Can Asia Take the Lead in the Next Generation of Social Games?

About the Author: Sangeet Paul Choudary writes regularly on strategies for online markets, and works closely with startups in these spaces in India, Singapore, and the US. You can follow him on Twitter. A version of this article was previously posted on Sangeet’s blog, platformed.info.

Tokyo Game Show 2012

Zynga’s (NASDAQ:ZNGA) recent reversal of fortunes brought up several questions about the social gaming and virtual goods model. The company’s growth is so closely linked to Facebook (NASQAQ:FB) that it is often indistinguishable which of the two was riding on the other’s growth. In any case, Zynga was the first application to leverage Facebook as a marketing platform at such a large scale and with such success. In doing so, it also heralded a wave of social gaming that shook traditional gaming companies into rethinking their offerings.

Zynga’s recent fall has simultaneously exposed the chinks in its strategy (which was leveraged by other players) and highlighted a growing trend among similar players in the social gaming space who are running into similar problems.

Over-reliance on a foreign user acquisition engine

Social gaming is a great example of user acquisition based not on relevance to target users, but on repeated incentives to current users to send invites to new users. There are two interesting points about social gaming in its current state:

1. Viral acquisition: Social games rely heavily on virality. This is often baked into the game mechanics. Users can acquire time (faster leveling up) or resources in the game by inviting their friends. The entire game is built around users calling other users in. This virality is NOT word of mouth; it has nothing to do with a positive experience that users may have had on the game.

2. Cross-promotion: Social games rely heavily on hits and cross-sell. Whenever Zynga puts out a new game out, it acquires users from existing games (cross-sell). However, this has a lot to do with momentum. If a game falls through in between, the audience carry-over suffers. In general, social gaming companies maximize revenues by making users play more games, thereby creating more monetization opportunities.

The two factors above imply that social gaming, unlike every other form of gaming, can scale well only on an underlying user-acquisition platform. Facebook, of course, was perfect as a user acquisition platform. The problem, though, was that this made Zynga and others over-reliant on the Facebook, and hence, over-exposed their business to any policy changes that limited the use of the platform.

Piggybacking on another network

Zynga and Facebook, not best friends anymore

Zynga’s growth strategy was piggybacking on Facebook’s growth. Networked businesses often ride the success of another network. Paypal rode eBay’s growth and YouTube was helped by MySpace’s growth early on. The key driver for success in piggybacking on another network’s growth is the ability of the overlying network to add value to users of the underlying network. Paypal provided eBay users a method for instant payment. Youtube provided Myspace (and later Facebook) users a way to easily share videos.