When Your User Cost is Higher Than Your LTV:

New Market Opportunities for Content Creators to Increase Life

Time Value of Customers

William Volk, CCO PlayScreen

Sunday, July 28, 13

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But First, A Joke ...

Perhaps you have seen this story?

Game Programmer Quits Job To Sell Street Food, Doubles Salary

First reported by Tencent, an unnamed game programmer in Shenzhen, Guangdong province left his job in the video games industry and took up a cart to sell "shaobing" on the street.

Sunday, July 28, 13

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But First, A Joke ...

In related news, his customers began demanding FREE FOOD ... with only 2% opting to make DLC (deliciously loadable content) purchases for condiments and spices.

Sunday, July 28, 13

The Evolution of the Game Industry

1982 Avalon Hill Controller$30 for 48KB of Code and Graphics

Now we ship megabytes and hope some people pay us a few pennies a day

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Sunday, July 28, 13

Freemium: How we got into this situation

Understanding where we’ve been helps us know where we’re going.

Box games, Consoles, Mobile(B.A.) and App Stores.

(B.A., Before Apple)

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Freemium (Free to Play) Dominates

• If you could PAY players to download games, i.e. NEGATIVE PRICES, publishers would do that

• In fact, many do

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The Key Insight about Free To Play

(Cost Per Install is NOT Cost Per User)

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Don’t get fooled by CPI

• Facebook Mobile Ad Campaign: CPI = 63¢!

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Don’t get fooled by CPI

• Must be Poor Retention? Right??• Lesson? Conversion is NOT Retention

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Why is it so expensive to acquire users?

• Expectations of app riches drives investment• Excess demand for ad inventory drives CPI• Market can’t support the number of apps released• 50% of app revenue is going to 0.1% of all apps• Ad profits reach 100% in some cases• In Contrast, the NES

• 785 carts, USA and PAL• Supply of games restricted• Quality controlled• High prices, high profit

• App Stores - Open, No Barriers,and Brutally Competitive... be careful of what you wish for

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What can you do to get better conversion?

• Optimize advertising for CPU not CPI• Pay Per Engagement

Model (CPE)• Creative that only attracts

the audience you want

• Use co-promotion channels (Chartboost etc.)

• Increase Daily Revenue (6¢ per user in that example, break even would be 60¢!!!)

• Ship 4.5+ Star Apps

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Tactic: Improve F2P Game Revenue

• Example: Candy Crush Saga• Life Model: Buy lives or earn with social activities• Chapters: Pay to advance, or ask friends for tickets• Moves: “So close to advancing?” buy 5 extra moves • Consumable Power-Ups and durable ‘$$Charms$$’• The Map: Discernible game progress

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Tactic: Improve F2P Game Revenue

• Example: Crickler 2• Consumption Model - Play A

Puzzle, Use A Credit• One Free Hint a Minute• Impatient? Buy Hints• Earn credits by watching

videos• Reduce CPU via co-

promotions• Create ‘topical’ puzzles to

drive consumption

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Sunday, July 28, 13

Tactic: Improve F2P Game Revenue

• Provide Alternative Payment Methods• Offers - Native-X/Tapjoy• Social Activity for Credits

• Although revenue/transaction is small, more players use this than IAP ... acts as a retention tool

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What’s Wrong With Freemium?

• Only a small number of players are payers• “Social casino games average a conversion rate

between 2% and 3.5% in the U.S. depending on the sub-genre.” - Social Casino Gaming Report 2012

• Many social games are dependent on whales

• App bubble creates eyeball-driven publishers driving acquisition costs above lifetime value

• What Can Go Wrong? Bombcats, Punch Quest

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Is there a backlash against Freemium?

• Typical Story: From CBC News, July 23, 2013

$3,000 iTunes bill stun mom

“To make a long story short, it was not fraudulent activity or criminal activity that I thought was happening from the U.K.; it was actually my seven-year-old sons who were playing a game while I was gone called Clash of Clans,” Marner said.

“The $3,000, $5,000, $10,000 bills, people are really going to complain about that when they show up, because it's pretty noticeable on your credit card statement,” said Fewer, who is the director of the Canadian Internet Policy and Public Interest Clinic.

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Sunday, July 28, 13

Strategy: Ship Paid And Pray

Small developers may be better off just forgoing ‘freemium’ and aiming for niche hits

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Strategy: Ship Paid And Pray

• This can work

• But odds are, it won’t

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Strategy: Ship Branded Paid Games

• Example: Leisure Suit Larry Rebooted

• Sucessfully launch (and actually ship) a ’80’s classic• Ship at $4.99 (higher costs for PC/Mac)• Hit iOS 100 Top Grossing in less than a week

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Strategy: Ship Branded Paid Games

• What works?• Name Brand Ports• Niche apps (Bocce)• Adventure Games• Mid-Core Games• Awesome Game

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Strategy: Higher Revenue Freemium Games

And that just might be Real Money Gaming (RMG)

(Monthly Revenue Per Paying Player)

(Source: SuperData Research)

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M O R G A N S T A N L E Y R E S E A R C H

7Thomas Allen, (212) 761-3356, thomas.allen@morganstanley.com

Key differences and similarities between social gaming and real money online gambling

Source: SuperData Research, H2 Gambling Capital, Morgan Stanley Research

2012e Social gamingSocial

gamblingPaying social

gambling Online

gambling

Player base (m) 799 173 3.2 49Market size (US$m) $7,952 $1,704 $1,704 $35,058ARPU (US$) $10 $10 $538 $716

M O R G A N S T A N L E Y R E S E A R C H

3Thomas Allen, (212) 761-3356, thomas.allen@morganstanley.com

Social Gambling is $1.7 billion industry, <5% of Online Gambling

US$390.5bn US$35.0bnUS$1.7bn

Total Global Gambling Digital Online Gambling Social Gambling

Source: H2 Gambling Capital, SuperData Research, Morgan Stanley Research

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Strategy: Real Money Gaming

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Strategy: Real Money Gaming

• Not so fast• Legal in Europe• USA lags at this time• Licensing requirements• CPU is expensive (no surprise) • Need to geo-fence• Apple approving apps, Google is not

• Experienced companies dominate market • PokerStars, BWIN, Betfair, 888, William Hill

• Harder than it looks. RMG is NOT a Social Casino• All players are paying, not just the whales• Deep understanding of casino games a requirement• Zynga: RMG Poker NOT the same app

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Strategy: Real Money Gaming

• Get your own license• Will take months. • Expensive• Keep more of the revenue

• Pick a licensing partner (Betable, Cashbet etc.)• Give up a good portion of revenue• Get to market faster• Have an understanding of the market

• Either way - execution matters

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Predictions

• Traditional Publishing model gains ground

• There will be a “land rush” into RMG

• The large video game publishers will ship branded games

• There will be a shakeout on mobile

• Apple has and will make it more costly for independents

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Sunday, July 28, 13

Final Rant: FUN MATTERS!

"Men have become the tools of their tools" - Thoreau

The day Excel became a more important tool for development than art and coding was the day game creation nosedived into being mostly garbage.

The game world will find its balance again one day, but it will take time before we realize the essential truth:

Thoroughly optimized garbage is still garbage.

(Inspired by a marketing rant created by Tom Cunniff)

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