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Interview with CEO of Serious Business January 6, 2010
Posted by jeremyliew in games, games 2.0, gaming, social games, social gaming.2 comments
In December I posted an interview with the CEO of Playdom that Atul Bagga, the gaming analyst at the investment bank ThinkEquity, recently conducted. Atul interviewed the CEO of Serious Business, Siqi Chen. Serious Business is also a Lightspeed portfolio company. The transcript gives some info on Serious Business’ revenue/DAU, conversion rates, demographics, and revenue split between digital goods and advertising.
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Atul Bagga, ThinkEquity (AB): Please explain your business and why should investors care about Serious Business?
Siqi Chen, Founder and CEO, Serious Business (SC): We are one of the oldest developers of social games. Our largest game is Friends For Sale, which we launched around six months after Facebook platform was opened, which has about one million daily active users. Over the past two years, we’ve grown from a two-person operation in my apartment to a 30+ person team working on Friends For Sale and two new games.
AB: Who’s your target customer?
SC: It varies widely by game. On average it is the Western customer, 25 to 35 years old with a large amount of disposable income. Our geo and demographic distribution generally matches to Facebook. But in terms of the revenue contribution, the majority of our revenue comes from the U.S., France, and Vietnam.
AB: Vietnam?
SC: It’s really hard to predict where you’re going to get viral, and depending on the month, we may explode in different countries. We’ve been doing well in Vietnam over the past half a year or so.
AB: What is your business model and what is the break up of revenue between virtual goods, advertising, and how do you see this breakup trending over the next couple years?
SC: Almost 90% of our revenue comes from virtual goods, although we do some branded advertising with partners like AppSavvy and AdNectar. Out of our virtual goods revenue, 90% comes from direct payments.
AB: Seems like that indirect or offer-based revenue is a very small part of your business. Is it because of the recent controversy in the business?
SC: Indirect or offer-based payments have always been a small percentage of our revenue. We have worked hard to make sure that percentage mix increases in favor of direct payments. We think it is a lot more sustainable when someone likes your game so much that they pull out a credit card and pay you. People have become more comfortable with the idea of paying for games on Facebook, and we’re working to get as close to 100% in direct payments as we can. The reason why we still have offers is that a large portion of our international users don’t have credit cards or don’t have the capability to pay us directly, so offers are a way for them to be able to still buy virtual currency.
AB: The offer providers claim that games that use offers would see about 20% lift in their conversion rate. Is that consistent with what your experience?
SC: That is probably true if you talk about conversion rates, but that doesn’t necessarily translate into the same percentage growth in revenues. The revenue you get from these users is very small relative to people who are paying you directly.
AB: How do you see the advertising revenue growing?
SC: Advertising used to be a large portion of our revenue, and in absolute terms, we have been growing this revenue stream through campaigns like McDonalds or Oakley. But over the long term, it is not our focus. We want to increase the proportion of revenues we get from direct payments rather than advertising. The way I think about advertising as a publisher is that you’re basically selling the chance of a user leaving your site; you want to be in the business of getting the users to come to your site and being able to monetize that. So strategically, this is something we want to move away from.
AB: Can you talk about the monetization potential of social games versus highly immersive MMOs and the difference in the types of items—expression versus functional?
SC: What makes social games work is that these games are viral, socially distributed games with universal appeal in theme and mechanics, whereas MMOs are usually focused on hardcore gamers that monetize much better. So the ARPU is lower on social games, but we make it up in massive volume.
AB: Can you share some of the metrics of your business—ARPU, conversion rate between paying versus non-paying user?
SC: In the case of Friends For Sale, conversion rate is about 1%, which is really low. And out of the people who pay for the game, we extract most of our revenue from users who pay us thousands of dollars and in some cases tens of thousands of dollars at a time. Our blended ARPU works out to about $0.45 per DAU per month.
AB: Can you give us some sense of how big this market could be?
SC: It is probably around a billion dollar-plus today. If you look at the trends, more people are spending more of their time on social networks. If you believe that this is how people are going to spend a large percentage of their entertainment time over the next four to five years, then you could argue that the market is just getting started on a path of explosive growth.
AB: What are the key competitive differentiators for Serious Business, and what is difficult for others to replicate?
SC: We think there’s a big opportunity in moving away from essentially single player games that are socially distributed towards truly social games, games about meeting new people and keeping in touch with the friends you already have. We have had some success with Friends For Sale in that direction and learned a lot of lessons on how to get people to migrate from playing with their friends to meeting new people. This is something we probably know better than most people in our space.
AB: What is your growth strategy? Is it about publishing more games, getting on more social networks, or clocking ARPU?
SC: It’s a combination of all of (the) above. We have a few games under development, including our first flash game. We are also working on expanding the user base of our existing games. We had never had more than two engineers on Friends For Sale at a given time, and we are now investing more resources into that game as well.
AB: Can you elaborate on the games in your pipeline?
SC: We have one game called The Hierarchy, which is in public beta right now and the feedback has been very positive. We think of it as a next-generation entry in the social RPG space in terms of an interesting combat system, production values, and content. We are bringing in some traditional MMO mechanics to the social gaming space. The majority of our company is focused on our first flash game. I can’t talk too much about it, but we’re really excited about this project. We have a pretty solid team that came from Zynga and EA and Naughty Dog working on it, and will be launching it in the next quarter.
