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Beyond Facebook, 2011 Beyond Facebook A Look At Local Social Networks in Europe and Latin America Executive Summary Social Gaming market will continue to grow, reaching $8.6 billion in world- wide revenues by 2014E. Non-Facebook social gaming represents the bulk of revenues, growing from $3.2 billion in 2011 to $5.6 billion by 2014E. Even excluding Asia non-Facebook platforms will total close to 25% of worldwide social gam- ing revenues. Region-specific social networks present significant, incremental distribution with strong monetization and lower customer acquisition costs. Key markets for social game developers are Brazil, Germany, Russia and Turkey. WHITE PAPER OCTOBER 2011 1 Beyond Facebook, 2011 Index Introduction & Motivation 3 Methodology 4 Current Landscape 5 Beyond Facebook 6 Market Size & Forecast 8 Figure 1: Worldwide Social Gaming Market 2010 - 2014E Figure 1a: Worldwide Non-Facebook Social Gaming excluding Asia 2010 - 2014E Figure 2: Worldwide Social Gaming Revenues by Geography (2011) Figure 3: Total Number of Social Gamers in Selected Markets (MM) 2009 - 2015E Figure 4: Total Social Gaming Revenue in Selected Markets (mil $) 2009 - 2015E Social Networks: Europe 12 Figure 5: Overview of Social Networks in Selected European Markets 2011 Leading Social Networks in Europe 13 Hyves Tuenti VKontakte StudiVZ Yonja Social Networks: Latin America 21 Figure 6: Overview of Social Networks in Latin America Orkut Quepasa Appendix 25 Table 1: Worldwide Social Gaming Market 2010 - 2015E Table 2: Social Gaming Audience & Forecast for Selected Markets Table 3: Social Gaming Revenue & Forecast for Selected Markets Contact & About 26 WHITE PAPER OCTOBER 2011 2 Beyond Facebook, 2011 Introduction & Motivation This white paper finds its origin in a series of conversations currently being held in the games in- dustry. Specifically, it aims to present a critical view on the tremendous popularity of social net- works. With well over 750 million users, Facebook dominates the space. However, Facebook rep- resents just 30% of worldwide traffic for social networks, and there is a large number of social networks around the world that deserve attention from content developers and publishers. Beyond the borders of North America, where it is a clear market leader, Facebook competes with locally incumbent social networks all over the world. The outcome of this competition is audience segmentation. For developers and social game publishers this means it can be strategically more sensible to cater to a niche audience instead of relying exclusively on Facebook. This white paper profiles several local social networks in Europe and Latin America, and presents high-level data on these respective markets. WHITE PAPER OCTOBER 2011 3 Beyond Facebook, 2011 Methodology All figures mentioned in this report are based on data collected by SuperData, unless otherwise noted. Social games operate using a so-called ‘free-to-play’ (F2P) revenue model, in which users are generally not required to spend any money until they reach a certain level in the game. On an on- going basis, SuperData tracks millions of paying online gamers worldwide. The total sample size for this report consists of 774,158 unique transactions by 152,159 individuals in the six-month period ending on June 1, 2011. We used this data to calculate the average revenue per paying user, or ARPPU, by dividing revenues by total number of paying users. Revenues include both di- rect payment (e.g. credit cards, mobile, prepaid game cards) and indirect payment from players using opt-in marketing incentive offers (e.g. offer providers). The figures mentioned in this report do not include revenue generated from display advertising. In modeling our market sizing and forecasts we employed additional data from the World Bank, national census information, and financial records of public companies. If you any questions or remarks regarding this study, please contact us. We appreciate your feedback. WHITE PAPER OCTOBER 2011 4 Beyond Facebook, 2011 Current Landscape With 750 million users worldwide, it may seem like Facebook is the only game in town. Certainly, its scale, technical sophistication and ability to generate daily headlines have put Facebook in a powerful position in the overall social networking landscape. However, its size and popularity have also forced Facebook’s hand in regard to key features, creating an opportunity for alternative plat- forms. First, consolidation is an important consideration among social game companies on Facebook. Currently, seven of Zynga’s applications are among the top 25, with a combined base of 268 mil- lion monthly active users. Also, Zynga’s multi-year deal with Facebook tilts the playing field in Zynga’s favor. This makes it very challenging for smaller firms with modest marketing budgets to compete on equal footing. In such a crowded space, it is difficult for any developer to stand out, without substantial investments in marketing and user acquisition. Secondly, as of July 1st this year, Facebook Credits became mandatory for all social game