The Bar Is Rising in Casual & Social Games, Says GSN’s Davin Miyoshi

If you only followed Zynga’s stock price, you might think the entire business of games on Facebook was in free-fall. But many of the big developers of social and casual games are doing just fine, according to Davin Miyoshi, vice president of social games at GSN, which operates a major game studio in downtown San Francisco. In fact, Zynga’s loss might be other developers’ gain, Miyoshi says, as the perceived uncertainty around online games discourages new investment, reduces competition, and gives financially sound players the opportunity to shine.

“It’s a really exciting time, actually, even though you will hear otherwise,” Miyoshi told me in an extended interview last week (an edited transcript of which is below). While all social game companies face a common challenge right now—namely, the fact that the industry’s first, rapid wave of “green field” growth is over—Miyoshi thinks most of Zynga’s problems are self-inflicted, having to do with overinflated revenue expectations and a company culture that’s proving, shall we say, unpalatable for many employees. (Actually, Miyoshi’s words were “toxic” and “miserable.”)

Davin Miyoshi, Vice President of Social Games at GSN

Miyoshi is a former investment banker who spent five years in corporate business development at 3Com, helping to engineer the turnaround at the ailing router and switch maker that paved the way for its eventual purchase by HP for $2.7 billion. After leaving 3Com in 2006, Miyoshi co-founded Mesmo, a social TV startup that evolved into a developer of social games and got acquired by GSN—also known as the Game Show Network—in 2010. The Mesmo team became the core of GSN’s social games division, which now has 35 employees and is the seventh largest game developer on Facebook. Miyoshi’s division focuses on virtual casino games like Wheel of Fortune Slots and Video Bingo, while GSN’s 100-strong East Coast shop in Waltham, MA, focuses on cash games like Scrabble Cubes. (I profiled that part of the organization back in 2008.)

I’m not a huge player of casual games, so I wanted to use my time with Miyoshi to get his sense of the state of the market, including which game genres are most popular nowadays, how business models are shifting, and how the fortunes of big players like Facebook and Zynga are affecting other companies. It was a frank and wide-ranging interview, as you’ll see below. One of Miyoshi’s major points was that the gold-rush days when casual game developers were scooping up million of new users each month have ended, and that developers are now being forced to grow by building better games that grab players away from competitors.

Xconomy: If you had to give a one-minute history of the business of casual and social games over the last few years, what would you say?

Davin Miyoshi: A few years ago the two main forms of monetization were downloads, the leaders in that space being PopCap and iWin and a few others, and the sorts of games in which GSN was involved—skill-based gaming where you had the ability to compete using real cash. What happened then with the emergence of social gaming on Facebook was that we saw a new way of being able to generate revenue from end users via virtual goods, virtual currency, and microtransactions. You could take classic casual games like Bejeweled Blitz and monetize them via power-ups.

On Facebook, you saw a number of different genres emerge. Early on it was role-playing games. Then you saw a lot of simulation style games, and enterprise-building and time-management games like Diner Dash and Sim City and Restaurant City. Then came the mid-core games, meaning real-time strategy games from companies like Kixeye and Kabam, such as Kabam’s Kingdoms of Camelot.

You also saw the emergence of the iPhone and being able to play casual games on smartphones. That’s an interesting jump and there is an opportunity for casual games there to do very well. You started with the paid application model and also developed a virtual goods marketplace there.

X: Where does GSN fit in now?

DM: GSN was a leader in the skill-based game business early on and continues to be a leader today. is also a casual game portal. And in 2010 we developed what people are referring to as a virtual casino, which is an incredibly popular space both on Facebook and on smartphones.

X: Define some of the terms here—what’s a skill based game, and what kinds of games are in a virtual casino?

DM: The key to a skill-based game is you need to remove all chance. In Solitaire, for example, you enable people to compete with the same exact deck. The other piece is fair matching. We want to make sure the games are enjoyable for all by matching people who have similar skill levels.

