Asocial Gaming: A Tough Business To Swallow

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

About a year ago, if we were to listen to analysts attempting to address the market investing in the video gaming industry, we’d have been certain that the pot of gold sat reliably at the end of the social gaming rainbow. Sage advice was being meted out indeed. It’s a shame that for those who enthusiastically bought into the thinking, and Zynga (NASDAQ: ZNGA), they were only being fed half of the story correctly. What might have helped the investors who hopped aboard the social gaming roller coaster would have been analysis that included at least a rudimentary understanding of what social in gaming actually means by any logical definition and what it potentially means for business. I live in a city of millions, but if I don’t talk with any of them, couldn’t I in fact even be anti-social, or at the least asocial? Much the same way, just because millions play a given game, if no true socialization takes place in the form of interaction, then why is it designated the label of social game?

The Trouble with Asocial Gaming?

Now, for many it may be difficult to see the problem with this type of gaming as a working business model. After all, isn’t it true that gazillions of people are playing these Zynga games? Well, gazillion is not an actual number, but there are indeed millions upon millions and this is effectively what had gotten everyone so excited. Surely if there are so many users this is a clear win right? Let’s take a peak.


<table> <tbody> <tr> <td> <p>DAU – Daily Active Users (average)</p> </td> <td> <p>57 million</p> </td> </tr> <tr> <td> <p>MAU – Monthly Active Users (average)</p> </td> <td> <p>233 million</p> </td> </tr> <tr> <td> <p>MUU – Monthly Unique Users (average)</p> </td> <td> <p>151 million</p> </td> </tr> <tr> <td> <p>MUP – Monthly Unique Payers (average)</p> </td> <td> <p>2.9 million</p> </td> </tr> <tr> <td> <p>ABPU – Average Bookings Per User (daily)</p> </td> <td> <p>$0.055</p> </td> </tr> </tbody> </table>

A quick glance gives the impression of 57 million people spending $0.055 per day. That doesn’t seem terrible, a captive audience that spends a tiny bit of money, but every day! Only that’s not what’s happening here. This audience is far from captive. The 57 million refers to Daily Active Users, which in and of itself is not nearly as meaningful as Zynga or those who were flogging their IPO would have had you believe. 

Anyone can create multiple accounts when they are free and they certainly do. There are advantages to creating multiple accounts in that a player can gift back and forth without using actual money or generating revenue for the business. Also, this negates the need for social interaction with actual human beings. Don’t completely disregard this when considering the numbers of users Facebook reports for member counts also as this phenomenon is not unique to Zynga games. Unless dealing with paid subscriptions, member counts aren’t all they appear.  

The table above (derived from Zynga’s 2011 annual report) shows that while there were 233 million active monthly users, only 151 million of them were unique, meaning that 151 million actual people comprised the 233 million accounts they reported. Still, 151 million people are a whole lot of people playing Zynga games. Dropping that L is the trick, so consider that of those monthly players, only 2.9 million were actual payers. Bookings (sales) to these 151 million users for the year totaled approximately $1.155 billion in revenues for 2011, so that’s annual revenue per monthly unique user in the neighborhood of $7.64. Zynga is running a pretty big kitchen to feed 151 million mouths while the extreme minority are actually paying for the grub.

It’s important to consider that servers along with many other associated administrative duties, technical maintenance and further development to find new ways to engage these fly by night customers are not free. The reality is that 2.9 million people per month were actually paying around $33 to play these games. It is much more likely that it wasn’t the same people consistently paying month to month either and so what needs to be considered is how many of them have already cycled through the unsatisfying experience of paying for something they certainly weren’t going to continue long term.

These games are greatly lacking in terms of what is best described as stickiness because the reality is there is no actual sense of community or real communication and therefore little in the way of ties that bind. Players do not need or generally wish to maintain any relationships with the other gamers in the community and so it’s not reasonable to expect Zynga-style social games to be able to maintain even these numbers of active paying users, let alone grow their numbers.

What makes social in gaming truly valuable are the gamers’ enormous investments in social ties developed by a truly engaging community in an immersive fantasy world, the sense of it being a virtual world they live in, love in, laugh in, succeed and fail in and look forward to exploring with friends all year round, year after year. The success stories in true and sadly unrecognized social gaming build worlds that are vast and have the actual feel of being a place people call home. Zynga and its peers do not create this experience at all.

Consider something like Activision Blizzard’s (NASDAQ: ATVI) World of Warcraft where 10 million members pay $15/month for extended periods to play, some taking breaks between updates and expansions, but regularly coming back again and again as those roll out.

Finally, consider that during 2011, 151 million Zynga users were serviced to generate $1.155 billion through the offering of around 30 games that each required some development and maintenance, albeit relatively minor per game when compared to a quality game like World of Warcraft. Also, consider that Zynga over the last 4 years has discontinued almost as many titles. In 2011, World of Warcraft for Blizzard alone generated $1.357 billion in revenues while serving 10 million, a small fraction of customers by comparison. It’s worth emphasizing Blizzard accomplished this offering just one well serviced and maintained game. What all this means is a fairly predictable result where a picture is worth a thousand words.

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ZNGA R&D Expense TTM data by YCharts

When it comes to Activision Blizzard's most successful franchises virtually everyone playing is paying and most stay for many, many years, growing their experiences with ever expanding worlds. More importantly for us investors, we have not just a sustainable, but thriving business model. Now that’s a kitchen that’s truly open for profitable business!

Robert Kralj has  positions in ATVI. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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