmusic, Google TV, games, and other key markets -- moreso than for its core paymenttechnology.Lifetime Value of Social Game Players (LTV) - What Do WeKnow?!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 766!!Although its still early in the evolution of the space, were starting to get a sense ofwhat the monetization of social game players looks like over time. Heres what manyof the leading social game developers are seeing, and how we expect these dynamicsto evolve over 2011.In general, with all of the Facebook Platform changes this year - now that developerscant keep stuffing the funnel with new users as easily, developers have spent much of2010 focused on improving retention and monetization. While developers used tofocus more on maximizing the number of paying players in the short term, nowdevelopers are thinking more about long term ARPPU and LTV -- while manydevelopers were still in "land-grab" mode a year ago weve seen a big shift towardoptimizing for LTV as we enter 2011.How Do Developers Measure LTV?!"LTV to date and projected LTV are our most important metrics," according to oneCEO of a leading social game developer. How exactly are these numbers calculated?First, developers segment their user base according to demographic and engagementproperties. These are often the same segments used in marketing efforts, asdescribed above. The LTV values of different user segments can of course vary byseveral orders of magnitude (from single cents to tens of dollars) depending ondemographics. Second, developers often segment LTV calculations by game, sincevalues are highly dependent on game genre.Developers apply a k-factor (that estimates free organic distribution - in general thishas declined over 2010 due to changes in Facebook platform product design, somedevelopers say by as much as 50%), and apply a discount for user acquisition costs.Some developers only count paid DAUs in their calculations (as opposed to all DAUs).Then developers often look at user cohorts over 30, 60, and 90 day periods, predictinglifetime values based on available data.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 767!!Often times, developers will optimize LTV very early in the lifecycle of a new gamesdevelopment to decide which games have the most promise. Many games just dontmake it - its better to figure this own earlier on. As we go into further detail below,we expect to see more niche/vertical products that cater to more hardcore players."We can significantly influence ARPPU by creating a better user experience," oneleading developer says, in contrast to trying to primarily focus on increasing thepercentage of paying players.How Long Do Players Stick Around?The amount of time that users stay engaged with social games varies widely, butmany developers we spoke with are seeing engaged players (i.e. players who dontbail after the first visit) stick around for 6-8 weeks on average. At some point, youredone with your aquarium, farm, or city. Generally, developers try to get users tomove between games when they hit the point of declining engagement.However, in some cases, these numbers can be much higher, even over six months ora year (for the oldest RPGs)."As we introduce new games to our stable users, we see constant spikes. Our idealcustomer is one who is playing three games and has spiked three times," according toone leading developer.When in Their Lifecycle Do Users Monetize Best?Based on our research and conversations with many industry leaders, social gameplayers can roughly follow a few different monetization lifecycles.First, most social games that are not currency-based (like poker) take a couple ofweeks to get the user engaged before hitting a paywall, where peak monetization!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 765!!occurs, after which monetization slowly tails off over time: • Phase 1: very low but gradually increasing monetization (learning the game) - 1 to 2 weeks • Phase 2: peak monetization (most engaged with the game) - 2 to 3 weeks • Phase 3: decreasing monetization (done playing the game) - 4 to 6 weeksFor these games, 80% of the revenues happen in the first 4-6 weeks after a playerjoins the game. While most players generally dont walk in on day one and spendmoney, it does ramp up pretty quickly. As the player approaches the latter part ofthat cycle, it often becomes more valuable for the developer to cross promote otherportfolio titles to get the player started in other games, where they may monetizeeven better.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 769!!A few games, however, dont die off after the initial peak. Some RPGs actually see asecond bump in monetization once die-hard users whove stuck around progress intothe elite levels of the game. Players who are sticking around after 2-3 months in anRPG tend to monetize well for a longer period of time. In general, the people whostick around for a long time are also the people who are paying to play the gameanyway. • Phase 4: second monetization peak (very invested in the game)Its important to note that savvy developers dont have this happen by accident - theycontinue to invest in the eldergame to keep these players involved. Playdom andZynga especially have rolled out content and expansion packs to accomplish that samegoal.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 76:!!Finally, currency based games (that require currency very soon after the start of thegame) like poker can monetize much sooner. These games hit peak monetization inweeks 1 and 2, before trailing off gradually:For these games, monetization happens quickly due to the need to "catch up" andhave enough currency to compete with other players who have been playing longer orare more successful. However, monetization can trail off over time as players figureout how to farm the game to generate more virtual currency without paying for it.Seasonality and Monetization Lifecycles in Social GamesAlthough social games in general follow the lifecycles we described above, seasonality!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 76;!!also has a big impact on monetization rates. In some cases, seasonal peaks can be thedominant drivers of revenue for social games.Whales consistently spend a lot. If a lot of whales go on vacation, developers oftensee a measurable short-term dip.Outside of seasonality, the monetization must be driven entirely by the game dynamicand social competition - i.e. what level are my friends at, and how do I pass them?One social game developer describes this as "keeping up with the Joneses" - the samereason people buy anything in life.But around major holidays, like Christmas, Valentines Day, and Mothers Day in theUnited States - users purchase virtual goods that are largely driven by the emotionalexperience. For example, inviting friends to see your virtual restaurants Halloweendecorations, or sending mom treats for her virtual pet for Christmas, is becomingincreasingly common. We expect these effects to continue.Banner Advertisings RoleOne final note on monetization: some developers are finding that banner advertisingcan boost monetization for highly engaged players. Heres how the developers do it:until players get to a certain level in the game, they never see any banner ads,because the developer wants the players to be focused on getting engaged with thegame and monetizing through virtual goods purchases - not clicking on ads and leavingthe game experience. However, once players get engaged with the game, developersare adding unobtrusive banner ads inside the game. Often time these are cost-per-install ads for other applications - as more brand advertisers enter social games, wecould see them outbid developers.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 76<!!In other words, once users get engaged, these developers are able to add otherlightweight monetization options in the game. This can supplement revenues by up to15%.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 76=!!5. Customer Acquisition andMarketing!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 76>!!One of the crucial factors that led to the explosion of applications and games on theFacebook Platform when it first launched in 2007 was how easy it was for developersto get their software into the hands of millions of users in a matter of weeks with nospend due to Facebooks powerful "viral" communication channels. Quickly thereafter,Facebook clamped down on the "wild west" of application spam, and social gamedevelopers have had to become increasingly sophisticated with how they acquirecustomers. Today, sophisticated customer acquisition and marketing are barriers toentry for new developers entering the market. !The Rise, Fall, and (Partial) Re-rise of Viral AcquisitionIn the beginning, the Facebook Platform had no rules. This is because Facebook itselfdidnt really know what to expect when it launched the Platform in late May of 2007.At the time of launch, the Platform gave developers more or less unlimited andunfettered access to three basic types of "viral" communication channels: invitations,notifications, and feed items: • Invitations (also called Requests): user-to-user channel in which the receiver is prompted to take an action (like "join my team") or ignore • Notifications: combination user-to-user and application-to-user channel through which the receiver is generally notified of an update (like new features, promotions, etc.) • Feed items: broadcast channel through which users post application content to their personal feed (like "I just planted a mango tree" or "I just reached level 10"), which then appears in their friends home page News FeedsBecause of the authenticity of real-world relationships in Facebooks social graph,users were quick to adopt these ways of spreading application information to theirfriends. As a result, apps spread like wildfire. In fact, the earliest social games - likeZombies, Werewolves, and Vampires - were based purely on recruiting more friends to!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 76?!!install the game. 5 points were awarded for sending an invitation, and 25 points wereawarded when a friend converted and joined your "Zombie army." Thus, the cost ofacquisition for new application users was very low, and almost all of the early successstories on the Facebook Platform grew almost entirely through aggressive use ofFacebooks communication channels.As you might expect, the user experience around application invitations quicklydegraded, and within a few months, Facebook began instituting restrictions on theviral channels. While 2007 was the "wild west" of application virality, 2008 was theyear that Facebook clamped down. Instead of unlimited use, the number ofinvitations that could be sent was limited to 10 at a time and 20 per day; similarrestrictions were applied to notifications. Facebook also instituted "allocation limits"based on user feedback - the more users reported an apps invitations andnotifications as spammy, the fewer that application was allowed to send.Facebook also began shifting its approach to Platform governance. In 2009, Facebookbuilt out its Platform policy enforcement team, tasked with monitoring applicationsand enforcing punitive measures, like shutting down communication channels, whenabusive apps were found. This increased throughout 2009 and 2010, as Facebook wasfaced with a variety of bad platform PR issues (like the platform ad networks that ranintrusive or deceptive ads) that led Facebook to become increasingly aggressive withits policy enforcement efforts as a whole.Nevertheless, apps and social games have continued to find opportunities to takeadvantage of Facebooks ever-changing viral channels. For example, apps like ZyngasFarmVille heavily encourage users to post content to the stream whenever they reachnew levels or achievements, or on their friends profile pages to give gifts or requestreciprocal actions. As a result of the frequent changes, many agile developers areable to grow quite significantly by adapting quickly to Facebooks product shifts, whileothers who dont move as nimbly are left behind.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 776!!Ultimately, most of what was called "viral growth" in the early days of the FacebookPlatform wasnt really "viral." In the truest sense, designing "viral" software meanscreating a natural and meaningful context for interaction with your friends. Bycontrast, many developers simply took "viral" to mean spamming Facebooksnotification channels as much as possible. As Facebook increasingly makes spamharder through product changes and policy enforcement, developers must createincreasingly meaningful game contexts for interacting with friends in order to takeadvantage of the opportunities Facebooks high-fidelity social graph offers forcustomer acquisition.Impact of Facebook Platform Changes on Viral DistributionToday, viral acquisition is still an important part of the growth of social games. ButFacebook has not stopped making tweaks and changing to the Platform ecosystem as awhole. Facebook made significant changes to each of the three main applicationchannels in 2010. We expect these updates to continue in 2011; developers willcontinue to need to pay close attention and adapt their products quickly. Those whodo will continue to find opportunities for very low cost user acquisition.News Feed!