Clipperton Finance Whitepaper: The new era of social gaming, who can topple Zynga's tower?

Social Gaming – Research Report
June 2011

The New Era of Social Games: Who Can Topple Zynga’s
Tower?

Thibaut Revel, Partner Alexis Barba, Associate
trevel@clipperton.net abarba@clipperton.net

Headlines

HEADLINES
Zynga has taken advantage of the new barriers to entry on Facebook to become the one and
only gorilla of social gaming – closest challengers like EA, Playdom or Crowdstar have been
unable to follow the tremendous pace of the leader, now on track for a mega IPO providing
them even further financial firepower

However social gaming still attracts an impressive flow of VC money and Zynga will face a
new type of competition:
– challengers coming from Europe are gaining strength on Facebook, following the
steps of Berlin based wooga, now #2 in terms of global audience
– other recent winners come from different activity segments such as mobile gaming
(Digital Chocolate)

It will take now more than capital and talent to be able to succeed under Zynga’s rule:
winning strategies will focus on differentiation – on specific audience targets (e.g. highly
customized local content, male hardcore games moving to Facebook), on fast porting to
mobile / tablets, or new monetization models…

Will “old-generation” gaming leaders manage to close the gap? There seems to be a strong
case for even more M&A activity, and another one for real innovation in game play.

2008/2009 Games 2011 Games

MindJolt Games Gardens of Time

PetVille Empire & Allies

2
Clipperton Finance Research Paper, 2011

Introduction

INTRODUCTION

At a time when more and more voices express their fear about a new Internet bubble due to the
puzzlingly high valuations reached by a few Internet darlings, it is worth noting that in certain spaces
of the new Web, there exists a clear rationale for the appetite of investors: in less than 4 years, the
new industry of online social gaming has attracted hundreds of millions of users and flourishing
companies, as well as plenty of capital. Born in 2007 with the first games by Zynga and Playfish,
social gaming is no longer in infancy with more than one hundred monthly active users on Facebook
alone, and 2010 revenues estimated north of $2bn.

The recipe of this explosive but sustainable growth is now well known: leveraging the power of social
networks, social games have dramatically widened the reach of the video games industry, which had
focused on the core target of young males for decades. There was already a growing audience of
“casual gamers” with the Wii phenomenon and the emergence of online game portals such as
Oberon, and titles such as Bejeweled or Dinner Dash. However, Facebook has taken this trend to a
new scale and through a new model: the core attributes of simplicity, self-expression and social
interactions of hit games such as Farmville and Pet Society have attracted very different demographic
groups all over the world, with a special success with females between 15 and 40 years old. The
other key achievement lies in the monetization of social games: they are free to play and rely mostly
on virtual good purchases. This means that the most addicted users can potentially pay significant
amounts whilst first time users can initially discover the game for free and at some point could in the
future choose to make a small payment in order to have access to special features or to progress
through the game more quickly.

The social gaming model looks solid and is financially virtuous enough to have a long lasting impact
on the whole $50bn games industry. However, the landscape has changed since the first game of
Zynga in 2008. With new barriers to entry, more and more invested capital and fierce competition, it
will take a lot for new winners to challenge existing leaders Zynga, EA or Crowdstar. This paper
intends to look at available statistics on Facebook games to pinpoint the key sea changes that have
happened behind the surface, and to focus on a couple of fundamental questions for the European
web and gaming ecosystem:

• Is there room for new companies to become leaders?
• Will some of the winners come from Europe?
• What are the new rules of the game and how to differentiate in this highly competitive
environment?

3

The New Era of Social Gaming

THE NEW ERA OF SOCIAL GAMING

From 0$ to Several Billions in 3 years
Facebook counts more than 500m active users, and website Inside Facebook estimates up to 675m in
terms of monthly audience as of May 2011, with now below 25% of users located in the United
States. In key Facebook countries, it is estimated that more than half of active Facebook users play
social games, which creates a pool of around 250/300m monthly social gamers on Facebook alone.

FIGURE 1 Penetration rate of social gaming in major Facebook markets (July 2010)

61% 60% 61%
50%

USA UK Germany France
Source: HiMedia

It is far less straightforward to assess the revenue of the social gaming industry, as most companies
are private. A bottom up approach based purely on the micro-transaction revenues from virtual
goods purchases1 gives a first order of magnitude: on the average game, 2% to 5% of monthly users
will be paying users, the average basket per purchase is in the range of $5 to $10, which leads to a
monthly ARPU2 of around $0.25 to $0.5. Of course, there is no “average game” and there are strong
variances in terms of game monetization, which can even be seen at game segment level as shown in
figure 2. Nevertheless, taking into account 250/300m social gamers in developed countries3, some of
whom play multiple games every month, and a $0.5 monthly ARPU, indicates a range of $1.5bn to
$3bn for the industry gross revenues on Facebook at the current run rate. This is in line with Zynga’s
numbers revealed by recent press articles stating a target of $1.5/1.8bn revenues in 20114 – it can be
expected that Zynga takes around (or at least) half of the total revenues of social games on
Facebook.

1
It is estimated that advertising and other non microtransaction revenue account for about 10% of overall
revenues
2
ARPU : Average Revenue Per User
3
Monetization variance is strong between countries like US / UK / France and developing countries with large
Facebook audience
4
New York Post article of March 2011 mentioning $1.8bn revenue and over 30% profit target for Zynga in
2011. WSJ cites $850m for 2010 revenues.

4


5
FIGURE 2 Typical social gaming metrics

Metric Typical Value

ARPU
$5 to $15
or "Average Basket"

Daily Conversion rate (paying users) 0.1% to 0.5%

Monthly Conversion rate 2% to 10%

DAU/MAU 20% to 40% over
or "Stickiness rate" the game life cycle

Top games: $1-2
=> Resulting Monthly ARPUs Poker games: $2-3
Average game: $0.2-0.5

Source: Inside Virtual Goods, Interviews

This is also in line with most top down market figures from gaming industry analysts. Research driven
investment bank Think Equity estimates the social gaming market to be worth $3.7bn in 2010 and
$6.1bn in 2011, which is higher than our “back of the envelope” assessment as it includes large non
Facebook sources revenues and notably $1.4bn in 2010 coming from Japan and China, where other
social networks are dominant.