AB: You had mentioned that you were one of the first game developers on Facebook. What has been the constraint for growth?
SC: I think that the real constraint for growth is talent. We are about 32 people, and finding the incremental hire is becoming increasingly difficult. The competition around products is pretty high, but the competition around attracting great talent is even higher.
AB: Is there a reason that you have been only on Facebook and not on MySpace or other networks? What does it take to port your games on other networks?
SC: It goes back to the problem of finding great talent. With our limited resources, we need to pick our battles very carefully. Today, the best platform to develop for is still Facebook given its large market size and low friction of distribution.
AB: How do you view the recent and upcoming changes on Facebook?
SC: It has always been a challenge, and it will continue to be a challenge for developers. This is another in a long series of Facebook changes that Facebook has made to improve the health of the ecosystem, and it won’t be the last. You just have to roll with it like every one else in the space. We’ve been through it before, and I think that the ecosystem is going to come out stronger, as it has in the past.
AB: How do you see Facebook payments changing the social gaming landscape?
SC: I’m holding a wait-and-see attitude. There are two camps: one that thinks a 30% fee to Facebook is too high to be sustainable, and others who think that it will be offset by the increase in conversion rates through the standardization of payment methods on the platform. I don’t know which way it’s going to pan out, but I think the worst case will be a minor decline and the best case will be a significant improvement.
AB: How do you view mobile platform as an opportunity?
SC: We don’t think of mobile as a distribution channel. It is not nearly as efficient in terms of distribution compared to a social network. We tend to think about mobile as an additional access point and not as an additional channel of distribution.
AB: What is the typical lifecycle of game—time to develop, beta testing, growth, and maturity?
SC: We are very metrics driven in the way our company works. We closely watch certain metrics, and if the game doesn’t meet the bar, we will kill it. In terms of development, e.g., Hierarchy took two engineers for two months to get to a public beta stage, and it is probably going to be a three- to four-months process to get the metrics around revenue and engagement tuned.
AB: What do you see is big challenges for Serious Business over the next couple of years?
SC: Our biggest challenge is reaching the revenue scale that we need to compete with the larger players in the space. It takes only one large hit to launch a company, if you look at what Mafia Wars did to Zynga, Pet Society to Playfish. Our goal over the next year is to make sure we get that hit and then scale from there.
AB: Is the scale necessary more from the development side or from the marketing effort?
SC: It is mostly from the development side. If you think about it, we’re competing against a team of 80 over at Mafia Wars. So just being able to iterate quickly enough, collect enough data, and make sure you are adding things that users want is a really hard challenge because your competitor can do it 10 times faster than you through sheer mass.
AB: Can you give us some sense how big Serious Business is and how fast you might be growing?
SC: We are at 32 people. We were around 20 a quarter ago, so we’ve been hiring pretty aggressively. We are profitable.
AB: Where do you see Serious Business three years from now? Do you see yourself as a public company, as an independent company, or as part of a bigger platform?
SC: It is hard to say, we are just focused on making great games today. I do hope that in a couple of years we will have a few hits and become a very profitable and sustainable company.
AB: Thank you so much for speaking with us.
Top 5 trends for enterprise cloud computing in 2010 January 5, 2010
Posted by ravimhatre in Cloud Computing, datacenter, enterprise infrastructure, virtualization.Tags: cloud, Cloud Computing, datacenter, enterprise IT, virtualization
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Lightspeed has invested across multiple enterprise infrastructure areas including database virtualization (Delphix), datacenter and cloud infrastructure (AppDynamics, Mulesoft, Optier) and storage virtualization (Fusion I/O, Pliant, Nimble).
Arif and I have teamed up this year to make a few predictions about Cloud Computing in 2010:
1. Enterprises move beyond experimentation with the cloud. Enterprises will start to deploy production cloud stacks with thousands of simultaneous VMs. They will increasingly be used as a resource for both pre-production and production workloads. CIOs and IT managers will test the benefits of creating and managing internal, elastic virtual datacenters – self-service, automated infrastructure with integrated and variable chargeback and billing capabilities, all built on commodity hardware.
2. Management software to deal with scaled cloud environments moves to the forefront. As infrastructure environments become increasingly dynamic and virtualized, the “virtual datacenter” or VDC will emerge as the new enterprise compute platform. New management platforms must be developed to apply policy and automation across thousands of transient servers, fluid underlying storage and networking resource pools, and variable workloads which often need to be dynamically migrated from one part of the VDC to another. Without new management tools, enterprises will fall short in their ability to achieve true “cloud economics” in their cloud environments.
3. Enterprise policy for dealing with public clouds starts to emerge. To counter the security and financial concerns around internal developers using public cloud providers such as Amazon on an ad hoc basis, CIOs and CFOs will start to craft their enterprises’ public cloud policies and centralize purchasing and procurement. Larger enterprises, due to security or compliance restrictions may initially prioritize internal private cloud development to recognize the benefits of cloud computing without compromising their data.
4. Public Clouds; “Its not just about Amazon”. Other mid and large-sized vendors (i.e. Microsoft, IBM, Rackspace, AT&T, Verizon, and others) continue to gain share in this rapidly growing market and 3′d party software matures which enables tier-2 and tier-3 service providers to get into the game of providing cloud services as a complement to traditional web and server hosting. EC2 becomes the commodity service offering as higher-end providers seek to differentiate their cloud offerings with SLA-based premium services and better management capabilities.
