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The Problem With Virtual Goods

Making a business out of a game is hard work. It takes great design, unique mechanics, creative marketing and some serious dedication to build a successful game. Turning this successful game into a business requires all of the above, plus a large amount of users that are willing to give you their money. And, if you want to give away access to your game or app for free, as many game makers now do, you will need an even larger number of total users to derive your paid user base from.

Today, virtual goods have become a common way to monetize a game, and while it may have become a very lucrative business for early comers like Zynga, it is not a good business to be in now. If you look at Zynga as an example of a successful virtual goods-based game company, the outlook is pretty grim for an up-and-coming game developer. Even before the 30% Facebook Credits tax, Zynga only makes an average revenue per user (ARPU) of approximately $1.21 because only a small percentage of their total users actually pony up their hard-earned cash.

Zynga’s business is only possible because of their tremendous scale, and many of the methods that they used to reach that scale are no longer available.

Some methods are subject to first-mover advantage, such as Zynga’s first successful game, Texas Hold’em Poker (aka Zynga Poker), which was the first poker game on Facebook and gave them huge group of users to market to for future games. Other methods are no longer available, in the case of the aggressive Facebook messaging tactics that Zynga employed early on that are no longer allowed by Facebook.

The chance of a company recreating Zynga’s success in the social gaming market is made even slimmer by the tremendous advantages of scale that Zynga enjoys, especially when Facebook helps Zynga meet monthly unique user targets for its games. Due to the low average revenue per user (ARPU) of many social games, game studios with small player bases are severely limited in their ability to scale their game and their business. It is difficult for studios to grow their user base through marketing efforts because the cost of user acquisition is so high relative to their value, especially in the short term. And it is difficult to produce a game of comparable quality to the social gaming giants with a small staff. Last but not least, the virtual goods-based games space is over-saturated with thousands of companies chasing the same user base.

Instead, game studios should look for new ways to monetize their games. Real-money play, or the ability for players to wager and win real money on gameplay, already generates incredible revenue for gambling companies. An average online gambling company earns approximately $300 ARPU with boring, outdated casino games. Games that utilize innovative new gameplay, such as modern social and mobile games, can leverage real-money play to make exciting new games and make significantly more money doing so. This new category of Real-Money Gaming will disrupt both the gaming industry, where ARPU is typically very low, and the gambling industry, where many of the popular game mechanics are in need of socialization. We believe that the next Zynga will come out of the currently unclaimed Real-Money Gaming space, and that the companies that are early to this space will have the same first mover advantage that lead to Zynga’s success within social gaming 1.0.