These figures prove that a new multi billion dollars industry has emerged in a very short time frame.
However, the question of the growth to come deserves a closer look. It is clear that the dynamics
have changed. Looking at consolidated usage statistics of Facebook games in figure 3, it is obvious
that since 2010, the viral growth has slowed down. In the second half of 2008 and in 2009, social
gaming on Facebook experienced an initial phase of explosive growth driven by the intrinsic virality
of the game experience: inviting friends to play and getting their help to reach the next level are the
fundamental drivers used by developers to create a strong viral marketing across the social graph.
This created an opportunity for the first entrants to enjoy an unprecedented growth at minimal
acquisition costs.

The Rules of the Game Have Changed
At the end of 2009, Facebook introduced a set of changes to hinder the virality and protect the
platform users from the spamming effects:

October 2009: developers no longer have the possibility to directly post game invitations on
the News Feed. Practically, the developer-to-user communication moves from the News
Feed home page to the Inbox or direct emailing.

5
Metrics definition : MAU=Monthly Active Users / DAU=Daily Active Users

5


March 2010: the end of application-to-user and user-to-user notifications on Facebook. The
platform encourages communications between developers outside Facebook by direct
emailing.
October 2010: Facebook groups the information and the posts regarding the games
applications in a separate user interface. Non gamers won’t receive games invitations or any
related information anymore.

These changes affect the ability of developers to recruit new gamers as easily as in the past. The
developers now rely a lot on their user base for cross promotion and virality, and are more likely to
invest marketing money to recruit new users. This has spurred a strong inflation in cost of customer
acquisition. Marketing services providers on Facebook, such as RockYou, charge rising unit costs per
download6 to deliver gamers installs; these costs are highly dependent of the targeted demographics
(country, gender, age) and are above $1 in most Western countries.

However, the goal of Facebook is not to hinder the growth of the social games. Just look at the other
big move by Facebook in its relation with game developers: the introduction of Facebook Credits, its
own virtual goods payment offering, based on the principle of one single virtual currency enabling
social gamers to make purchase on any game. This scheme has a strong traction with leading
developers, and shows the commitment of Facebook to nurture the social gaming ecosystem. It is
also one of the major sources of revenue for the platform as they earn 30% on all Facebook Credit
transactions, thus replicating the business model of Apple’s iStore.

7
FIGURE 3 MAU evolution of the Top 60 2011 Developers (MAU stands for Million Active Users)

800

700

600

500 All Players

400
All Players
300 without Zynga

200 Zynga

100

0

Source: AppData, Clipperton Finance Analysis

6
Developers tend to pay CPA (Cost per Action) or CPI (Cost per Install) to traffic providers to control their
customer acquisition budget on a performance mode
7
There is skew in these consolidated statistics as they take into account only the top 2011 developers as seen
in Appdata – however, most of the gaming usage in previous years was also driven by the current leaders

6


This change in pace of growth for Facebook games has also come with a decline in the user
engagement. This critical metric for social games, which measures both the stickiness of a game and
the frequency of play, computed as the ratio of daily users over monthly users, has gone down from
25-28% on average for top games in fall 2009 to around 20% today. The impact of the “new
regulation” imposed by Facebook at the end of 2009 is very clear with a steep decline in November –
December 2009.

FIGURE 4 User Engagement Evolution for Facebook games (for Top 150 games as of April 2011)

35%

30%

25%

20%

15%

10%

Source: Clipperton Finance Analysis

Does the Winner Take it All?

The other major take away of the evolution of the gaming usage (as seen in figure 3) is the weight of
Zynga. The arch-leader has taken more than the lion’s share: Zynga accounts for around 40% of the
monthly users of Facebook games (based on the Top 60 developers), and even more in terms of daily
users. Zynga has taken share to its most serious challengers of 2009: Electronics Arts / Playfish,
Playdom (acquired by Disney in July 2010) and Crowdstar. Each of these 3 American competitors – it
is fair to consider that Playfish is headquartered in the US since its acquisition by EA - now account
for less than 10% of the cumulative MAU as of April 20118, implying a scale factor of at least 7x
between Zynga and its US rivals.

Regarding Playfish and Playdom, the post acquisition period and the integration into large corporate
groups has certainly been a source of loss of focus. Electronic Arts has clearly changed the editorial
strategy of Playfish, a company who had experienced success with games tailored for a female
audience, while EA has pushed to social gamers its sports franchises such as FIFA and NFL American
Football, which appeals to a men only audience. As such, EA has now “two legs” in terms of social
gaming audience, but this disruptive strategy certainly had a cost in terms of users’ metrics.

8
Based on the Top 60 developers as of April 2011

7


FIGURE 5 Share of Cumulative MAU of the Top 60 Games Developers (Top 60 as of April 2011)
60%

50%

40% 40%

30% Acquisition Zynga
of Playfish
Acquisition Playdom
20% by Disney
EA

10%
6%
3%
0%


Social gaming is undoubtedly a blockbuster driven industry. And Zynga has been the only contender
showing the ability to launch massively successful games period after period. Responsible for 6 of
the top 10 games on Facebook and 4 of the 5 top positions, Zynga has already launched 10
“blockbuster games” – if we define blockbuster as a game that one day exceeds 1m DAU.

th
FIGURE 6 Top 10 Facebook games & developers with more than one “blockbuster” – June 30 2011

Game ranking by MAU # of blockbusters (>1m DAU)
June 30th 2011 June 30th 2011

Zynga 10
# Game MAU (#m) Developer
1. CityVille 87,8 Zynga
CrowdStar 5
2. Empire&Allies 44,2 Zynga
3. Farmville 38,5 Zynga Playdom 5
4. TexasHoldEm Poker 35,5 Zynga
5. Monster Galaxy 19,2 Gaia Online Electronic Arts 4
6. Gardens of Time 14,2 Playdom
7. Frontierville 13,9 Zynga wooga 3
8. Café World 11,8 Zynga
9. Bejeweled Blitz 10,4 Popcap Games Popcap Games 2
10. Diamond Dash 9,9 wooga
Digital Chocolate 2


Zynga seems to be building a solid competitive advantage as its huge lead in terms of users installed
base, coupled with strong marketing budget firepower, enables them to cross promote aggressively

8


their new releases on their existing and long lasting blockbuster traffic. They target both very fast
ramp up at launch, as CityVille for instance reached 10m DAU in less than two weeks (!), and long
game lifetime as titles such as Farmville or Frontierville have been in the top 5 for two years and one
year respectively.

