Friday, July 15, 2011

Business, F2P, MMORPGs and basic math

My past two columns have been digging into Zynga numbers from their S1 statement to see what we can learn about the real F2P business. Today, I'm going to do some basic math with the, Don't worry, its nothing worse the multiplication, division, addition and subtraction. just those simple tools can generate some very interesting results.

The big squawk in the MMORPG space right now is about MMORPGs turning to F2P/Micro-transaction models. Its being hailed as some great new trend, but I've always maintained that the economics were fairly clear. That this isn't a viable way to make money in this space. Why then do it? Because, I contend, in all these cases you have failed MMORPGs with sunk costs to recover and some income is better then none.

With the hard Zynga data, we can explore this topic a little bit better.

Two columns ago, I dug out of Zynga's numbers a clear data point-- that Zynga grossed $3.21 per year per active account in 2010; Last column, with a bit deeper analysis, I concluded that they see a raw margin over operating expenses of about 20%. This means a net before marketing and such of about $0.64 per active account.

So, lets make a few assumptions:
(1) Zynga is the master at this and represents a best-case long term return (a fairly reasonable assumption i think.)

(2) Your MMORPG costs $40M to develop. (Age of Conan was $40m as per, Wow cost $68M to develop So that seems conservative.)

(3) Your MMORPG has a life-span of 5 years and maintains peak usership for all 5 years. (A very generous assumption.)

(4) Your MMORPG has no more cost of operation then Zynga's casual games and can reach the same profit margin. ( A very very generous and almost certainly false assumption.)

In this perfect storm, how many users does it take til you break even?

Well 20% of $3.21 is about $0.64 a year per active account. Over 5 years thats $3.21 again for the 5 years (not surprising, 5 is 20% of 100).

$40M/3.21 = 12,461,059

SO to even make back your investment in this model, you need to sustain an active user base of almost 12.5 million users over 5 years.

Seen many MMORPGs do that recently? WoW only has 11.4M current subscribers, took years to get to that point, and spent a lot of money on marketing in the process that isn't accounted for in the above overly-generous model.

Real F2P MMORPGs are sometimes a desperate way to get some revenue out of a failed product with sunk costs. But as a way to even break even its a fantasy, not a business model.

Saturday, July 9, 2011

More Zynga Analysis - Profit margin

One of the unanswered questions for a long time has been "how much money does Zynga actually make?" They have been happy to release gross figures, but not net. What is their actual profit margin. A friend of mine used to joke "We lose $10.00 on every sale but we make it up in volume!" Obviously, it doesn't matter HOW much money comes in the door if it costs you more then you are taking in to get it.

This is particularly highlighted by the revelation of my last blog. Zynga is taking in about $3.00 per active user account per year. Now, the economics of online help here a little. Your operational costs are mostly based on concurrently connected users, or CCU. Each concurrently connected user has a cost associated with supporting that user's online session. So its really the return per CCU that matters in your final economics.

It is a rule of online entertainment that your peak CCU is 5% to 10% of your total active user population. So, lets be generous and multiply Zynga's $3.21/yr/active account by 20. That gives an actual income of $60/peak CCU/year or $5.00 per peak CCU/month.

Thats *not* a lot of money to runa service on. A $5.00 per month subscription MMO generates $100/peak ccu/month by the same math. a $15.00 one generates $300 per peak CCU/mo. So, how much of that $5.00 a month is beign spent to get support that user? What is left is what is called the "margin", and thats where your profit comes from.

We can get a rough guess from this, more complicated chart from the S1:

In particular we are interested in this line, gross revenue:

And this line, which is profit after operating expenses:

What we can see from these charts is that, in 2010, Zynga took in $597,495K or just about $597.5M.
Not bad, but what was left after expenses? from the second line we see that, before taxes, it was $127,059K or about $127M.

From that, we can compute a rough margin, using the formula margin% = 100*net/gross. Thus Zynga had a profit margin in 2010 % of about 100*127/597.5 = 21%. Thats not a great margin, but its not razor slim either. As long as they can hold their costs even they aren't in a bad place.

And there is the rub. Because entertainment that stays the same bores its audience and dies. Every other platform and niche in game playing has seen a fairly rapid escalation of complexity and cost in games. The casual space is not likely to be any different. So, can Zynga meet the future challenges it faces on $5/ccu/month? Its a good question. if i had the answer I'd be making a lot more money then I do now (which isn't too shabby as it is.) One thing is for sure, you cant run a game as complex as a modern MMORPG on that. Not without drastic compromises in security.

Another interesting thing emerges from the Zynga documents however, which is that in 2009, with $127M of income, they actually *lost* money. Now a lot of that may be attributable to marketing spends to get themselves to their current $600M of revenue. But if 2010 is benefitting from last 2009's deficit, it calls into questions how sustainable the current margin really is.

No easy answers, but an interesting read. One thing is for sure-- this is not a financial model that supports server-heavy game designs. Unfortunately, those server heavy designs are also the only way to make complex games secure.

All in all I suspect it will be an interesting future for Zynga.

Thursday, July 7, 2011

Real Zynga Numbers

There has been much speculation about Zynga's numbers over the past few years. They gave out tantalizing tidbits but never enough to really know what they were making. As the acknowledged leaders of the F2P space, this is important information and, in the absence of real information, speculation ran wild.

However, in order to make a public offering, you have to "lift the skirts" as they say and so, buried deep in Zynga S1 filing with the SEC are these interesting tidbits:

This is a chart showing Zynga's gross income. The magic bar is the darker blue "revenue" bar as thats the actual money they took in.

This by itself is not much news, but when combined with this next chart, also in the document, it starts to paint a picture:

Looking at a total 2010 income of $698M and an average DAU of 217M, thats about $3.20 per active user account per year.

Honestly, thats better then I thought, though obviously a lot less then the $60 - $180 per account per year a subscription MMO returns.