The future of social gaming is much talked about and divides opinion: will consumer appetite and market investment continue to grow through 2013 and beyond?
Whilst unique user numbers and market revenues have continued to climb over the past couple of years, the industry has seen shares in Zynga (the largest player in the market) fall steadily since its $1bn IPO in December 2011, with shares at the time of writing down over 75% from $10 one year ago to $2.33.
There are several contributing factors to the difficulties faced by Zynga and its competitors:
- Monetisation: Getting users to spend money in-game is tough. The majority of games are typically freemium meaning they are free to play, but have paid-for options designed to enhance user experience. 95% of players don’t spend a penny.
- User Retention: User engagement and monetisation for individual games can be short-lived, often dropping a month after an individual starts playing.
- Facebook Dependency: In addition to the rising costs of attracting new users due to Facebook increases in advertising costs and to Facebook’s 30% cut of gaming revenue introduced in 2011, the recent and controversial algorithm changes to Facebook’s news feed curb the virality of games.
- Mobile: Consumers are increasingly shifting towards using mobile devices to access the internet, social networks and games. Mobile gaming platforms are being developed, but some gaming businesses have been slow to adapt to demand.
- Commoditisation and Competition: As more games and developers enter the market the need for visibility and differentiation has become increasingly important and increasingly difficult. App stores offer a wealth of gaming choices for users and gaming developers struggle to make their apps stand out from the crowd.
But these challenges have not slowed market growth or investor interest and social gaming businesses looking to get ahead of the curve are beginning to focus on online gambling and real-money games (as opposed to games with virtual incentives and prizes).
Gambling addresses the first and most challenging difficulty associated with social gaming: monetisation. How to get more users to spend money on social games and how to get those already spending money to spend more each time.
According to the Casual Games Association social casino, poker and slots games generate 1.6 – 2 times the Average Revenue Per Paying User (ARPPU) generated by social games on average.
And it’s not only the social gaming businesses moving into the online gambling sector, gambling operators are also moving into the social gaming sector:
- Caesars Entertainment Corporation bought social gaming developer Playtika in 2011
- IGT purchased social gaming developer Double Down Interactive in January 2012
- Bwin.Party made two moves into social gaming in 2012: buying out a number of contracts from two Eastern European gaming developers in May for US$23m, and announcing a partnership with Zynga in October.
- 888 Holdings announced a tie-in with Facebook in December 2012 whereby 888 Holdings will launch real-money bingo and casino games on the Facebook platform, with the first release due Spring 2013. This follows Facebook’s first foray into real-money gaming with Gamesys in 2012.
For gambling operators, the social gaming market represents an opportunity not only to generate additional revenue streams but also to substantially increase reach. The hypothesis is yet to be proven, but the theory is that social gaming (whether casual, casino or real-money games) may be used to convert users to online gambling where monetisation will likely be higher.
There is also the attraction for gambling operators of entering new markets currently closed to online gambling, notably the US market. Whilst there are currently significant legal restrictions to online gambling in the US, last week’s announcements that New Jersey intends to vote on allowing online gambling for a 10-year trial period have led to even further speculation surrounded the expected deregulation of the US market. Social gaming presents the opportunity to gain a strong foothold and first to market advantage in a potentially very attractive market for online gambling.
Will social gambling continue to gain momentum? Almost certainly, but in which territories and how quickly may depend upon the level of regulatory and public acceptance. Whilst there are indications that online gambling will be deregulated in the US and of brands using social gaming as a first to market advantage, the regulatory bodies of some other countries have been taking steps in the opposite direction: curbing the proliferation of gaming on social networks due to concern that it might encourage gambling behaviour and addiction, particularly in children given their time spent on social platforms.
(1) Japan: The Consumer Affairs Agency of Japan announced in May 2012 that “kompu gacha” would be illegal from July 1st, and that game developers using this monetization system would be fined. Despite not being real-money gambling, the system in question has comparable qualities to gambling (paying money for a random chance of reward, albeit virtual reward) and can result in losing high sums of money. It became a focus for regulatory bodies due to the rise in gaming amongst children, with an increase in complaints logged and a few highly publicised stories of school children losing relatively high sums of money, including one child reportedly spending $5,000 in one month.
(2) Belgium: The Belgian Gaming Commission, known for its strict gambling operator licensing and its operator blacklist, announced in November 2012 that if the characteristics of social games met the criteria of gambling (playing a stake which can be lost and involving an element of chance) then the provision of these games would also be restricted to those licenced operators. Spend limits on games were also discussed.
(3) Australia: In January 2013 reports emerged in Australia that Senator Nick Xenophon is campaigning for real-money social games, including those such as Slotomania where prizes can be won rather than cash, to be banned by reclassifying them as gambling. He intends to push legislation through Federal Parliament this month.
(4) United Kingdom: The UK Gambling Commission has expressed concerns over social gaming and particularly its exposure to the younger generation, and has commissioned a review to advise whether social gambling should fall under gambling regulations. From a public acceptance perspective, whilst social gaming had not previously attracted the same levels of attention from the public eye in the UK, front page headlines in December 2012 on the 888 / Facebook tie in “tempting young to gamble” show there may be more coverage and regulatory pressure to come as plans for real-money gaming on the social network develop.