Nevertheless, Zynga faces new competition, notably from Europe (focus of Section 2 of this report),
and from challengers coming from different horizons than the Facebook games, such as Digital
Chocolate and Booyah (originally focused on mobile games), as well as Gaia Interactive (originally
focused on its own social gaming community Gaia Online). Investors apparently think that it is still
possible to get a piece of the pie despite Zynga being such an impressive leader; more than ten major
Venture Capital investments have been made in emerging social gaming companies since the
beginning of 2011, totaling more than $150m, with a large number of these deals financing European
companies.

FIGURE 7 Selected Financing in the Social Gaming Space since January 2011

Date Name Country Description Investor Firms Amount Raised
Develops social games for social
Jun-11 Social Point Spain Nauta Capital $3,4m
networks
Designs and develops online social Highland Capital Partners, Tenaya Capital,
May-11 wooga Germany games to play with friends and Balderton Capital, HV Holtzbrinck $24m
family Ventures
Publishes social games developed
May-11 Pixonic Russia Ventech, Kite Ventures, TA Ventures $5m
by studios
Develops and publishes
May-11 Peak Games Turkey Earlybird Venture Capital $5m
entertaining games
Develops addictive games (RPG) for
May-11 Kabam USA Google Ventures, Pinnacle Ventures $85m
social networks
Develops and Publishes Games
May-11 Pretty Simple SA France Idinvest Partners SA $2,8m
(RPG) on social networks
Devleops Games (RPG & Casual) for
Apr-11 Kobojo France Endeavour Vision, IDinvest Partners $7,5m
social networks
Operates as a game portal
Apr-11 MindJolt USA developing casual games for social Austin Ventures, L.P. n.a
networks
Develops and publishes fun games Doughty Hanson Technology Ventures,
Mar-11 Megazebra Germany $2-3m
(Casual) for social networks Kizoo Technology Ventures, Markus Stolz.
Develops and publishes
Feb-11 Peak Games Turkey Hummingbird Ventures $1,5m
entertaining games
Develops Games (Casual) for PC and Intel Capital, Sutter Hill Ventures,
Feb-11 Digital Chocolate USA $12m
mobiles Bridgescale Partners.

9

The European landscape

THE EUROPEAN LANDSCAPE
Increasing weight of European players in global social games market
If we take out Playfish which can be considered US-based since its sale to Electronic Arts in 2009,
there used to be in Europe a scarcity of noticeable social gaming companies. This has changed in the
last 2 years, with more and more hits launched by European developers.

European players have seen their market share within the Top 60 game developers grow from 4%
in 2009 to7% in 2010 and accelerating even faster in early 2011 as it reached 12% during the Jan-
April 2011 period.

FIGURE 8 Facebook Gaming Market Share by Region – Based on MAU of Top 60 Developers

85% 79% US
87%
Europe*
Asia

4% 7% 12%
10% 8% 8%
FY 2009 FY 2010 Jan-Apr 2011

* Excluding Playfish considered US-Based

The growing presence of European players has been driven first by the emergence of a global leader
(wooga) and then by the emergence of several interesting European challengers.

wooga, the clear European audience leader
Founded in Berlin in 2009, wooga (world of gaming) launched its first game (Brain Buddies) in late
June 2009 and its rapid growth enabled the company to be the first European player to reach 5m
MAU, in September 2009.

The company completed a €5m round of financing led by Balderton and Holtzbrinck Ventures in
November 2009, and subsequently released several other successful games that entered the Top 30
Facebook games: Bubble Island, Monster World, and more recently Diamond Dash.

10


FIGURE 9 wooga – Evolution of MAU on Facebook (m#)

35 MAU (m#)
30m
30

25
Launch of
Diamond Dash
20 Launch of
Monster World
15
Launch of
10 Launch of Bubble Island
Brain Buddies
5

0


The current key figures for wooga are impressive:

# 2/3 Facebook Game developer in terms of MAU - very close race with Electronic Arts
30m MAU as of early June, strong audience in France & Germany
+220% in audience (MAU) over the last 12 months
3 games in the Top 20 Facebook games (Diamond Dash, Bubble Island and Monster World)
85 people as of May 2011
Revenues have not been disclosed – it’s very likely that Zynga’s US challengers such as
Playdom and Crowdstar still outreach wooga revenue-wise, given their skills in
monetization, their lower reliance on pure casual games and their strong presence outside
Facebook (MySpace, mobile, Japanese networks…).

It’s worth noting that wooga’s spike in audience and growth drivers have come mostly from the 2
“casual games” titles, Bubble Island and Diamond Dash9, which is a clear difference with the US
leaders. It may also have an impact on the monetization metrics, as successful role playing games
(RPG) tend to attract more paying users than casual games.

A new round of financing of $24m has just been completed in May 2011, with Highland Capital
Partners leading the transaction along with Tenaya Capital and existing investors Balderton Capital
and Holtzbrinck Ventures. This fresh capital will help the company strengthen its leading position in
Europe and continue to grow at a global scale. The funding will be mainly used to “hire the most
talented artists, game designers and engineers” and “grow the team up to 150 people by the end of
2011”.

