Online investment bank Digi-Capital recently updated its Global Games Investment Review 2012 for Q1. Already a consolidation trend has been showing up with thirty mergers resulting in $1.7 billion in transactions. By comparison, the entirety of 2011 saw 113 transactions of $3.4 billion value. In the center of this consolidation distress was previous industry juggernaut Social/Casual, a section that includes titles like Zynga’s FarmVille, which fell drastically in Q1 2012.
Digi-Capital, in a brief public overview of its Q1 update, demonstrated this downward trend for Social/Casual.
In 2011, Social/Casual accounted for 57% of transaction value and 32% of transaction volume, but in Q1 2012 it accounted for 3% of transaction value and 16% of transaction volume. So our view that Social Games… is in consolidation mode could continue to be an ongoing trend through 2012, as the [Venture Capital] market appears to have slowed down its frenetic pace of social games investment from 2011.
The investment firm also outlined the possible causes for this downturn.
When you look at our Review, there are compelling reasons why this is happening. We think of total Daily Active Users (“DAU”) as a general proxy for revenue, and average DAU per game as a general proxy for profitability for social games companies. While this is open to interpretation, our comparison of the top 50 Facebook games companies below… indicates that some social games companies continue to do well in terms of revenue, profitability or both (e.g. Zynga, Wooga, King, EA, Peak Games). However our analysis also indicates that many social games companies might be struggling on one or both measures, which could be the catalyst driving consolidation in the sector.
Analysis: It’s a little surprising to hear about a consolidation and downward trend in Social and Casual games, a sector which usually seems to earn more than it really should, but I think there are probably three main reasons its happening.
First, some of it is just natural market flow. 2011 was a record year with some enormous highs and ridiculous expansions, and I think what Q1 2012 is showing us is that the market is just slowing down. Due to the very nature of Social and Casual games, there’s a bit of a “fad” element in them, and I think after wearing its presence thin last year that that dimension of novelty and newness is wearing off, at least for now. It’ll come back later with a new wave of games, but for the most part, I think people are tired of what’s already up for grabs.
Second, I think the rise of F2P is taking a large chunk of Social and Casual’s market. Due to the inherent social nature of MMOs and the casual air of a F2P game, these two sectors can easily overlap and outshine each other with the right games. Also, while there are certain places that will always be the domain of Social/Casual—namely Facebook or the iOS—the general PC/Internet market has always been under hot contention, and I think that a good deal of that market is finally being lost to the F2P games, especially the MMOs. Previously the mainstay of South Korea and China, F2P MMOs are finally making their Western debut, and they’re doing all right for themselves. A quick look at the top player counts on Steam shows over seven F2P MMOs ranking in the top fifty games. That’s pretty impressive if you ask me.
Third, social gambling has become very popular, and more companies are starting to consider investment in this area as the scent of possible U.S. regulation changes fills the air. For example, Caeser Entertainment’s Harrah’s brand just acquired Playtika for $90 million, and IGT acquired Double Down Interactive for $500 million. There are some big plays happening in this market, and if everything turns out right for social gambling firms, then they could be looking to sap away a significant portion of the Social/Casual player base.
Ultimately, Social/Casual games have new competitors, and I think if they want to survive, they’ve got to be a little better than Zynga’s click-a-button-then-give-us-$20 model. Maybe we can have a little innovation in such a stagnant market for once, who knows. What is clear, however, is that now that the lazy king has been knocked off his throne, even if only temporarily, there’s going to be some interesting developments in many of these non-core gaming sectors as 2012 progresses.