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 777!!Facebook made two important changes to the News Feed in 2010 in terms of socialgame distribution. First, Facebook started grouping multiple application news feeditems together into a single story. This decreased the amount of real estateapplication and game stories were getting in the feed. While Facebook knew thiswould hurt virality some, the bigger problem motivating the change was overall userfeedback rates on game-related content in the feed. Facebook has decided that itdoesn’t want to become a pure-play social gaming platform, and thus is trying to limitgame-related stream content to contexts in which it is most relevant to the viewer.Near the end of the year, Facebook made a second change to the News Feed byremoving game-related feed stories from the view of users not already playing thegame. In other words, only users already playing a game saw feed stories from theapp after the change. Thus, the News Feed became more of an engagement channelthan a viral channel.Invitations/RequestsSecond, Facebook made two changes to invitations in2010. First, Facebook moved down the access point toapplication invitations on the home page from the top right of the page to the middleright of the page, decreasing invitation conversion rates.Then, near the end of the year, it moved the access point to invitations to the leftside of the home page, inside the bookmarks area. After the change, users saw anumber next to the games bookmark if they had any invitations awaiting them.Because Facebooks bookmarks area is sorted by most recent use, apps that havebetter engagement rates are automatically bubbled up into the bookmarks morefrequently. This limited the visibility of invitations, especially for those applicationswith lower engagement rates.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 775!!NotificationsThird, Facebook eliminated application access to thenotification channel. Because developers weresending so many spammy notifications, userengagement rates with the channel had decreased tolevels that were worrisomely low for Facebook. Overall, this was a change expected by the developercommunity, but still one that was met with developerresistance.Overall, Facebook says it is working to restore functionality similar to that which waslost with the viral channel changes of 2010 through product changes that don’t alsosuffer from the same problems that Facebook’s previous implementations did. Weexpect Facebook to launch these features in the first half of 2011, but how well theymight perform is unknown.Cross Promotion!Large Developers vs Small Developers!For developers with large installed user bases, cross promotion is becoming anincreasingly valuable way to drive targeted traffic. In 2007, the largest gamedevelopers at the time (Zynga and SGN) tried to create cross-promotional networks ofapp developers via game bars - much like old school link exchanges. However,ultimately, Zynga and SGN used the intelligence derived from these game bars toeither acquire or compete with up and coming developers, and once developers gotscale, they didnt want to make their inventory available to others.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 779!!As a result, this kind of "traffic exchange" game bar faded from prominence in 2009.Despite a lot of talk amongst medium-sized developers about creating cross-promotional alliances, they generally have proven too complex to work out, whencreated by developers themselves. Rather, larger developers primarily cross promotenew apps or specific promotions within other games in their portfolio. Developers tryto target players whose playing patterns or demographic profile fits the target userprofile for the new game. The closer two games are thematically, the more effectivecross promotion can be. These days, youll see "game bars" across the top or side ofmost popular games from large developers, pushing traffic across the developersportfolio of games.The ability to cross promote games has become a significant competitive advantagefor the larger developers. These days, many larger developers a majority of their newinstalls coming from cross promotion. These developers increasingly see their ownapplications as ad networks through which to promote their own services and targetfor maximum monetization. Developers with game portfolios can do powerfultargeting inside their own apps, matching users with the best monetizing apps.Publishers and New Third Party Cross Promotion Networks!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 77:!!However, 2010 saw the rise of new independent third party cross promotion networkslike Applifier and AppStrip (acquired by Tapjoy), created to solve the need amongstsmall developers for increased distribution without significant paid acquisitionbudgets. So far, these cross-promo networks have been gaining traction by enablingdevelopers to both trade and buy inventory across the network. For many smallerdevelopers, these networks offer some of the same advantages that the largerdevelopers experience by cross-promoting within their internal network of sites. Asdevelopers grow, they become less dependent on third parties for distribution.In addition, more small developers started turning to the traditional publisher modelin 2010 in order to achieve distribution with larger partners. For example, Playdomand Kabam partnered with smaller developers. In addition, 6waves continued to growas an international publisher for many developers - helping them localize and crosspromote their games in different regional markets around the world.Overall, smaller developers are hoping that publisher relationships can help themovercome some of the big hurdles to gaining traction before fast followers come in.For instance, if it takes six months for your game to get popular, it could be verydifficult to not be copied and end up #5 or #6 in the market. Small developers needhigh retention and high virality - but Facebook has made virality harder in 2010.Paid AcquisitionWhile cross promotion is becoming a more important way for social games to optimizefor revenue, paid acquisition is still a very important way for social games to get newusers. Ultimately, even with a really high quality game designed for significant viralgrowth, you can only get the viral coefficient so high. Pairing viral growth with paidacquisition is the strategy of choice for most serious social game developers today.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 77;!!Currently, most developers buy their traffic primarily through two channels: 1)Facebook, and 2) Third party ad networks operating on the Facebook Platform.Facebook AdsFacebook Ads is Facebooks performance advertising platformthat all advertisers - including brands, local advertisers,affiliates, and developers - use. While developers haventalways spent a lot of money on Facebook Ads, they arenow. We have consistently heard that the majority of the topten performance advertisers on Facebook are social game developers. In addition,many of the early adopters of new advertising products built by third parties on top ofFacebooks Advertising API are these same developers.The rise of Facebook Ads spending is due to a few factors: 1. Facebook has clamped down on the "wild west" phase of application virality that allowed developers to be very aggressive in spreading through Facebooks (free) viral communication channels. Now, the rules and policies around those channels have decreased the number of new users developers are getting through them. 2. Facebook has also placed increased restrictions on the data that third-party Facebook Platform ad networks have access to (primarily due to privacy concerns). As a result, the effectiveness of that channel has decreased (more on that below). 3. Facebook has added targeting features to Facebook Ads primarily for developers. For example, the "Friends of Connections" targeting feature allows developers to target users who are friends of users of their applications. Combined with other Facebook Ads targeting features, like age, sex, and!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 77<!! location, this new social targeting capability makes Facebook Ads an even more compelling acquisition channel.Thus, while Facebook Ads are increasingly relatively expensive, theyre also quiteeffective. Ultimately, we think the fundamentals for continued spending on FacebookAds by social game developers are strong. Because developers have in-depth insightinto the value of an acquired user, we expect them to continue spending behind theirsuccessful games. This means good things for Facebook.US installs are currently selling for $1.00 (effectively), while international users canbe much less. The range for the price of a US install can vary from $0.50 to $2.00.Some developers are able to get the price down to $0.50 - $0.75 by doing lots oftesting and investing more behind the creative that performs best.Third Party Facebook Platform Ad NetworksFacebook Platform ad networks sprang up almost immediately after the birth of thePlatform itself. Because Facebook has always had a very open policy toward thirdparty monetization services, dozens of ad networks have moved onto the FacebookPlatform to help developers monetize.In the early days of the Facebook Platform, many were skeptical of the "CPI" (cost-per-install) advertising market because they thought it looked like a pyramid scheme -developers with traffic selling to those without cant last that long, many said.Nevertheless, the CPI market has hung around longer than most expected, and haseven experienced a mild resurgence despite new Facebook policy limitations.Over the last couple of years, Facebook added new advertising policies that limitedhow much user data developers can share with ad networks - whereas beforedevelopers were sharing nearly everything, now theyre sharing nearly nothing. As a!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 77=!!result, some third party ad networks have seen substantial decreases in eCPMs,leaving some to exit the market entirely.Nevertheless, those who have kept optimizing have built successfulbusinesses. Developers are still spending on Platform ad networks as an importantsupplemental channel to their Facebook ad spend. While rates are lower, so is thequality of the users. However, these ad networks are still delivering Facebook users,making this channel significantly more valuable to social game developers than all theother ad networks out there that are operating off the Facebook Platform.On the Facebook Platform, US users can be bought for about $0.50, with internationalrates much lower as well.Finally, it should be noted that some social game developers have also built a networkof quiz applications purely for reach purposes. Ultimately, it may be cheaper to buildor buy a network of quiz applications on Facebook, compared to buying installs fromothers. This continues to be a common tactic even today.Cost of Customer Acquisition and LTV!Throughout 2010, developers saw increasing cost of customer acquisition, largely dueto increases in paid user costs and decreases in organic viral distribution. With theseincreasing costs, margins have been getting more squeezed. For example, one leadingdeveloper said, "Last year, we paid $2 per install and got 5 viral installs for free. Thisyear, were paying more per install, and just getting that one."Thus, in some cases, cost of customer acquisition is becoming a very high percentageof gross margins. For instance, if a developer pays $3 for a user that monetizes at $5per year (effectively a $5 LTV, since most of these products are shorter lived thanthat), that leaves $2 for everything else. This is obviously not sustainable, and the!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 77>!!most long-term oriented developers are unwilling to spend at levels that dont matcha certain LTV/CPI ratio threshold.We believe Facebook didnt intend to make users this expensive, but does understandthat that is the case now, and is going to try to alleviate some of this pressure byimproving virality in 2011. For example, at the end of 2010, Facebook introduced new"discovery stories" into the News Feed that tell a users friends when they start playinga game. One other factor that may be affecting prices is that as Facebooksadvertising business grows, developers are increasingly competing for the same top-tier target users as brand advertisers.If prices dont stabilize for developers, we may simply see a slowdown in paidacquisition. However, this is also forcing developers to get more creative with theiruser acquisition strategies, like doing more specials and event-driven promotions.A Look at Growth and Decay of Games Launched in 2010!To get a sense of how different games launched in 2010 have performed, take a lookat the AppData charts below for ten games we selected. Each chart shows theMonthly Active User (MAU) and Daily Active User (DAU) stats each game has achieved. As you can see, different developers (and games) have seen a variety of results,illustrating the challenges, and opportunities that remain, on the Facebook Platformas we enter 2011.As you can see, several of the latest games released (but not all) seem to achievepeak adoption very quickly. We believe this is attributable to the heavy use of initialnetwork cross-promotion and spending. The biggest breakout game we have seensince FarmVille (which peaked in early 2010) is Zyngas FrontierVille - most othershave peaked in the several-million MAU range. Nevertheless, the shapes of most of!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 77?!!the charts below are still substantially different; we are still seeing intermediateheterogeneity despite many of the end results being similar across launches.Nightclub City by Booyah!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 756!!Social City by Playdom!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 757!!Epic Goal by Kabam!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 755!!NanoStar Seige by Digital Chocolate!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 759!!Mall World by 50 Cubes!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 75:!!Family Feud by iWin and BackStage!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 75;!!FIFA Superstars by EA/Playfish!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 75<!!FrontierVille by Zynga!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 75=!!Zoo Paradise by CrowdStar!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 75>!!My Empire by EA/Playfish!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 75?!!Mercenaries of War by Kaboom!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 796!!Baking Life by ZipZapPlay!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 797!!Lucky Train by A Bit Lucky!