What’s the fastest growing segment of the entertainment industry? What sector can bring in $650 million in the first five days a product is on the market? And what industry has increasingly become the focus of technology giants, online retailers, and media attention? The answer to all three questions is the video game industry, and it’s in the midst of transformation thanks to the subscription economy.
For decades, the video game industry has utilized the conventional single-purchase model. Customers buy $59 retail games, and your profits are measured by your units shipped minus your cost of development. But with the advent of the Internet, games shifted from being single purchases to subscribable services. While most game publishers still operate under the old model, several pioneers have already leveraged the superior customer relationships afforded by the subscription model to very lucrative enterprises.
Zynga is at the heart of this debate, with many critics and industry insiders saying that it’s both the wave of the future and a flash in the pan. Here, we take the former position. To see the latter position, check back next week.
Zynga utilizes a freemium business model and offers a variety of social-strategy games (such as Farmville, CityVille, and Mafia Wars) on the Facebook platform. The games are free to play but often require social actions (such as partner purchases) or in-app purchases to progress faster in the game (usually requiring the player to obtain “energy”). Their business model is derived from both in-app credit card purchases and partnerships and is unquestionably one of the most profitable in the gaming world right now. Let’s take a look at why Zynga is so well positioned to ultimately win the Subscription Gaming Wars.
1) No one knows their customer better
Critics often point to the unsustainability of Zynga’s business model. And there’s a certain amount of truth to that: games that rely on bugging your friends and lack a compelling mechanic won’t succeed in the long term. But Zynga has always stayed ahead of this curse by selling to their customers with remarkable specificity and flexibility. When one game becomes tired, an update, new content pack, or new game are ready to roll out– renewing interest. The company has made its name by offering games that are addictive and approachable (and free) at first, but then targeting the different types of gamers and what kind of content they’ll need to keep playing. Someone once said Zynga has monetized their business model down to the haystack in Farmville, and that’s not entirely off the mark. So far, no one has as successfully leveraged in-app purchases as Zynga has. This is partly due to the sheer amount of data that Zynga has access to; the company’s analysis of its audience is the best in the market– it knows when players log on, how long they usually play, and what incentives they’ll need to keep playing– often before they themselves know. Compare this to other companies that struggle to ship products in a timely manner and worry about critical reaction. Zynga has circumvented the need for the expert– they can tell you whether their games are successful in remarkable detail.
2) Amazing profits means they can buy better games
Another criticism that is common of Zynga’s business model is that their products are all very similar, with similar game mechanics, art style, and leveling systems. Others will even go so far as to say they aren’t even games but highly interactive mosaics since there is virtually no challenge and no chance of failure.
But Zynga’s reported 600 million in profits are so high that they have the luxury of not having to worry about those criticisms…yet. Instead, Zynga can actually afford to gobble up other, more innovative developers, and utilize their talents to build better games. Zynga has begun to make overtures to companies like PopCap (the developers of Plants Vs. Zombies) and Rovio (developer of Angry Birds), and already acquired OMGPO (the developer of Draw Something). Money talks, and with the amount that Zynga has, they can certainly buy their way to better games.
3) Freemium is still a stronger model than a conventional $59 game
Zynga doesn’t offer paid subscription games…yet. But their freemium model is well-suited to the transition to a paid model. Instead, Zynga is leveraging small-single-transactions to great success. While counter-intuitive, these small purchases are often recurring revenues that dwarf the profitability of single purchase $59 games. Why? Because more people will throw down a dollar or two for a freemium game than will invest in the hardware to run the $59 game and then actually purchase the game itself. The threshold for entry is simply much, much lower.
4) Zynga is flexible enough to move to new models as needed
The old guard of video games is stuck in the language of units shipped, single-purchases, and meeting deadlines. Companies that utilize the Internet (and especially the Cloud) to distribute their content have a distinct advantage. Zynga, like many of these new developers, can update content, release new content, and make available new revenue streams in hours, not weeks. Zynga’s billing platform and business model are exceptionally well-suited to this, as their many in-game purchases could easily be turned into recurring subscriptions as needed.
5) Shorter development time means they can churn out products faster
As previously discussed, Zynga has a distinct advantage over many of its peers due to its marriage to the Internet. It can distribute its content instantly, get its message out to its customer within seconds, and even radically update its games– all in short order. Compare that to the lengthy development cycle of AAA titles like Modern Warfare 3 and Battlefield 3 which takes months, even years. Zynga can adapt to the market and produce content quickly, cashing in on the latest genres and changes.
6) Facebook needs them
But the biggest reason Zynga will likely succeed is that Facebook needs them and will do all they can to accomodate the game developer. When you’re the favored app developer of the largest social networking site in the world, you have a distinct advantage over everyone else. Facebook has recently admitted that 12% percent of their revenue in 2011 came from Zynga. As Facebook grows, so does Zynga. This partnership is perhaps the most important one in gaming right now, and until Zynga can be knocked from their favored perch, everyone is playing catch up.