5. VMware has to rethink its business model. As Hyper-V,Xen and KVM continue to commoditize the hypervisor and gain enterprise market share, cloud computing starts to encroach on traditional ESX/vSphere use cases for application and server consolidation. Value continues to move up the stack into integrated management features and scale-out application support. To counter enterprise adoption of other hypervisor and cloud over-lay platforms, VMware will be forced to adjust pricing and licensing models to account for scale-out cloud deployments on top of hundreds or thousands of commodity servers.
2010 Cleantech Predictions December 18, 2009
Posted by Andrew Chung in 2010, Cleantech, biofuel, electric vehicles, energy efficiency, energy storage, predictions, smart grid, solar.2 comments
Lightspeed has invested across several cleantech areas, including solar (Stion), biofuels (LS9, Solazyme), clean coal (Coaltek), LED lighting (Exclara), and energy storage (Leyden Energy, f/k/a Mobius Power).
Peter Nieh and I (Andrew Chung) teamed up again this year to make a few predictions about cleantech in 2010 (see our prior year predictions for 2009 and 2008):
1. There will be increased availability of equity, debt, and project finance capital, along with an increased flight to quality.
Despite 2009 being a slow year for venture capital firms raising funds (Q3 featured the fewest number of VC firms raising money in 15 years), the cleantech category appears to have drawn continued commitments. Several domestic firms raised large cleantech-focused funds earlier this year. Internationally – from China to Singapore, India to South Africa – a number of local venture and private equity firms are now raising multi-hundred million dollar funds to target cleantech investment. As such, the global pool of equity capital targeted at cleantech will be greater in 2010, as investors continue to look at the sector as a source of investment opportunity. The emergence of the debt markets from the depths of the fallout from late 2008 and the growth in capital flows from an improved stock market should also increase the availability of debt, tax equity, and project finance capital.
Despite the rise in availability of capital in 2010, investors will likely remain cautious. We expect a larger share of dollars to go into emerging leaders and high-potential portfolio companies, as the number of new companies funded in first-time investments grows more moderately. Larger funds may preserve capital to make more substantial bets in later-stage, “winner’s circle” companies.
2. Massive project deployments and manufacturing capacity growth will be undertaken, as winners and losers become more apparent.
In 2010, we expect a number of prominent VC-backed cleantech companies to be tested, as they emerge from R&D and initial customer acquisition and move into full-scale production and/or deployment mode. Some companies will rise to market leadership, while others may fall, as the myths and reality of their technology, competitive edge, and ability to scale come to light.
The “shakeout” will likely impact the sectors that have seen the most investment in recent years, such as:
- Solar: Many up-and-coming solar manufacturers have made bold claims about their capabilities. As these companies start to ramp their manufacturing capacity, their validity of their claims on efficiencies, yields, cost economics, capital efficiency, and field reliability will become more readily apparent. Companies will find it much more difficult to “scale first, optimize later,” as pressure on cash reserves increase significantly.
- Smart grid: As some of the massive project deployments with nationwide utilities roll out, whether new technologies can truly scale to millions of endpoints cost effectively and reliably will become clearer. The utilities will also better judge the extent of the value created by the deployed networks and how far it extends beyond advanced metering into areas like demand response, distribution automation, and network management.
3. Momentum in plug-in hybrids and electric vehicles to continue, as a greater variety of vehicles starts to arrive to market. Electrical storage will be the key enabling technology.
Nearly every major carmaker claims it will launch a plug-in hybrid electric vehicle (PHEV) or all-electric vehicle (EV) some time between 2010 and 2013, as concept cars start to become production models. Notable target launches for 2010 include the Chevy Volt and Nissan EV-02. Numerous startups will also look to enter the market, despite the challenges in raising the funding needed to compete in the automobile industry.
Another trend to watch in 2010 will be an increased focus for fleet operators to consider adoption of HEVs and PHEVs, as the industry looks to rebound from the downturn and retire more of their aging fleet. Adoption will still be early, but sustainability initiatives and new emissions regulations should help.
The key enabler for the HEV and PHEV revolution will continue to be the battery technology. While established companies like Sanyo, LG, and Hitachi are all attempting to adapt their lithium-ion battery technology for the automotive market, limitations with traditional chemistries have made it difficult for a clear victor to become apparent; startups have an opportunity to disrupt the market and become alternatives for OEMs. For example, Leyden Energy (formerly Mobius Power, a Lightspeed portfolio company) is bringing to market Li-ion batteries that offer the high energy density that is critical for EVs, while providing a high degree of safety and long cycle life over a wide operating temperature range. We expect there to be some healthy competition and progress made here in 2010.
4. 2010 could see several public exits from some of the emerging leaders; consolidation, M&A, partnership, and JV activity expected to grow
With the IPO markets opening a crack in mid-2009 after nearly a year-long drought among VC-backed companies, investors appear cautiously optimistic about some public offerings in the cleantech area in 2010. We expect that IPO demand in this sector will be driven by factors like the success of the A123 offering (although the stock has come down 35% from its high and stabilized at where it opened in September 2009) and the scarcity of quality cleantech public companies.
