Industry Prediction #2: Traditional Game Publishers Will Struggle with Monetizing Social Games

It took a while for social gaming to become accepted as a legitimate genre by the gaming giants, but major game publishers are now embracing virtual goods and the industry is heating up with activity.  Big software players like Electronic Arts and THQ are getting their feet wet in social games through acquisitions of independent studios and by launching free-to-play versions of popular console games. Ubisoft has entered the arena already, launching games like Tick Tock, Horse Gaga and Vineyard Country on Facebook, but has not seen much success with those titles.

On the console side, Microsoft is estimated to have earned over $600 million through virtual goods on Xbox Live, and Playstation is looking to social games to breathe life into its barren Home virtual world. We expect that these companies will inject huge amounts of production and marketing dollars to support these new ventures, especially as they compete with Zynga and Playdom, and many are heralding this as the inevitable end of the independent game studio. However, we believe that the “little guy” will actually continue to thrive in the social gaming sphere, particularly because the big players’ strategies will be lacking in three critical areas:

1. User Acquisition

Software gaming giants are used to traditional distribution models of in-store purchases or direct downloads. In contrast, social games have a very different purchase funnel: purchase intention is flexible and highly influenced by viral factors; commitment cannot be guaranteed because the games are free to play; and conversion to a paying user involves providing just the right kind of incentive at just the right time. Moving a player through the funnel and monetizing their activity require an intimate understanding of how social game mechanics tie in with their respective distribution platforms, and over the past year, social game studios have invested a lot of money and energy into learning these nuances. The big software developers who are just entering the space will pump marketing dollars into the social game sphere, but without knowledge of how to properly monetize users, their user acquisition costs will end up exceeding the lifetime value of the user. Instead, smaller social game developers will have a treasure trove of knowledge about how to aggressively monetize a smaller audience, and will succeed in cultivating a more profitable user base, through better game design and improved use of the social graph and viral notifications.

2. Distribution

Major game publishers entering the social space will play it safe and look to follow Zynga’s lead by distributing on Facebook – we have already seen Ubisoft launch three Facebook games. Facebook is attractive to game publishers because of its ability to deliver large audiences and because it is the only place where they can leverage their marketing budget, as no other platform has an advertising platform that they can utilize so effectively. But as described earlier, Facebook is oversaturated – there are over 550,000 active apps on the platform – and the big software players will fail to take advantage of the opportunity represented by so many other distribution channels because they will be so focused on Facebook. Instead, smaller developers will innovate in the way their games are distributed and see greater success this way.

3. Content

The online gaming industry operates like the Hollywood studio model: find a formula that works and create one mega hit that recoups all costs; after all, a large share of the gaming industry’s software revenues are generated just by the Grand Theft Auto franchise. Major game companies will take a similar cookie-cutter approach to social gaming and this will be a big flaw in their strategy. It’s no secret that current social games are all variations of the same theme – the numerous lawsuits between social game companies point to the lack of creativity – and users are starting to get worn out with the simplistic, repetitive game play dynamics of first generation of social games. And while the big players will be improve production values through larger budgets (including leading the march towards 3D social games), true innovation will be hard to come by in their offerings since many social gaming hits have come from acquired IP. As Zynga’s and Playfish’s acquisition spree slows down, its growth and innovation will also stagnate.

Instead, smaller, independent game developers will lead the process of improving game design and understanding how to convert players to payers during different trigger points within the game. They will also lead the way with game play innovation and making social games more social by adding text and voice chat functionalities between avatars, combined activities, tournaments and shared goals, and more interactivity between individual user environments.

Like our predictions for the future? Let us know what you think in the comments.