9
We define casual games among social games as games where the users play short session based on skills (e.g.
“destroying bubbles”) by opposition to management and role playing games, where the player gets into the
skin of a virtual character for a quest or to become the best farmer for instance

11


Ten other European developers above 2.5m MAU
Beyond its strong audience performance, wooga showed that becoming a big European player in this
very competitive and US-centric market was achievable. Following their steps, a breed of new
companies, from all over Europe, have emerged. Today ten other European game developers reach
more than 2.5m MAU.

th
FIGURE 10 Top 10 European Challengers – Based on Facebook MAU (June 9 2011)

MAU DAU DAU/
MAU (m#)
Developer Inception Country (m#) (k#) MAU Current Games @ 250k+ DAU
June 9, 2011 Avg. May 2011
Diamond Dash, Bubble Island,
wooga 2009 Germany 30,5 28,0 4.665 17%
Monster World & Happy Hospital
Social Point 2008 Spain 14,3 17,0 913 5%
King.com 2003 UK 13,1 9,5 1.466 15% Bubble Saga & King.com
Peak Games 2010 Turkey 5,2* 4,9 674 14% Okey
Game Insight 2010 Russia 5,2 6,0 827 14% Mystery Mannor & Resort World
Megazebra 2008 Germany 4,9 4,6 589 13% Mahjong Trails
Kobojo 2009 France 4 3,3 676 21% PyramidVille & Goobox
Playtika 2010 Israel 3,4 2,8 618 22% Slotomania
GameDuell 2003 Germany 3,1 3,1 429 14%
Nordeus LLC 2010 Serbia 2,9 2,6 600 23% Top eleven
Ubisoft 1986 France 2,7 3,0 434 14% CSI:Crime CITY

Source: AppData, Clipperton Finance Analysis *8.8m MAU including the publishing of Komşu Çiftlik (The Farm by The Broth)

Social Point and King.com are today the strongest challengers to wooga in terms of monthly
audience.

Social Point has even been the European audience leader from August 2010 to late
February 2011, before wooga’s Diamond Dash explosive growth. Based in Barcelona and
founded in 2008, Social Point has created numerous basic Facebook casual games
adapted from well known real life games such as Pool Master, Mahjong Zen or Trial
Madness. A bunch of them are still attracting a significant audience, but this is the only
company in the Top 10 of Europe along with GameDuell not to have a single game
reaching more than 250k DAU as of early June 2011. Social Point posts today by far the
lowest retention factor (DAU/MAU ~5%) among the European leaders but its recent
move towards management games10 may help the company increase this figure (current
DAU/MAU on Social Empires is around 13%).

King.com is currently the third European player in terms of MAU with 13m MAU. A
recognized leader in online casual and skill games with community features around its
King.com portal, the UK based company has started to try to capitalize on the Facebook
wave since 2009. Its audience has recently surged: the MAU were below 3m until April,
and they surged in two months up to 13m MAU, notably thanks to the launch of casual
game Bubble Saga in mid-April 2011 which reached 6m MAU in less than 2 months. All
King.com’s games are casual.

10
Management games are games where the players is in charge of expanding either a universe (a farm, a city, a
kingdom, a sports team…) with a strong identification and often a long time spent per session, in contrast with
casual games. Role playing games (RPG, very common in console games and browser games) can be seen as a
subset or a close segment, where the player is identified to a virtual character.

12


Behind these two challengers, Peak Games (Turkey, founded 2010) should be distinguished from the
other players as it reaches close to 9m MAU, taking into account the audience of both its own social
games such as Okey (Turkish card game) and the published Turkish version of Barn Buddy (Komşu
Çiftlik), a Farmville me-too originally developed by US developer The Broth. Peak capitalizes on the
strong Facebook audience in Turkey which has become the 4th largest Facebook country with almost
30m users.

Then a limited number of players have between 2.5m and 5+m of MAU: GameInsight (Russia, 2010),
MegaZebra (Germany, 2008), Kobojo 11 (France, 2009), Playtika 12 (Israel, 2010), GameDuell
(Germany, 2003), Nordeus (Serbia, 2010) and Ubisoft (France, 1986). Among them Kobojo enjoys a
strong momentum, driven by the success of management game PyramidVille, recently proposed to
non-French audience (Spanish and Italian versions).

Still looking at audience performance, and beyond the sheer number of players per month (MAU), it
is also important to look at retention (game stickiness) i.e. DAU/MAU. Most European leaders have a
DAU/MAU around 15%. A few players stand out by superior retention metrics such as Nordeus (23%),
Playtika (22%) and Kobojo (20%) in contrast with Social Point’s very low retention level of around 5%.

Most European leaders still relying heavily on a limited number of
games
Despite the different number of games launched, European leaders (excl. Social Point and
GameDuell) still rely heavily on their top 3 games which account for more than 80% of their total
aggregated monthly audience. This is particularly noticeable for MegaZebra and Ubisoft who both
have launched 19 games.

For certain players such as King.com, Peak Games, Kobojo, Playtika, Nordeus and Ubisoft, the
dependency is particularly strong on one single game which represents more than half of their total
audience.
st
FIGURE 11 Weight of Top games in Aggregated MAU for European leaders – As of June 1 2011
Total # of Games 6 18 5 6 8 19 6 3 18 1 19
100%

Game 1
Game 2
50%
Game 3
Others

0%


11
Disclaimer: Clipperton Finance acted as the sole financial advisor of Kobojo in early 2011 for their €5.3m A
round
12
Playtika was partially acquired in May 2011 by Harrah's, a unit of Caesar's Entertainment Corp. (US casino
chain), for a rumored $80m valuation.

13


Over the past 12 months European leaders developed and launched games on Facebook at different
paces: from only one game launched by Kobojo to 15 by GameDuell (more than one every month).

King.com and Game Insight have been the top performers, launching 3 successful games (> 250k
DAU) over this period of time, while Kobojo showed great efficiency with a success on their sole
launch (PyramidVille), their first attempt in the management game segment.

Considering the Top 8 companies (excl. GameDuell, Nordeus and Ubisoft), 38 games have been
launched over the last 12 months and 11 of them reached more than 250k DAU, which leads to an
average ratio of one success out of every three launches13.

FIGURE 12 Launching Pace and Success Ratio over the last 12 months – European Leaders

Since June 2010
MAU Ranking #Games # of Hits
(as of June 9th) launched @250k+ DAU Success Ratio
Wooga 3 2 67%
Social Point 9 0 0%
King.com 4 3 75%
Peak Games 8 3 38%
Game Insight 5 0 0%
Megazebra Gmbh 5 1 20%
Kobojo 1 1 100%
Playtika 3 1 33%
GameDuell 15 0 0%
Nordeus LLC 0 0 n.a
Ubisoft 10 1 10%


European leaders’ audience still dependent on casual games
While the global social gaming market is dominated by management and role playing games (around
75% of the cumulated audience), European players are still mainly positioned on casual/skill games:
except from GameInsight and Ubisoft who are RPG-oriented developers and Nordeus whose sole
game is a sports RPG, all other top European players have less than 50% of their audience playing
on RPG games, and most of them are still relying heavily on casual games.

