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 http://forums.ageofconan.com/showthread.php?t=149585&page=3, Wow cost $68M to develop http://www.raphkoster.com/2006/06/13/what-wow-cost/. 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.
Friday, July 15, 2011
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.
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.
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.
Tuesday, June 28, 2011
AARP under right wing attack
The AARP, traditionally a strong supporter of medicare and social security and a pain in the ass to conservatives wishing to cripple or eliminate these programs, is currently under the same kind of low-political and propaganda attack we just recently saw leveled at PBS.
If you appreciate the AARP but are under 50 years of age, you might want to show support now by becoming an associate member for $12.50.
As a little fore-warned is fore-armed reading, the right is quoting this article BADLY out of context and in very misleading ways. if you think you might have to discuss it with someone, its worth reading in its entirety...
If you appreciate the AARP but are under 50 years of age, you might want to show support now by becoming an associate member for $12.50.
As a little fore-warned is fore-armed reading, the right is quoting this article BADLY out of context and in very misleading ways. if you think you might have to discuss it with someone, its worth reading in its entirety...
Monday, June 20, 2011
Just because you say it often, doesn't make it true....
One of the most common of logical fallacies in modern society is the Availability Heuristic. This is the tendency in the human mind to believe most strongly that which is most available in memory. This biases us towards decisions based on the most recent experiences, and the easiest ones to remember.
Its not an unreasonable bias to be built into us as animals. The most recent experiences have the greatest likelihood of pertaining to where we are right now. Furthermore, repetition increases memory and the speed at which memory is recovered, and this too is reasonable. If something happend 10 times recently its a lot more likely to be relevant then something that happened just once.
Generalities are also easier to remember then specifics. It can be argued that this too at one point in time was adaptive in that we are unlikely to encounter the exact same situation twice but we might well encounter many that have important things in common.
Unfortunately, today we live in a finely crafted soup of experience designed specifically to drive our decision making in directions those who pay for the soup want us to go. From all of the above comes a very simple and well known advertising maxim: the more times people hear your message from apparently different sources, and the simpler that message is, the more likely they are to base their decisions upon it.
The Bush administration raised this to a fine art in the political arena by coordinating many right wing radio and talk show hosts around daily messages. Each day they would send all these people a short list of bullet point "messages of the day' to tell their listeners, with the Fox news network at the center driving it home. (http://www.opednews.com/wade_071604_outfoxed2.htm)
A less directly coordinated, but no less insidious, effort has existed since the 1970s and has continued to exert its influence to day. (An examination of its approach to Welfare as an issue can be read here: http://www.publiceye.org/welfare/Decades-of-Distortion.html)
To me, one of the most insidious distortions that has been created through continued repetition of a falsehood is the idea that this is a "Christian Nation."
Nothing could be further from the actual truth. This nation was founded by expatriates from Europe, a place of legitimate Christian nations-- which is to say nations whose Kings claimed their right to rule on Christian religious precepts and which defined Christianity as their state religion.
In stark contrast, our founding fathers did *not* by and large identify themselves as Christians, but rather were part of a movement that has come to be called "enlightenment deism" by theologians and historical scholars. This was founded in the notion that god was represented in the natural order and could be found there, and not in institutions and religions created and run by men. (http://en.wikipedia.org/wiki/Deism)
They enshrined that belief in one of the most amazing and daring propositions of their day: that *all* men were created equal by their maker, and that freedom of religion was an individual right that should be held totally separate from the matters of governance. By doing so, they were declaring war not just on England, but on all the European notions of state religion.
This is NOT a Christian nation, nor has it ever been one. This is a nation that exists independent of any religion. That it happened to be majoritively occupied by Christians, at its founding or today, was not a reason to make that the state religion.
That was what our founders thought. Thats what the constitution says. And if you didn't know that, maybe you should read it again.
Its not an unreasonable bias to be built into us as animals. The most recent experiences have the greatest likelihood of pertaining to where we are right now. Furthermore, repetition increases memory and the speed at which memory is recovered, and this too is reasonable. If something happend 10 times recently its a lot more likely to be relevant then something that happened just once.
