Social Gaming
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October 16, 2009
Industry Report
Think Entertainment: Gaming Social Gaming: Revising Our Market Size Estimate To Reflect Rapid Growth
Reason for Report: Industry Update Atul Bagga 415-249-6362, [email protected]
THINK SUMMARY: Over the last six months, growth in social gaming has exceeded our expectations (DAU for the top five developers up 5x during this period), which has rendered our original market size estimates conservative. We estimate the current market size for social gaming at about $60 million per month and expect it to grow at approximately 45% CAGR over the next three years to reach $2 billion by 2012, driven by a combination of strong growth in usage and improving monetization. KEY POINTS: • Usage of social games has taken off much stronger than we expected (please see our report, "The Emergence Of Games As A Service" published on May 4, 2009). Daily Active Users (DAU) for the top 10 social gaming companies has increased more than 5x over the last six months, driven by the viral nature of these games, aggressive marketing campaigns by a few gaming companies, and emergence of a few new genres of games, most notably Farm and Aquarium games. • The popularity of gaming on social networks is evident from the fact that 20 of the top 25 applications on Facebook are games (as measured by Monthly Active Users or MAU; source: Developer Analytics), compared with 16 of the top 50 applications six months ago (as measured by MAU; source: Facebook). We believe that the usage (as measured by MAU) is even more skewed toward games now compared with six months ago. • Our conversations with a number of social gaming companies suggest that the monetization curve is concentrated to the large players—with only about 3-5% of the active users directly paying for the games. The ARPU curve for the direct paying users seems to resemble any other free-to-play online game, i.e., heavily concentrated on the top users. Looking ahead, we believe that there may be some room for improvement in the conversion rate (from active users to active paying users) driven by availability/increasing popularity of newer payment methods (e.g., Facebook credits, more prepaid cards, and mobile payments). • We are seeing a pick up in indirect pay, i.e., users paying for the virtual currency by opting for advertisers' offers (lead generation for marketers such as Netflix, Blockbuster, etc.) or taking online surveys. We estimate that the conversion rate could be slightly better for indirect paying users—at about 4-5% (versus 3-5% for direct paying users) albeit with relatively lower ARPU. • All in all, we estimate the current social gaming market size to be approximately $60 million per month (run market of $720 million per year) and expect the market to grow at about 45% CAGR to reach $2 billion within the next three years.
Please see analyst certification (Reg. AC) and other important disclosures on page 5 of this report.
October 16, 2009
Industry Report
Over the last six months, growth in social gaming has exceeded our expectations, which could render our original market size estimates conservative. We estimate the current market size for social gaming at about $60 million per month and expect it to grow at approximately 45% CAGR over the next three years to reach $2 billion by 2012, driven by a combination of strong growth in usage as well as improving monetization. Social Gaming Growth Has Far Exceeded Our Expectations: Usage of the social games has taken off much stronger than we expected. Daily Active Users for the top 10 social gaming companies has gone up more than 5x over the last six months, driven by the viral nature of these games, aggressive marketing campaigns by a few gaming companies, and emergence of a few new genres of games, most notably Farm and Aquarium games. Exhibit 1: Daily Active Users (Million) Zynga Playfish Slashkey Crowdstar PopoCap Games TwoFishes Interactive TallTree Games Playdom Rawr! Games Serious Business Five Minutes Total Source: Developer Analytics
Oct-09 47.1 12.1 5.8 4.0 2.8 2.1 2.1 1.9 1.8 1.2 1.0 81.9
May-09 6.7 4.7 1.8 0.2 0.6 0.2 0.4 0.4 15.0
Oct-09 148.6 56.9 12.7 218.2
Jan-09 21.5 19.2 1.0 41.7
Exhibit 2: Monthly Active Users (Million) Zynga Playfish Playdom Total Source: AppData.com/InsideSocialGames.com
Page 2
October 16, 2009
Industry Report