Consolidation and vertical integration in areas like solar and biofuels will continue – many involving distressed companies that can no longer support the high cost of their assets and debt load. A number of solar M&A deals were announced in 2009, including First Solar acquiring Optisolar for $400 million and MEMC acquiring SunEdison for $200 million.
A number of biofuels companies have been active in the last couple of years developing strategic partnerships and joint ventures in order to speed up their market entry. LS9 and Solazyme (Lightspeed portfolio companies), for example, have teamed up with established giants like Chevron, Proctor & Gamble, and the U.S. Navy to further their development efforts.
We expect to see these types of transactions and relationships to continue in earnest in 2010, as large companies seek ways to tap into startup innovation, and startups seek ways to scale up in more capital-efficient fashion.
Interview with CEO of Playdom December 16, 2009
Posted by jeremyliew in games, games 2.0, gaming, playdom, social games, social gaming.1 comment so far
Atul Bagga, Gaming analyst with ThinkEquity, has published some great research on the social gaming space. He recently published an interview with the CEO of Playdom, John Pleasants. Playdom is a Lightspeed portfolio company and I’ve known John since we worked together at CitySearch in the mid-late 90s. The report requires an account with the investment bank ThinkEquity, but I’m reproducing the text of it here with permission from Atul. It has some interesting tidbits of information for people interested in the space, including revenue, employee count, paying conversion rates, ARPPU, ARPU, revenue mix etc.
Atul Bagga, ThinkEquity, (AB): Please explain your business and why investors should care about Playdom?
John Pleasants, CEO, Playdom (JP): We are in the social gaming space, which is defined as online games that live primarily inside existing social networks. Our products are a combination of games and social interactivity and it’s the hybrid of the two that makes them differentiated from traditional games that tend to be more immersive and generally more focused on production qualities, graphic capabilities. Social gaming is a free-to-play model, so it attracts a broad demographic of people. There are now hundreds of millions [of] people playing social games, and as a category, social gaming is still in infancy. So it’s a disruptive model. Relative to traditional gaming, this model has lower cost of production and higher returns, because you can very quickly capitalize on your user base, and it’s a live service, so you change and evolve your product over time. You don’t have the risk of spending a lot of money and time building a product then shipping it and hoping people come. You’re mitigating all of that risk in the traditional entertainment model, and hence, we have a superior model for entertainment, production, and distribution.
AB: Can you explain how do you make money—virtual goods, advertising, what could be the mix between these different revenue streams and how do you see it trending over a longer term?
JP: We are primarily a virtual goods model. People acquire items in order to accelerate in a game or to unlock new parts of the game and limited edition items. That represents 90 percent of our revenue. Between five and 10 percent of our revenue comes from advertising. I think that the revenue mix will always be dominated by direct consumer payments.
AB: How much of the virtual goods revenue comes from direct payment versus indirect payment and maybe if you can share your thoughts on indirect payment that lead generation offers, et cetera?
JP: A vast majority of our revenue comes from the direct payment. We want to have direct billing relationships with all of our customers. Offers can be a good thing for people who can’t or don’t want to pay but are willing to invest time or some personal information. Only about 15% of our revenue comes from the indirect payments. As long as the offers are clean, legitimate and transparent, they can be acceptable. But if they are less than transparent and manipulative, they don’t create a good user experience and they are not good for us.
AB: You mentioned that about five or 10 percent of revenue coming from advertising. What kind of advertisements are these—are these video ads, in-game ads, banner ads?
JP: These are primarily adjacency ads to our existing products. We’ve done a few things, sort of in-game experiences, but it’s rather limited. And advertising has not, to date, been a focus for us. We do not even have one person in our company dedicated to advertising at this time.
AB: If we look at the Chinese online gaming space, it seems like highly immersive massive multiplayer online games are better monetized than the casual games. And given that your games are shorter duration, more casual; what gives you the confidence about the ability to monetize these games?
JP: Well, it really all comes down to reach in different behaviors. You’ve got game room phenomena over in China and Korea, so people go in games rooms and play these online games. We don’t have that phenomenon here because we have a lot of personal computers in the home and people can buy downloadable games. In our markets we have 300-plus million people on Facebook alone, so that’s the equivalent of our game room. That’s where everybody has congregated and we’re simply going there and offering them a free model. While hardcore gamers, like a World of Warcraft have limited reach, games like a Maple Story or a Mobsters 2 or a Sorority Life game reach much broader demographics.
AB: Can you talk a little bit about who is your target customer.
JP: Target customer is anybody who lives inside the social networks, which these days feels like anybody. Facebook has users from 13 to 80 years old and it has equal distribution between men and women. Each of our game has a different demographic. Sorority Life appeals more to women; Mobsters 2 appeals more to men; Poker application appeals to a gaming or casino demographic. So if you took the aggregate of it, it’s broad-based and follows the populations of the social networks, with a primary target of 18 to 35.
AB: Can you give us some sense on how big this market could be and maybe if you could share some of your assumptions around market-sizing estimates?