In a virtual casino, the games look very similar to real-world or “terrestrial” slot machines. The only difference is they deal with virtual currency. Typically, companies that play in this space give away an allotment of free tokens every day, and people who use their allotment can either wait until the next day to get another allotment or purchase more. You can’t win anything but more virtual currency.

GSN's "Outlaw Video Poker" on Facebook

X: Is that genre getting popular?

DM: Very much so. It’s becoming incredibly popular on Facebook, and now on the iPhone. If you look at the top-grossing applications on Facebook, a large number of them are virtual casino games. Zynga actually built its business on a casino game, Texas Hold Em poker, which funded them and enabled them to branch out into the other genres.

X: Which game genres are most profitable right now?

DM: If you look at it on an average-revenue-per-user basis, I think you’d find that mid-core and virtual casino games are highest up. The mid-core market is very small compared to the FarmVilles and those types of games—it’s probably only 1 to 2 million daily active users. But in terms of actual revenue, [mid-core games] generate tremendous amounts, because their users are spending a higher amount per person. A similar thing happens with virtual casino games. A Zynga game might have 15 million daily active users, but the revenue per user is going to be much smaller.

X: What are the most popular games within the GSN Games portal?

DM: Wheel of Fortune Slots is one of the best-known terrestrial slot machines, and we have the license for it in the social space. Undersea Treasure Slots is popular. Also Video Bingo, Outlaw Video Poker, and Enchanted Library, which is a hidden-object game with a collection and decoration component to it.

X: How did GSN end up building a games portal, rather than marketing separate games individually, the way Zynga does?

DM: The long version of the story is that I started a company called Mesmo back in 2006. It was a social video company, before YouTube was really big. The Facebook Platform was launching around the same time we were launching in May 2007, and we quickly jumped on that platform, but we realized that we were way ahead of the market—nobody was watching video on Facebook at that point.

So we pivoted into games in the TV space. TV Trivia was the first game we developed, and that ended up being huge. It was probably the largest TV trivia game every created. At the peak we had probably 5 million monthly active users. And we tried to build a social TV site out of that, and we broadened out into fan pages and the ability to put your favorite shows and characters on your profile, but we quickly realized we weren’t making any money. So we decided to pivot again. We said, let’s continue to do what we did really well, which was in the game space, and we built Make Me A Celebrity, which was one of the first virtual role playing games on Facebook. We were probably the first non-Mafia-related RPG.

It was mildly successful—we probably had 3 to 5 million monthly active users. And we were generating revenue from virtual currency, so at that point we said, hey, we need to build more titles if we really want to grow this business. So around July of 2009, we decided to be come a game portal, and from that point on we were growing very quickly. GSN ran into us and saw that we had a similar model to theirs—we were a casual game portal with a virtual tournaments and virtual currency. Mesmo was acquired by GSN in April of 2010, and the portal is now called Games by GSN.

So the basic answer is that we really wanted to address a broader casual games market. We still believe today that the portal-based model enables you to bring in fresh content on an ongoing basis and really maintain a relationship with the user. Many companies today release large standalone titles, and we view those as islands. They really need to work hard to redevelop the brand and make a connection to the user with each title. With the portal approach, we are trying to nurture a community and introduce new games to that community and not have to reacquire the same audience.

X: Is it fair to say that the casual game market is getting more competitive, and that the growth is slower than it was a few years ago?

DM: Yes. What Zynga built its business on was not only poker but taking people who had never played casual games before and introducing them to games. They converted people on social networks into first-time gamers. That was a beautiful thing, and they were able to do it across many different genres of games. But the bar was pretty low, because many of these people had never played casual games. Today you’re not dealing with green-field conversion of users—you are dealing with having to take someone away from an existing game, and everyone has limited time. So the bar has risen and it’s an incredibly competitive environment.

X: Facebook is central to this business. What are they doing to support game developers these days?