13
The success threshold at 250k DAU is not an optimal metric but one can consider that below 250k DAU, a
game is below the radar on Facebook, even if it can still monetize strongly on a limited number of users.

14


FIGURE 13 Top 10 European Social Games Developers – MAU Split by Type of Game

100%

RPG
50%

Casual/Skill

0%

Source: AppData, Clipperton Finance Analysis * Not considering published games

European leaders will certainly seek to change or rebalance their game positioning in order to
leverage their large user base on more RPG games on which the retention and the monetization can
reach higher levels.

Over the past months, clear moves towards RPG games were initiated by developers who built their
user base on casual/skill games.

– Kobojo with PyramidVille successfully launched in late January and currently at 2m+
MAU with a DAU/MAU around 20%
– Social Point with Social Empires launched in January 2011 and currently at around 1.4m
MAU
– Peak Games launched RPG Komşu Şehir in February 2011, reaching 900k MAU in a few
days but then falling rapidly. Though, RPG games have already shown their potential on
Peak Games’ audience as the publishing of Komşu Çiftlik (Turkish version of Barn Buddy
developed by The Broth) is a great success in Turkey: launched in late December 2010
the game reaches today more than 3m MAU, while it has lost most of its English
speaking audience due to the domination of Farmville in this game segment.

The development/publishing of more RPG games from the players who have the biggest cross-
promotion capacity is likely to change the overall European gameplay balance. It will also require
more creative and development talent than the basic casual games. Moreover, this trend may be
accelerated by newcomers successfully entering the social gaming industry through RPG games, such
as the French company Pretty Simple who were Founded in 2010 by two former employees of zSlide,
where they had collaborated on the launch of hidden object title Treasure Madness (hit game -
900k+DAU in early 2010). Pretty Simple launched in late November 2010 its first game (My Shops)
which has been steadily growing since then to reach 330k DAU in early June.

15


Monetization is Different from Audience
The three pillars of social game developers are Virality, Retention (both dedicated to audience
performance – reach and loyalty) and Monetization. The combination of audience and monetization
performances leads to revenue. Existing players have different strategies regarding their focus on
audience (reach and/or retention) and on monetization. The previous sections have mainly focused
on top European developers in terms of audience but it should be clear that other players tend to
favor games for which the audience retention and the monetization per player can reach higher
levels, thus not requiring high audience to generate significant revenue. A good example is publicly
traded Weka Entertainment (France) who, despite a relative low reach on Facebook (avg 2010 MAU:
2.4m), manages to get a good retention factor (avg 2010 DAU/MAU: 22%) and apparently strong
monetization performance as the company posted a €9.1m revenue in 2010. The company seems to
be making the most of its application Is Cool, a card collection game, where users exchange cards
with friends and optionally pay to complete their cards families. Quite a simple game play but a
money spinning recipe: assuming that 80% of their 2010 revenues stem from Is Cool on Facebook,
this would imply a monthly net ARPU of about €0.5 for this game (or $0.7), an impressive metric for a
casual game.

16

What Does it Take to Win Today?

WHAT DOES IT TAKE TO WIN TODAY?
In a space characterized by an arch leader, a benign but sometimes unpredictable regulator
(Facebook) and a clear advantage for established players with a solid base of users, one could think
that new entrants face an uphill battle. This is partly true but social gaming remains an
entertainment space driven by editorial talent and creativity, and a fast moving arena where
innovation is well rewarded.

Today’s Fast Growth Developers
Ups and downs in the Facebook league tables are a clear sign that top seats are still up for grabs.
New entrants who had no presence on Facebook in early 2010 have been able to attract up to 10m
MAU.

FIGURE 14 Winners & Losers – MAU evolution on Facebook (Apr 2010 to Apr 2011)

Developer Apr-10 Apr-11 YoY MAU YoY % Developer Apr-10 Apr-11 YoY MAU YoY %
Top 10 Winners* (%) Top 10 Losers (%)
Booyah 0.02 2.00 1.97 8044% Meteor Games 7.47 1.60 -5.87 -79%
Icebreak Games 0.04 3.16 3.12 7413% Slashkey 9.50 2.16 -7.34 -77%
Ubisoft 0.05 3.21 3.16 6218% LOLapps 38.22 12.87 -25.35 -66%
Gaia Online 0.26 9.71 9.45 3678% Country Life 9.40 3.28 -6.12 -65%
Playfirst Inc 0.12 2.31 2.19 1783% Playdom 40.56 18.65 -21.91 -54%
Casual Collective 0.25 4.28 4.03 1591% Elex 4.36 2.65 -1.71 -39%
Social Point Inc 2.10 17.81 15.71 748% Crowdstar 51.46 31.58 -19.88 -39%
Zipzapplay 0.33 2.44 2.11 639% Mindjolt 17.72 10.96 -6.76 -38%
50 Cubes 0.78 5.61 4.83 618% Electronic Arts 55.99 35.98 -20.01 -36%
Digital Chocolate Inc 2.00 13.20 11.20 562% Gamehouse 4.39 3.31 -1.08 -25%
*: Excl. OUAT Entertainment & DNA Games: not relevant

Top 10 Winners (m.) Top 10 Losers (m)
Zynga 248.00 265.21 17.21 7% LOLapps 38.22 12.87 -25.35 -66%
Social Point Inc 2.10 17.81 15.71 748% Playdom 40.56 18.65 -21.91 -54%
Wooga 8.72 21.22 12.50 143% Electronic Arts 55.99 35.98 -20.01 -36%
Digital Chocolate Inc 2.00 13.20 11.20 562% Crowdstar 51.46 31.58 -19.88 -39%
Gaia Online 0.26 9.71 9.45 3678% Slashkey 9.50 2.16 -7.34 -77%
Cie Games 0.00 8.29 8.29 n.a Mindjolt 17.72 10.96 -6.76 -38%
Telaxo 0.00 7.40 7.40 n.a Country Life 9.40 3.28 -6.12 -65%
Minimax 0.00 7.24 7.24 n.a Meteor Games 7.47 1.60 -5.87 -79%
Popcap Games 10.47 17.15 6.68 64% Elex 4.36 2.65 -1.71 -39%
GSN 2.32 8.88 6.56 283% 6 Waves 18.32 17.13 -1.20 -7%


