Jay Aird, co-founder of social analytics company dystillr and Karma Gaming, examines how a small developer can grow in a crowded Facebook market.
It's no secret that the success of social gaming has led to a major influx of competition. While barriers to entry remain relatively low, the barriers to achieving success are a different story.
Today, Facebook game developers find themselves in an increasingly competitive environment dominated by a few major players. Production values have gone up, as have platform and acquisition costs. It's a hits-based business where you need not just a great game to win, but also a deep understanding of how to use the Social Graph.
Given these challenges, is it too late for smaller developers to find success on Facebook? We don't believe so. What we believe is developers targeting Facebook need to spend more time thinking about the business of games and be more strategic in how they choose to compete.
A good starting point is with a thorough analysis of the Facebook market. In this feature, we'll provide a high level analysis of that market and explore techniques developers can use to quickly and efficiently determine where and how they can compete and come up winners.
What is happening in the market overall?
What's happening within the overall Facebook environment? While many reports suggest social gaming has peaked, the absolute figures in terms of the player base indicate otherwise. Across all games on Facebook, there are currently 153 million daily active users (DAUs), a 28 percent increase over the past 12 months.
Growth genres versus declining genres
A valuable strategy developers can use to increase their opportunity for success is to focus on games in genres that are experiencing rapid consumer uptake or, alternatively, in genres that are under-represented. While Facebook games on the whole have gained users over the past year, the fortunes of different types of games have varied widely.
Simulation-type games (FarmVille-style), which once commanded an overwhelming majority of Facebook game players, have lost significant market share. The simulation game genre peaked in January 2011 with an aggregate 400,520,000 monthly active users (MAUs) and has fallen 34 percent since that peak to an aggregate 262,944,143 MAUs as of October 2012.
While still the largest genre in terms of monthly active users, simulation-type games peaked in January 2011 and are currently in decline. Growth on Facebook is now being led by genres such as gambling & casino, puzzle, and card & traditional. Click for larger version.
So how has the overall ecosystem grown in size while simulation genre games have fallen so sharply? The answer is the market is becoming more diverse, which is driving new growth. In particular, growth has been driven by puzzle-type games and gambling and casino-themed games. Together, these game genres reach over 50 million daily active users, an 86 percent increase over the past year. Notably, this figure now exceeds the 39 million daily active users across the once dominant simulation genre.
We can see the market is evolving from a simulation genre-dominated ecosystem to an increasingly diverse games market. This trend is being driven by the consumer's demand for more diverse game experiences on Facebook, a positive for smaller, specialized developers looking for opportunities.
Analysis of sub-genres
Let's dig deeper to further explore opportunities, for example, the gambling & casino genre. Our goal is to uncover opportunities where we believe we can compete and be successful. We now need to examine the underlying composition of our targeted genre to learn what types of games are most popular, where our competition is concentrated, and what game types are under-represented on the Facebook platform.
The gambling & casino genre is comprised of multiple sub-genres, including popular categories such as slots, casino, poker and bingo.
The category 'Other' includes hybrid game styles that draw inspiration from multiple gambling categories such as Slingo (Slots and Bingo).
We can see that poker is the largest sub-genre within gambling-themed games overall. With this understanding, we could look toward popular forms of gaming that might be currently under-represented on Facebook.
One example in the gambling & casino genre could be social betting apps. While gambling games like sports-betting are immensely popular in offline channels and traditional online gambling channels, this category has yet to truly take off on Facebook.
Data suggests the secret sauce for social betting apps has not yet been successfully cracked on Facebook. Cracking the code for how to make a successful social betting app could pay big dividends.
We know it's massively popular elsewhere in the world, as the global online interactive betting market was valued at 10.67 billion euros in 2011. This figure is over twice that of interactive casino according to H2 Gambling Capital.
Market Concentration Ratios
At dystillr.com we look at competition within specific genres to gain insight into which areas of the Facebook ecosystem are most saturated and, more importantly, where exploitable opportunities may exist.
One analysis technique we can use to assess the competitive landscape is an assessment of market concentration levels. Market concentration reflects the degree of saturation within a specific market. The chart below provides an analysis of the market concentration for six popular game genres as an example, with higher points corresponding to more saturated markets. Simulation is the most saturated game genre, with a "very high" market concentration level. At the other end of the spectrum, adventure and strategy has a "low" market concentration level. The puzzle genre ranks fourth, with a "moderate" rating.
