Daniel James, CEO of Three Rings, had an interesting post yesterday with his predictions for social gaming in 2010. I’ve seen James speak at a few conferences and know he can always be counted on for a unique opinion. A lot of what he talks about in this post is how important Facebook is to the phenomenal growth of social games and how it will actively try and take a revenue cut for that.
He starts out by discussing some of the changes Facebook made to virality in 2009.
Virality will decline and may cease to be the major force on the FB platform. The changes that Facebook has started to implement will continue into 2010, causing a reduction in virality overall. Facebook is well-established as a great environment to acquire customers and generate revenue. By dialing down the viral component the platform will become less attractive to new developers who lack funding, but it’s not clear that Facebook cares.
Virality is the key reasons social games work otherwise they would simply be known as casual games, so if Facebook is looking to crank down on virality it’s big news for social game companies. James believes Facebook is taking such steps to try and take a cut of the revenues their platform makes possible.
Facebook takes ~50% of game revenues. The payment component is a part of Facebook taking back its rightful share of game revenues on its platform; the massive reduction in virality will be the other key component, driving paid acquisition models and more revenue for Facebook from ads, game placement, etc. Social games’ have been a bonanza because they’ve fed greedily upon FB’s extraordinary user acquisition machine, exceptional openess, and generous viral features, without necessarily returning a lot back to Facebook Inc. or the net user experience of most users. I think Facebook will change that in 2010, and I think they are quite justified in doing so. Successful social games can operate with 60%+ net margins, I think Facebook would quite like the lions share of that.
I tend to agree with much of what James is predicting, however I doubt Facebook will be as aggressive with taking a cut and believe a lot of the changes are being made more for usability.
Facebook is struggling with it’s own slowing growth
As James points out himself, Facebook has peaked and will see a flattening or decline in active audience. To add to that he also believes that daily active users (DAU) on social games have also peaked. What that says to me is that Facebook itself will be in need of growth. Social games are a big driver of Facebook use, so to start limiting the virality is certainly dangerous. If James is right and Facebook is doing this for revenue, they must simply expect social gaming companies to step up and pay for any lost growth from the change in virality. 
That could be true but I doubt the ecosystem is that robust. Many of the social gaming hits are still relatively new and as James points out the whole field might have already peaked.
I think it’s a delicate balance at this moment and expect Facebook to move tentively into taking a revenue cut. Social gaming companies are already buying up tons of ads on Facebook, there is little reason to rock the boat.
Facebook has shown a history of making usability priority 1
It’s my belief that the changes to virality were made more for usability concerns than for the sake of revenue. Facebook is where it’s at today, at the top of the social network heap, because of it’s superior usability. We can all remember how annoying MySpace pages were. Zuckerberg is also very big on usability so it’s understandable that virality was a hot topic within the walls of Facebook when users began to complain about some of the tactics social games were taking. Ultimately it seems the usability proponents won out, but we’ll see if they push for more changes in the name of usability.
Social gaming companies weaning away from Facebook
Facebook is undoubtedly important to social gaming companies and exactly why they’re actively trying to limit their dependence on it. Zyenga recently launched FarmVille.com and I would expect more sites are to follow. The question is if the recent explosion of social games has found a permanent spot in the public’s heart or is still very dependent on the Facebook spigot?
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