Zynga, the company behind Texas Hold 'Em on Facebook, and other game makers are attracting millions of users. Will the shine wear off?
Gaming goes gangbusters in a downturn. In 2001, the Nasdaq was plunging and such tech mainstays as telecom, e-commerce, and enterprise computing were in a tailspin. But gaming giants Electronic Arts (ERTS) and Activision (ATVI) soared. Titles including The Sims, Grand Theft Auto, Halo, and the Madden sports series became national big-budget obsessions.
In the current recession, amid declines in computing and online advertising, gaming again is on a tear. Only this time around, it takes more than producing a pricey console or a slick blockbuster in a shrink-wrapped box to win big at gaming. In a way, it takes a lot less.
Some of the most impressive growth of late is in technologically stripped-down games that offer players social, communal experiences. The most talked about are Guitar Hero, Rock Band, and several interactive titles associated with Nintendo's (7974.T) Wii. And the trend isn't confined to the living room. Less talked about is a surge in social games, played with friends on smartphone platforms such as Apple's (AAPL) iPhone and on mass-market sites such as Facebook and News Corp.'s (NWS) MySpace.
Many Games Are Free
Social gaming is less about killer graphics and quicksilver hand-eye coordination and more about connecting with friends. The best games aren't impressive in terms of technology, though they're quite adept at harnessing media that let players interact. For games on social networking sites, that means letting far-flung friends and families share an activity, rather than just photos and wall posts. On the iPhone, games utilize sophisticated multitouch technology that lets the screen respond to more than a single touch at a time. The number of people playing social games is expected to surge to 250 million in 2009, from 50 million in 2008, by some industry estimates. During recessions, people tend to look for low-cost entertainment, often staying at home. Many social games are free; often even power users pay less than $50 a month.
Despite the low costs associated with social games, many actually make money. That's where entrepreneur Mark Pincus comes in. Pincus missed the last countercyclical gaming surge. Unlike most Silicon Valley geeks, Pincus isn't into video games; and in the early part of the decade he was too busy starting a company called Tribe, an ultimately failed effort to merge local newspapers with the burgeoning social networking trend then made popular by Friendster.
Pincus doesn't intend to make the same mistake twice. So he started Zynga, a site that specializes in social gaming. He's raised almost $40 million from some of the most well-regarded names in venture investing, including über-angels Reid Hoffman and Peter Thiel. Other investors include Union Square Ventures' Fred Wilson, and Kleiner Perkins Caufield & Byers.
Zynga's Disco Holiday Party
Zynga's most popular game is Texas Hold 'Em on Facebook. It gets 2 and a half million players a day. Across all networks, 45 million people per month play Zynga games. The bulk of that is on Facebook. In April, Zynga passed widget maker RockYou, owned by NetPickle (NetPickle), to become Facebook's top application maker, with 40 million monthly active users, according to Facebook. That's one-fifth of Facebook's 200 million users.
And here's the shocker: Zynga is actually generating a lot of revenue, and it's profitable. The site has annual sales of about $100 million, according to several people close to the company. That's about double what many blogs have speculated. Zynga has swelled to 250 employees who get Google-like perks. The site gets some revenue from selling ads, but mostly from the 2% to 10% of users who pay $1 an hour to play premium games or buy virtual goods. Even amid the recession, revenue is rising.
This recessionary disconnect was palpable during Silicon Valley's holiday party season. Zynga's fete was unlike the bare-bones holiday office lunch or the prepaid lavish affairs that came with a dour mood due to recent layoffs. Held at a club in San Francisco's North Beach district, the party featured Zynga staff in disco outfits, free drinks, and a 1970s-style band that also played at Pincus' recent wedding.
Borrowed Platform Carries Risk
So why isn't a Twitter-and-Facebook-obsessed press talking about social gaming more? You've got me. After all, Zynga isn't the only one benefiting from the surge. Playdom is the other giant of the space, reportedly generating almost $50 million in revenue. And while Zynga has big-name backing, Playdom is a much leaner and more profitable operation, according to some investors in the industry.
In Pincus' view, PlayFish represents even bigger competition. Its title Pet Fish is the most successful application on Facebook, with 2.5 million daily active users, just seven months after it launched. Then there's Social Gaming Network, better known as SGN, which is funded by David Sze of Greylock Ventures, the well-respected backer of LinkedIn, Facebook, Digg, Oodle, and other closely watched Web 2.0 names. More than 10 million people have downloaded SGN's iPhone and iPod Touch games, and more than 1 million people play its games across social networks every day.
As attractive as the social gaming phenomenon may be, it also carries risk. Building the bulk of your business on someone else's platform is always dicey. And games that do well are restricted to poker and mob war-style contests. Every big player has its own version of each, with little to set one apart from the others, critics say. Whether they can continue to build a catalog of titles that resonates with gamers remains to be seen. And like all things Web 2.0, social gaming may turn out to be a passing fad that people drop as soon as the next new shiny diversion comes along.
Disdain from Developers
There's also the risk for fraud when it comes to certain online transactions associated with social gaming, such as the sale of virtual goods. "We've found once you get into these digital-only goods and services there's massive opportunity for fraud," Pincus says. "We couldn't find a single company that could manage or solve that problem for us. We had to build the whole infrastructure in-house. We had to go out and get relationships with credit-card processing companies."
What's more, social gaming is not only bringing in a new type of gamer, but also a new type of developer. While they're highly adept at tailoring games to a social platform, these developers often don't have the high-level programming skills needed to build more advanced games. The barriers to entry have effectively dropped. Many in the gaming Old Guard look down their noses on social gaming. "I've detected disdain," Pincus says. "Critics say, 'These aren't real games. These aren't real game companies. There's no technology here.'"
Not surprisingly, Pincus is still hopeful. "I've also detected excitement," he says. "A lot of people come to the game industry who aren't typical developers and they can unleash their creativity on these massive platforms without the constraints of cost and time to market." Pincus can afford to shrug off the naysayers—so long as Zynga keeps making money in the fractured Web 2.0 world.