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 795!!Off-Facebook Promotion!While the vast majority of customer acquisition is happening within the context of theFacebook environment, we are seeing early experiments in off-Facebook promotion,including offline. For example, Zynga struck a deal in 2010 to build a presence inside7-11 convenience stores in the US to drive awareness of FarmVille and other games. Ingeneral, the fact that Zynga is going to 7-11 for growth reflects not only their size,but also the rising cost of customer acquisition within Facebook.In addition, Facebook has launched several offline initiatives to drive the growth ofCredits. In October 2010, Facebook started selling prepaid Credits gift cards inTarget, Wal-Mart, and Best Buy in the United States. In addition, Facebook announceda partnership with Plastic Jungle to let consumers trade in other gift card balances forCredits. In general, Facebook is making a big effort to make it easy for people to getCredits through a variety of alternative payment methods.Network Strategy and Economies of ScaleAs we near the fourth anniversary of the Facebook Platform, the network strategyemployed by larger developers and economies of scale are continuing to createsustainable barriers to entry to new developers. For the biggest developers, itsbecoming increasingly easy to launch new titles via cross-promotion using the existingnetwork of users. For example, in the second quarter of 2010, Zynga launchedFrontierVille and brought each of them nearly 10 million users within two weeks afterlaunch through a combination of cross promotion and spending.In 2011 and going forward, we expect the largest and most well-financed developersto continue to invest in every interesting genre and push aggressively to gain tractionthrough similar means. This strategy favors those developers that are buildingsophisticated customer acquisition systems internally. Developers that figure out how!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 799!!to buy the best users the most efficiently will be able to increase their leads evenmore over others through increased spending over time. While third party agenciescan help some, ultimately this is a function that all serious developers need tocultivate in house. For service businesses, marketing analytics are just as core to theoperation of the business as traditional "product" metrics.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 79:!!6. 2011 Market Size and TopDeveloper Revenue Estimates!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 79;!!2011 Social Gaming Market SizeIn our last report, Inside Virtual Goods: The US Virtual Goods Market 2010-2011, wepegged the total US virtual goods market at $1.6 billion in 2010, growing to $2.1billion in 2011, and the social gaming segment of that total at $835 million, growingto $1.2 billion in 2011.Based on our research, we estimated that the total number of people paying forvirtual goods in social games and apps (either directly or through offers) in the US at12 million per month, or 8% of the overall US social networking population of 160 to170 million. We estimated that the top 1-3% of users spend on average $15 - $20 permonth, generating about $560 million in annualized revenue, and that the remainingpaying users spend on average $1.50 - $2.50 per month, generating another $240million in annualized revenue.Collectively, this means all paying users combined are generating an average of about$5 in revenue per user per month (ARPPU). That means many developers are seeingtotal monthly ARPU of about $0.25 - $0.50, which is admittedly low. What we saidthen is still true today: "However, it must be remembered that users spend less timein social games and virtual gifting environments than they do in other types of onlinegaming. Sessions are shorter, retention is lower, and many developers strategieshighly depend on the growth of the social networking platform in order to be able tocheaply and continually get new people into the top of the funnel through aggressiveviral marketing."How have our estimates on the social gaming market changed since then? Currently,theyre tracking as expected. While Facebook grew a little faster than we wereexpecting, we expect the overall number of users purchasing virtual goods in socialgames to roughly track linearly with the growth of Facebooks audience, which weestimate to be about 30% for 2011.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 79<!!Commensurate with audience growth, we are seeing increases in ARPUs by developersas well, as they improve their game designs and acquire more valuable customers. Asa result, we estimate developers will see about 20% improvements in ARPU in 2011.Together, were estimating 50% overall growth in the US social gaming market in 2011to $1.25 billion overall, with much of this number coming from the largest developers.This is a slowdown from the 70% growth that we saw in 2010, but is still a significantgrowth rate given the size the market has attained, and the number of environmentalvariables in flux. How does this break down amongst top developers? Lets take a look:Top Developer Revenue EstimatesEach year, we make an attempt to speculate about how several of the top developersare performing, both in terms of revenue generation from virtual goods and the coststructure required to support the estimated level of revenue. The purpose of thisestimation exercise is not to provide pinpoint estimates of developer revenues butrather to provide a framework for how we believe several of the top developers mightbe performing. These reflect our best estimates as to how these firms are performingand should be treated as illustrative of the general scale and broad parameters offinancial performance, not exact financial breakdowns of those firms’ operations.!Zynga!Zynga continued to be one of the most important companies in social games in 2010.While the company continued to grow in 2010, the growth for both the company andthe space was not quite as robust as what was experienced in 2009. The table belowcompares some high-level fundamentals for the company from the time of the originalreport and this years update:!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 79=!!Zynga at a Glance EOY 2009 November 2010Monthly Unique Visitors 217 million (based on 200 million(Portfolio-summed) AppData)De-Duplicated Monthly 100 million 110 million (estimated)Uniques (estimate)Paying Users 1 million 1.5 million (estimated)Headcount (full-time 750 1600employees and contractors)The numbers cited in the 2009 column in the table above were derived from datafrom a Zynga blog post, which provided some high level summary information aboutthe company. The numbers for the November 2010 column are a combination of dataderived from AppData and from other sources.If 2009 was a year for massive audience growth, 2010 was a year to consolidate gainsand focus on increasing per-user monetization as well as the percentage of users thatparticipate in some form of transaction. This was probably a reaction to theincreasing challenges associated with driving audience growth via viral distribution orby riding the wave of the growth of Facebooks game-playing audience. Without theability to cheaply or quickly grow the overall audience, we believe the company spentan increasing amount of time and energy on increasing the revenue performance of itsnetwork of games. In attempting to determine Zyngas revenue, there are a few keythings to consider: • Not all games monetize meaningfully - While Zynga has over 25 live games, we believe that only the largest games contribute meaningfully to revenue. While one cannot discount the revenue contribution that!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 79>!! comes from those games, understanding the core games is the key to determining the likely earnings potential for the business. • 90% of all revenue comes from virtual goods (offers and direct payments) - Based on numerous interviews with company executives, Zynga has maintained that the company derives the vast majority of its revenue from virtual goods. Those virtual good can be paid for by either incentivized offers or direct payments. Either way, understanding virtual goods should make it fairly easy to understand how well the companys games monetize. • As the company has scaled, that traffic growth has likely included increased traffic from non-US and non-English markets where monetization rates are lower. • At scale, its important to understand the relationship between total uniques, de-duplicated uniques, and actual purchasing users. Estimating revenues for companies at this scale requires a different approach than a simple bottoms up estimate from a single game or small studio. Given that Zyngas overall audience, not accounting for de-duplication, appears to have grown by 8-10% on the Facebook platform this year, making accurate estimates of the companys unique audience critical when deriving revenue estimates.There are a few compelling reasons to believe that Zynga was able to improvemonetization over the course of 2010: • There was tremendous growth in the core on-Facebook Zynga Poker franchise, which grew from a monthly audience of over 35 million monthly active users, up from about 22 million users at the end of 2009. Given that Zynga poker was one of the first Facebook games to really grow on the platform, seeing an old game grow by roughly 60% in one year is surprising. Historically, poker has been one of the highest monetizing categories of all social games. It seems reasonable to!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 79?!! associate the growth in Zynga poker usage with increased revenue and profitability for the company. • While Farmville did not continue its meteoric rise in 2010, the company did have success with a number of games in the Flash simulation and resource management genres. Treasure Isle and FrontierVille, both of which are in the relatively high monetizing simulation and resource management genres, were released in 2010 an are both in the top 10. While the release of those games did not necessarily increase the companys overall audience, even share shift within the Zynga portfolio toward higher monetizing games would boost the companys revenue and profitability. • With increasingly expensive costs of acquisition, it seems likely that Zynga would invest more of their time, energy, and resources to the games that have the best monetization rates relative to the cost of acquiring users. • Finally, we believe that Zynga has relied heavily on the ability to use its own existing network to drive traffic to new launches. As such, we believe that has had two effects. One, it has kept the cost of net new customer acquisition down while allowing all of their new games to get an early spike in traffic. Second, we believe that Zynga has been able to keep a large fraction of its paying users within its own network and has been able to get them to play and pay for multiple games, giving them a higher network-wide ARPPU than other firms. • Total November 2010 ARPPU o Total Unique Audience for Core Games = 190 million monthly active users / 2 games per unique user = 95 million unique users o Total Number of Unique Paying Players = 1.5 million o Average Revenue per Paying User (ARPPU) = $30 per month o Contribution from non-core games = $4 million!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7:6!! o Total Revenue, ex-advertising = $49 million per month • Total November 2010 Expenses o Headcount Expenses = 1,600 employees x $10,000 per employee = $16 million o Servers and Operations = $10-12 million o Marketing and Customer Acquisition = $6 million o Total Expenses = $32-34 millionWhile the estimates above represent a fairly robust $600 million annual run rate, itsinstructive to note that Zyngas overall network traffic is down about 20% from itspeak of roughly 260 million monthly active user in March 2010. Keeping this in mind,its entirely possible that the company was trending toward an annualized run rate of$1 billion (or roughly $80 million per month) at some point earlier this year. Growth in Core Games Traffic 2010, Zynga (MAU, In Millions)!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7:7!!Playfish!Playfish was a major story in social gaming for 2009 - the company managed to growvery quickly, built a strong reputation for building very high-quality games, and wasultimately acquired by Electronic Arts for a deal that could be worth as much as $400million. Similar to what we did for Zynga in the exercise above, the focus for Playfishis on the revenue generated by the "core" games, not the entire suite of games thecompany launched. In 2010, Playfish found its greatest success in continuing to focuson its ability to build strong games in the simulation and resource managementgenres, with the successful launch of a few games in that genre. The company alsoexperimented with launching a number of games that either leveraged ElectronicsArts sports franchises (namely Madden and FIFA) or had more hardcore themes likeGiven the nature of the games that Playfish has launched, we believe that theirrevenue is even more concentrated than what we reported for Zynga. Given thenature of the games Playfish has developed, we suspect that there are 3 games thatcurrently generate the bulk of their revenue - Country Story, Pet Society, andRestaurant City.Growth in Core Games, Playfish 2010 (MAU, in Millions)!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7:5!!Because Playfish has been less forthcoming about financial performance in the press,we had to make some assumptions about how their games monetize and how thatmonetization is spread across titles: • The only games that contribute meaningfully to monetization are Pet Society, Restaurant City, Country Story, My Empire, and Hotel City. The other games generate traffic but do not contribute meaningfully to monetization as of the time of publication. • We suspect that Playfish games have more engagement than average but more variable monetization. Historically, the company has devoted more resources to game design and engagement than aggressive promotion of monetization. Our estimate is that Playfish achieves something in the range of approximately $20 ARPPU for its core monetizing games, with Pet Society possibly doing 20-25% more on an ARPPU basis.