OK it's over, but was it really a "Revolution"?

Here is a Good article by Tadhg Kelly that many others have linked to this weekend. While it's good and nails a few of the key trends at play, there's a couple things in the article that don't sit well with me. I'm not sure I can do much better, but here are a few points to consider.

Tadhg points us to the recent goldrush(es) around Social and Mobile games, specifically naming 5 trends (social customer acquisition, a 'price crash', distribution at scale, game metrics focus, and lower development cost (for mobile and social), and then goes on to knock on why each of those is coming to an end.

While he's correct about all five, it's the way they are lumped together that makes me a bit uncomfortable. In some areas they are trends affecting different areas entirely, in some areas with overlap, but by casting them all as part of this single "revolution", it's somewhat misleading.

In saying Social Stopped Working, he's correct that easy, exploitive viral channels were closed, and that customer acquisition costs went up - but it's unfair to dismiss social-viral potentiality altogether. e.g. Its a bit unfair to say that Words With Friends winning over Lexulous is entirely due to customer acquisition spend. There are design elements involved that make WWF a game with higher potential of distribution (e.g. they were quicker to add push-notification of turns, and have an end-game mechanic that leads to active-games growth)

His points about cost-of-entry going up (in terms of cost of acquisition and the points he makes about production costs) are right on the money, and are typical of any maturing market. We saw this happen in PC Casual, XBLA, heck, I remember a time when people used to say "4 guys in a garage can do it relatively cheaply!" about PC first person shooters. There's nothing new here. However, when lumping together to social vs mobile categories - what I view as two separate gold rushes with overlapping but different timelines and trends - it confuses the discussion somewhat.

In any case. It's a good article. The trends are real and should be considered when thinking about how they'll effect your business. And in the end, any attempt we make to classify them as a single market, or single trend or a single 'revolution' are all just definitions we're artificially placing on these things anyway. I'm reminded of the Richard Feynman quote:

"...although we humans cut nature up in different ways, and we have different courses in different departments, such compartmentalization is really artificial, and we should take our intellectual pleasures where we find them."

So it is here that any distinction we make into different compartments is artificial - models for us to try and understand the changes afoot. We should take lessons where we can find them, be they pleasurable ones or otherwise.

3 Problems Hiding in Zynga's IPO filing

[I'm not a lawyer nor an accountant. My opinions are mine and not my employers, etc, etc]

Zynga's S-1 filing is really interesting reading. Tech Crunch has a (rather short) post on it here, and VentureBeat has a better post looking at some of the details here. Hit the bullet points on the VB post if you want the TL;DR version, but most of this will leap out at you from the S1 filing anyway. Short version:

• 600M revenue in 2010, almost 4X 2009. $235M revenue Q1 this year alone.
• Profits growing, with revenue (Q1-Q1: 135%), but...
• R&D up sharply (160%)
• marketing costs up (130%)
• but on the plus side, Cost of Revenue (mostly operating costs) up 110%, suggesting they are getting efficient, or benefits of scale, or both

So, all in all they are doing very well, and it certainly looks like a better investment than GroupOn or any of these other crazy IPOs that have people crying bubble.

But hang on a second. It still smells funny. Look at it from 10,000 feet. The company is HIGHLY dependent on one platform/vendor (Facebook), they don't have nearly the revenue or war chest that the incumbent publishers have, etc.

So, I thought I'd read through some of the fine print. I think the S1 doesn't address three important areas:

1. Allocation of R&D costs: Details on R&D are sparse, and the statement just cites increases in headcount, etc. What it doesn't say is whether that's because of a broadening portfolio of games (that would spread risk) or whether individual game title budgets are growing, which would suggest an increase in risk, as each title becomes a bigger gamble.
2. Risks posed by entry of EA and other incumbents: As the major publishers awaken to social games, this could have a three-sided effect on Zynga: (i) R&D costs go up to compete on product quality, (ii) possible loss of MSS as the publishers bring major titles to market, and (iii) user acquisition costs go up as the competition drives CPMs on FB's ad network up.
3. Terms of Facebook credits agreement. To Zynga's credit, they DO call out the move to the Facebook credits system that took place last year, where they went from giving up 2-10% of revenue for payment processing to giving up 30%. However, they didn't just move to Facebook's credit system. They did so after a bit of a fight, and they signed a five year agreement. What are the terms? I'd like to know, for example...

