By Nima Pourshasb, Director of Corporate Development at Live Gamer
How do you monetize social networks and social games? There is a growing consensus that the answer is with a virtual goods micro-transaction business model. Social networks and start-ups are positioning themselves accordingly. Hi5 has announced its own virtual currency. Facebook and MySpace seem to be working on their own payments platforms. Jambool provides virtual currency, while Gambit, Zuora and Spare Change offer a variety of direct payment methods. Users can pay for virtual goods by completing offers or surveys thanks to SuperRewards, OfferPal and Sometrics while Zong and MobillCash let them pay with their cellphones. It is a matter of time until services emerge that optimize electronic storefronts – layout, inventory, pricing and promotions – and virtual goods marketing campaigns.
The pitch for the micro-transaction business model is simple. There is a higher user monetization relative to advertising revenues because of the type of engagement that occurs in social communities and games. Central to this argument is the metric for user monetization: Average Revenue per User (ARPUs). The below figure shows several public estimates of annual ARPUs. The apparent wide discrepancy is misleading because of the different ways of defining ARPU. If analyses based on ARPU segmentation, such as average ARPU levels by game/app type and characteristics, or by social platform and region, will inform key decisions about design and user acquisition marketing budgets, these inconsistencies may result in wrong and costly decisions.
The R in ARPU
Benchmark’s Bill Gurley estimates Facebook’s annual ARPU of $2.57 by dividing the company’s annual revenue by its monthly active users. One might mistakenly take this number as the ARPU of a Facebook user, yet this value does not factor in that the user is also monetized by third party applications – both through ads and micro-transactions. Developer Analytics estimated in August 2008 that more than 20 Facebook Apps had monetization potential of $2,000 per day. Following the terms in its contract with application developers, Facebook virtually sees none of this revenue. The only micro-transaction revenue that Facebook itself generates is through its virtual gifts, which accounts for $50-$60MM of annual revenue. In other words, $2.57 is how much Facebook, as the platform, monetizes on an average user, not the monetization value of a Facebook user. If Facebook wanted to increase its own ARPU, it could simply develop more of its own apps with micro-transaction models or it could change terms of contracts with developers in order to get a larger cut from their revenue.
Jeremy Liew from Lightspeed Ventures estimates ARPU for Jagex’s MMO Runescape (freemium game) as $0.84/month/user. In contrast, all user monetization in Runescape hits Jagex’s top line as they have no third party apps.
Why are there no public estimates on the monetization value of a Facebook user? It is hard to get data to estimate the aggregate revenue across all Facebook app developers.
The U in ARPU
At SXSW, Susan Choe, CEO of Outspark (a publisher of Free-to-Play online games), announced $50 monthly ARPUs, creating strong reactions of disbelief until the audience started concluding that she was probably referring to ARPPU – average revenue per paying user. This illustrates the definition issue with users. Different definitions of a user dramatically skew the ARPU numbers:
- Registered users: They sign up or installing game/app, but may use it very infrequently (if at all) and they never pay. Minimal or non-existent monetization.
- Active users: They use app or play game with a certain frequency, but never pay for anything. Monetization only through ad revenue.
- Paying users: They pay for purchasing digital assets or for subscriptions at least once or with a certain frequency.
Even within these categories, companies might define users differently. The difference in the numbers because of varying definitions are in the orders of magnitude. As an example, in his ARPU vs. ARPPU blog post, Raph Koster estimates monthly ARPUs in freemium successful models as $0.50-$1.50, versus $30-$35 monthly ARPPUs for subscription games.
Returning to Jeremy Liew’s Runescape ARPU estimate, he reached $0.84/month/user by dividing the monthly runrate ($5MM) by the 6MM Runescape players, 5MM of which play for free. If he had used, the 1MM subscribing paying users, he would have concluded with an ARPU of $5.00/month/user.
As the micro-transaction business model gets more traction, we will see a spike in claims of ARPU figures. These will vary wildly – at times because of their nature, at times because of the metric definition. Caveat emptor.
Note: Sources for below data points are links in blog post.