What’s really going on with Facebook gaming?

According to Facebook and the press, Facebook gaming is booming. Headlines from the media indicate:

Is this really the case? From a Silicon Valley perspective it certainly doesn’t seem so. Most gaming people here in Silicon Valley have friends somewhere at Zynga, Crowdstar, Digital Chocolate, Playdom, RockYou, 6 Waves, EA, etc. etc., folks from those companies often claim that Facebook gaming (Facebook games accessed via Facebook.com PC/canvas) has fallen off a cliff.

The notable exception of course is Kixeye; although understood that Kixeye employs a differentiated strategy of owning a very small hardcore audience and monetizing the shit out of it. In this case, their audience of only 4.6M users relative to the overall Facebook user base of over 1.1B (665M DAU in March 2013) users was predicted to have generated over $100M in revenue last year. Even crazier is Kixeye’s claims of a mind blowing $0.80 ARPDAU all on social.

But the new leaders in Facebook gaming such as King, Wooga, and Social Point are not in Silicon Valley they are elsewhere. Is it just that Silicon Valley social gaming companies aren’t competitive (perhaps like SV mobile game companies)or is there something else going on?

Current Leaders on Facebook:

Top FB Devs by MAU

How Is Facebook Gaming Actually Doing?

Let’s take a closer look at what’s actually going on…

We should start by looking at the source upon which the conclusions are being drawn: Facebook’s reporting of it’s “games” revenue. In the chart below Facebook games revenue is accounted for by “Payments and Other Fees Revenue” in grey.

FB Revenue Growth Q1 2013

On the face of it we can see a very healthy increase in Advertising Revenue (42.7% YOY for Q1 2013) but lets focus on “Payments and Other Fees Revenue” where games revenue is accounted for. Judging by the graph above it certainly seems to be growing but let’s take a closer look.

First of all, what is “Payments and Other Fees Revenue”?:

Payments and other fees. We enable Payments from our users to our Platform developers. Our users can transact and make payments on the Facebook Platform by using credit cards, PayPal or other payment methods available on our website. We receive a fee from our Platform developers when users make purchases from our Platform developers using our Payments infrastructure. We recognize revenue net of amounts remitted to our Platform developers. We have mandated the use of our Payments infrastructure for game apps on Facebook, and fees related to Payments are generated almost exclusively from games. Our other fees revenue consists primarily of user Promoted Posts and, to a lesser extent, Facebook Gifts revenue, and has been immaterial in recent periods.

– Source Facebook 10-Q Q1 2013

So, “Payments and Other Fees Revenue” = 1. Revenue from Credits, 2. Promoted Posts, and 3. Facebook Gifts. “Primarily”.

However, we need to take care to note that as per Facebook’s 2012 10-K under “Results of Operations” section:

In the fourth quarter of 2012, we recorded all Payments revenue at the time of purchase of the related virtual or digital goods, net of estimated refunds or chargebacks, instead of deferring Payment revenue until the expiration of the 30-day claim period, as we are able to estimate future refunds and chargebacks based on historical trends. This charge resulted in a one-time increase in Payment revenue of $66 million in the fourth quarter of 2012.

Basically, what this means is that Facebook now is accounting for games revenue as it is charged and making an allowance for refunds and chargebacks based on their historical data. They used to account for this after 30 days to see whether refunds or chargebacks occurred. Hence, this basically made Q4 of 2013 a month in which there were effectively 4 months of revenue recognized.

Some conclusions about Q4 2012:

  • Overstated Q4 2012: Q4 2012 is overstated due to deferred payment issue adding an additional $66M to the quarter, Promoted Posts and Facebook Gifts also accounted for $5M in that quarter = $185M of true game revenue
  • Relatively Flat Growth: Comparing an adjusted $185M for Q4 2012 to $188M for Q4 2011 suggests flat (perhaps even negative) growth not only for Q4 2011 but relatively flat growth for 6 straight quarters including Q1 2013

So, is Facebook games revenue really booming? Well, it really should be given the tremendous overall user growth:

FB DAU Growth

So, in reality, amidst user growth of 28% DAU and 25% MAU between Q4 2011 and Q4 2012 we have flat to negative games revenue. To me this means that Facebook gaming is significantly underperforming.

So much for all of the media hype and the media’s inability to take 1 extra step and actually look through the numbers.

What about Q1 2013?