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7:9!!Electronic Arts’ acquisition of Playfish creates numerous challenges for estimatingrevenues and performance for Playfish. Now that the company is a part of ElectronicArts and no longer an independent company, it is difficult to estimate and account forall of the human and technical resources that Electronic Arts has devoted to theproject and how the company’s cost structure might have changed following theacquisition. While we do believe it’s possible to come up with reasonable estimatesfor the company’s revenue generating capabilities, the lack of clarity around thecompany’s cost structure means that it is too difficult to make an accurate predictionon the company’s performance for this report.Playdom!Growth in Core Games, Playfish 2010 (MAU, in Millions)!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7::!!Playdom has its roots in building games on the MySpace platform. Over the past 18months, the company has completed a transition to a more meaningful presence onthe Facebook platform, both via organic development as well via acquisition. LikePlayfish, Playdom is now part of a larger company (Disney). However, because thatdeal closed late in calendar 2010, we feel comfortable making some estimates aboutthe company’s performance given that they spent the majority of the year as anindependent company: • Total November Revenue o Total Unique Audience for Core Games = 30 million o Total Number of Unique Paying Players = 400,000 o Average Revenue per Paying User = $20 per month o Revenue from Non-Core Games = $500,000!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7:;!! o Total November Revenue, ex Advertising = $8.5 million • Total November 2010 Expenses o Headcount Expenses = 600 employees x $12,000 per employee = $7.2 million (We think headcount is slightly higher per employee for Playdom because a larger portion of staff are US-based.) o Servers and Operations = $2 million o Marketing and Customer Acquisition = $2 million o Total Expenses = $11.2 millionBased on the numbers presented above, it appears that Playdom might be losingmoney on a monthly basis. It is important, however, to understand how Playdom gotto where they are over the course of the year. Its very unlikely that the financialpicture looked this way over the course of the year.At the end of 2009, Playdom had 250 people in terms of headcount and didapproximatly $50 million in revenue. The company also claimed to be profitable atthat point and had around 28 million monthly uniques. For the purposes of ourcalculations, not all 28 million of those uniques would count as being involved in thecore suite of games that monetize well. Over the course of the year, the companymore than doubled headcount but audience growth did not keep pace with thatdoubling. The company also made massive investments in its own internalinfrastructure to support a strong set of centralized services and had over $40 millionin new venture capital to allow the company to scale operations in advance of futurerevenues.For the year, we estimate that the company generated somewhere betweeen $60-$80million, up from the rumored $50 million at the end of 2009. Its very likely that thecompany was running at near breakeven or slight profitability for the majority of theyear as the companys rapid growth in headcount and infrastructure relative toaudience means that they must have either spent more than they brought in in!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7:<!!revenue, greatly improved monetization, or some combination of the two. Thecompany likely will exit the year on a $7-9 million per month run rate.CrowdStarGrowth in Core Games, CrowdStar 2010 (MAU, in Millions)Last year, CrowdStar was largely considered an emerging story, a new company thatwas showing impressive growth potential and growing its audience very rapidly. Thisyear, CrowdStar has clearly made it into the top-tier of social games developers. Thecompany continues to be a major player in the space and we have tried to estimatetheir financial performance below: • Total November Revenue!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7:=!! o Total Unique Audience for Core Games = 33 million (does not include Quiz Planet) o Total Number of Unique Paying Players = 375,000 o Average Revenue per Paying User = $20 per month o Revenue from Non-Core Games = $1 million o Total November Revenue, ex Advertising = $8.5 million • Total November 2010 Expenses o Headcount Expenses = 150 employees x $12,000 per employee = $1.8 million o Servers and Operations = $2.5 million o Marketing and Customer Acquisition = $2.5 million o Total Expenses = $6.8 millionOne of the interesting things to note about CrowdStar, when compared to its peers, isthat it is able to manage a fairly large audience on a much smaller headcount base.Also, CrowdStar has not raised a large venture capital round, which we believeinfluences the way that the company looks to scale its expense structure. For theyear, we believe that CrowdStar, like Playdom, generated somewhere in theneighborhood of $60-70 million in revenue in 2010 and will likely exit the year at an$8-$9 million run rate heading into 2011.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7:>!!Section II - The Future!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7:?!!1. Facebook Platform Changes andthe Relationship Between Facebookand Application Developers!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7;6!!Impact of Platform ChangesWhile Facebook announced a "Platform Roadmap" at the end of 2009 that highlightedthe major changes it was planning for 2010 and gave developers a sense for thedirection Facebook was taking the Platform, no such similar roadmap has beenreleased this year.Last years changes had a significant impact on the Facebook Platform in 2010. Takentogether, the removal of the Notifications channel, the relocation of access toInvitations, the changes to the News Feed (and platform policies preventing auto-popups), and the creation of an email delivery API significantly decreased applicationvirality and impacted the specific ways developers optimized their apps for growth,retention, and engagement. As we mentioned above, the theme of 2010 for many topdevelopers was "half the traffic, double the revenue per user" (although neithermetric swing was that extreme in actuality).Facebook has hinted that it is planning on adding new iterations of viral channels in2011 that could alleviate the distribution burden that developers have sufferedrelative to earlier iterations of Facebook Platform communication channel design.While its possible that Facebook might open up new high-signal channels that willlead to meaningful new growth for developers without making users feel spammed,we would advise very cautious optimism on behalf of developers. Facebook is alwaysthinking about whats best for the long run, and that might not mean decreasing thecost of user acquisition for developers in the next few quarters.Ultimately, Facebook has the luxury of dialing back the viral channels to make themless spammy because, even with the changes, it still presents by far the bestopportunity for developers. Facebook itself must continue to balance the tension ofcreating developer opportunity without ruining the overall Facebook user experience.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7;7!!Facebook Platform Policy and the LOLapps Example!As Facebook has matured, it has come more into the public policy limelight, and thushas taken steps to discipline (and in some cases make public examples of) developersthat violate its policies, particularly those that relate to data privacy. Last year,Facebook banned two third party ad networks from the Platform for violating itspolicies on data privacy. In October 2010, Facebook suspended all of the applicationsof LOLapps, one of the top 15 developers on the Facebook Platform by monthly activeusers, for a few days, following concerns highlighted in the press about a third partydata company (Rapleaf) that LOLapps was working with. LOLapps subsequentlystopped all data sharing that was against Facebook policies, and was reinstated to theplatform, but getting its business instantly and completely "turned off" for a few dayswas a very traumatic experience for the company.A couple of weeks later, Facebook suspended viral channel access for all of itsapplications and games except one for a period of up to six months, effectivelyneutering many of the companys products. Heres how one LOLapps game, CritterIsland, trended in terms of DAU in the few days immediately following the viralchannel cutoff on October 29, 2010.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7;5!!In general, we expect Facebooks motivation to prevent cases of user data leaks dueto Platform companies to only increase in 2011, particularly as the narrative aroundFacebooks "openness vs. privacy" dilemma is continued by business press.Developers and Advertising SpendDevelopers spent more money on Facebook Ads in 2010 than they ever had before - bysome accounts, as many as 7 of Facebooks 10 top performance advertisers aredevelopers. Why?Fundamentally, because developers have a very good sense of the lifetime value ofFacebook users, theyre in the best position to spend more aggressively to acquireusers that fit their target monetization profile. As a result, developers have beenaggressively using Facebooks latest ad targeting features to improve their paidacquisition efforts in order to "fill in the gaps" in their own cross promotional effortsand promote games to new demographics. Facebook has sales reps devoted to thelargest developer accounts. More generally, its also a smart move on the largestdevelopers parts to more directly align their financial incentives with Facebooks.Now, Facebook has more short term reasons to make sure developers are makingmoney.At the same time, developers are getting squeezed by the increasing cost of paid useracquisition in the second half of 2010. Many developers are seeing users cost up to60% or more of projected lifetime values, which isnt sustainable. If Facebook doesntimprove organic distribution channels, we could see a slowdown in developer adspending in 2011.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7;9!!2. The Future of Facebook Creditsand the Changing MonetizationLandscape!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7;:!!Impact of Facebook Credits!While many developers strongly resent Facebook imposing Credits on them, and theend of the day, much of their concern (and the ensuing drama) is a moot point givenhow dependent developers are on Facebook. While some developers (like CrowdStar)jumped on the Credits bandwagon early, others are holding out as long as they can.Ultimately, the 30% fees will have a very significant impact on developers in the shortterm. Facebook will need to grow the market for Credits significantly beforedevelopers break-even when taking fees alone into account. (For perspective,developers coming onto the Facebook Platform from China are thrilled to learn thatfees are as low as 30%.)Nevertheless, developers continue to vote with their feet and invest heavily indeveloping for the Facebook Platform, because thats where the richest opportunitieslie.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7;;!!As Facebook rolls out Credits more broadly, it is displacing many of the third partypayment aggregators (like Offerpal and Super Rewards) who were increasingly tryingto move up the payments stack. Offerpal (now Tapjoy) was even been beta testing itsown universal virtual currency, but it did not become very widespread.Instead, more direct and alternative payment providers will be partnering directlywith Facebook to deliver payments for Facebook Credits. Facebook has alreadypartnered with PayPal, Zong, TrialPay, PlaySpan, Rixty, and many others. We expectto see more partnerships with regional, mobile, and pre-paid providers in 2010.All in all, although its been in developer testing since late 2007, we think FacebookCredits will start to become a substantial revenue generator for Facebook in 2011.Offers and Performance AdvertisingAlthough the offers industry took a big PR hit in late 2009, the space is still relevantto the social gaming monetization ecosystem, though the only company to havesuccessfully launched a partnership with Facebook thus far is TrialPay.The removal of spammy and scammy offers at the end of last year did decrease offersrevenues, and spurred developers toward increasing their reliance on directmonetization methods. However, by the end of the year, offer networks sawimprovements in monetization rates nearly back to earlier levels, due to increases ininventory quality. The space is continuing to try to improve quality, and we expectthis to happen over time, as players in the space create increasingly directrelationships between brand advertisers and social game developers.Commensurate with increasing numbers of brand advertisers entering the space willbe continuing iterative product improvements on the ads themselves. Inside socialgames, most offers have usually looked like a plain wall listing 10 or 20 offers. In!