JP: I think the western market is somewhere between $0.5-1.0 billion today and it can be $3-5 billion over the next three years. It’s growing more than 100 percent a year and all the metrics are moving in the right way. That starts with Internet penetration worldwide, followed by social networking penetration, followed by percent of users of social networks that play games, followed by percent of people who pay inside of these games, followed by how many games they play per month, followed by ARPU per paying user. Add it all up; they’re all growing and if each of those things goes up you know 20 or 30 percent or whatever the respective numbers are, it adds to 5-10x of the category over a three to four-year period of time.
AB: Can you share some of the metrics with us—typical conversion rate between playing users versus paying users; typical ARPU?
JP: It’s all over the map, but we see conversion in the range of 1-4%. Our ARPU per paying user tends to be about $20; but when you average it all in with all the non-paying people, it is about $0.20-0.25 cents per month.
AB: What is your growth strategy? Is it more about getting in more social network, clocking-up ARPU, or adding more games to get a bigger audience?
JP: Yes, the latter; more games, bigger audience. We have 15 games now and we hope to well more than double our size over the course of the next year. We have also acquired (Lil) Fram Life through our acquisition of Green Patch.
AB: Can you talk about your mobile strategy? Now that Apple has opened up its platform for in-game transaction, how does that change the landscape?
JP: We have our Mobsters product both online, as well as on the iPhone. We have booster packs that come off of that and that product is doing well for us. We have recently acquired Trippert Labs, which gives us dozens of applications on iPhone. Micro-transactions are an important part of this economy; it’s how it works, so I’m very excited that Apple is opening up their platform and enabling more Flash over time to live and exist inside the iPhone environment. Our games are live services and a consumer should be able to access them from any device they have, whether that’s a mobile device or a Notebook or a PC.
AB: Who do you think represents the biggest competitive threat for Playdom?
JP: Surely, Zynga and Playfish both are very similar companies as ours. Some of the independent developers can come up quickly and do nice jobs. Some of the big media companies are trying to get into this, foreign companies especially from China are aggressively moving into this space as well.
AB: What is the key source of differentiation for Playdom that is difficult for others to replicate?
JP: You have to make the products, and you have to know how to run a live service, and you have to have the infrastructure to manage the scale, which I think is one of our strengths. The other thing is that we’ve a very good combination of Internet people, gaming people, creative people, and live services people. You have to get the right blend of talent that can keep these things.
AB: Can you talk about the Facebook Credit? How does that change the payment landscape and what does that mean for a social gaming company like yours?
JP: I think that if Facebook were to create a universal payment system for a platform as large as theirs, I can imagine it would grow the ecosystem and drive conversion rates. Look at what happened to Amazon when they did 1-Click Ordering. I think it could have [a] material impact on our business.
AB: When you look out a couple of years, what do you see as the biggest challenges for Playdom?
JP: Our company has tripled in size in the last three months and when you’re growing like that, just staying high quality and high efficiency while driving absolute volume and throughput is a challenge. We are on a path to increase the size of our company by 5-10x in one year from a not-so-insignificant base. And in doing that you can create chaos or you can create a beautiful piece of art, that is the challenge.
AB: Can you give us some sense of how big Playdom is and how fast you might be growing?
JP: We have about 28 million users a month right now. We have about 220 full-time people, rapidly growing. We have north of $50 million in revenue this year. We are profitable.
AB: Of 25 million people that you mentioned, what’s the breakup between Facebook and MySpace?
JP: I’m guessing 60/40 on MySpace because we [have] 13 applications on MySpace and six on Facebook; but our revenue distribution tilts a little bit more toward Facebook.
AB: If you look out three years from now, where do you see Playdom? Do you see yourself as a public company, as an independent private company, or as a part of any bigger platform?
JP: We’re still a very young company with very big dreams and we’re trying to build a great self-sustaining enterprise. There are all kinds of things that could happen along the way. We’re not building the company to be sold rapidly. We’re trying to create IP. We’re trying to create a strong and lasting infrastructure. We can be a company that is worth billions of dollars by having hundreds of millions of revenue and having high profit margins. And mostly we’re trying to build great products that people love to play and enjoy playing and hopefully make their lives happier and meet more people and all the things that come from social gaming.
AB: Thank you so much for speaking with me.
2010 Mobile Predictions December 14, 2009
Posted by jseid in 2010, mobile, predictions.5 comments
We continue to be excited about the mobile sector and the opportunities for entrepreneurs to build large companies. The industry has seen the smartphone universe expand dramatically and now no smartphone is complete without an app store. New business models like mobile advertising, which were touted in 2005 and 2006 but failed to live up to early expectations now seem to be blossoming. That said, we believe we’re still in the early innings with many more innovations to come.
Here are our predictions for the mobile sector for 2010:
1. Virtual goods means real revenue in mobile
We’ve all seen the rise of the virtual-goods economy in the online world. Like its impact on the online world, virtual goods is poised to have profound positive impact on mobile-app startups for several reasons. First, unlike the subscription fee or one-time purchase business model, virtual goods can help eliminate the friction to adoption. The cost to the consumer to try the app can be $0 yet the app developer still has a way to make money by selling virtual goods.
Second, the virtual-goods business model has proven to be a very scalable one. It has helped to create multiple public companies valued in the billion-dollar plus range including DeNA (in mobile) and TenCent (in the online world). Finally, it’s not mutually exclusive with the existing purchase, subscription and advertising business models. Certainly widespread adoption of virtual goods in mobile will take time and, depending on the platform, various issues will have to be worked through. But this business model’s entrance into the mobile arena bodes well for the entire ecosystem.