Well, this quarter looks better… but not by much. $213M is much higher than $185M. But, here’s what I don’t like about Q1 2013:

  1. Continued Flat Revenue: DAU was up 26% and ad revenue was up 43% year over year but game revenue was only up 6% (after adjustments)
  2. User Growth in Low ARPDAU Countries: ARPU increased by 21% for North America but in my view having a lot more games like Kixeye’s may be difficult, further Facebook has largely saturated North America and most of the growth will come from developing countries with lower ARPU
  3. Accounting Fudge Factor: By changing it’s accounting policy, Facebook has the flexibility to tweak “Payments and Other Revenue Fees” by changing the allowance for refunds and chargebacks however it wants to

Where Will Facebook Gaming Go From Here?

Let’s consider an overview of Headwinds and Tailwinds for Facebook gaming revenue:

Screen Shot 2013-07-22 at 10.55.10 PM

Given the competing trends, it’s really hard to tell how this category will do in the future. Further, much of the success of the Facebook gaming platform on PC/canvas depends on what management wants to do. A recent abbreviated conversation with an ex-Facebook insider:

  • Me: What happened to gaming on Facebook?
  • ex-FB Insider: Zuck hates games. Games could go to zero [Meaning Zuck doesn’t care if it goes to zero]. That’s what platform risk is.

However, the current indication by Facebook management based on recent earnings calls seems to indicate support for PC/canvas gaming.

To get a better idea of this category there are some market events/hints that bear close watching. Here’s what to watch for:

  1. Facebook Game Publishing: As has been fairly widely reported and as I’ve announced ahead of the media in my Rumors section, Facebook will launch a Games Publishing business. The big picture of the business seems pretty clear as far as business model (similar to Kakao Talk and Line) but what’s less clear are the ties to the canvas page and whether there will be an impact on PC/canvas games. I’m hearing a few things that may indicate there is potential to drive growth on the PC/canvas side as well.
  2. Hardcore Social: Obviously Kixeye has been reportedly kicking major ass. As usual Zynga is not far behind in copying anyone’s successful strategy and has launched it’s rip “fast follow” of Clash of Clans called Dojo Mojo for PC/canvas. It’s not clear how big the hard-core audience on PC/canvas is but certainly lots of potential upside here. Keep an eye out on this space as it may expand PC/canvas games revenue.
  3. New Entrants: Some mobile game companies have recently announced launching Facebook games… My suspicion is that this may be related to #1 above. Keep an eye on additional new entrants as this may portend movement ahead.

So what are the conclusions?

  1. Facebook Gaming Not Booming Yet!: Contrary to popular reports Facebook gaming is not booming nor is it even growing on a relative basis… at least not yet. 
  2. Likely Movement Ahead: There seems to be an effort by Facebook to prop up the Facebook gaming numbers and industry rumors indicate Facebook will actually make some efforts to push revenue here
  3. Continued Downfall for Zynga: Zynga is getting their asses handed to them by King, Wooga, and Social Point in Facebook PC/canvas casual gaming and that trend doesn’t look like it will stop for many of the same reasons I point out about competitiveness of mobile gaming companies in Silicon Valley. Zynga is now trying to shift to be more like Kixeye but given Zynga doesn’t have product driven management (Will Harbin on the other hand plays his games for hours every day) I doubt they will be successful here as well. Although we may see some upward head fakes in the short to medium term the overall trend should be negative for Zynga (at least outside of real money gaming) on PC/canvas.

Update (7/26/’13): Facebook announced earnings on July 24th. We again saw flat to down revenue for canvas gaming. Management did not break out Promoted Posts & Gifts revenue but I suspect that portion should be up and growing. Interestingly, On July 26, Facebook sent out a developer survey focused on canvas app development:

FB Dev Survey

Hence, I assume they are at least trying to improve canvas and courting independent developers back to Facebook:

Screen Shot 2013-07-26 at 2.40.52 PM

Screen Shot 2013-07-26 at 2.42.43 PM


  • Kevin Hogan

    Posted August 22, 2013 11:41 am

    Great analysis Joseph! It’s always good to see objective research into market opportunities.

    It is still possible to make money off FB canvas games (and there are still new games appearing that are doing well such as Criminal Case) but you are right in identifying that it is not a growing market.

    I think the biggest headwind to growth on that platform is the fact that more and more FB traffic continues to shift towards mobile. Remember FB does not make a penny off the purchases made on the mobile versions of Candy Crush Saga!

    Interesting that you picked up on the strength of European developers. Ironically, the speed of Silicon Valley (and resulting high staff turnover) is quite a big hindrance when it comes to creating world class studios.

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