Games will make up to 80 percent of the $10 billion mobile apps will bring in this year, according to a new report from Flurry, which provides developers with analytic tools. It says users spend over 40 percent of their time on iOS and Android devices using games. "The free-to-play (freemium), business model, where consumers download and play the 'core loop' of a game for free, but then pay for virtual goods and currency through micro-transactions, is the most prolific business model in the new era of digital distribution," the report concludes. Flurry says the companies that best understand this approach include Electronic Arts (NASDAQ:EA), Zynga (NASDAQ:ZNGA), Mobage and Supercell. The report studied a sample of more than 300 million consumers using iOS and Android games over a 90-day period. It only studied free titles, and then put them into four main categories, based on their earning characteristics. Here are the four categories of games it came up with:
1) Games that are used frequently for a long time, including slots, turn-based games that are played between two people and simulation games. The most successful companies maximize revenue through in-app purchases and by displaying ads to those who are not willing to pay.
2) Strategy games - the only genre played intensely for a short period of time. Game life cycles are short and the game's live services must be executed flawlessly. Companies that monetize well encourage players to spend money on progressing through the game. To maximize retention, developers must continuously release new content after the game's initial launch.
3) Games defined by infrequent game play for a short period of time. Developers have fewer opportunities every week to monetize the user. This kind of gaming is defined as the "Card-Battle "genre, which is mostly popular in Asia, but is now growing in the West.
4) Games such as solitaire that are easy to pick up and play and may be enjoyed for a long time. While these evergreen games may lack the depth required to generate sizeable in-app purchases, they generate substantial advertising impressions over time. As well as driving strong ad revenue, the large audience of these games can be used to cross-promote a developer's more narrowly focused, but better monetizing titles.
Zynga vs Facebook in Real Gaming
Earlier this week, Zynga announced it will launch its newest casino title, Elite Slots, on Facebook (NASDAQ:FB) soon. The offering will be Zynga's third casino title, following poker and bingo. The company needs to do well with this game, since there is a large audience that enjoys winning virtual currency on Facebook. This, of course, is not part of Zynga's plans to make big money online through real-money gaming. Those efforts are still at the least a year away in the U.S. Last week Zynga filed papers with the Nevada Gaming Control Board to legalize online real money gaming in the state. News of the filing sent Zynga shares up more than 7 percent. As the approval process for Zynga could take up to18 months, any gains Zynga saw last week are most likely to evaporate. Analysts anticipate Zynga will post a loss of $0.03 in the current December fourth quarter. For the fiscal year, analysts see the company earning $0.03, down from last year's $0.05. In 2013, analysts see the company earning $0.02 per share. With its real gaming prospects at least a year out, I see Zynga as a better long term than short term prospect. The company plans on releasing real money games in the United Kingdom in the first half of 2013, but has been beaten to the punch.
Facebook announced it will partner with 888 Holdings and become the next in line to launch a portfolio of real money gaming products, targeting adult British consumers. 888 Holdings is publicly traded in the UK and received a healthy boost to its share price on the announcement Wednesday. It will become the second real-money gambling provider to reach such a deal, after Gamesys started distributing a Facebook app through the FB App Center, allowing UK users over 18 years old to play an online game called 'Bingo Friendzy' for real cash prizes. 888 says it will use its existing social gaming outlet Mytopia to offer real-money bingo, casino and slot games on Facebook in the UK. It will start with Bingo Island. Facebook will take a certain percentage of revenue earned by the British gambling concerns in the deals. This will give it a new revenue stream beyond advertising and the revenue it earns from Zynga's popular games. Analysts are expecting Facebook to report $0.15 in the fourth quarter and $0.52 for the fiscal year. While shares are still down 27 percent from its first day of trading, over the past three months shares are up an impressive 36 percent. Facebook's venture into gambling should reward shareholders well over time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.