2. Still waiting for “off-deck” to (really) happen
Well, in some ways it has happened—almost. Certainly, the iPhone App Store is a great step forward for the industry. But, compared to the success of the iPhone App Store, the rest of the industry’s major players—Android, Nokia (NYSE: NOK), Windows and RIM (NSDQ: RIMM)—have a lot of catching up to do. Those app stores are not quite functioning at where they need to be to give iPhone’s App Store a run for its money.
The most cynical in the industry may actually say the iPhone App Store is not truly “off-deck,” it’s just a different deck. But however you want to slice it, we’re still a long way off from mobile-app developers being able to create true direct-to-consumer offerings like their cousins in the web world.
3. Nokia or RIM buys Palm (and the next round of big battles begin)
Palm built a slick OS but it is in a tough spot as a standalone company. It’s not RIM and Nokia, big handset guys with material smartphone market share, and that creates a tough spot for Palm (NSDQ: PALM).
Apple’s iPhone not only created a great consumer experience but it created a great platform for developers. This platform allows developers to create compelling mobile apps, to reach the consumer without going through a carrier, and to bill the consumer leveraging the iTunes merchant
relationship. Apple (NSDQ: AAPL) set off the virtuous cycles that feeds both the growth in the installed iPhones (and iPod Touches) and the growth in apps (and developers).
Legacy software at Nokia and RIM and the lack of deep OS software expertise at other handset vendors meant Palm had a chance to create its own virtuous cycle. Until Android pulled the rug out and ran off with the momentum.
In the world of mobile operating systems, Palm has created a real asset. For large OEMs like Nokia and RIM that have solid hardware and massive distribution but legacy software, Palm may be an asset they can’t live without.
4. The enterprise moves past using mobile data for just email
RIM did a great thing for industry in driving mobile data into the enterprise. This was no easy task since the enterprise is complicated. It not only involves catering to the needs of the end user but also getting IT comfortable that you are conforming to and not breaking their network and security architecture. Mobile email now has a healthy adoption rate in the enterprise and the good news is that people believe in the productivity benefits and are looking for the next set of applications to mobilize (the bad news about mobile email adoption is that response-time expectations have shrunk to hours and there’s no such thing anymore as an “out of office” auto response for why you can’t read email).
Other smartphone platforms beyond RIM, such as the iPhone, have also seen interesting levels of adoption, and we expect that to grow. With a rich and growing smartphone base in the enterprise and a positive experience around the benefits of mobile data from both end users and IT, we expect 2010 will create an opportunity for a new generation hot mobile apps and technologies—this time focused on the enterprise.
In 2010, mobile innovations will branch out into new categories, while also benefiting as the recipient of long-awaited applications. Both these trends will create new methods for monetization in the U.S. and beyond, and ultimately, promise another important and profitable year for the category.
2010 Consumer Internet Predictions December 11, 2009
Posted by jeremyliew in 2010, Consumer internet, predictions.9 comments
Once again, Lightspeed is going to go on record and make some predictions for 2010, in the areas of Consumer Internet, Mobile, Cleantech and Enterprise. I am leading off with our 2010 Consumer Internet Predictions, with my partners posting the other predictions coming over the course of the next week or so at the Lightspeed Blog.
This is the fourth year that I’ve been making predictions for the consumer internet.
First, let’s take a look at how I did on my predictions for 2009:
1. Consumers seek cheap thrills
Grade: A. I predicted an increase in time spent on social networks and on games. In fact, social games have been the breakout story of 2009.
2. Trading real money for virtual goods
Grade: A. Virtual goods has been the business model powering the growth of social games.
3. Web 2.0 leaders pull further away from the pack
Grade: B. Facebook has reached cashflow positive on huge revenue growth, but other web 2.0 leaders like imeem and ilike have had a bumpier ride.
4. Online ad prices continue to fall, alternatives help make up some of the ground
Grade: B. CPMs have continued to fall and behavioral targeting, the best hope for arresting the slide, is under a cloud from the FTC.
5. Getting serious about monetizing non-U.S. traffic
Grade: C. Most attention is still focused on the US.
Overall a B+ average – that’s not too bad! Now on to new predictions:
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1. Social games overflow out of Facebook.
I’ve said before that I think that social gaming is a tactic, not a category. 2009 was the year that social games overran Facebook (17 of the top 20 Facebook apps by DAU are games as of Nov. 23rd). I think that in 2010, they will overflow Facebook and spill into the open web.
We’ve seen the first indications of this with the launch of farmville.com recently. But Playfish was the first to take a game from Facebook to the open web when they launched petsociety.com in May. And companies like Bigpoint and Gameforge have been launching similar games on the open web for years.
Games optimized for Facebook will need to be modified to work well on the open web. Some of the elements of serendipitous discovery, such as the feed, will be lost, but the ability to use email and IM without any “platform rules” restricting communication channels may offer new channels for growth.
2. Brand advertising starts to move online, boosting premium display, video and social media
The cyclical downturn in advertising made 2009 a tough year for publishers. But, there were some real bright spots amid the darkness. The most promising trend is that brand advertisers are shifting their advertising dollars from offline to online. This is finally following the audience that started shifting several years ago.
