The Market for Browser and Social Network Games: Table of Contents

DFC Intelligence DFC Intelligence Phone 858-834-4340 12707 High Bluff Drive Fax 858-780-9830 Suite 200 www.dfcint.com San Diego, CA 92130 The Market for Browser and Social Network Games: Table of Contents March 2012

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About This Report In the ever-changing gaming industry, it is a daunting task to properly define and analyze a market segment in the gaming industry. Especially in the relatively new free-to-play (F2P) segments everything is constantly changing and evolving. In an attempt to achieve such a goal, DFC Intelligence narrows down the research scope as specific as possible even though sometimes it may seems arbitrary. This report looks at a specific segment of the PC online gaming market: products developed for play online within a browser or social network. The main feature of these products is they are easy to access and can be played without the end user needing a high performance system or to download a large client. Other DFC Intelligence reports look at other segments of the online game market, including freeto-play client games, subscription MMOGs, console games and mobile games. The DFC Online Game Market Forecasts and Worldwide Game Market Forecasts aggregate these segments into combined worldwide forecasts including forecasts by individual region and country. This report, co-written by DFC with noted industry veteran and executive Jess Mulligan, covers primarily online games that meet the following criteria: 1) are playable in a browser or social network, 2) allow a user initially to play for free with optional microtransaction-based in-game item purchase and/or subscription for premium content, 3) run on a PC platform, and 4) have no large client. (See the Definition section for detailed explanations.) Popular games that fall into the category include games played on Facebook, such as products from Zynga; games from companies that aren t dependent on social networks, such as Bigpoint in Germany, and; some large virtual worlds such as Club Penguin, Habbo Hotel and Runescape. In this report, we first define and discuss the browser-based and social network business. There is then a discussion of business models for multiple types of games. This includes a look at issues such as marketing and the difference between a game delivered in an independent browser versus one delivered in an application or social network such as Facebook. Five-year forecasts for the segment are provided and there is also a look at some of the top companies and products. San Diego, CA March 2012 David Cole, Founder and Analyst, DFC Intelligence Email: dcole@dfcint.com Web: http://www.dfcint.com/index.php Jess Mulligan Email: jessica.mulligan@gmail.com LinkedIn: http://www.linkedin.com/in/jessicamulligan

Table of Contents INDEX OF TABLES... 6 I. EXECUTIVE SUMMARY... 9 II. MARKET OVERVIEW AND HISTORY... 13 A. OVERVIEW... 13 B. DEFINING BROWSER AND SOCIAL NETWORK GAMES... 18 C. DEFINITIONS... 19 D. HISTORY... 23 E. THE KEY DIFFERENCES BETWEEN BROWSER AND SOCIAL NETWORK GAMES AND OTHER ONLINE GAMES... 28 1. Lower Development Costs... 28 2. Faster Development Cycles... 29 3. Easier to Add or Change Content and Features... 30 4. Accessibility... 31 5. Social Network Games: A More Casual Audience Means a Larger Market... 32 III. CURRENT ISSUES AND TRENDS... 33 A. WHERE THINGS STAND TODAY... 33 1. The Man quisition Roll-Up Strategy... 33 2. The Start of Decline in Active Users or MAUs and DAUs... 34 B. LONGER DEVELOPMENT CYCLES AND HIGHER DEVELOPMENT COSTS... 38 C. MORE POACHING IN NON-BRAND NAME PRODUCTS... 40 D. REVENUE TRENDS TO TODAY... 41 IV. LOOKING FORWARD... 42 A. ISSUES AND SOLUTIONS... 43 B. KEY ISSUE #1: HOW TO GET MORE REVENUE PER PLAYER?... 43 1. More Flogging the Data... 44 C. KEY ISSUE #2: HOW TO CONVERT MORE PLAYERS INTO PAYERS?... 45 1. Design Issues... 45 2. Differentiating Products... 46 3. What Features and Content Will Attract More Players?... 46 D. LAUNCHING IN MORE LANGUAGES/TERRITORIES... 48 1. Cultural Localization... 48 2. Payment Processing... 49 3. Comparing Europe and the US... 49 4. The Ease of Facebook Credits... 52 5. Marketing and Distribution: The Rising Cost of Customer Acquisition... 53 6. Word of Mouth as Guerilla Marketing... 54 E. EXPANDED DISTRIBUTION... 55 1. Territory Expansion... 55 2. Moving Away from Facebook... 56 3. Is Mobile Really Viable?... 57 F. MORE BRAND NAMES IN THE SPACE... 62 G. MORE AND BETTER MARKETING... 63