Let’s take a look at two clear winners of the last twelve months:
Digital Chocolate, founded by EA veteran Trip Hawkins, became famous for its hit mobile
games on the iStore before making a successful move towards Facebook games in 2010 with
titles such as Millionaire City and MMA Pro Fighter. Following the success of Millionaire City,
the company launched a slate of social games titles based on a similar game play and game
engine, such as Hollywood City and Vegas City, with a mitigated success. The most interesting
aspect of Digital Chocolate’s strategy is their ability and consistency in publishing their games
both on Facebook and on mobile platforms. Millionaire City was on the iStore less than three
months after the launch on Facebook, and the other way round, Zombie Lane enjoys now a
tremendous audience growth on Facebook, capitalizing on the success of the zombie theme
developed by Digital Chocolate on iPhone games. The targeted audience is now clearly a young

17


male audience, with the Zombie game and the most recent release, a war game named Army
Attack.

Cie Games has only one application on Facebook, Car Town, which attracts 8m monthly
actives, and has been the first developer to adapt the popular men’s car theme to social
gaming. The surprising bit of the story is that Cie Games is neither a brand new VC-backed
company nor a seasoned game developer porting its titles to social networks. The mother
company, Cie Studios, was founded in California in 1999 and is specialized in B2B interactive
services for customers like Pioneer Electronics and Volkswagen, to whom they provide
different channel management software, mobile applications and online product visualization
tools.

The New Growth & Differentiation Avenues
Male audience and the “hardcore” social gamers

The focus on a female audience was at the core of the emergence of social gaming, and in
2009 the top themes were around pets, farming, nursing or managing your shop. Women
found on Facebook games more immersive than traditional casual games, where the
universe was designed to their tastes and where they could interact with real life friends.
Men were also targeted with Poker games and role playing title such as Zynga’s Mafia War.
As of Q1 2011, it can be estimated that “male centric” titles account for only 15 to 20% of the
social gaming activity on Facebook.

FIGURE 15 MAU Split by Games’ Gender Category – 2011 – Based on Top 150 games

69% Female-oriented games (65% + of MAU are women)

15% Male-oriented games (65% + of MAU are men)

16% Cross Gender games

2011


18


The segment of male online gamers looking for role playing games such as World of Warcraft
still remain to be attracted to Facebook. Cie Games has not been the only player to focus on
traditional men’s interests. Beyond cars, other new favourite themes include war / strategy
(Zynga’s latest title Empire & Allies), street fighting (Funzio’s hit Crime City, noticeable for its
high quality graphics with a console game flavour), sports (EA’s Soccer, Golf and American
Football titles or Nordeus’ Top Eleven Football Manager).

FIGURE 16 Men’s Stuff: Crime City and NFL Madden - Screenshots

Crime City NFL Madden

US company Kabam, who received one of the largest recent fundings with $85m in a Series D
private placement led by Google Ventures and Pinnacle Ventures, just four months after a
$30m Series C with Redpoint Ventures and Intel Capital, has chosen to focus solely on the
male audience target with role playing games around classic themes such as heroic fantasy
(Kingdown of Camelot, Dragons of Atlantis14) and adventures in history (Glory of Rome). Their
first hit Kingdom of Camelot was characterized by superior ARPU and retention metrics. CEO
Kevin Chou commented on the latest round of funding “We’ve tapped into a major shift in
hardcore gamer behavior, as we create compelling social gaming experiences for traditional
console and PC gamers”. This is in line with their announced strategy to become the “Blizzard
of social games” and to create the segment of “Massively Multiplayer Social Games”. One of
the very different features of Kabam social games is the synchronous play that allows users
to find the MMORPG15 real time flavor on Facebook. This type of games and technology must
imply more budget per title than a management game like Farmville or Happy Aquarium,
which can explain the large amount of capital received by Kabam and its hiring spree (from
25 to 400 employees across US, Europe and Asia in less than two years).

The shift to mobile social games

Mobile and social gaming seem to be bound to grow with a significant overlap. As Internet
usage rapidly shifts to mobile devices, addicted players expect to have a seamless experience
enabling them to keep on playing when they are on the move.

14
Title coming from the acquisition in October 2010 of the social gaming studio Wonderhill
15
Massively Multiplayer Online Role Playing Games – best known example is World of Warcraft from Blizzard.

19


So far, the lack of support of the Flash content in the iPhone environment was an obstacle to
enable this genuinely pervasive experience of social games from PCs to smartphones. Hence
even the leading developers offered mobile applications that offered only very limited
features compared to the PC experience and it was hard to recreate the “real thing” on
mobile. The rapid emergence of the Android ecosystem and the decision by Apple to relax
(partially) the restrictions on the tools developers can use should facilitate the playability and
the full game experience on mobile, and even more on the wider screens of tablets. The real
challenge for developers remains to be able to launch a high quality mobile adaptation of
their games for the leading mobile OS as fast as possible after the launch of the PC version,
which requires experience in mobile environment and best in class development processes.
PopCap is maybe one of the few examples of social game developers making a substantial
business on mobile screens as they announced that 25% of their revenues at end of 2010
came from mobile; their simple casual games are easier to adapt on a smaller screen and the
company has a long history of publishing games on all platforms, from desktop to browser
games, Facebook games and now mobile.

Actually, the integration seems to happen the other way round, from mobile to social:
companies like Digital Chocolate have been successful in shifting their focus from mobile
apps to Facebook. It will be interesting to see if Angry Bird’s developer, Finland based Rovio
will try to follow the same route.

Recent M&A activity also proves the strong interest for expansion into mobile. Mobile
social games are already a strong market in Japan, and the largest deal in the mobile gaming
space has seen US leader for iPhone games, NGMoco acquired for about $300 to 400M in
December 2010 by Japan based DeNA, the local leader in mobile social games through its
mobile gaming community Mobage. Google is also on a similar track. In the summer 2010,
having just acquired US social game developer Slide, the US giant targeted SocialDeck a
company with a particular know how in mobile porting, and one that had developed a social
gaming platform technology facilitating a simultaneous game play across different social
platforms and mobile devices.