Generalities are also easier to remember then specifics. It can be argued that this too at one point in time was adaptive in that we are unlikely to encounter the exact same situation twice but we might well encounter many that have important things in common.
Unfortunately, today we live in a finely crafted soup of experience designed specifically to drive our decision making in directions those who pay for the soup want us to go. From all of the above comes a very simple and well known advertising maxim: the more times people hear your message from apparently different sources, and the simpler that message is, the more likely they are to base their decisions upon it.
The Bush administration raised this to a fine art in the political arena by coordinating many right wing radio and talk show hosts around daily messages. Each day they would send all these people a short list of bullet point "messages of the day' to tell their listeners, with the Fox news network at the center driving it home. (http://www.opednews.com/wade_071604_outfoxed2.htm)
A less directly coordinated, but no less insidious, effort has existed since the 1970s and has continued to exert its influence to day. (An examination of its approach to Welfare as an issue can be read here: http://www.publiceye.org/welfare/Decades-of-Distortion.html)
To me, one of the most insidious distortions that has been created through continued repetition of a falsehood is the idea that this is a "Christian Nation."
Nothing could be further from the actual truth. This nation was founded by expatriates from Europe, a place of legitimate Christian nations-- which is to say nations whose Kings claimed their right to rule on Christian religious precepts and which defined Christianity as their state religion.
In stark contrast, our founding fathers did *not* by and large identify themselves as Christians, but rather were part of a movement that has come to be called "enlightenment deism" by theologians and historical scholars. This was founded in the notion that god was represented in the natural order and could be found there, and not in institutions and religions created and run by men. (http://en.wikipedia.org/wiki/Deism)
They enshrined that belief in one of the most amazing and daring propositions of their day: that *all* men were created equal by their maker, and that freedom of religion was an individual right that should be held totally separate from the matters of governance. By doing so, they were declaring war not just on England, but on all the European notions of state religion.
This is NOT a Christian nation, nor has it ever been one. This is a nation that exists independent of any religion. That it happened to be majoritively occupied by Christians, at its founding or today, was not a reason to make that the state religion.
That was what our founders thought. Thats what the constitution says. And if you didn't know that, maybe you should read it again.
Friday, June 17, 2011
Non-news and real-news in the industry.
In the non-news category we have this totally incorrect but sure to be talked about blog....
http://techcrunch.com/2011/06/15/facebook-project-spartan/
The idea that this is some kind of end-run of one giant around another is entertaining, but also complete and utter bollocks. Anyone who actually researched and thought about the situation could see that.
Jobs is no fool. There is a reason why Apple allows HTML5 on their
platform but does not allow web Flash content.
HTML 5 is played under the control of the browser, which means they
have total control and can chose to block anything that interferes
with their business. Flash on the web is played by the Flash plugin,
and is under the control of Adobe and *not* apple. The Flash plugin
could be used to load arbitrary third party content onto the iOS
device and there is nothing they could do about it.
Jobs relented as far as allowing Adobe AIR apps because they cannot be
used to load third party content onto the phone and thus are not a
threat to Apple's control.
Microsoft taught the industry that the key to ultimate power is in
the hands of he who controls access to the user. Jobs learned that
lesson well.
Now in the real news department we have this salvo by Microsoft:
http://www.zdnet.com/blog/bott/microsoft-calls-graphics-technology-in-chrome-and-firefox-harmful/3470#comments
Make no mistakes, this is total FUD. The two "independent" reports cited in the article were released on the same day, less then 2 hours apart from each other (the writer acknowledges this correction in the comments below his article.) But it is important because it marks Microsoft's first offensive on a very real battlefield. Microsoft fought long and hard to kill OpenGL on Windows because they could not control it. And they had just about succeeded in getting the entire industry to relent and use the APi they *do* control, D3D.
But the unlikely partnership of Apple and Google have re-opened the entire fight for the desktop with HTML5. And a critical part of this is WebGL. So critical that IE9, while supporting much of HTML5, is conspicuously lacking this feature. This is a battle Microsoft could lose, they are losing market share as is to Chrome. The perception that they lag behind in features could accelerate that loss.
http://www.techspot.com/news/44078-ie-losing-share-firefox-gains-a-bit-chrome-used-by-1-in-8.html
Microsoft is responding true to form. What they don't want to do, they attack with misinformation and fear tactics to scare customers and try to kill the market for. They did this relentlessly with Java. I'm sure they have done it many other times.