Games Are Now By Far The Biggest Category Of Applications On Facebook: The popularity of gaming on social network is evident from the fact that 20 of the top 25 applications on Facebook are games (as measured by Monthly Active Users or MAU; source: Developer Analytics), compared with 16 of the top 50 applications six months ago (as measured by MAU; source: Facebook). We believe that the usage (as measured by MAU) is now even more skewed toward games compared with six months ago. Exhibit 3: Top Games On Facebook – Now And Six Months Ago Game FarmVille Mafia Wars Pet Society YoVille Farm Town Texas HoldEm Poker Restaurant City Café World MindJolt Games Happy Aquarium Roller Coaster Kingdom Fish World Bejeweled Blitz Country Story FARKLE Barn Buddy My Fishbowl (Lil) Farm Life Happy Farm Animal Paradise Geo Challenge Word Challenge Who Has The Biggest Brain Bowling Buddies Street Racing Vampire Wars Kidnap Friends For Sale Mob Wars Poker Palace Minigolf Play
Developer Zynga Zynga Playfish Zynga Slashkey Zynga Playfish Zynga MindJolt CrowdStar Zynga TallTree Games PopCap Games Playfish Viral TheBroth TwoFishes Interactive Greenpatch Inc Elex Rekoo Playfish Playfish Playfish Zynga Zynga Zynga Context Optional Serious Business Mob Wars Trevor Smith Playfish
MAU Oct-09 Apr-09 59.0 NM 25.9 9.5 19.9 10.6 19.5 5.3 18.7 NM 18.2 12.3 16.6 NM 15.9 NM 14.9 3.2 12.4 NM 8.9 NM 8.4 NM 8.3 NM 7.8 NM 7.6 NM 6.6 NM 5.2 NM 5.2 NM 4.0 NM 3.5 NM 1.4 4.0 3.6 3.5 2.7 3.5 1.8 3.7 2.0 2.7 3.8 2.6 1.0 2.5 6.6 2.2 1.7 2.1 1.6 1.9 0.9 1.9
Rank Oct-09 Apr-09 1 NM 3 9 5 8 6 18 7 NM 8 7 9 NM 10 NM 11 31 12 NM 15 NM 16 NM 17 NM 18 NM 19 NM 20 NM 21 NM 22 NM 23 NM 24 NM 221 25 113 29 191 29 167 33 91 36 50 39 192 42 37 44 90 45 144 46 313 48
Source: Developer Analytics (as on 10/15/09) and Facebook (as on 04/21/09) Not Surprisingly, Conversion Rate (From Active Playing To Active Paying Users) Remains Pretty Small; We Expect Some Improvement With Availability/Increasing Popularity Of Newer Payment Methods: Our conversations with a number of social gaming companies suggest that the monetization curve is concentrated to the large players—with only about 3-5% of the active users directly paying for the games. The ARPU curve for the direct paying users seems to resemble any other free-to-play online game, i.e., heavily concentrated on the top users. Looking ahead, we believe that there may be some room for improvement in the conversion rate (from active users to active paying users) driven by availability/increasing popularity of newer payment methods (e.g., Facebook credits, more prepaid cards, mobile payments).
Page 3
October 16, 2009
Industry Report
Indirect Pay Contributing Almost 30-50% Of The Social Gaming Revenue: We are seeing a nice pick up in indirect pay, i.e., users paying for the virtual currency by opting for advertisers offers (lead generation for marketers such as Netflix, Blockbuster, etc.) or taking online surveys. We estimate that the conversion rate could be slightly better for indirect paying users—at about 4-5% (versus 3-5% for direct paying users) albeit with relatively lower ARPU. We Expect A 45% CAGR For Social Gaming Market Over The Next Three Years: All in all, we estimate the current social gaming market size to be about $60 million per month (run market of $720 million per year) and expect the market to grow at about 45% CAGR to reach $2 billion within the next three years. Exhibit 4: Market Size Estimate For Social Gaming Current
Population (million) Internet Penetration (%) Internet Users (million) Social Network Penetration (%) Social Network Users (million) Gamers on Social Network (%) Gamers on Social Network (million) Direct Paying Users (%) Direct Paying Users (million) ARPU - Direct Paying Users ($/month) Market Opportunity - Direct Paying Users ($ million) Lead Generation (Offers/Surveys) Penetration (%) Lead Generation Users (million) Avg Number of Lead Gen/User/Month ARPU/Lead Gen ($/month) Market Opportunity - Indirect Paying Users ($ million) Ad Supported Users (million) Hours Game Play/Week Ads Served/Hour Game Play Total Ads Served (billion) CPM Market Opportunity - Ad Revenue ($ million) Social Gaming Market Size ($ million) Source: ThinkEquity estimates
Annual Monthly Run Rate 341 341 74% 74% 252 252 63% 63% 158 158 30% 30% 47 47 3.0% 3.0% 1 1 $20 $20 $28 $340 4.5% 4.5% 2.1 2.1 3.4 3.4 3.7 3.7 $27 $324 47 47 5 5 20 20 21 248 $0.25 $0.25 $5 $62 $60 $726
2012E
368 77% 284 70% 198 40% 79 5.0% 4 $25 $1,191 6.0% 4.8 3.4 4.4 $868 79 5 20 413 $0.30 $124 $2,183
Page 4
October 16, 2009
Industry Report
Important Research Disclosures Analyst Certification I, Atul Bagga, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report. The analyst(s) responsible for preparing this report has/have received compensation based on various factors, including the firm's total revenues, a portion of which is generated by investment banking activities.