The local content angle

The high level of competition between Zynga, Playdom, EA, Crowdstar, Digital Chocolate and
their followers creates a tough turf for new entrants in the core market of English speaking
countries. All the more in terms of acquisition costs, as the US, the UK and countries like
Australia exhibit the highest revenue per users, which goes with high acquisition costs.

That’s why smaller players try to take an early lead in emerging Facebook countries. As
mentioned above, Peak Games from Turkey is a good example of this strategy. As there was
no adaptation of the leading games to the Turkish market, they decided to create a local
gaming market with the popular local card game Okey, and then publish adaptation of US
games on a revenue share basis.

20


FIGURE 17 Facebook users split by countries and languages
Facebook countries (millions) – Estimates Facebook languages (millions) – Estimates December
December 2011 2011
299
209
67

72
41
36
24 22 22 21 21 21 36
20
15 12 12 12 11 22 21 21 20 16 14 12 11 10 6 5

Source: Clipperton Finance Analysis

As seen on Figure 17, far behind the English speaking market, Spanish, German, Turkish,
French and Italian are the top 5 linguistic markets that are already targeted by the leading
players with increasingly localized versions – Turkey being an exception. However, there can
be another layer of localization on top of the mere language adaptation, linked to the
characters, the cities or decors where the action takes place. The local flavor could be an
interesting trend to follow. Linguistic areas such as Portuguese or Arabic speaking countries
are almost virgin territories, and strategic positions could be built in these markets from local
players able to attract some social gaming talent.

The cross platform option

There have been social games developed in parallel for Facebook and MySpace for a while –
this has been initially core to Playdom and Zynga’s strategy. Playdom is still the social game
leader on MySpace, with over 15m monthly active on the #1 game on the platform -
Mobsters, a Mafia theme game that has lost its audience on Facebook since mid 2009. But
with now around 60m users globally of which 35m in the US, MySpace has lost so much
momentum compared to Facebook that it is not considered a growth driver by the
developers’ community – even though MySpace audience is urban, wealthy and thus clearly
“bankable”.
Going towards smaller social network sites is often closely linked with the local angle, as
Facebook do not (yet) dominate all countries. The most interesting example is maybe Brazil
where Google’s owned social network site, Orkut, has a strong leadership position with over
30m monthly unique visitors. This creates barriers to entry for Zynga and the other leaders
on Facebook, and has attracted developers who specialize in games for the Brazilian
audience. Vostu a US based social gaming company focused fully on the Brazilian market and
claiming over 30m active users has attracted a large VC round of $30m led by Accel Partners
and Tiger Global Management in November 2010. They are in direct competition with Miami
based Mentez who has also decided to focus on the Brazilian market, in parallel with other
Latin American countries. Russia, where Facebook is still marginal, and where local social

21


networks enjoy high audience rates, is another obvious candidate for local social gaming
play.

Hi5 is also trying hard to become a social gaming platform, hoping its strength in Latin
America will help attract top developers. With around 20m social game players, Hi5 has
enabled to attract Facebook titles such as Barn Buddy by The Broth or Millionaire City by
Digital Chocolate, and introduces new monetization features with a mix of virtual goods and
advertising to maximize developers revenues.

Time will tell if these local social networks can resist to the Facebook tsunami (Facebook has
already overtaken Orkut in India for instance) and to the local versions of Zynga or Playdom’s
games. So far, the cross platform approach is a real bet, and betting against Facebook makes
the bet even more interesting. Notably, in Vostu’s case, Jim Breyer from Accel, who is a
Facebook board member, will join Vostu’s board; even Facebook insiders seem to think that
Facebook will not reign everywhere.

New monetization avenues

Virtual goods are one of the key ingredients behind the success of social games. They fit the
Freemium model very well, as only the players who are really engaged and who want to
progress quickly will pay, and they choose the amount they spend on an impulse basis. This
monetization model is here to last, and subscription based games on Facebook are still to
emerge.
However, we should witness some innovation in the monetization front. One emerging
feature is in-game advertising. Instead of buying in-game banners, leading corporations turn
to building brand awareness on Facebook by partnering with developers on special events.

FIGURE 18 McDonald’s Special Event on FarmVille

22


Brands like McDonald’s love the concept of engaging directly with their customers in a fun
environment, and of course the sheer size of the audience provided by a 24 hour campaign
on FarmVille or CityVille – games that attract over 30m users per day, the closest thing to
Monday Night Football on the web. This is indeed a marketing proposition that only Zynga
and a few of the top developers can propose. Zynga has pushed the bar higher with their
recent marketing deal with Lady Gaga, who gave exclusivity on certain songs of new album to
FarmVille players; the fans had to pay a visit to GagaVille to get their reward… For this type
of new revenue streams, size does matter.
Another new business model attempt is social betting. Early stage Crowdpark, based in
Germany, proposes to bet with friends on all sorts of events, from sports results to the sex of
Victoria Beckham’s next child. The legal trick is to avoid gambling restrictions thanks to a
virtual currency used for every bet. Players compete for fun, not for money. But will that
scale up to Betfair’s size?

For incumbent video games leaders– adapt strong franchises

Just a few months after the acquisition of PlayFish in November 2009, EA launched a football
management game on Facebook based on its FIFA license. Just in time for the 2010 FIFA
World Cup in Germany! The title climbed to 5m MAU during the World Cup and has managed
to retain 3m MAU one year after launch. This shows the strategic choice of EA to use social
networks as another channel in their content strategy, trying to leverage their highest value
IPs from console games on Facebook. Sebastien DeHalleux, a co-founder of PlayFish and
advisor to EA, said about this strategy just after the launch of FIFA “People play FIFA because
they identify with specific players and teams and want to talk about the sport that they love.
The trick is to use the brand assets — 9,000 real-life athletes that we have rights for in games
— and build a meaningful exchange between fans and the athletes.” Nevertheless, the
experience of FIFA on Facebook is radically different from the console titles, it’s a
management game, not a football action game, and the animation and the fluidity can’t be
matched. And it’s a complete change from PlayFish’s initial editorial strategy which was
centered on female themes with titles such as Pet Society and Restaurant City, two titles who
are still the most popular EA’s titles on Facebook… Following FIFA, EA also adapted two of its
sports franchises to Facebook, with Madden NFL Superstars and PGA Tour. With limited
success in terms of audience.