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7;<!!2011, we hope to see better integrations with offers more befitting to the game andits audience. For example, games targeted at younger female players could offerspecific product samples at appropriate points within game play.One final note: while we havent discussed banner advertising much in this report, itremains a small but sustainable part of the market. While many people thought cost-per-install ads would go away after the initial Facebook Platform rush, these ads havehung around for a long time. Today, some social game developers use banner ads forsupplemental income, especially with engaged users (but not with new users, so as tokeep them in the game). Banner ads still play a more prominent role in the "quiz"-type applications that try to monetize users as much as they can as quickly as possiblebecause they usually only engage with the application once.Role of Alternative Payment SystemsAlternative payment methods, like mobile and prepaid cards, have becomeincreasingly important to social game developers who are hoping to expand theirmonetizable user base.Because it is hard to monetize users in different countries due to the lack of creditcards and bank accounts in many regions of the world, emerging regional or localsolutions have been gaining more traction by partnering with payment aggregatorsand now, Facebook, to increase monetization in different markets. Some paymentaggregators offer dozens of payment options to users in several European options, forexample.In particular, mobile payments and prepaid cards have been instrumental inexpanding the virtual goods markets in new countries for developers, despite the highcarrier fees. In late 2009, we also saw the first prepaid cards for Zynga, Playfish, andPlaydom games launch in US retail stores (through partnerships with InComm),!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7;=!!followed by the launch of Facebook Credits prepaid cards in Target stores in 2010,making social game purchases more readily available to younger players andconsumers without credit cards or PayPal accounts.All in all, we expect alternative payments to continue to play a meaningful role insocial game monetization in 2011. As Facebook continues to grow both internationallyand amongst older and younger users in the US and abroad, microtransactioninfrastructure is going to be absolutely vital to the growth of the market.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7;>!!3. What Does the Emergence of theBig 4 Mean for Small and MediumSized Developers?!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7;?!!Over the course of 2009, the social gaming landscape saw the emergence of the "Big3" developers - Zynga, Playfish, and Playdom. Over the course of 2010, the "Big 3"became the "Big 4" with the emergence of CrowdStar. Those four companies, for themajority of 2010, were able to distance themselves from the pack in terms ofrevenue, monthly and daily active users across multiple social networking platforms,and hit releases. With the emergence of three large, established players, itsworthwhile to contemplate what this competitive dynamic means for smaller andmedium sized developers.Growing Value of Cross PromotionOne of the greatest challenges for developers of all sizes is keeping abreast of thechanging landscape of the rules and regulations of the Facebook platform. In 2010,there was a continued decrease in the availability of low-cost social distributionchannels on the Facebook platform. As a result, we have seen those companies withcaptive distribution, namely the Big 4, have had a significant advantage in theirability to launch new titles and direct meaningful amounts of traffic to those newtitles. As a result of the value of that captive distribution, which is not available atany price to third party developers, new services are emerging to offer developers asimilar opportunity to share traffic across games.These new services, namely the offerings from TapJoy, AppBar, and Applifier, allowdevelopers to engage in click exchanges where every click a developer sends toanother developers game earns them the right to earn a click in return, minus a smallcommission for the network provider. We will be monitoring the efficacy of these 3rdparty click exchanges in driving meaningful, quality volume to emerging developers.Zynga Mafia Wars Cross Promotional Footer!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7<6!!Playfish Cross Promotional BarMarketing and Customer Acquisition!Related to the section above, the overall question of marketing and customeracquisition continues to loom large for small and medium sized developers. As wehave mentioned earlier in this report, Facebook has taken some very concrete stepsto reduce the number of free channels available to games developers looking toacquire users. While many of these platform changes have been in response toaggressive acquisition tactics by developers, the net effect has been to make free orviral acquisition more difficult.While larger, well-funded social games developers might have the financial resourcesto invest in customer acquisition prior to gathering enough data to determinecustomer LTV and other per-user monetization metrics, smaller developers with lessfunding are typically more price constrained. As such, their ability to invest heavily inpaid customer acquisition is limited compared to their better funded peers until andunless they can figure out that they are cost effectively acquiring users.A second threat to marketing and customer acquisition on the horizon is the impact ofFacebook Credits, which we alluded to earlier in the report. The 30% take after thefact will likely have a negative impact on overall customer lifetime value, as mostdevelopers look at that on a net basis. By decreasing the LTV, small developers in!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7<7!!particular will find it difficult to justify customer acquisition. In addition, becausemany small developers have portfolios of 1-2 games, they are not able to spread thatcustomer acquisition spend over multiple titles to defray the cost.From CrowdStar to Kabam!In 2009, the big growth story was the emergence of CrowdStar, which vaulted into theupper ranks of Facebook developers from relative anonymity. CrowdStar wasemblematic of what many other emerging developers aspired to achieve, namely tocrack the top 5 ranks in terms of total audience. In 2010, the focus of mostdevelopers was quite different. While there were a few companies that were able tovault themselves into the conversation of relevance based on overall audience size,namely Digital Chocolate and RockYou, we also saw the emergence of a new strategyfor small to medium developers. This new strategy was to focus much more energy onbuilding deeper games that are more about attracting and serving high monetizingaudiences instead of looking to achieve large aggregate audiences.Kabam, which was formerly known as Watercooler, was able to fly under the radar asit built Kingdom of Camelot into a game that boasts a modest audience by socialgames standards but has above-average monetization. This emerging strategy forsmaller developers can succeed for two major reasons: • Largest social games developers are focused on games with large aggregate audiences - The largest social games developers were largely focused on games that would reach audiences of tens of millions of users on a monthly basis for most of 2010. While this strategy does pay dividends in leaderboard comparisons, it is not the only way to build a successful social games. For companies focused in building games with large monthly and daily active user counts, the idea of building hardcore games with sub 10 million user monthly active user counts is not necessarily interesting.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7<5!! • High rates of per-user monetization allow smaller developers to fund customer acquisition - Because Kabam has worked on games that offer above- average monetization rates, the company is able to spend money to acquire customers to play the game. While the audiences for some of the hardcore games they have built is finite, they can afford to reach and hopefully retain those people long enough to make the LTV math work out.Kabam is likely the first and most visible example of a medium sized social gamesdeveloper focused on carving out a successful strategy that makes sense in thecurrent environment.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7<9!!4. Off-Network Games with FacebookConnect!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7<:!!iOS Devices!In late 2010, leading social games developers are once again looking at theopportunity on iOS devices. There are a few things that have driven the renewedinterest in this space. First, there are simply more devices out there for developers totarget, including the iPod Touch, iPhone, and iPad. All of those devices have provento be popular gaming devices. Second, weve seen a few pioneering companies,namely ngmoco, demonstrate that it is very possible to build real revenue on the iOSplatform using free-to-play games. Despite those positive factors • Lack of Flash Support - The majority of the top-performing Facebook social games are written in Flash. Apple, to date, has not been willing to allow Flash on iOS devices, meaning that those games that developers would like to port to that platform must be modified to deal with the lack of Flash support. While there are some tools looking to allow web-based Flash games to be playable on iOS devices, these technologies are still in their infancy. • Existing Genre Coverage - While the leading social games companies have taken a wait-and-see approach to the iOS platform, mobile games developers have been focused on building games that use similar themes to those on Facebook. For example, while Zynga only recently released Farmville for the iOS platform, ngmocos We Rule has been a very popular free virtual farming game for some time. There are also competitive products in several other genres, namely poker, pets and other games. • Social vs Single Player Games - One other reason that the path from the web to social mobile will be challenging is the nature of gameplay on mobile devices. While mobile devices do have built-in connectivity, users do not always have access to a phone network or Wi-Fi network to connect to a game server. Also, because there is not any ubiquitous social network to connect game players with each other, both finding people with whom to play and using!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7<;!! social networks to distribute content are difficult. As such, many of the most popular, successful social games do not have a central game server to keep track of communications between and among users. There are some notable examples of games, namely Words with Friends, that are social and do have connectivity as a core use case, but that is not the dominant model. There are a number of companies, namely ngmoco and Apple with its GameCenter product, working on building in a ubiquitous social layer on mobile, there is not any company that can yet claim to have cracked the code on that problem. • Distribution - Finally, one of the things that has helped social games grow quickly has been low-cost, high volume distribution. To date, it has been hard to get social distribution on the iPhone, for many of the reasons described above. While there are plenty of channels for paid distribution, these channels have more friction and can offer (in the aggregate) fewer users than whats possible on social.Android Devices!The other opportunity that could become interesting in mobile social is the Androidplatform. Android continues to grow and offers game developers a global, cross-carrier opportunity to develop games that could reach a potentially massive audience.The Android platform also has some different challenges than the iOS platform. First,the Android platform supports Flash, meaning that developers might be able to createsocial mobile games that integrate with and support Flash. That should reduce thedevelopment time required to build mobile products. Second, there are a number ofcompanies, namely Scoreloop, OpenFeint, and Papaya Mobile, who are activelyworking to build a social layer to enable the types of social interactions that workwell for web-based social games. • No Support for In-App Purchases - At the time of publication, the Android platform did not support in-app transactions. In order to have a robust, interesting social games (or games for that matter) experience on Android, in-!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7<<!! app purchases and the related support for microtransactions is a requirement to make those kinds of games work. While there are 3rd party solutions, such as those provided by Papaya and Zong, having a platform-provided solution would be a real boost to the ecosystem. • Device and OS Fragmentation - While the iOS platform does have some fragmentation (users on different version of the iOS operating system, the differences between the iPad, iPod Touch, and iPhone), the Android ecosystem is much more fragmented. There are many more devices, each with their own screen dimensions, input schemes (keyboard vs no keyboard), and various flavors of the Android operating system. Supporting all versions of Android on all devices takes a lot of resources but expands reach; trimming the scope of supported devices saves resources but can shrink the addressable market. • Higher Friction Checkout Experience - One of the principal advantages the iOS platform has had with microtransactions is that Apple already has over 150 million credit cards on file from its own iTunes store. The Apple checkout experience is generally friction-free once youve given them your credit card information. • Broken Discovery Process - While the Apple app store is really well merchandised, there are a growing number of Android app stores, most of which lack the polished presentation of the Apple App Store. Developers have remarked that the difficulty in discovering content in the Android app store contributes to making things more difficult when it comes to being found by consumers looking for games.In many ways, the Android experience today mirrors where the Apple iOS App Storewas around this time next year. With sustained effort and growth, its likely that theAndroid platform will eventually become a promising platform on which to build socialgames.