Rating Definitions Effective October 7, 2009, ThinkEquity LLC moved from a four-tier Buy/Accumulate/Source of Funds/Sell rating system to a three-tier Buy/Hold/Sell system. The new ratings appear in our Distribution of Ratings, Firmwide chart. To request historical information, including previously published reports or statistical information, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600 Montgomery Street, San Francisco, California, 94111. Buy: ThinkEquity expects the stock to generate positive risk-adjusted returns of more than 10% over the next 12 months. ThinkEquity recommends initiating or increasing exposure to the stock. Hold: ThinkEquity expects the stock to generate risk-adjusted returns of +/-10% over the next 12 months. ThinkEquity believes the stock is fairly valued. Sell: ThinkEquity expects the stock to generate negative risk-adjusted returns of more than 10% during the next 12 months. ThinkEquity recommends decreasing exposure to the stock. Distribution of Ratings, Firmwide ThinkEquity LLC IB Serv./Past 12 Mos. Rating
BUY [B] HOLD [H] SELL [S]
Count
Percent
Count
Percent
120 51 7
67.40 28.70 3.90
14 2 0
11.67 3.92 0.00
This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. The opinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state. This research report was originally prepared and distributed to institutional clients of ThinkEquity LLC. Recipients who are not market professionals or institutional clients of ThinkEquity LLC should seek the advice of their personal financial advisors before making any investment decisions based on this report. Additional information on the securities referenced is available upon request. In the event that this is a compendium report (covers more than six ThinkEquity LLC-covered subject companies), ThinkEquity LLC may choose to provide specific disclosures for the subject companies by reference. To request more information regarding these disclosures, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600 Montgomery Street, San Francisco, California, 94111. Stocks mentioned in this report are not covered by ThinkEquity LLC unless otherwise mentioned. Member of FINRA and SIPC. Copyright 2009 ThinkEquity LLC, A Panmure Gordon Company
Page 5
Industry Report
Think Entertainment: Gaming Social Gaming: Revising Our Market Size Estimate To Reflect Rapid Growth
Reason for Report: Industry Update Atul Bagga 415-249-6362, [email protected]
THINK SUMMARY: Over the last six months, growth in social gaming has exceeded our expectations (DAU for the top five developers up 5x during this period), which has rendered our original market size estimates conservative. We estimate the current market size for social gaming at about $60 million per month and expect it to grow at approximately 45% CAGR over the next three years to reach $2 billion by 2012, driven by a combination of strong growth in usage and improving monetization. KEY POINTS: • Usage of social games has taken off much stronger than we expected (please see our report, "The Emergence Of Games As A Service" published on May 4, 2009). Daily Active Users (DAU) for the top 10 social gaming companies has increased more than 5x over the last six months, driven by the viral nature of these games, aggressive marketing campaigns by a few gaming companies, and emergence of a few new genres of games, most notably Farm and Aquarium games. • The popularity of gaming on social networks is evident from the fact that 20 of the top 25 applications on Facebook are games (as measured by Monthly Active Users or MAU; source: Developer Analytics), compared with 16 of the top 50 applications six months ago (as measured by MAU; source: Facebook). We believe that the usage (as measured by MAU) is even more skewed toward games now compared with six months ago. • Our conversations with a number of social gaming companies suggest that the monetization curve is concentrated to the large players—with only about 3-5% of the active users directly paying for the games. The ARPU curve for the direct paying users seems to resemble any other free-to-play online game, i.e., heavily concentrated on the top users. Looking ahead, we believe that there may be some room for improvement in the conversion rate (from active users to active paying users) driven by availability/increasing popularity of newer payment methods (e.g., Facebook credits, more prepaid cards, and mobile payments). • We are seeing a pick up in indirect pay, i.e., users paying for the virtual currency by opting for advertisers' offers (lead generation for marketers such as Netflix, Blockbuster, etc.) or taking online surveys. We estimate that the conversion rate could be slightly better for indirect paying users—at about 4-5% (versus 3-5% for direct paying users) albeit with relatively lower ARPU. • All in all, we estimate the current social gaming market size to be approximately $60 million per month (run market of $720 million per year) and expect the market to grow at about 45% CAGR to reach $2 billion within the next three years.
