Games and other social applications that run on Facebook are enjoying a swift rise in revenue in recent times and it is not from banners or advertising. The rise in revenue is primarily because a small percentage of players are paying to buy virtual goods or upgraded features. There have been many precedents set in China, most particularly Tencent, that show just how powerful the model can be.
So why the doom and gloom in the face of such powerful growth curves? Primarily because a lot of the ‘payment’ is coming in the forms of alternate indirect mechanisms. That is, the game player doesn’t fork over the cash directly. Instead they complete ‘offers’ and sometimes get their friends to do the same.
If alarm bells aren’t ringing now, they should be. A similar bubble rose about three years ago around a concept called ‘incentive marketing’. Jay Weintraub has an excellent overview of the industry, written in 2006, that is still relevant today. The summary? You would get a free ipod (or PS2 or T-Mobile Sidekick when they were cool) if you completed a credit card application, signed up for a netflix trial and god knows what else. And you also needed to get a lot of your friends to do the same before you got the actual thing you set out to get.
But everybody wins you say? Well, at least initially yes. But customers or leads who have signed up through incentive marketing turned out to be the worst ever. At the first Leadscon in Vegas last year many presenters used the ‘Free iPod’ guys as a throw away line for terrible lead quality. The average length of a customer if they signed up for a subscription product was 6 months and leads received through the mechanism were of terrible quality.
And guess what? The incentive marketing folks were the largest buyers of social networking traffic in its nascent stage. Although Facebook applications reach users efficiently through engaging them in fun and useful games vs the free ipod guys showing display ads alongside social networking sites, the source of the traffic is essentially the same. Granted, social networking has become mainstream in the 4-5 years since the heyday of incentive marketing but the parallels are clear.
To use Leadscon again, at last month’s conference there were many sessions on lead quality and lead scoring. That is, predicting how likely a lead would turn to a customer and then what type of customer they would turn out to be. And guess what? On the left hand side with the highest quality was the filet mignon of PPC and SEO and on the far right was the sausage of incentive marketing (inclusive of Facebook app driven incentive leads) with a paltry conversion rate and a crappy lifetime customer value.
Offerpal is perhaps one of the best examples of company’s to thrive out of this new wave of growth. They recently raised $15m last month and are currently riding a crazy growth curve. Ironically, the CEO, Ann Shukla, was also invited to present at Leadscon, which, for those of you who are counting, brings my total mentions of the Leadscon conference to three.
The practice is fuelling the growth of not only platforms like Offerpal but the games they help power, many of which are large ventured backed companies. For instance, from the article:
“Mrs. Shukla said the company was working with more than 800 developers on such games as Mobsters on MySpace, (Lil) Green Patch on Facebook and Texas Hold ‘Em poker on Facebook. She said that the median application is collecting $150,000 a month in revenue by teaming with Offerpal Media.”
The consumer behavior has changed only subtly from five years ago: instead of completing a laundry list of offers to qualify for a $150-250 value product, each consumer is completing a small number of offers for a smaller economic value to be used in the game or application.
But just like credit card companies and Netflix were happy to give the free ipod guys a shot, they are also happy to completely shut down the channel as well once it proves it doesn’t work. As the category of leads/customers grows, the more important it will be for more senior marketing folks to take a real look at the quality of leads provided through Facebook games and apps. And they’ll find the same result of quality they did back in 2004-5: a whole heap of shit.
That won’t necessarily mean Offerpal or Facebook apps wont stay in business and even indeed one day become lavishly profitable businesses. What it does mean is that the market is on a synthetically charged, unsustainable growth rate and a huge correction will soon be upon us.
Those looking to buy or acquire Facebook gaming companies need to look very close and hard at the percentage of virtual goods revenue that is derived from cold hard cash vs indirect means. Those with higher skews to the latter should be discounted appropriately before the whole thing blows up.