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7<=!!Open Internet and Facebook Connect!In 2009, Zynga announced that they would launch the FarmVille.com destination siteas a standalone place where people could play their hit game, FarmVille, offFacebook. There was rampant speculation about what it meant for the social gamingindustry. Since the initial announcement, we have not seen further public activity onthis front, but that doesn’t mean that the company has abandoned opportunities offFacebook.Before delving into this argument too deeply, it’s important to remember why gameson social networks, Facebook in particular, are growing so quickly. Many of thesegames and game concepts are not new. What’s new is the combination of low-costand low-friction distribution on social networks, a working virtual goods model, andrapid user acquisition by the underlying platforms themselves. This is a really potentcombination that’s clearly working.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7<>!!On the open Internet, game developers have two ways of acquiring customers. Oneoption is do a deal with a big games portal or other centralized distribution point. Asecond option is to advertise on the Internet and drive users to a destination site.Either way, the dominant model is to find people on the web and drive them to yoursite or the place where your games are available. Part of why games on socialnetworks are growing so fast is that they break this model; instead of finding peoplewho want to play games and driving them to your game, social games turn this on itshead. Instead of chasing people down and trying to get them to play gameselsewhere, why not just put the games where the users already are? Turning thisparadigm on its head means you can do one really important thing – you can reachpeople who aren’t looking for games.For Zynga,one of the biggest impediments facing continued growth is the combinationof Facebook as the only large-scale attractive social network on which to deploy andmonetize games and the company’s own deep penetration of the existing populationof people on Facebook interested in games. As was stated earlier in this report, wedon’t see another social network with Facebook’s combination of reach, distributionopportunities, and monetization opportunities on the horizon. There are otherplatforms with reach, growth, or good monetization, but not any one platform thathas the scale, growth, viral channels, and monetizable audience that Facebook offers.Changing that dynamic will take a long time. So, in the meantime, Zynga is limited toan audience on Facebook where they’ve already achieved deep penetration.The open Internet is the one platform at least has the scale opportunities that Zynganeeds to continue growing its audience off of an already large base. As a result, we’veseen Zynga continue to make overtures toward expanding their off Facebookpresence. In 2009, we saw the launch of FarmVille.com as a standalone domain thatwould allow people to play FarmVille without being on Facebook. Zynga also signedpartnerships to get Farmville on two of the top casual games sites, namely Yahoo andMSN (although FarmVille is no longer available on MSN). Earlier this year, there were!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7<?!!rumblings that Zynga was poised to launch Zynga Live, a standalone site that wouldessentially be a social network for games. Despite repeated rumors of impendinglaunch, Zynga Live was not released in 2010.In last year’s report, we presented a framework to determine what it would take for agame, or collection of games, to succeed off Facebook. We still believe the corethree principles outlined in last year’s report still hold. The three characteristics aresummarized below: • Wide appeal – The types of casual games that Zynga builds require a large user funnel to make them work. Given the relatively low conversion rates from free to paying users and the relatively modest per-user monthly revenue numbers, social games require a lot of users to make the business model work. Games that have broad appeal have the opportunity to attract a very large audience because they have the opportunity to appeal to a wide swath of the Internet audience. • Known monetization – Zynga has a number of games, particularly those in the resource management space, that monetize well. If the web audience ends up being less lucrative, you could still afford to spend to build up the web user base by subsidizing the web property with revenue from Facebook. If the economics are the same, there’s no issue. Having a known customer lifetime value would allow Zynga or anyone else to figure out whether there are opportunities to cost-effectively acquire users on the Internet. • Knowledge of customer acquisition tactics that work at scale – One nice thing about the Internet is that you’re not restricted by social networking platform policies around how often and through which channels you can contact users. For all of that benefit, though, you lose all of the known things that work on Facebook but do not exist on the open Internet (the wall, the News Feed, notifications, etc.) and need to learn what works on the web. This could be a!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7=6!! positive or a negative – were not sure how steep the learning curve would be when it comes to succeeding on the web.It is important not to overlook the disadvantages of being off of a social networkingplatform. One of the best things about building games on social networks is that youcan be ambient – having a presence there means that you get many moreopportunities to engage users when they’re not thinking about your game. They couldbe messaging a friend, reading an article, using IM, or otherwise making use of theFacebook platform when you hit them with a call-to-action that drives them back toyour game.However, there are other reasons that building sites like FarmVille.com are more thanjust a hedge against Facebooks future platform changes, particularly for Zynga: 1. While Facebook has over 500 million monthly active users, thats a subset of the total addressable Internet population for Zynga. Allowing users to play Zynga games outside of Facebook opens up their total addressable market. The logic for doubling down here has less to do with dependence on the fickle nature of the Facebook platform and policy changes and more to do with the opportunity to reach people who are not playing games on Facebook. 2. Zynga has not seen the same type of audience growth in 2010 that they were able to acheive in 2009. If the company is interested in continuing to grow its audience, as opposed to just focusing on monetization, they will eventually become constrained by Facebook. There are only so many Facebook users who are interested in games and have not yet encountered a Zynga game. More than anything, the company needs to find ways to acquire net new customers for their audience. There will be a day when theyve simply penetrated Facebook to the point where the companys future growth prospects will have to come from some other platofrm or channel.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7=7!!With overall audience growth slowing in 2010, we believe that the case for Zyngadoubling down on its off-Facebook strategy are even stronger. With slowing year-over-year audience growth, the company will have to think seriously about where elsethere are growth opportunities. Second, the companys portfolio of broadly interestinggames has grown, with the addition of FrontierVille and Treasure Isle in 2010.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7=5!!5. Will Another Platform Other ThanFacebook Emerge?!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7=9!!Since the Facebook Platform launched on May 24, 2007, other social networksfollowed suit and launched their own developer Platforms as well. Google madewaves in 2010 with several significant acquisitions. At the same time, major portalslike Yahoo and MSN have been expanding their own efforts to create applicationplatforms on top of their services as well. But will anyone other than Facebookemerge?Google!The biggest story in the social platform landscape in 2010 was Googles series ofrelated acquisitions and rumored plans to create some kind of service more directlycompetitive with Facebook. In July, it was reported (but never officially confirmed)that Google had acquired a stake in Zynga. In August, Google acquired Slide, a largedeveloper of social applications and games, for $182 million (with earnouts up to $228million). Then, later in August, Google acquired Jambool/Social Gold, a paymentsprocessor and maker of tools for virtual economy management, for a rumored $70million. Finally, at the end of August, Google acquired SocialDeck, a developer ofmobile social applications, for an undisclosed sum.Many rumors have swirled regarding what Googles social strategy is exactly, and whois running it. Fundamentally, there are two basic beliefs about what Google will try todo: 1) Google will try to compete directly with Facebook by building out its own socialgraph and platform, seeding usage through its existing services, or 2) Google willdeepen its existing services with more functionality oriented around digital goods andusers’ friends.Exactly how the first scenario would play out is tough. Facebook has a 550 millionuser head start, and an extremely high-fidelity social graph (in general) compared toan email contact list. Ultimately, it would going to take someone with Googles sizeand strength to have enough muscle to make a dent in a space where so manymarkets are dominated by Facebooks network effects. However, we expect that even!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7=:!!efforts by someone like Google would still take many years to gain a substantialbeachhead. Of course, Google could accelerate its own growth by prioritizing its ownprofiles and deprioritizing Facebook content in search results, but that might createbigger problems for Googles reputation and integrity.Google has bought a cross-platform games company in Social Deck, a payments layerin Social Gold, and a social apps team in Slide. Google is also making a big push onmobile with Android, the TV with Google TV, and the browser with Chrome. We dontthink Google will build a full-fledged standalone social network to compete head onwith Facebook, but rather, it is more likely that whatever they do will leverage theirmulti-screen footprint to enable new types of consumer experiences, includingpossibly games.MySpaceAlthough MySpace has been battling larger issues due to declining overall traffic, itsstill one of the largest US websites today, and is the second largest social networkingapplication platform. Playdom and Zynga, two of the largest developers on theFacebook Platform, are the largest developers on the MySpace Platform as well.MySpace was a founding member of Googles OpenSocial initiative, designed todecrease the cost of developing for multiple social networks, but the movement hasnever fully delivered on its promise: developers must still do custom work to integratewith each platform they build on top of - not just for technical reasons, but culturalones as well. In addition, the MySpace Platform team has never been as aggressivewith their approach to viral communication channels as Facebook was. WhileFacebooks policy was to be completely open at first, and add restrictions later,MySpace only opened its communication channels gradually. For both of thesereasons, in addition to Facebooks sheer size and growth, many developers havechosen not to focus on MySpace.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7=;!!Ultimately, the MySpace Platforms fate is most directly tied to MySpaces overalltraffic. If the site continues to bleed users, fewer developers will want to do the newdevelopment work needed to deploy even existing applications on its platform, muchless build new games from scratch. MySpace has largely ceded core identity toFacebook, and is in the midst of a transformation to becoming a media sharingcommunity.TwitterAlthough a lot of people use Twitter to monitor for news, and a few games have beendeveloped on top of the Twitter platform - including some social RPGs like Spymasterand 140 Mafia back in 2009 - Twitter has yet to gain much traction within the socialgame developer community. Ultimately, Twitter seems to be more intent on creatingan information network rather than a more fully featured application platform withcanvas pages and multiple communication channels.Unless Twitter adds major new features to its APIs, it will simply remain a viralchannel for some social games to grow, but not the identity platform itself on whichthose games are built. Because most people arent used to getting game play updatesin their Twitter stream, Twitter will face some big hurdles if it hopes to make itselfinto more of a social gaming platform.Finally, Twitter has also developed "Sign in with Twitter," a way for other websites toauthenticate users with their Twitter identity. While Twitter is gaining some tractionin this sense as an identity platform, the resistance weve seen to using Twitter toshare game-related information thus far (and overall lack of adoption) makes uspessimistic on Twitters overall promise as a pure social gaming platform.International Social Networks (China, Japan, Russia)!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7=<!!We are more optimistic on regional markets where a dominant player other thanFacebook exists. While many international social networks have lost or are losingsubstantial ground to Facebook - like Hi5 in many countries around the world,Friendster in southeast Asia, and Orkut to some degree in India and Brazil - othershave held their ground.For example, Facebook has been unable to penetrate much of the Russian market todate, and a strong social gaming platform is developing on top of VKontakte. The caseis similar in a few other eastern European markets. Renren, QZone, and others havebuilt very large social gaming platforms in China, which is of course closed toFacebook and many other western companies.In general, while these companies have built strong positions in their local markets,they have not been able to expand outside of their native countries. As a result, wedont expect any of them to challenge Facebook in any major English speakingmarkets in the foreseeable future. However, we do think further study here ismerited for a future report.However, many developers building for Chinese, southeast Asian, and European socialnetworks have in fact begun migrating to the Facebook Platform - in large part due toits comparatively open policies. Whereas its hard for a new developer to getdistribution on a major Chinese platform - and when they do, the platforms usuallyhave the leverage to negotiate publishing deals on very favorable terms - anyone canbuild for Facebook. And since Facebook has established such a large audience in manycountries previously dominated by local players, thats where they see theopportunity. We think this trend will continue in 2011. It will be interesting to see ifFacebooks growth influences local platforms to be more open with their owndeveloper programs.