Expect their next move to be an "alternative" WebD3D based on the "industry standard" (in the sense that they own the industry currently) Direct3D API for desktop apps.
What happens after that will be up to consumers.
http://techcrunch.com/2011/06/15/facebook-project-spartan/
The idea that this is some kind of end-run of one giant around another is entertaining, but also complete and utter bollocks. Anyone who actually researched and thought about the situation could see that.
Jobs is no fool. There is a reason why Apple allows HTML5 on their
platform but does not allow web Flash content.
HTML 5 is played under the control of the browser, which means they
have total control and can chose to block anything that interferes
with their business. Flash on the web is played by the Flash plugin,
and is under the control of Adobe and *not* apple. The Flash plugin
could be used to load arbitrary third party content onto the iOS
device and there is nothing they could do about it.
Jobs relented as far as allowing Adobe AIR apps because they cannot be
used to load third party content onto the phone and thus are not a
threat to Apple's control.
Microsoft taught the industry that the key to ultimate power is in
the hands of he who controls access to the user. Jobs learned that
lesson well.
Now in the real news department we have this salvo by Microsoft:
http://www.zdnet.com/blog/bott/microsoft-calls-graphics-technology-in-chrome-and-firefox-harmful/3470#comments
Make no mistakes, this is total FUD. The two "independent" reports cited in the article were released on the same day, less then 2 hours apart from each other (the writer acknowledges this correction in the comments below his article.) But it is important because it marks Microsoft's first offensive on a very real battlefield. Microsoft fought long and hard to kill OpenGL on Windows because they could not control it. And they had just about succeeded in getting the entire industry to relent and use the APi they *do* control, D3D.
But the unlikely partnership of Apple and Google have re-opened the entire fight for the desktop with HTML5. And a critical part of this is WebGL. So critical that IE9, while supporting much of HTML5, is conspicuously lacking this feature. This is a battle Microsoft could lose, they are losing market share as is to Chrome. The perception that they lag behind in features could accelerate that loss.
http://www.techspot.com/news/44078-ie-losing-share-firefox-gains-a-bit-chrome-used-by-1-in-8.html
Microsoft is responding true to form. What they don't want to do, they attack with misinformation and fear tactics to scare customers and try to kill the market for. They did this relentlessly with Java. I'm sure they have done it many other times.
Expect their next move to be an "alternative" WebD3D based on the "industry standard" (in the sense that they own the industry currently) Direct3D API for desktop apps.
What happens after that will be up to consumers.
Wednesday, June 1, 2011
"You are at a cross-roads, you can go east or west."
We are at a potential cross-roads in online games in the United States, and its important the consumers understand the stakes.
Here's a simple question:
Its a given in a capitalist society that either you run a business to make money or you don't have a business very long.
Therefor in business, the primary motivator for any decision is "how do we make money."
Would you rather the developer of your favorite game's primary motivation be to provide an entertaining game that motivates and keeps subscribers, or a game that motivates you to "buy stuff."?
To put it simply, do you want to be entertained or sold to? Because thats the real choice. Ironically, as an important online developer, I find myself in the position of the salesman today when I really want to be an entertainer.
What do YOU want me to be?
Either way, you the consumer *will* be paying for it or there will be no more games. Your choice of ways to pay makes the difference in what we as developers become.
Here's a simple question:
Its a given in a capitalist society that either you run a business to make money or you don't have a business very long.
Therefor in business, the primary motivator for any decision is "how do we make money."
Would you rather the developer of your favorite game's primary motivation be to provide an entertaining game that motivates and keeps subscribers, or a game that motivates you to "buy stuff."?
To put it simply, do you want to be entertained or sold to? Because thats the real choice. Ironically, as an important online developer, I find myself in the position of the salesman today when I really want to be an entertainer.
What do YOU want me to be?
Either way, you the consumer *will* be paying for it or there will be no more games. Your choice of ways to pay makes the difference in what we as developers become.
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