The first wave of online advertising was dominated by direct response advertisers. The Internet promised measurability, and direct response was the easiest thing to measure. Brand advertising lift was not so easily measured by click through rate. However, measurement tools from companies like Vizu are improving and allowing brand advertisers to see the lift that an online campaign can deliver in key metrics like brand favorability and intent to buy. Big brand advertiers who will not see transactions consumated online, from Consumer Packaged Goods to Quick Service Restaurants to Big Box Retailers, are spending 10s and even 100s of millions on digital media. This money is starting to flow to publishers and networks with premium display inventory that truly understand the needs of brand advertisers. These needs are quite different from the needs of direct response advertisers, and include safe content, brand metric measurement, real reach and frequency measurement, and guaranteed delivery across a campaign. Ad networks like brand.net, Collective, Specific and Undertone have been riding this wave.
Video content also lends itself to brand advertising because it allows the repurposing of 30- second TV commercials. Video ad networks like BBE, Tremor, YuMe and Brightroll have all benefited from TV ad dollars moving online, following users who are increasing watching their video online.
Social media sites are taking a different path towards capturing these brand dollars. They use integrations and take advantage of the native behavior on social media. Users affiliate themselves with the brands that they like, and implicitly recommend them to their peers. Facebook and MySpace continue to dominate in this category, but companies like Rockyou (a Lightspeed portfolio company) are also winning meaningful campaigns from brand advertisers.
3. Direct Response Advertising becomes ever more efficient
Whereas only 5% of brand advertising is now spent online, around 30% of direct response is spent online. With this volume comes experience and improvement. Direct marketing online is now very sophisticated. Additionally, the ever increasing volume of available advertising online inventory, driven by social media, means that there is always an oversupply. But various flavors of targeting, including demographic, behavioral and contextual targeting, are helping direct marketers to more efficiently reach their target customers. While the FTC may limit behavioral targeting in the future, the trend still favors direct marketers, who are able to acquire customers relatively inexpensively.
I expect this trend to continue through at least the end of 2010, with no near term pressure on advertising pricing. This will continue to favor direct response advertisers who will enjoy relatively low customer acquisition costs. Companies who realize a long lifetime of value from their customers (e.g. gaming companies like Playdom – a Lightspeed portfolio company, subscription businesses like Zoosk and ecommerce companies with a profile for repeat purchase like Gilt) will continue to be able to acquire fully valued customers at a discount in 2010, just as they did in 2009. Other direct response advertisers who realize one-time value (e.g. lead gen, big ticket ecommerce) can also do well, depending on the rate of rebound in demand for their products.
4. Finding Money and Saving Money online
Although the recession is officially over, unemployment is expected to continue to climb and consumer confidence about the current situation is still at historical lows.
Many consumer are looking online to save money, or to find money.
Discount ecommerce, whether in the form of discount shopping clubs like Gilt, Ruelala and Hautelook, single SKU sales like woot, or pay to bid auctions like bigdeal, swoopo or gobid, are all likely to see growth this year. Coupon and discount code sites, like retailmenot and savings.com, will also continue to do well. Local savings like Groupon and Living Social Deals are also showing real growth.
Finding money is harder than saving money. But there are a number of businesses that have helped consumer find sources of cash that they didn’t realize they had. Cash4Gold is the highest profile of these given its Superbowl ad earlier this year, and traffic has continued to grow for that site:
Online payday lending companies like payday one, peer to peer lending companies like prosper and lending club and reverse mortgage companies like golden gateway are all helping consumers to get access to more money. I expect further innovation in helping people find additional sources of cash.
5. Real time web usage outpaces business models
2009 was the year that Twitter really entered the public consciousness. But it isn’t just Twitter that is behind the rise of the real time web. Companies like Aardvark, Four Square, Gowalla and of course Facebook are driving real time content, including location info, and companies like bit.ly, oneriot and collecta are all trying to organize and make sense of the this data.
I expect this trend to continue in 2010. Real time information puts a new spin on categories like user generated content, news, vertical search, local information and Q&A. Unfortunately, these categories have been some of the hardest to monetize.
UGC and news are relatively low CPM categories, and real time is unlikely to change that. Vertical search has shown some success in transactional categories (e.g. travel, shopping) where there is an opportunity to buy traffic and arbitrage, but has not been nearly as successful in content categories (e.g. video search, picture search). Many of the early real time search engines are more focused on content than transactions. Local information has historically been a difficult business. It is an area where there is high demand for content, but cost of sales have been very high. The most successful companies in local have innovated on their sales model rather than on their content generation model. Real-time location info sounds more like a content innovation than a sales model innovation.
Q&A is one area where there may be some real opportunity. In general search, around 30% of queries are transactional, and hence monetizatable. Some real time and mobile Q&A sites are reporting that for them, an even higher proportion of their queries are monetizable (e.g. “Whats the camera for low light?”, “Where can I get a good pizza late night in Noe Valley?”). If this remains true, and if mobile is a key driver of real-time search, then there could be real promise in this use case.
This time next year, we’ll get to look back and see how accurate my 2010 predictions were. I’m hoping for another B+ or better.
Stay tuned for the rest of our predictions over the course of the next week or so at the Lightspeed Blog.