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7==!!Casual/MMO PortalsGame portals are becoming increasingly social, though their fundamental modelsarent based on real identity. Leading casual and MMO portals today like Gameforge,Bigpoint, Big Fish, Pogo, Miniclip, AddictingGames, and Kongregate are increasinglyadding social features, like the ability to login through Facebook Connect, and publishgame accomplishments and updates to your social networking accounts to drive moretraffic. Some, like Gameforge and Bigpoint, have established free to play models thathave worked well.These sites certainly have some potential to ride the social gaming wave, but theunderlying model of social competition is largely absent from these games, becausemost people dont play them with their real world friends. As a result, these gamesare usually more like traditional single-player or multi-player games, not dependingon the same social dynamics as games on Facebook or MySpace for distribution orretention. Weve yet to see games portals get significant traction with mainstreamaudiences by bringing their friends onto the site, but we expect these companies tocontinue to push harder down the social lines in 2011.Global Portals: Yahoo, MSN, and OthersFinally, portals should not be forgotten in the race to create social gaming platformsaround the world. While the largest portals in the US - Yahoo, AOL, and Microsoft -have not had much success launching application platforms, they do haveconsiderable power in other regions around the world.In the US, major portals launched a spate of new application platform initiatives in2008 and 2009 (Googles gadgets and iGoogle apps, Yahoos My Yahoo and Yahoo Mailapplication platform, AOLs Mail integration, and so on). The portals courted the!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7=>!!largest Facebook app developers to create apps for their platforms as well, and manyagreed to be launch partners.However, since then, not much has happened. Why? Usually, the integration points forthese platforms have been less well suited for social games than an actual socialnetwork like Facebook. For example, the iGoogle portal is not a place where usersnormally interact with friends, and Yahoo Mail treats everyone in your Contacts foldercompletely separately from your "application friends." Its harder to get people to playgames like FarmVille in an email client, where the focus is more on communicationproductivity, than on a social network like Facebook.In other areas of the world, like southeast Asia, the portals have more sway. Forexample, Yahoo is one of the biggest game platforms in Taiwan. As a result, its in abetter position to expand in the direction of social games. But, like regional socialnetworks, we dont see any of these having the power to overtake Facebook incountries where its already dominant.Mobile Social Networking PlatformsFinally, one area in which Facebook may encounter new challengers is in the mobileplatforms arena. Facebook has invested heavily over the last few years in developingstrong carrier relationships, and as we enter 2011, Facebooks various mobileplatforms reach over 150 million users per month, and are continuing to grow. Whomight be able to challenge Facebook in mobile?Some mobile social networking platforms have emerged, like OpenFeint, ngmocosPlus+, and Scoreloop. While these services are still young, Japans DeNA recentlyacquired ngmoco, representing DeNAs optimism about the free to play market andngmocos role in distribution as well. These services have a lot of potential for growth,!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7=?!!particularly as developers look for new distribution channels given the challenges ofgetting into iPhone, iPad, or Android leaderboards. However, it remains to be seenwhether any of them can create a meaningful social graph apart from Facebookidentity and Connect integration.In addition, popular mobile social platforms in other regions of the world viewFacebook as threatening in many ways, and may move more aggressively to competewith Facebook in markets both home and abroad. For example, Facebook is becomingmore popular in Japan, where Mixi dominates, and Facebook has gained widespreadadoption throughout Southeast Asia over the last two years, where Mig33 and othersoperate popular mobile social applications.Ultimately, and especially in the US, technology is generally still ahead of useradoption, primarily due to social graph deficiencies everywhere except Facebook.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7>6!!6. Competitive Response in theBroader Media and Games Industry!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7>7!!Casual Game DevelopersThe traditional casual games companies, namely Real Networks, PopCap Games,Playfirst, BigFish Games, and others have been working aggressively to defend theirtraditional web and download businesses as they come under increasing pressure.Historically, casual games have been the onramp for games for that segment ofpeople who are not considered hardcore games.In 2010, we saw continued progress from casual games, both established andemerging, in developing a strong position in social games. While PopCap has been thestandout of this group in terms of the established social games companies withtraction on Facebook, we have seen the success of casual games in the game showgenre achieve a fair amount of success and new companies like MindJolt emerge tofocus exclusively on the opportunity for arcade and casual games on Facebook. Wealso saw Playfirst, which has a strong history in traditional casual games, begin toestablish a more meaningful presence on Facebook with the launch of Chocolatier. If2009 was the year where casual games developers continued to experiment withsocial games, 2010 was the year where they began to experience real success andidentify strategies that could succeed.There are a few key issues facing casual developers who are looking to succeed onsocial: • Business model for social casual games - For most social games developers, the dominant model has been a freemium model where the core game experience is free and users pay for decorative or functional virtual goods. In other genres, particularly the game show genre, the primary monetization mechanic is the classic arcade model - users pay money to play additional sessions. Bejeweled Biltz, which is currently the largest traditional casual game on the Facebook platform, uses a coins-for-upgrade model that the company said has pushed it to its first $1 million revenue month in September of this!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7>5!! year. Overall, though, for those developers who have enjoyed success with the pay-for-download model that works well on PC and mobile games, finding a comparatively lucrative model on social has been very challenging. • Build, Buy, or Partner - To date, the traditional casual studios have not been active players in the M&A market for social games companies. While Zynga and Playdom have been actively acquiring smaller studios to bolster their capacity, casual games developers have chosen largely to eschew M&A and focus on building games themselves or partnering with other folks to build and augment their social games efforts. It is unclear whether the lack of M&A effort is driven by a business philosophy that doesnt support M&A-driven growth or a gap between the prices social games companies require and what traditional casual companies are willing to spend.While traditional casual games companies havent generated the same level ofrevenue as some of their virtual-goods focused peers, they have done very well inachieving a strong market position in social games and have been willing to trydifferent business models, particularly the arcade model, as a way to monetize theircontent. We expect casual games companies to continue to experiment with a varietyof business models and strategies for success.Console Games Companies!Electronic Arts struck first in November 2009 with its acquisition of Playfish inNovember of 2009. While some believed this would herald in an era of traditionalconsole games companies acquiring social gaming companies, this has not come topass as of yet. And we did not see much more activity from traditional casualcompanies in 2010. Why have the traditional games companies remained on thesidelines as the space has continued to grow? There are likely a few key reasons as towhy their activities have been muted:!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7>9!! • Continued experimentation with internal efforts - Following the Playfish acquisition, we believe that EA has focused most of its efforts on figuring out how best to work with that team and to find a healthy balance between building original social games and leveraging existing EA IP for new social games. We believe it will be some time before EA aggressively returns to the M&A path. Ubisoft has released a number of social games, including TickTock, and has announced additional plans to do more internal work building out its in-house social games capabilities. Clearly, a number of the leading traditional console games companies have focused on determining their in-house capabilities before more aggressively pursuing external help. • Different game mechanics and play patterns - Many console games compete on different dimensions than social or even casual games. Many console games live on platforms that are more technically sophisticated than the computing environment available to most Facebook users. In addition to working on more powerful computing platforms where the dimensions of competition are different, social games are about short session time, high frequency of interaction, and social relationships among players. Thats very different than building a console game designed to provide hours of uninterrupted enjoyment. • Large run rates required to impact public companies - On a more practical note, many of the large console games companies are publicly traded and have multi-billion dollar annual revenue run rates. While social games are a fast- growing sub-sector of games, the scale of the industry is not quite large enough to make an immediate bottom line impact for most companies in the space. For those companies who are interested in and looking for immediate contribution to corporate financial performance, social gaming does not yet represent an immediate shot in the arm for financial performance.It would be unwise to count out the incumbent console games companies. There aretwo major shifts that have happened of late and the console games companies have!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7>:!!shown themselves extremely adept at acquiring or building capabilities to be majorcompetitors. For example, Activisions acquisition of Bilizzard instantly made them amajor player in the online MMO space and the post-acquisition performance of thatinvestment would certainly suggest that large game companies are capable ofacquiring smaller players and making those acquisitions succeed. Similarly, with theemergence of the iPhone games ecosystem, established mobile and console playerslike Gameloft, Glu, and Electronic Arts have managed to estabilsh leadership positionson that platform as well. It is unclear whether existing console games companies willbe able to replicate that success in this new social games space. Last but not least, aswas mentioned in IVG #4, Microsoft has built up a very strong virtual goods businessoperation with its Xbox Live service.Casual MMOs and Virtual Worlds!To date, the leading casual MMOs and virtual worlds have been focused on their web-based properties. Companies such as IMVU, Gaia Online, Habbo, and others have notyet made a major splash on social networks. However, the success of games such asYoVille (Zynga), Pet Society, and other games that have common characteristics withoff-network casual MMOs and virtual worlds, raises the question as to why more ofthese companies havent more aggressively pursued success on social networks.The most likely answer to this question is that the web-based casual MMOs and virtualworlds have fairly well developed social networks, of sorts, of their own among theirexisting user bases. Would being on Facebook help? On the one hand, its likely thatmany of the users in these virtual worlds and casual MMOs are on Facebook andconnecting Facebook up with these existing virtual social networks would enablethose virtual worlds to grow more quickly by allowing users to share their activity andinvite more of their friends to participate in the experience. On the other hand, itmight turn out that there are users in these virtual worlds who are attracted to thembecause they allow users to maintain a persona and identity separate and distinctfrom their real-world identities.