• Do they get preferential ad pricing and/or placement as a result?
• Although signed in July 2010, the S1 states the migration was only completed April 2011, so how much of the revenue from 2010 and 1Q11 was earned at 95 points on the dollar vs 70 points?

With any company, it'd be possible to ask infinite numbers of questions to learn or infer more. In this case though, I think there are at least a couple key things that investors should consider.

Food for thought over your long weekend...

Shh!! 3 Unspoken Lies About Social Games

The inimitable Greg Costikyan wrote an excellent piece for Gamasutra, lambasting Social Games, and claiming that they are in fact not very social at all.

I agree, and thought I'd add two more topics that came up in conversation at Login recently, and in conversations with a couple social games developer friends.

So let's give Greg Credit for calling out the first lie on my list:

Lie #1. Social games are social games. (Truth - they aren't very social at all)

And to this I'll level two more accusations.

Lie #2. Social games are viral. (Truth - they aren't)

Social games are often cited as "viral", or having the opportunity to be so, because of the social network on which they reside. However, short of the early days in which FB allowed apps to spam a user's friends list, this just isn't the case.

Companies like Zynga are rumored to spend many millions on advertising within FB to acquire users, but if the games were truly viral, they would spread on their own, being recommended whole-heartedly by friends via word of mouth.

The fact that few social games have been able to exceed the virality of the average dog-on-skateboard Youtube video - let alone the virality of an Angry Birds - is proof that they aren't viral. (Some examples do come to mind though. Parking wars and Cow Clicker certainly got a lot of watercooler talk.)

Lie #3: Social Game Publishers are building Games, not Products. (Truth - most have little respect for the medium other than as a revenue generator).

I'll cut to the chase: To my knowledge large publishers in this space, like Zynga and Playdom, don't have developer credits listed in their games.

I wasn't able to find them anyway. I had a couple developer friends lament about the fact that there were no game credits and that when they'd asked management at these companies, they'd been told no.

I think that speaks volumes about those publishing these games and what they think of the people working on them, and of their contributions. "It's just a product, and you are just a cog".

There are a few companies out there doing the right thing (I'm looking at you Brenda!), but I fear these are the exception.

With all the excitement around 'Social Games' these days, it's important that we don't delude ourselves about some of the lies being told.

//rant off

EA Buys Playfish

From Techcrunch today:

Electronic Arts closed it’s anticipated acquisition of social gaming startup Playfish for $275 million in cash. An additional $25 million in stock will be set aside for retaining the top talent at the startup, and another $100 million in earnouts are part of the deal as well if the business hits certain milestones. So the total value of the deal could amount to as much as $400 million when all is said and done.

Wow. $400M is a lot of money. Social games are clearly the hot ticket right now, so it makes sense for EA to jump in, but one has to wonder if that's money well spent.

The stock & earnout will retain the people for some time, which is I'm sure a big part of why they acquired the company.

Still, the titles are cheaper to develop, and there doesn't (as of yet) seem to be the same IP loyalty that there is in hardcore games (are there Farmville fanboys out there dissing Mafia Wars?).

Time will tell if it was a good call, but it certain does seem rash, especially with all of the kerfuffle around questionable sources of social game revenues. (Interesting meta-level piece on the same issue here)

Akoha: Serious games and 'playing it forward'

Raph had a pointer to a pretty intriguing new game & company called Akoha.

Dubbed a 'social reality game', Akoha centers around the play of cards. On those cards are tasks, like "give someone a book" or "Send drinks to a couple in love". 

You register has having received the cards (by either typing in a code or snapping a pic of the 2D barcode with your phone cam) and then note when/where you accomplished the task in order earn 'karma points' and level up within their game system .

You can track the progress of individual cards as well, making this kind of a MMO meets serious games meets "where's george". This comic explains the whole game pretty well.

I immediately ordered a number of card packs but am worried that they won't arrive before GDC, as I think they'd be awesome to be using there.

As Raph points out, this is pretty close to Cory's Whuffie brought to life. (minus the viewable-by-anyone indicator in Down and Out. Maybe a FB feed? How about bad-ass hats, t-shirts, pins, etc for Level 10 bad-ass charity cleric?)

A very cool concept.

What's more, I looked up info on the company, only to find that their based in Montreal, right near Deluth. (If anyone at Akoha ends up reading this, how about a special edition card for "buy someone at Akoha a smoked meat at Schwartz's". I'll play it next time I'm in town!