Test your design intuition December 10, 2009
Posted by jeremyliew in A:B testing, UI.1 comment so far
I’m an advocate of A:B testing of all elements of design and copy. However, that doesn’t mean that good design intuition can’t help advance the baseline from which you start your testing.
Which Test Won? has a list of real world A:B tests run on different homepages, lead gen pages, search landing pages etc, all with an eye to which helped advance the funnel the best.
VERSION A |
VS. |
VERSION B |
 |
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Helpfully, it also analyzes the results and draws specific design conclusions.
I recommend checking the site out for anyone in social media, social gaming, ecommerce or lead gen.
How to measure how well an online media company is scaling. December 8, 2009
Posted by jeremyliew in Consumer internet, Digital Media, Internet, media, start-up, startup, startups.4 comments
Two years ago I posted about the three ways to grow an online media business to $50 million in revenue. In this article I focused on RPM (Revenue per thousand pageviews, = CPM x sell through rate x # of ad units per page) and drew the distinction between three strategies, and the traffic needed for each strategy to get to scale:
1. Broad Reach, low RPM, traffic in the 10s of billions of pageviews/mth
2. Demographic Targeting, moderate RPM, traffic around 1 billion pageviews/mth
3. Endemic Targeting, high RPM, traffic in the 100s of millions of pageviews/mth
I think using CPM/RPM in this is a useful framework to think about strategy, but it isn’t necessarily the most useful way to think about howe well an online media business is scaling. In practice, most online media companies do not sell out their inventory through direct sales. Because direct sales generates RPMs so much higher than remnant inventory running through ad networks, the amount of direct sales is key.
Direct sales shows real economies of scale. While it is harder and more expensive to sell, support and serve a $1M insertion order than a $10k insertion order, it doesn’t cost 100 times more. Unfortunately, many media startups find that their campaigns are primarily in the 10s of thousands. This creates inefficiency and makes it difficult to scale. It is hard to get to $50M in revenue $10k at a time.
Right now, the key measure that I use to judge how well an online media company is scaling is by looking at quarterly revenue by advertiser. The more advertisers are spending over $100K per quarter the better. I like to see 10 or more advertisers spending over six figures per quarter. This shows that the site has grown beyond “experimental buys” and has become a core part of the advertising mix for a core set of advertisers. These sites are over the hump on scalability of their business as it is much easier to get repeat business from clients who are committed to the site, and to use these reference accounts to drive further sales growth.
What do readers think about this measure of how well an online media company is scaling?
Why the economics of social gaming are so attractive to investors December 1, 2009
Posted by jeremyliew in games, games 2.0, gaming, social games, social gaming.4 comments
In 2009 social gaming exploded onto the scene. EA bought Playfish for $300M+ just a couple of weeks ago, and Zynga and Playdom* both raised large rounds of financing this year. Traditional computer gaming has been showing steady growth for a long time, but not the tremendous growth that the leading social games companies have shown. What is it about social games that has enabled such a difference in trajectory over the last year? And why has it been startups and not the big established publishers that have led the charge. There are three key factors:
DRAMATICALLY FASTER AND CHEAPER DEVELOPMENT
FRICTIONLESS DISTRIBUTION
FREE DISCOVERY
Read more about these three factors at my guest post over at Paid Content.
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*Lightspeed Venture Partners is an investor in Playdom
Which games will go the way of Pinball machines? November 27, 2009
Posted by jeremyliew in economics, game design, game mechanics.10 comments
It is interesting to note that while MMOGs, time management games and real time strategy games have made the jump to social games, First person shooters have not. Why not? I find the current generation of FPS very hard to pick up, and that may be part of the problem.
The Cheaptalk blog has an interesting post on an economists view about why pinball peaked and died out. He blames it on the transferability of skill from one pinball machine to another, combined with adaptive technology. This caused the market for pinball machines to bifurcate to experts and newbies, with most effort going towards building games for experts.
Pinball attracted a different crowd than video games like Defender (my new pal designed Defender and Stargate too,) and this is the fundamental theorem of pinball economics. Pinball skill is transferrable. If you can pass, stall, nudge, and aim on one machine you can do it on any machine. This is both a blessing and a curse for pinball developers. The blessing is that pinball players were a captive market. The curse was that to keep the pinball players interested the games had to get more and more intricate and challenging.
Pinball developers struggled with this problem as pinball was slowly losing to video games. Video games competed by adding levels of play with increasing difficulty. Any new player could quickly get chops on a new game because the low levels were easy. This ensured that new players were drawn in easily, but still they were continually challenged because the higher levels got harder and harder. By contrast, the physical nature of pinball, its main attraction to hardcore players, meant that there was no way to have it both ways.
Eventually, to keep the pinballers playing, the games became so advanced that entry-level players faced an impossible barrier. High-schoolers in 1986 were either dropouts or professionals in 1992 and without inflow of new players that year essentially marked the end of pinball.
What game genres have similar characteristics? First Person Shooters come to mind. This challenge is magnified in a mutliplayer environment – it’s not fun to get fragged within seconds of starting a game. It’s the same experience that a new paintball player gets if they wander onto an average paintball course today – most players are now experts.
I highly recommend reading the article if you’re involved in the games and social games industry. I suspect that there is a risk that the competition for players in some popular social games genres may take us in a similar direction if we are not careful.
What other genres of games do readers think may be at risk in the same way?
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