Please see analyst certification (Reg. AC) and other important disclosures on page 5 of this report.
Think Entertainment: Gaming
Social Gaming: Revising Our Market Size EstimateTo Reflect Rapid Growth
Over the last six months, growth in social gaming has exceeded our expectations (DAU for the top five developers up 5x during this period), whichhas rendered our original market size estimates conservative. We estimate thecurrent market size for social gaming at about $60 million per month andexpect it to grow at approximately 45% CAGR over the next three years toreach $2 billion by 2012, driven by a combination of strong growth in usageand improving monetization.
• Usage of social games has taken off much stronger than we expected(please see our report, "The Emergence Of Games As A Service" publishedon May 4, 2009). Daily Active Users (DAU) for the top 10 social gamingcompanies has increased more than 5x over the last six months, driven bythe viral nature of these games, aggressive marketing campaigns by a fewgaming companies, and emergence of a few new genres of games, mostnotably Farm and Aquarium games.• The popularity of gaming on social networks is evident from the fact that 20of the top 25 applications on Facebook are games (as measured by Monthly Active Users or MAU; source: Developer Analytics), compared with 16 of thetop 50 applications six months ago (as measured by MAU; source:Facebook). We believe that the usage (as measured by MAU) is even moreskewed toward games now compared with six months ago.• Our conversations with a number of social gaming companies suggest thatthe monetization curve is concentrated to the large players—with only about3-5% 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 onlinegame, i.e., heavily concentrated on the top users. Looking ahead, we believethat there may be some room for improvement in the conversion rate (fromactive users to active paying users) driven by availability/increasingpopularity of newer payment methods (e.g., Facebook credits, more prepaidcards, and mobile payments).• We are seeing a pick up in indirect pay, i.e., users paying for the virtualcurrency by opting for advertisers' offers (lead generation for marketers suchas Netflix, Blockbuster, etc.) or taking online surveys. We estimate that theconversion rate could be slightly better for indirect paying users—at about4-5% (versus 3-5% for direct paying users) albeit with relatively lower ARPU.• All in all, we estimate the current social gaming market size to beapproximately $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 withinthe next three years.
Reason for Report:Industry Update
October 16, 2009