devel- opers on the platform. In financial terms, Facebook charges a 30% commission on all transac- tions, similar to Apple’s App Store. Over the past few months, game companies like Arkadium , Digital Chocolate, and PopCap Games have publicly stated that integrating Facebook Credits im- proved monetization by increasing conversion rates, increasing ARPPU and reducing billing and payment issues. However, this transition indicates a crystallization of the platform, allowing devel- opers less wiggle room in developing a monetization model around their content. Another exam- ple of this maturation is Facebook’s efforts to curb the type of messages an application can post WHITE PAPER OCTOBER 2011 5 Beyond Facebook, 2011 on a user’s wall. To prevent users from growing tired of an endless stream of automated status updates and in-game activity, Facebook drafted a new set of rules and, according to some, effec- tively “killed” virality and increased the cost of player acquisition (All Facebook, May 7, 2010). Thirdly, a recent sudden shut-down of a slew of applications by Facebook send a shockwave through the development community (Business Insider, June 26, 2011). Facebook, which had failed to successfully communicate the implementation of an algorithm, began automatically shut- ting down apps if they post too often to a user’s wall. Being the biggest fish in the pond no doubt attracts a slew of spammers trying to reach Facebook’s audience, but in managing that, it may be smaller developers paying the price. No doubt Facebook will continue to provide a profitable, viable platform for dedicated developers. At the same time, a growing number of smaller, niche focused social networks are providing an alternative to the single platform launch. Beyond Facebook With Facebook maturing and becoming a more costly investment, smaller, more focused plat- forms provide room for growth and diversification. Social networks like Hyves (the Netherlands) and Tuenti (Spain) offer a mass-market, local experience to their audiences, while other social networks target a distinct market within their regions, such as students (StudiVZ) or people look- ing to date (Badoo). In the online game space, savvy companies like Bigpoint (which recently re- ceived a $350 million round of funding) have built their success by targeting these niche audi- WHITE PAPER OCTOBER 2011 6 Beyond Facebook, 2011 ences. Not only do these niche social networks co-exist in a Facebook dominated world, many are thriving. In addition to regional social networks, strong competition from Google, in the form of Google+, will provide social game developers with broader distribution and increased potential for moneti- zation. In addition to new viral distribution channels, Google is currently charging a 5% commis- sion rate, significantly less than the 30% of revenue currently charged by Facebook. This multiplicity of vibrant social networks creates a significant opportunity for social game devel- opers willing to port their content to new networks and localize for non-English speaking regions. In the following we look at social networks throughout Europe and Latin America, two of the fast- est growing regions for social game usage. WHITE PAPER OCTOBER 2011 7 Beyond Facebook, 2011 Market Size & Forecast Despite Facebook’s apparent dominance, the bulk of social gaming revenues is made on other platforms. Figure 1 shows the current size of the worldwide market as well as a breakdown of where revenues are generated. Figure 1: Worldwide Social Gaming Market 2010 - 2014E ($, billions) $10 Non-Facebook Social Gaming Market Facebook Social Gaming Market $5 $0 2010 2011E 2012E 2013E 2014E Asia, where local social networks reign supreme, remains the largest market for social games, with estimated $2.0 billion in total revenues for 2011. Even when excluding Asia (figure 1a), we see that close to a quarter of worldwide social gaming revenues are generated outside of Face- book. This number will continue to increase as developers and publishers move to their own plat- forms and other social networks such as Google+. WHITE PAPER OCTOBER 2011 8 Beyond Facebook, 2011 Figure 1a: Worldwide Non-Facebook Social Gaming excluding Asia 2010 - 2014E ($, billions) $10 Non-Facebook Social Gaming Market Non-Facebook Social Gaming Market, excluding Asia $5 $0 2010 2011E 2012E 2013E 2014E Figure 2: Worldwide Social Gaming Revenues by Geography (2011) Asia ROW 40% 4% Latin America 5% Europe 23% N. America 28% WHITE PAPER OCTOBER 2011 9 Beyond Facebook, 2011 Turning our attention to several key markets, we find substantial audience sizes. Countries like Turkey, Germany, Brazil and Russia present important growth areas in the coming period. Spain, despite its relatively small size in comparison to North America is expected to increase more than five-fold from its 2009 audience size, from 3.4 million to 15.9 million social gamers. Estimated revenues will reach approximately $100 million by 2015E. Russia, too, represents a rapidly expanding market. Its audience base of 12.9 million social gam- ers (2009) is on pace to increase to 69.5 million by 2015E.