V. BUSINESS MODELS... 67 A. OVERVIEW... 67 B. REVENUE SIDE ANALYSIS... 68 1. Revenue Model 1: A Modest Success Scenario for a Browser F2P with a Pure Virtual Item Model... 71 2. Revenue Model 2: Solid Hit Browser F2P with Pure Virtual Item Model... 74 3. Revenue Model 3: Slow Build Big Hit Browser F2P/Optional Subscription... 77 4. Revenue Model 4: Massive Hit Browser F2P/Optional Subscription... 80 5. Revenue Model 5: Modest Hit Facebook Game Model... 83 6. Revenue Model 6: Massive Hit Facebook Game Model... 86 7. Revenue Model 7: Steady Hit Facebook Game Model... 89 8. Simple Revenue Business Models... 92 C. COST SIDE ANALYSIS... 97 1. Overview... 97 2. Development Cost... 97 3. Marketing and User Acquisition Cost... 98 4. Payment Methods and Financial Infrastructure Costs... 99 5. Ongoing Costs... 100 6. Browser and Social Network Game Cost Model One... 101 7. Browser and Social Network Game Cost Model Two... 104 8. Browser and Social Network Game Cost Model Three... 107 VI. MARKET SIZE AND FORECASTS... 110 A. NORTH AMERICA AND EUROPE GROWTH SCENARIOS... 112 B. WORLDWIDE FORECASTS FOR BROWSER AND SOCIAL NETWORK GAMES... 116 VII. COMPANY AND PRODUCT PROFILES... 123 A. BIGPOINT... 123 B. DISNEY: PLAYDOM AND CLUB PENGUIN... 131 C. ELECTRONIC ARTS, PLAYFISH AND POPCAP... 138 D. FACEBOOK... 142 E. FUNZIO... 151 F. GAMEFORGE... 156 G. JAGEX... 159 H. KABAM... 161 I. SULAKE CORPORATION... 171 J. WOOGA... 175 K. ZYNGA... 179

Index of Tables Table 1 Worldwide PC Online Game Revenue: 2008-2014... 14 Table 2 Worldwide PC Online Game Sales by Region: 2011... 15 Table 3 North America and Europe Browser and Social Network Games as Percent of Total PC Online Games: 2008-2011... 16 Table 4 Zynga Revenue: 2008-2011... 17 Table 5 Facebook Users: 2006-2011... 25 Table 6 Zynga Monthly Active Users: 2009-2011... 26 Table 7 : Comparison browser game dev time versus client/server MMO 2008-2010... 29 Table 8 Facebook Top Games: 2011-2012 (in millions of MAU)... 35 Table 9 Top Facebook Game Publishers: March 2012... 37 Table 10 Projected Development Costs for Browser and Social Network Games: 2008-2015... 38 Table 11 Browser and Client/Server MMO Development Cost Comparisons: 2008-2015... 39 Table 12 Western Europe PC Online Game Revenue by Country: 2010-2016... 49 Table 13 Average 2010 Transaction Size by Country (Europe)... 51 Table 14 Modest Success Scenario for a Browser F2P with a Pure Virtual Item Model... 71 Table 15 Five Year Cumulative Revenue for Modest Success Scenario for a Browser F2P with a Pure Virtual Item Model... 72 Table 16 Solid Hit Scenario for a Browser F2P with a Pure Virtual Item Model... 74 Table 17 Five Year Cumulative Revenue for Solid Hit Scenario for a Browser F2P with a Pure Virtual Item Model... 75 Table 18 Slow Build Big-Hit Scenario for a Browser F2P with an Optional Subscription... 77 Table 19 Five Year Cumulative Revenue for Slow Build Big Hit Scenario F2P with Optional Subscription... 78 Table 20 Massive Hit Scenario for a Browser F2P with an Optional Subscription... 80 Table 21 Five Year Cumulative Revenue for Massive Hit Scenario a Browser F2P with an Optional Subscription... 81 Table 22 Modest Hit Scenario for a Facebook Game... 83 Table 23 Three Year Cumulative Revenue for Modest Hit Facebook Game... 84 Table 24 Facebook Modest Hit Scenario Monthly Active Users First 18 Months... 85 Table 25 Massive Hit Scenario for a Facebook Game... 86 Table 26 Three Year Cumulative Revenue for Massive Hit Facebook Game... 87 Table 27 Facebook Massive Hit Scenario Monthly Active Users First 18 Months... 88 Table 28 Steady Hit Scenario for a Facebook Game... 89 Table 29 Five Year Cumulative Revenue for Steady Hit Facebook Game... 90 Table 30 Facebook Steady Hit Scenario Monthly Active Users First Three Years... 91 Table 31 Basic Revenue Model at 2% Conversion Rate... 93 Table 32 Basic Revenue Model at 5% Conversion Rate... 94 Table 33 Basic Revenue Model at 10% Conversion Rate... 95 Table 34 Basic Revenue Model at 15% Conversion Rate... 96 Table 35 Standard Transaction Fee Comparison between U.S. and Korea... 100 Table 36 Low Cost Browser or Social Network Customer Acquisition Cost Model... 101 Table 37 Low Cost Browser or Social Network Customer First-Year Profit/Loss Analysis at 1% Conversion Rate... 102 Table 38 Low Cost Browser or Social Network Customer First-Year Profit/Loss Analysis at 2% Conversion Rate... 102