DM: Facebook is continuing to invest incredibly aggressively in this space. Zynga accounts for roughly 15 percent of their revenue, maybe even closer to 20 percent. That’s not just from the 30 percent take they get on sales of virtual currency, but also from the additional advertising dollars that we all spend. A very large portion of many gaming companies’ revenue goes back into user acquisition, with performance-based advertising on Facebook being the largest, if not all, of your spend.

Investing in the platform means making sure it’s highly engaging and supportive of the games you want to grow. So you see multiple touch points where they will highlight games: in the news feed, the right-hand bar, the bookmarks. Game developers and Facebook are finally in alignment. There was a time when that wasn’t the case—it’s been a love-hate relationship.

X: What’s your diagnosis of Zynga’s troubles? Their stock has tumbled even farther and faster than Facebook’s.

DM: The recent decline at Zynga is due to them missing their earnings number and revising their future earnings downward. What’s happening is that Zynga got really good at converting this audience in the social graph, but they have done that now, and there isn’t as much rapid growth through conversion of new players. Now they are layering on more genres of games but across the same audience. Taking the same “ville” format and doing it five or six times isn’t as effective.

So, it’s a couple of things. One, the expectations of growth were so high that it really impacted their stock price negatively when they couldn’t deliver. Two, they haven’t really pushed the envelope on innovation. They’ve been accused of cloning other people and “fast following.” At some point, even if you have the scale, fast following is not a market-leading style or approach.

With the number of resources they have, you would expect them to be really leapfrogging and innovating in the space, and building market-leading games versus fast following. But it sounds like the morale and the culture are suffering. The culture there has been highlighted as miserable and toxic, and I think it’s been confirmed—the people you talk to there will tell you they work long hours in a cutthroat environment. Also, with the stock price now in a decline, the company is now below its 2010 valuation. For anyone who joined in the last couple of years, their options are now underwater. So people are leaving like mad. We’re seeing significantly more Zynga interviews.

X: I’m sure you saw that irreverent recruiting video that Kixeye published a couple of weeks ago. In that video they more or less poked Zynga and EA directly in the eye for making cookie-cutter games. But it seems like there’s a lot of bluster in this industry. Are Kixeye’s games all that much more original than Zynga’s? How is Kixeye’s Battle Pirates different from the “Zombie Castle Rescue” game parodied in the video?

DM: Kixeye does a great job. They are innovating in the mid-core space and definitely creating a different genre of game than Zynga is.

But I think the argument could be made that there aren’t that many new game mechanics in the casual game world. A lot of games leverage game mechanics from games that have been around for a while.

Like slot machines—you could [look at GSN’s games and] say “Oh, they’re not really innovating.” But we try to push the envelope in terms of what we are doing there. For example, Crime Scene Slots combines hidden-object game mechanics with a slot machine. That’s never been done before. Bingo Blast combines bingo and a slot machine. So we are innovating in the virtual casino space, versus some people who are just producing very classic slot machines, leveraging the same slot engine and just putting new skins on it. We don’t think that’s very interesting.

X: How much of the original Mesmo team is still on board at GSN?

DM: The original team is all still here, more than two and a half years later, which is a testament to the culture and the environment. Everyone is very happy with the acquisition and where we’re headed as a company.

It’s a really exciting time, actually, even though you will hear otherwise. I love it when you hear things like “Everything is falling apart,” because it discourages further investment from the VC community, and it removes the potential for exits, temporarily. That puts many companies that aren’t on a sound financial footing in a tough place, so it reduces competition and enables us to continue to gain market share. In this environment we’re at a significant advantage because we are well backed and doing well financially.


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One response to “The Bar Is Rising in Casual & Social Games, Says GSN’s Davin Miyoshi”

  1. Regardless of how industry leaders are performing at the moment, casual Facebook gaming is still growing. As Facebook approaches 1-billion users, there will be more people with easy access to these games. Certainly, there are more games out there than just blank-ville and we’re just in the infancy of this form of gaming. As in other forms of game development, Facebook games will rise and fall and the best ones will get their due. That’s what users want and that’s the direction this industry is headed.

    RocketOwl Inc.