A genre with a lower market concentration ratio paired with high average user engagement, promising growth rates and/or demonstrated popularity off of Facebook could present a strong early indicator for an opportunity. Recognizing the emerging trend that social gamers and gambling shared a similar DNA paid off in a big way for companies like DoubleDown Interactive.
Competing with the "800lb gorillas"
One of the largest competitive advantages top developers such as Zynga have over smaller developers is their network effects; their ability to cross-promote new games to their existing base of players without cost. Their market position provides an unlevel playing field to market new games to players, which cannot easily be replicated.
The following chart provides insights into just how powerful the network effects for Zynga really are. While Zynga's games are showing challenges in sustaining audiences at the same peak levels over time as attained previously, their ability to launch a title and gain traction within the critical first 30 days remains a formidable competitive advantage.
Engagement is calculated as daily active users divided by monthly active users with the resulting figure multiplied by 30 to provide an estimated monthly average.
Zynga's enormous pre-existing audience provides them with network effects that give each game they produce a significant head start over the competition.
Given Facebook gaming requires a critical mass audience for profitability and the competitive advantage held by larger developers, how can smaller developers compete? To quote Harvard Business Professor and strategy guru Michael Porter, "the worst error in strategy is to compete with rivals on the same dimensions."
To that end, a core activity of smaller studios should be to analyze their competition and look for areas to differentiate and create a unique position. By doing this we can gain a sense for their market strategy, their target audiences, what products are most successful for them and which products are most engaging to users.
This process should involve monitoring not just the most successful developers but also the up-and-comers in the space.
Understanding audience size benchmarks
Freemium is the dominant business model for Facebook games, which requires a critical mass audience to become economically viable. While it is easy to look towards the Top 10 game lists and get caught up in the sheer scale for the top performing games, this information is less relevant to smaller developers and new entrants. The following table outlines the monthly active users required by a game to make it into a respective benchmark as of October 2012:
Monthly Active Users
Top 1 percent apps
Top 5 percent apps
Top 10 percent apps
Top 25 percent apps
Top 50 percent apps
As we can see, the numbers fall off quickly at lower benchmarks. We can also see the majority of games struggle for profitability. To break into the top 10 in games overall requires an audience of 15,700,000 MAUs (at time of writing), which demonstrates the difficulty of becoming an elite game on Facebook. What this information does give us is more useful inputs for financial models and more realistic expectations. It also can serve as a way for developers to benchmark their own progress against the majority.
Without question, Facebook is a fiercely competitive environment. Standing out, or for that matter, even getting discovered is no easy task. However, the trend towards an increasingly diverse games market is ultimately good for smaller developers, as it becomes harder for the top developers to maintain their position across a growing variety of game niches.
Nonetheless, small developers are at a distinct disadvantage to the big game development studios when it comes to a critical component of success on Facebook: user acquisition. Whereas Zynga can count on millions of instant users within days of releasing a title, small-time developers need to fight just to get a fraction of a percent of that. So, to succeed, smaller developers should focus on three core activities.
Monitor the market to spot trends
In order for smaller developers to take advantage of these changing market conditions, they need to keep their finger on the pulse of the market at all times; just making the "best" games often isn't enough anymore. Rather, there's a need to augment development efforts with market analysis to uncover what types of games have unmet demand. By doing this, smaller developers can take advantage of a key competitive advantage they have over larger players: their ability to move and react quickly to trends.
Concentrate on retention
Smaller developers can give themselves a leg up by concentrating on user retention -- it's easier to keep an existing user than to acquire a new one. Retaining users obviously requires delivering quality gaming experiences but it's also a factor of stickiness -- how much the game's mechanics keep players coming back for more -- as well as how many alternatives there are in the game's particular niche.
Target genres that monetize at higher rates
Smaller developers need to concentrate on making the most of their audience. Positioning is one critical component of this: not all genres of games are created equal. For instance, gambling and casino themed social games drive significantly higher average revenue per user (ARPU) than many other types of social games. According to a recent report by Morgan Stanley, gambling and casino type games have an ARPU of around $9 per user compared to $5 across all social games.