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
