Social games played on sites like Facebook and MySpace are the hottest part of the game industry. The market for social games has been dominated by three companies: Zynga (, Playdom (, and Playfish ( In November 2009, Electronic Arts ( acquired Playfish for $300 million in cash and stock and guaranteed another $100 million in bonus payouts if certain milestones were met by 2012. A short time later in December 2009, Digital Sky Technologies (, a Russian firm with offices in Moscow and London, bought a $180 million stake in Zynga. Based on this investment, as well as other investments in the firm, many financial analysts put Zynga’s market share worth somewhere between $1.5 and $3.0 billion.
To the casual observer, these valuations seem astounding. It is the case that social games are simpler than the average video game and take much less time
to play. It is also the case that they have expanded the game audience beyond traditional video gamers who tend to be young males. Yet, from an economic standpoint, the major difference between social games and video games is that the former are free. If players don’t have to pay, where does the return on investment (ROI) for companies like Electronic Arts and investors like DST come from? The answer lies in micropayments.
The Solution
In 2007 Facebook launched a platform that enabled software developers to create applications for the site. Currently, the site has tens of thousands of applications. Similarly, MySpace, which relies on Google’s OpenSocial platform, has 4,500 applications available to users. Today the most popular application category for both of these social networks is social gaming. On Facebook, for example, there are nine games that have more than 12 million active players per month. This is more than the number of monthly players for World of Warcraft, the most popular online game. Of course, they pay to play. Among the top 10 most popular social games on Facebook, Zynga has three offerings— Farmville, Mafia Wars, and Café Word—with a combined audience of over 105 active players per month, while Playfish has two offerings— Pet Society and Restaurant City—which has 60 million active users per month.
If it doesn’t cost anything to play a social game, then how does the game company make its money. One way is with advertising. Either continually or at various times during the game, ads can be displayed. Just as the advertising firms do with the search engine companies or other Web sites, the game companies can either be paid for “impressions” or “clicks.” Historically, advertising revenues have been very low for all kinds of applications on Facebook, MySpace, or any of the other social networks. It is especially true for social games because advertising firms like to pay when a user clicks on an advertisement rather than paying for simply displaying the advertisement. Obviously, clicking on an advertisement while the game is in progress is disrupting to the flow of the game.
Increasingly, application developers of all sorts are turning toward a new model, which has been called “freemium” in the United States. The “freemium” has its roots in Asia and is built on the concept of providing a service for free and charging either for virtual goods or premium features. For example, in China the most popular instant messenger service is Tencent’s QQ. Tencent is not a household name, except in Asia. Tencent has a market cap of $80 billion and its QQ offering controls over 85 percent of the market with more than 330 million users. In 2007, the company generated $523 million in revenue—that’s four times as much as Facebook, in a country where the average monthly wage is less than $20—with operating profits of $224 million. Only 13 percent of the revenue came from ads. Two-thirds came from Internet services like games and digital goods: “gifts” such as virtual flowers, background music for users’ profiles, and virtual pets. Some of the most popular items involve QQShow which is like Yahoo! Avatars. However, unlike Yahoo! Avatars, QQ avatars can be customized and personalized for a price. You can buy new clothes, hairstyles, accessories, and backgrounds. QQ users can also create a living space for their avatars, furnishing it with digital plants, couches, and the like. All of this can be done for a few RMBs here and a few RMBs there. RMB stands for renminbi, the Chinese currency, which is equal to about US$.15. Pretty soon all of those RMBs add up to millions of dollars.
In the case of social games, the freemium model is built on the notion of giving away the games but charging players a small amount for virtual goods that enhance the game experience. One example is Mob Wars, a Facebook application in which players rise through the ranks of a gangster organization by committing crimes and fighting other players. Mob Wars costs nothing to play. Players are given a certain amount of virtual currency to spend on recruiting and equipping their mobs. To earn more, you have to perform certain tasks—or sidestep the process by paying with real money instead. According to TechCrunch, Mob Wars is generating $1 million per month from these microtransactions.
An open question is: how are these microtransactions handled? It’s the same micropayment issue that was raised in the opening case of the chapter. However, in this instance there a number of start-ups that have arisen to address the issue, such as Spare Change (, Zong (, and PayByCash (
Among these, Spare Change seems to have the most traction. Spare Change, which was recently bought by PlaySpan (, is used by the developers of Mob Wars and 700 other Facebook, MySpace, and Bebo applications. It takes three lines of code to add the Spare Change micropayment system to an application. Spare Change is processing $2.5 million micro-payments per month, which is approximately $30 million a year. The Spare Change system handles payments as low as $.10. In order to use the system, a player needs to register and tie his or her account to a credit card, a PayPal account, a Spare Change account, or a mobile phone bill. Once registered, the player is given a PIN number that can be used to purchase the virtual goods or services. Spare Change charges 8 percent for each transaction, which is much cheaper than the credit card companies or PayPal.
At this point, it is difficult to tell what will happen to the companies developing social games and the companies developing the micropayment systems designed to support the games. It appears that they both have substantial momentum. But, we’ve seen this pattern before only to have the various companies meet their demise, especially the companies selling the micropayment systems. For the micropayment companies, one potential threat is the social networking companies themselves. A couple of years back, both Facebook and MySpace were working on payment systems for their application development platforms. Over time, both these efforts faded into the background. Even if the social networks eventually provide their own systems, it does not mean that they will capture the market. Remember what happened to eBay in its battle with PayPal. Of course, while it lost the battle, it also won the war when it purchased PayPal.

What does the term freemium refer to? Give some examples.
Do you think this is a good model for other companies to follow?

why is it difficult to
generate revenue through advertising? Why is it particularly hard for social games?

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