Are social games going to die?
Alex St. John, President and CTO of hi5, has written a very interesting article about the state of the social gaming market which was published on techcrunch.com. My interpretation of his article is: many social game companies will die and the few that survive will do what other online game companies (e.g. Bigpoint, gameforge, worldwidegames) have always been doing: build a platform-independent user base and create games that are playable across platforms without dependence on a single social network.
Social games NEED a social network for distribution
The buzzword “social games” has been around for a while. Investors, not only in the Valley but everywhere, believe they are “hot” because they read stories about game generating a few million users in a few days. Hence, it is no surprise that I sometimes get the question “are you social?” If “social” means that people play with or against each other and that we benefit from word-of-mouth then yes, we are very social. MMO browser games such as the ones published by worldwidegames (my company) or its competitors, such as Bigpoint or gameforge, have always been social because people meet in the games and interact with each other. If you mean with “social” that we require a social community such as Facebook for distribution of our titles then no, we are not social. We are independent!
Growth will not be for free anymore
It all began with a few games that generated a few million users via the viral channels of Facebook. When Facebook figured out that some companies got growth for free and actually benefited from item sales on the social platform, Facebook reacted: viral channels were heavily limited, advertising was priced at market levels (if not higher!) and a virtual currency was introduced that made Facebook earn with every virtual item sold via these games.
Growth is very likely not to be profitable
Now that viral growth has been reduced, social game companies have to acquire their users at market prices rather than getting them for free. And here is the problem: how do I explain to my investors who have just put a few ten million dollars into my company at a valuation of a few hundred million dollars that my viral growth now is not a million users a day but only ten thousand? Well, you don’t explain it, you spend money for marketing and continue to grow heavily, however, this time a much smaller portion of your revenues hit the bottom line. The question is whether the average revenue per user (ARPU) in a social will be high enough to pay for marketing. In the Zynga corporate blog there is a post from Dec. 16, 2009 stating that Zynga has over 230 million monthly active users (MAU) and more than 1 million paying users. This results in 0.4% of monthly active users converting into paying users. In typical MMO browser games like ours, this number is ten(!) times that high. Now you do the math: can growth of social games ever become profitable if they start to pay for their users? Especially when there is pressure from the investors to continue growing at high speed?
The solution: Scale down!
Getting rid of the dependence on Facebook can only be part of the solution. Accounting 101 tells me that in order to survive in the long-term a company must be profitable. Profitability can only be reached if the cost per new user (CPL) is lower than the lifetime value (CLV) of this user. My learning from being the online games market for more than two years is: the more you try to scale your marketing the higher the average acquisition cost of new users will be. That means that at the end of the day, companies will have to scale down to a level where sustainable profitability can be reached. Will this scaling down of growth to healthy levels happen very soon? No, of course not, social games are too hot to become profitable 
You can find Alex St. John’s article here.