Please see analyst certification (Reg. AC) and other important disclosures on page 5 of this report.
October 16, 2009
Industry Report
Over the last six months, growth in social gaming has exceeded our expectations, which could render our original market size estimates conservative. We estimate the current market size for social gaming at about $60 million per month and expect it to grow at approximately 45% CAGR over the next three years to reach $2 billion by 2012, driven by a combination of strong growth in usage as well as improving monetization. Social Gaming Growth Has Far Exceeded Our Expectations: Usage of the social games has taken off much stronger than we expected. Daily Active Users for the top 10 social gaming companies has gone up more than 5x over the last six months, driven by the viral nature of these games, aggressive marketing campaigns by a few gaming companies, and emergence of a few new genres of games, most notably Farm and Aquarium games. Exhibit 1: Daily Active Users (Million) Zynga Playfish Slashkey Crowdstar PopoCap Games TwoFishes Interactive TallTree Games Playdom Rawr! Games Serious Business Five Minutes Total Source: Developer Analytics
Oct-09 47.1 12.1 5.8 4.0 2.8 2.1 2.1 1.9 1.8 1.2 1.0 81.9
May-09 6.7 4.7 1.8 0.2 0.6 0.2 0.4 0.4 15.0
Oct-09 148.6 56.9 12.7 218.2
Jan-09 21.5 19.2 1.0 41.7
Exhibit 2: Monthly Active Users (Million) Zynga Playfish Playdom Total Source: AppData.com/InsideSocialGames.com
Page 2
October 16, 2009
Industry Report
Games Are Now By Far The Biggest Category Of Applications On Facebook: The popularity of gaming on social network is evident from the fact that 20 of the top 25 applications on Facebook are games (as measured by Monthly Active Users or MAU; source: Developer Analytics), compared with 16 of the top 50 applications six months ago (as measured by MAU; source: Facebook). We believe that the usage (as measured by MAU) is now even more skewed toward games compared with six months ago. Exhibit 3: Top Games On Facebook – Now And Six Months Ago Game FarmVille Mafia Wars Pet Society YoVille Farm Town Texas HoldEm Poker Restaurant City Café World MindJolt Games Happy Aquarium Roller Coaster Kingdom Fish World Bejeweled Blitz Country Story FARKLE Barn Buddy My Fishbowl (Lil) Farm Life Happy Farm Animal Paradise Geo Challenge Word Challenge Who Has The Biggest Brain Bowling Buddies Street Racing Vampire Wars Kidnap Friends For Sale Mob Wars Poker Palace Minigolf Play
Developer Zynga Zynga Playfish Zynga Slashkey Zynga Playfish Zynga MindJolt CrowdStar Zynga TallTree Games PopCap Games Playfish Viral TheBroth TwoFishes Interactive Greenpatch Inc Elex Rekoo Playfish Playfish Playfish Zynga Zynga Zynga Context Optional Serious Business Mob Wars Trevor Smith Playfish
MAU Oct-09 Apr-09 59.0 NM 25.9 9.5 19.9 10.6 19.5 5.3 18.7 NM 18.2 12.3 16.6 NM 15.9 NM 14.9 3.2 12.4 NM 8.9 NM 8.4 NM 8.3 NM 7.8 NM 7.6 NM 6.6 NM 5.2 NM 5.2 NM 4.0 NM 3.5 NM 1.4 4.0 3.6 3.5 2.7 3.5 1.8 3.7 2.0 2.7 3.8 2.6 1.0 2.5 6.6 2.2 1.7 2.1 1.6 1.9 0.9 1.9
Rank Oct-09 Apr-09 1 NM 3 9 5 8 6 18 7 NM 8 7 9 NM 10 NM 11 31 12 NM 15 NM 16 NM 17 NM 18 NM 19 NM 20 NM 21 NM 22 NM 23 NM 24 NM 221 25 113 29 191 29 167 33 91 36 50 39 192 42 37 44 90 45 144 46 313 48
Source: Developer Analytics (as on 10/15/09) and Facebook (as on 04/21/09) Not Surprisingly, Conversion Rate (From Active Playing To Active Paying Users) Remains Pretty Small; We Expect Some Improvement With Availability/Increasing Popularity Of Newer Payment Methods: Our conversations with a number of social gaming companies suggest that the monetization curve is concentrated to the large players—with only about 3-5% of the active users directly paying for the games. The ARPU curve for the direct paying users seems to resemble any other free-to-play online game, i.e., heavily concentrated on the top users. Looking ahead, we believe that there may be some room for improvement in the conversion rate (from active users to active paying users) driven by availability/increasing popularity of newer payment methods (e.g., Facebook credits, more prepaid cards, mobile payments).