Table 39 Low Cost Browser or Social Network Customer First-Year Profit/Loss Analysis at 3% Conversion Rate... 103 Table 40 Moderate Cost Browser or Social Network Customer Acquisition Cost Model... 104 Table 41 Moderate Cost Browser or Social Network Customer First-Year Profit/Loss Analysis at 1% Conversion Rate... 105 Table 42 Moderate Cost Browser or Social Network Customer First-Year Profit/Loss Analysis at 2% Conversion Rate... 105 Table 43 Moderate Cost Browser or Social Network Customer First-Year Profit/Loss Analysis at 3% Conversion Rate... 106 Table 44 High Cost Browser or Social Network Customer Acquisition Cost Model... 107 Table 45 High Cost Browser or Social Network Customer First-Year Profit/Loss Analysis at 1% Conversion Rate... 108 Table 46 High Cost Browser or Social Network Customer First-Year Profit/Loss Analysis at 2% Conversion Rate... 108 Table 47 High Cost Browser or Social Network Customer First-Year Profit/Loss Analysis at 3% Conversion Rate... 109 Table 48 North America and Europe Growth Scenario 1 for Browser and Social Network Games... 113 Table 49 North America and Europe Growth Scenario 2 for Browser and Social Network Games... 114 Table 50 North America and Europe Growth Scenario 3 for Browser and Social Network Games... 114 Table 51 North America and Europe Growth Scenario 4 for Browser and Social Network Games... 115 Table 52 North America and Europe Growth Scenario 5 for Browser and Social Network Games... 115 Table 53 Worldwide Browser Game Forecasts by Region: 2008-2016... 117 Table 54 Worldwide Social Network Game Forecasts by Region: 2008-2016... 118 Table 55 North America Forecasts for Browser and Social Network Games: 2008-2016... 119 Table 56 Europe Forecasts for Browser and Social Network Games: 2008-2016... 120 Table 57 Rest of World Forecasts for Browser and Social Network Games: 2008-2016... 121 Table 58 Worldwide Forecasts for Browser and Social Network Games: 2008-2016... 122 Table 59 Bigpoint Key Facts... 123 Table 60 Registered Users for Key Bigpoint Browser Games: 2011-2012... 124 Table 61 Playdom Key Facts... 132 Table 62 Playdom MySpace Monthly Users by Title: March 2009... 133 Table 63 Playdom Facebook and MySpace Users October 2009... 133 Table 64 Playdom Facebook MAU by Game: March 2012... 134 Table 65 Club Penguin Key Facts... 135 Table 66 Top Electronic Arts Facebook Games: March 2012... 139 Table 67 Facebook Revenue by Type: 2009-2011... 144 Table 68 Facebook Users by Region: 2009-2011... 145 Table 69 Facebook North America Users: 2009-2011... 146 Table 70 Facebook Europe Users: 2009-2011... 148 Table 71 Facebook Asia Users: 2009-2011... 149 Table 72 Facebook Rest of World Users: 2009-2011... 149 Table 73 Funzio Key Facts... 151 Table 74 Gameforge Key Facts... 156 Table 75 Gameforge Browser Games: 2002-2012... 158 Table 76 Jagex Key Facts... 159 Table 77 Kabam Key Facts... 161

Table 78 Sulake Key Facts... 171 Table 79 Sulake Revenue: 2008-2010... 172 Table 80 Wooga Facebook Monthly Active Users: 2010-2012... 177 Table 81 Key Zynga Facts... 179 Table 82 Zynga Revenue and Income: 2008-2011... 181 Table 83 Zynga Expenses: 2008-2011... 182 Table 84 Zynga Daily Active Users: 2010-2011... 183 Table 85 Zynga Monthly Active Users: 2010-2011... 184 Table 86 Zynga Monthly Unique Users: 2010-2011... 185 Table 87 Zynga Monthly Unique Payers... 186 Table 88 Zynga Revenue Per Monthly Active User... 187 Table 89 Zynga Revenue Per Monthly Unique User... 188 Table 90 Zynga Revenue Per Monthly Unique Payer... 189