Casual Connect 2011: Emerging Trends

@timechange
Tim Chang Partner Norwest Venture Partners
www.nvp.com tchang@nvp.com +1-650-321-8000

Norwest Venture Partners (NVP) - Introduction

Inception in 1961
45 year investment history

Funded more than 400 companies

>60 active global portfolio companies Current fund of $1.2B raised in 12/09 17 investment professionals Based in Palo Alto, CA Office in India; Investing in India for more than five years Office in Israel

Managing >$3.7B in venture capital

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Global VC firm
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Active investments in US, India, Israel, and China

Consistently ranked in top quartile of venture capital firms

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Gaming-related Investments

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Recapping 2010-1H2011 Highlights/Lowlights

Highlights: - First Big Exits in Social Gaming: Playdom($763M), ngmoco($403M) - First Big Midcore Exit: Riot Games ($400M)

- Yes, Casual Studios Can Have Massive Outcomes Too! (Popcap)

- Payments/V-goods Infra Exits: Playspan, Zong, Jambool - Rise of Midcore: Kabam, Kixeye raising massive rounds - Mobile Social Gaming funding frenzy: TinyCo, Rovio, PocketGems
- Copycat Social 1.0 Memes - MoSoLo & ARG

- Android Launches IAP (finally!) - International Platforms Open Up Addl Distro & Monetization:

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Recapping 2010-1H2011 Highlights/Lowlights

Lowlights: - Social Gaming 1.0 consolidation: game over? - Facebook Standardizing FB Credit Tax

- Facebook Overrunning Overseas Incumbent Networks? (Orkut)

- Distribution Bottlenecks: Less Virality = More $$ Needed - Sudden Death of CPI Model for Mobile Distro on iOS: Tapjoy - Android IAP aint working that great yet - Frothy Valuations vs. Pending Consolidation - Cloud Gaming: still not ready yet - HTML5: still not ready yet

- War for Talent: Analytics, Backend, Designers, Mobile Developers

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Global Snapshot Global Trends Overview:

The Social Gaming Warfront and Landgrab has Expanded Beyond the US
Players Battling for Distribution Power, New Revenue Streams, Talent Acquisition Mobile is the New Hope for Social Gaming New Publishing Models Emerging Across Regions

Facebook Global Growth vs. Incumbent Networks

New Genres Emerging Beyond Copycat x-Ville Games

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Global Snapshot: Whats Everyone Fighting Over?

New Revenue Streams:
- US Facebook market dominated by Zynga easier to launch elsewhere? - US iOS market is extremely noisy hard to cut above the noise

Distribution Power:
If Content is King, then Distribution Power is God Almighty 3 Original Pillars of Facebook Social Gaming: Virality, Cross-Promotion, Facebook Advertising With Virality gone, Zynga has won the US online Facebook social 1.0 wars GAME OVER (Round 1) Distribution Power = cross-promotion ability across a loyal network of DAUs: X-Box Live Layer + Game Cross-Promotion - Social networks in other regions are opening up their app platforms less crowded territories to exploit and build distribution power? - Mobile has never had virality opportunity to create a Zynga and X-box Live style network?

Talent Acquisition:
- Getting more expensive to build Social Games, as they scale into micro MMOs and Games as a Service - Too expensive to engage in hiring (acquisition) wars with Zynga, etc. in the US - Need to hire/acquire/partner with overseas studios and teams to lower costs and grow capacity

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Global Battleground Snapshot:

Japan: (New Revenue Streams)
Small market (DAUs), high ARPU Players used to freemium + MTX model, and paying via mobile) 80% mobile (Flash-supported on legacy phones = no app builds needed) 3 different networks: DeNA, GREE, Mixi opening app platforms and expanding into US, China, etc

China: (Talent Acquisition; Distribution and Revenues Still Challenging)

Large market (DAUs), low ARPU Familiarity with freemium + MTX via MMO games + virtual goods on QQ Primarily online play; smartphone apps still on the come 1 dominant network (Tencent QQ), 3 challengers (Kaixin001, RenRen, 51) not fully open platforms yet, poor revenue splits - Lower cost labor pool - MMO companies and Tencent entering US for IP and talent acquisition, as well as international publishing

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Global Battleground Snapshot:

Korea:
- Traditionally a hardcore/midcore gaming market: MMO RPGs, client downloads - NHN, Nexon aggressively expanding overseas - Best-suited for midcore if free to play MMO companies go browser-based and leverage social networks for publishing

Brazil:
- VERY social player base: Orkut is dominant network, with Facebook growing quickly - Payment methods remain challenging, but on the rise with healthy ARPU - Native players like Mentez and Vostu looking to dominate distribution before Zynga and others can enter via Facebook

Russia:
- Kontakti is incumbent social network leader - Importer Publishers like i-Jet often critical for market entry - Tricky region to operate in

India:
- Still nascent big potential for mobile social gaming as grey market Android smartphones gain adoption
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Emerging Trends 2011-2012

Whats Next? - Social Gaming Distribution 2.0: Life in the Post-Viral Era

- More Midcore: Online + Mobile

- Proof of Real Gamification? - Healthy Gaming / Quantified Self - Next-gen Platforms: Cloud Gaming, 3D-in-Browser, HTML5 - New Genres: Music, Physical/Gesture, Youth Edutainment (Club Penguin 2.0 on Tablet) - Evolution of Business Models + Mechanics

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Life in the Post-Viral Era The original social gaming tri-pod of distro is dead:
Virality Crosspromotion Facebook Ads

FB Credits: more convenient peanut butter w/ 30% tax! Shift towards building own destination sites w/ own XboxLive-style layerUse FB as new retail storeshelf? FB Ads FB Installs; non-FB Ads non-FB Players, but no link between FB Ads and non-FB Players yet No link between FB online notifications & mobile app installs!
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That Darned G-word Gamification Hype & Backlash:

Cant just bolt-on or retrofit Gamification as an afterthought Not just about slapping on badges or leaderboards

Toolkit for Loyalty & CRM 2.0, behavioral analytics?

Agency / Consulting Project-Based Model vs. Saas Platform? Renewal and Upsell based on ROI will be the Ultimate Test Weve seen this movie before: white-label social networking, branded Facebook app & fanpage buildseven Omniture 7 Deadly Sins Motivation Design Framework 3 Phases of Gamification:
1) New User Onboarding (Levels 0-5)
2) User Engagement (Levels 5-50) 3) User Retention & Power User Cultivation (Levels 50 100)
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Healthy Gaming example: Lumosity

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Quantified Self example: Basis

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Music Edutainment example: Rock Prodigy

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Social 1.0 -> Midcore: Gaming Archaeology

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Untapped Models & Mechanics?

Freemium + MTX + Subscription: Lumosity, Youth, Edutaiment More Innovation on the Earn It Side of Buy It or Earn It: CPE, CPI, Viral Work MoSoLo: Foursquare w/ Real-Life Missions? (To-dos, Fitness, Nutrition, Education, etc.) Offline Actions + Online Rewards (and Vice Versa): Earning Virtual Currency through Retail Transactions? Check-in + Loyalty & Leveling Winsters multiplayer synchronous collaborative gameplay Turn-based phase-matched PvP (Steambirds; oldschool games like Starfleet Battles) ex: Magic-style card games; RockScissorPaper Combo Sequences Whale-hunting & cultivating End-game / Epic Win in Social Games (vs. attrition / burn-out / saturation) Reputation & Referral-based social mechanics: Linked-in meets Social Gaming for Guilds, Alliances, etc? Social Q&A (Quora, Formspring, Friend.ly, OpinionAided)
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Recommendations for Entrepreneurs

Zynga IPO + PopCap M&A = continued frothiness for the next 6-12 months but these valuations are unsustainable and distribution is consolidating and marketing is getting tougher and more expensive and players (+investors?) are hitting saturation and fatigue points So either:
A) Raise a ginormous warchest at a crazy valuation, sit on it, and then buy up your competitors on the cheap once the market crashes B) Sell out in the short term while the market is hot! (Zynga, Publisher1.0, Media, Intl) C) If youre just starting out, put together the best possible talent and build to flip as a talent acquisition D) yes, its possible to raise a high-priced Series A or Bbut you better not run out of gas before hitting major traction or milestones!

AND ALWAYS THINK ABOUT HOW YOURE BUILDING YOUR OWN DISTRIBUTION MUSCLE ALONG THE WAY!
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Tim Chang

http://www.nvp.com

tchang@nvp.com

Twitter.com/timechange

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