Page 3
October 16, 2009
Industry Report
Indirect Pay Contributing Almost 30-50% Of The Social Gaming Revenue: We are seeing a nice pick up in indirect pay, i.e., users paying for the virtual currency by opting for advertisers offers (lead generation for marketers such as Netflix, Blockbuster, etc.) or taking online surveys. We estimate that the conversion rate could be slightly better for indirect paying users—at about 4-5% (versus 3-5% for direct paying users) albeit with relatively lower ARPU. We Expect A 45% CAGR For Social Gaming Market Over The Next Three Years: All in all, we estimate the current social gaming market size to be about $60 million per month (run market of $720 million per year) and expect the market to grow at about 45% CAGR to reach $2 billion within the next three years. Exhibit 4: Market Size Estimate For Social Gaming Current
Population (million) Internet Penetration (%) Internet Users (million) Social Network Penetration (%) Social Network Users (million) Gamers on Social Network (%) Gamers on Social Network (million) Direct Paying Users (%) Direct Paying Users (million) ARPU - Direct Paying Users ($/month) Market Opportunity - Direct Paying Users ($ million) Lead Generation (Offers/Surveys) Penetration (%) Lead Generation Users (million) Avg Number of Lead Gen/User/Month ARPU/Lead Gen ($/month) Market Opportunity - Indirect Paying Users ($ million) Ad Supported Users (million) Hours Game Play/Week Ads Served/Hour Game Play Total Ads Served (billion) CPM Market Opportunity - Ad Revenue ($ million) Social Gaming Market Size ($ million) Source: ThinkEquity estimates
Annual Monthly Run Rate 341 341 74% 74% 252 252 63% 63% 158 158 30% 30% 47 47 3.0% 3.0% 1 1 $20 $20 $28 $340 4.5% 4.5% 2.1 2.1 3.4 3.4 3.7 3.7 $27 $324 47 47 5 5 20 20 21 248 $0.25 $0.25 $5 $62 $60 $726
2012E
368 77% 284 70% 198 40% 79 5.0% 4 $25 $1,191 6.0% 4.8 3.4 4.4 $868 79 5 20 413 $0.30 $124 $2,183
Page 4
October 16, 2009
Industry Report
Important Research Disclosures Analyst Certification I, Atul Bagga, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report. The analyst(s) responsible for preparing this report has/have received compensation based on various factors, including the firm's total revenues, a portion of which is generated by investment banking activities.
Rating Definitions Effective October 7, 2009, ThinkEquity LLC moved from a four-tier Buy/Accumulate/Source of Funds/Sell rating system to a three-tier Buy/Hold/Sell system. The new ratings appear in our Distribution of Ratings, Firmwide chart. To request historical information, including previously published reports or statistical information, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600 Montgomery Street, San Francisco, California, 94111. Buy: ThinkEquity expects the stock to generate positive risk-adjusted returns of more than 10% over the next 12 months. ThinkEquity recommends initiating or increasing exposure to the stock. Hold: ThinkEquity expects the stock to generate risk-adjusted returns of +/-10% over the next 12 months. ThinkEquity believes the stock is fairly valued. Sell: ThinkEquity expects the stock to generate negative risk-adjusted returns of more than 10% during the next 12 months. ThinkEquity recommends decreasing exposure to the stock. Distribution of Ratings, Firmwide ThinkEquity LLC IB Serv./Past 12 Mos. Rating
BUY [B] HOLD [H] SELL [S]
Count
Percent
Count
Percent
120 51 7
67.40 28.70 3.90
14 2 0
11.67 3.92 0.00
This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. The opinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state. This research report was originally prepared and distributed to institutional clients of ThinkEquity LLC. Recipients who are not market professionals or institutional clients of ThinkEquity LLC should seek the advice of their personal financial advisors before making any investment decisions based on this report. Additional information on the securities referenced is available upon request. In the event that this is a compendium report (covers more than six ThinkEquity LLC-covered subject companies), ThinkEquity LLC may choose to provide specific disclosures for the subject companies by reference. To request more information regarding these disclosures, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600 Montgomery Street, San Francisco, California, 94111. Stocks mentioned in this report are not covered by ThinkEquity LLC unless otherwise mentioned. Member of FINRA and SIPC. Copyright 2009 ThinkEquity LLC, A Panmure Gordon Company
Page 5
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