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7>;!!During 2010, we did not see much forward progress from companies in this sector interms of their Facebook strategies. Nonetheless, given the continued growth of socialgames, it seems unlikely that these companies can continue to ignore the opportunitythat Facebook represents. In 2011 we expect at least one of these companies to makea major push into social games, either by launching products on the Facebookplatform or bringing some of the games and genres that have worked well onFacebook to their own platform.Media Companies!Disneys acquisition of Playdom was the most significant move by a major mediacompany into the social gaming company. Disney acquired a company with over 600employees and several years worth of social games development across multipleplatforms. Part of the logic for doing such a large transaction was to both acquire alarge, functional team of social games developers as well as senior leadership,particularly John Pleasants, who could help the company in its larger efforts in digitalentertainment. Now that Disney has set the bar with a very large acquisition, it willbe very interesting to see how other media firms will respond. We still believe mostother large media firms, other than Disney, face the same core set of decisionsaround social: • Build - Media companies could build up their own in-house capabilities to build, market, and support social games. With increasing cost of entry, its unclear how many companies who do not have an existing online games presence are prepared to spend what it will take to learn and ultimately succeed in social games. A commitment to a build strategy would require quite a few resources in terms of headcount, experienced personnel, and a marketing budget. • Buy - A second strategy would be to buy a studio or group of developers who possess the skills described above and task that team with the responsibility for solving the distribution and marketing pieces of the puzzle. This too would be a reasonable strategy for media companies to pursue - a small team of!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7><!! developers could likely be acquired for an affordable sum. But with Disney having purchased such a large team, its unclear whether that has effectively raised the stakes for other media companies and made them more focused on acquiring established companies at scale or whether the prospect of acquiring small development teams is still an attractive option. • License - The third strategic option would be to license their existing IP to games developers who are already active building social games. The advantage of this approach is that it does not require media companies to develop any specific expertise around building or distributing social games and its consistent with how they approach traditional games opportunities. With the continued success of the licensing strategy for companies in the casual space, we expect media companies to continue to look for licensing or partnership opportunities as a way to get into social games.Overall, we expect that most media companies will proceed cautiously, leading with alicensing-driven strategy until they have a more firm grasp on how valuable theirintellectual property is on the platform.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7>=!!7. Investment Landscape!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7>>!!Venture Capital!The venture capital environment was very favorable for social games companies in2009. The "Big 3" (at the time) alone were able to raise well over $200 million inventure capital in 2009. Through the first three quarters of 2010, the fundinglandscape for social games companies changed markedly. The largest companies wereable to raise additional capital to fund expansion. However, there were relatively fewexpansion rounds financed during this year - the bulk of the activity resulted in largecompanies raising more money and smaller companies raising small amounts of seedcapital to get started. The developments in the M&A market have clearly impactedthe funding environment for social games companies. With two major acquisitions,namely Playfish being acquired in 2009 for up to $400 million and Playdom gettingacquired for up to $700 million in Q2 2010, the space has seen two major deals. Thekey question facing those looking to deploy venture capital in the social games spaceis what happens next. There are three key questions that a prospective investor wouldhave to answer to be comfortable investing in new or emerging social gamescompanies: • Competition with Zynga - Zynga is now firmly established as the leader of the web-based social gaming companies, with more monthly users, daily users, and revenue than any other company in the space. With two major acquisitions having happened already and Zynga now approaching 1,600 employees, there is a valid question as to whether small companies can compete effectively with Zynga. • Exit Strategy - Another key question for investing in companies in the space is the probability of a successful exit for companies in the space. In the last 18 months, weve seen a robust market for small exits within the industry, largely driven by Zynga and Playdom acquiring smaller independent social games developers. By and large, though, these acquisitions have been about acquiring!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7>?!! experienced teams with social gaming talent, not large windfalls for investors. The larger outcomes in the space have been for larger teams of hundreds of developers and large portfolios of games. Unless that dynamic changes, funding social games companies with small outcomes is unlikely to be an attractive value proposition for venture investors. • Achievable Scale - There is also a related question as to whether well see another Zynga or Playdom sized company created in this space. On the one hand, its clear that there is a market for large social games companies. On the other hand, there is a question as to how many large companies the space can support. Aside from Kabam, Digital Chocolate, and CrowdStar, both of which have been in the space for over 18 months, the space has not really seen the emergence of another major platform company in the space.Consistent with the points above, we have seen relatively few expansion financingsfor web-based social gaming companies to grow from emerging company to leader.We have, though, seen quite a few new bootstrapped and seeded companies thatcould grow at some point.The one area where investment activity appears to be stronger is the mobile socialgaming space. In 2010, there was significantly more attention paid to the mobilesocial opportunity. There are a few key reasons why mobile social gaming has seenmore investment activity:Lack of a dominant company - Unlike web-based social gaming, where weve seen astrong number of established leading companies, mobile social in 2010 was and still islargely viewed as a contestable market. While the space has seen the emergence of afew strong companies, there has not yet been a Zynga-like company (with thepotential exception of ngmoco) created from scratch. While a few of the traditionalincumbents, namely Gameloft and EA, have strong presence on the iPhone platform,!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7?6!!there is still enthusiasm about the ability to create a really meaningful company inthe space.Rapidly growing device ecosystem - The mobile social gaming space has twoimportant platforms. In addition to the well-known opportunity on the iPhone / iOSplatform, there is also a growing opportunity on the Android platform as well. Withthe continued adoption of Android and iOS smartphones, the number of addressabledevices continues to grow and games continue to be a major activity that people playon that platform.The one difference between mobile social and web-based social gaming has been thata number of the investments have gone to companies more focused on buildingplatform companies as opposed to individual developers. For example, companiessuch as ngmoco:), Aurora Feint, and Papaya Mobile have been able to raise money tosupport their social networking infrastructure plays for mobile devices. Much lessmoney has been invested in individual game developers. It is interesting to note thatthere are many successful independent smartphone game developers who have beenable to bootstrap and hence have not needed to raise additional money.M&A and IPO Landscape!There were two major acquisitions that happened in 2010, both of which havesignificant implications for the space. First, Disney acquired Playdom for up to $700million, bringing on roughly 600 employees experienced in social games development.Shortly after the acquisition, Playdoms CEO, John Pleasants, was promoted to Co-President of Disneys online group. In Q3 2010, DeNA, a leading Japanese mobilephone games company, acquired ngmoco:) for $400 million, giving them a major USplatform for smartphone games. With these two deals, the social gaming space hasseen over $1 billion in acquisitions in the web-based space alone and the potential tosee just as much activity on the mobile side.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7?7!!Given the increased competition and consolidation in the web-based social gamingspace, we expect to see further consolidation in the social games space. Thisconsolidation will be driven by a combination of existing industry players such asZynga and CrowdStar, media companies like Disney, and foreign games companies. Ofnote, we expect to continue to see Zynga and other private social games companiescontinue strategic acquisitions of other private companies.Of the aforementioned groups, we expect to see increased activity on the part offoreign games companies, particularly those from China and Japan. DeNa has alreadymade a major acquisition in acquiring ngmoco:), and a number of smaller acquisitionsthroughout the course of the year. There are also a number of major Chinese gamescompanies with strong balance sheets and deep knowledge of making the free-to-playgames model work based on what they’ve seen in their home markets. There areopportunities for these companies to grow their footprints in the United States bymaking strategic acquisitions of both large and small social games developers.The two most interesting companies on the M&A side are Zynga and CrowdStar. Bothcompanies have the requisite number of employees (100-200 in the case of Crowdstar,well more than 1,600 for Zynga), a wide portfolio of titles, and the monetization runrates to be interesting acquisition targets. The challenge in each case, however, isprice. Acquiring either company would be expensive; hundreds of millions of dollars inthe case of CrowdStar and likely several billion dollars in Zyngas case. At thoseprices, given that Disney and EA have already made significant acquisitions, theuniverse of potential buyers is constrained.The most interesting IPO story for social games continues to be Zynga. The companycontinues to grow, in terms of headcount, usage, users, and revenue. Given theamount of venture capital the company has raised, its likely that an IPO is the onlyway that the company can achieve the valuation it desires. At the time of publication,the company had not publicly announced any plans to make a public offering.!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7?5!!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7?9!!III. Appendix: Company Index!!!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7?:!!50 Cubes www.50cubes.com51.com www.51.com6Waves www.6waves.comA Bit Lucky www.abitlucky.comActivision www.activision.comAddictingGames www.addictingames.comAdNectar www.adnectar.comAdParlor www.adparlor.comAeria Games www.aeriagames.comAmazon www.amazon.comAol www.aol.comApple www.apple.comApplifier www.applifier.comAppstrip www.appstrip.comArkadium www.arkadium.comAtari www.atari.comAurora Feint www.aurorafeint.comBebo www.bebo.comBigFish Games www.atari.comBigPoint www.bigpoint.comBlackhawk www.blackhawk.comBoku www.boku.com!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7?;!!Booyah www.booyah.comBoyaa www.boyaa.comBroken Bulb Studios www.brokenbuldstudios.comCafe.com www.cafe.comCasual Collective www.casualcollective.comCie Games www.ciegames.comCrowdstar www.crowdstar.comDeNA www.denaglobal.comDigital Chocolate www.digitalchocolate.comDigital Sky Technologies www.dst-global.comDisney www.disney.comElectronic Arts www.ea.comELEX www.elex-tech.comFacebook www.facebook.comFive Minutes www.fiveminutes.comFriendster www.friendster.comFunzio www.funzio.comGambit www.getgambit.comGameDuell www.gameduell.comGameHouse www.gamehouse.comGameloft www.gameloft.comGlu www.glu.comGMG Entertainment www.gmg-entertainment.com!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7?<!!Google www.google.comGree www.gree.jpGSN www.gsn.comgWallet www.gwallet.comHappy Elements www.happyelements.comHeyZap www.heyzap.comhi5 www.hi5.comInComm www.incomm.comiWin www.iwin.comKabam www.kabam.comKaixin001 www.kaixin001.comKongregate www.kongregate.comKontagent www.kontagent.comLOLapps www.lolapps.comMetrogames www.metrogames.comMicrosoft www.microsoft.comMindJolt www.mindjolt.comMixi www.mixi.jpMSN www.msn.comMySpace www.myspace.comNews Corporation www.newscorp.comNexon www.nexon.netngmoco www.ngmoco.com!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7?=!!Nintendo www.nintendo.comOMGPOP www.omgpop.comOrkut www.orkut.comPapaya Mobile www.papayamobile.comPaymentPin www.paymentpin.comPayPal www.paypal.comPeanut Labs www.peanutlabs.comPlaydom www.playdom.comPlayfirst www.playfirst.comPlayfish www.playfish.comPlaySpan / Spare Change www.playspan.comPogo www.pogo.comPopCap Games www.popcap.comQZone qzone.qq.comReal Networks www.realnetworks.comRekoo www.rekoo.comRenRen / Xiaonei www.renren.comRixty www.rixty.comRockYou www.rockyou.comScoreloop www.scoreloop.comSGN www.sgn.comShanda www.shanda.comSlashkey www.slashkey.com!2010 Inside Network, Inc. www.insidevirtualgoods.com
    • !"#$"%&(")*+,-.//%$0*1&2+*+)&/2$/3",-.,4"#.56778! 7?>!!Slide www.slide.comSocialGold www.jambool.comSometrics www.sometrics.comSponsorPay www.sponsorpay.comSummerlight www.summerlightstudios.comSuper Rewards / Adknowledge www.srpoints.comSupersonicAds www.supersonicads.comTarget www.target.comTencent www.tencent.comThe9 www.corp.the9.comTheBroth www.thebroth.comTokenAds www.tokenads.comTrialPay www.trialpay.comTwitter www.twitter.comUbisoft www.ubi.comViacom www.viacom.comViximo www.viximo.comVKontakte www.vkontakte.ruWooga www.wooga.comYahoo www.yahoo.comZipZapPlay www.zipzapplay.comZong www.zong.comZynga www.zynga.com!2010 Inside Network, Inc. www.insidevirtualgoods.com