23


FIGURE 19 Ubisoft’s success on Facebook – CSI Franchise adaptation

Let’s have a look at a European incumbent now. Unlike EA, Ubisoft has not done any
acquisition in the social gaming space – the company has an internal team developing their
own games (and also managing external developers) to test the waters on Facebook. As said
in section 2, they have launched almost 20 games (many should been seen as tests rather
than genuine commercial launches) among which one can be considered as a real success:
CSI, a role playing game adapted from the TV series franchise where the users solve mystery
crimes in Vegas. It would be interesting to see if Prince of Persia, Assassin’s Creed or Rayman
will be adapted on Facebook.

A new wave of M&A could also help the incumbents to accelerate their shift towards social
games. The CEO of Activision recently ruled this out for the American studio, citing “too high
valuations”. Indeed, the valuation of Zynga (in the latest private funding rounds and for the
much expected but not yet announced IPO) would now be above EA’s enterprise value of
around $5Bn. Actually the highest valuation in online gaming today is clearly Tencent: the
Chinese web gorilla, active in instant messaging (QQ service) and deriving most of its
revenues from online gaming and virtual goods, has a market capitalization north of $40Bn
on the Hong Kong Stock Exchange.

Zynga is however so far ahead of the rest of the pack that it should not be the only
benchmark and one can expect to see deals in lower valuation territories where both
incumbents and social game developers see the value to join forces, assets and talents to
bring better games to social platforms.

24


CONCLUSION
The explosive growth of social gaming seems to be built on solid foundations, and Zynga is
clearly printing money today, reaching impressive profit levels for a four year old company -
an achievement that even Groupon will have difficulties to match despite its even superior
topline growth trend. So far, the success in usage experienced by this new industry comes
almost only from adaptations of existing game concepts to the social networks. The first
wave of games was centered on casual game plays, card games and simple management
games often tailored for a female audience, and now we have witnessed the adaptation on
Facebook of war games, strategy, cars or heroic fantasy game plays; and also adaptation of
existing preeminent game franchises like FIFA Superstars and CSI. At some point, the phase of
adapting successful titles and game plays to social networks won’t be enough to sustain the
growth.

The future winners in the long term should be the companies who are really able to make the
most of the new features enabled by the social graph on Facebook and other networks, with
new types of interactions between players and game plays designed from scratch for social
users. It could be Zynga or it could be newcomers.

25

APPENDIX: SELECTED M&A ACTIVITY

APPENDIX: SELECTED M&A ACTIVITY
Date Target Country Description Acquiror Deal value

May-11 DNA Games USA Develops games (RPG) for social networks Zynga n.a

Designs and develops games for mobile
May-11 Rough Cookie BV NL ngmoco n.a
platforms
Develops and distributs online games and
Apr-11 Hallpass Media CA Mindjolt Games n.a
virtual worlds (Casual)
Publishes and develops social games (RPG)
Apr-11 Social Gaming network Inc USA Mindjolt Games n.a
for mobile
Develops an online portal tracking career
Apr-11 MarketZero Inc-Austin Team USA Zynga n.a
stats of online poker players.
Develops social games (RPG) for social
Apr-11 Wonderland software UK Zynga n.a
networks and mobile
Develops social games (Casual) for social
Apr-11 OpenFeint USA GREE International $104m
networks and mobile
Develops video games (RPG on PC) and
Apr-11 Floodgate Entertainment LLC USA Zynga n.a
casual games for social networks
Develops a social browser (blogs and social
Jan-11 Flock USA Zynga n.a
bookmarking)
Develops high-quality entertainment social
Dec-10 Newtoy Inc USA Zynga n.a
games (RPG) on mobile platforms
Develops games and entertainment
Oct-10 Ngmoco, Inc. USA DeNa Co Ltd $400m
experiences for the iPhone and mobile

Oct-10 Bonfire Studios USA Develops and operates online social games Zynga, Inc. n.a

Offers online application for social
Aug-10 Slide, Inc. USA Google Inc. $182m
networking websites
Develops and publishes online video games
Aug-10 Eyedentity Games Inc KO Shanda Games Ltd $95m
through its platform
Develops and publishes video games for
Jul-10 Playdom USA Walt Disney Co $763m
social networks
Develops social gaming applications for
Jul-10 Tapulous USA Walt Disney Co n.a
mobile
Developer of social networking and
May-10 Acclaim Games Inc USA Playdom Inc n.a
downloadable casual games software

May-10 XPD Media Inc China Provides and develops of online games. Zynga, Inc. n.a

Developer of online and social games
Apr-10 Merscom LLC USA Playdom Inc n.a
software.
Engages in development of social games and
Feb-10 Big Six Games, Inc. USA hi5 Netw orks, Inc. n.a
designs a social gaming platform
Operates as a social gaming platform and
Feb-10 Serious Business, Inc. USA Zynga, Inc. n.a
produces online games for the users
Provides tools and services to support game
Jan-10 Mochi Media, Inc. USA Shanda Games Limited $80m
developers
Develops and publishes video games for
Nov-09 Playfish Limited UK Electronic Arts $300m
social networks

26

DISCLAIMER

DISCLAIMER

This document has been produced by Clipperton Finance (“Clipperton”) and is communicated to you solely for your
information and should not be construed as a solicitation or offer to buy or sell any securities or related financial
instruments.

This research paper is based on information available to the public and other sources deemed reliable.

No representation or warranty (expressed or implied) is made as to, and no reliance should be placed on, the fairness,
accuracy or completeness of the information contained herein and, accordingly, none of Clipperton’s officers or employees
accepts any liability whatsoever arising directly or indirectly from the use of this document.

Clipperton Finance has been engaged as an advisor by a company mentioned in this report: Kobojo.

CLIPPERTON FINANCE

Based in Paris and London, Clipperton Finance is a European corporate finance boutique dedicated to the High Tech and
Media industries. Clipperton is focused on start-up and high-growth companies in the Internet, Software, Telecom,
Components, CleanTech, MedTech and Media spaces, advising them in their financial transactions: fundraising/capital
increases and Mergers & Acquisitions. Over the past years the company and its team have successfully structured
numerous high level international transactions in the European High Tech sector.

For more information, visit www.clipperton.net

Contacts

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