Week 4 - Post 2

Well as suspected, I am really enjoying learning about the particular business models that have evolved in this digital age.  But before I go any further with the options "interesting readings", I thought it best to pause and summarize a few sound bites about the "required reading" materials.

I like in particular how the Business Models on the Web article succinctly stated many of the typical categories.  It is almost too simplistic, but they capture the essence of the models well.  And I loved the video on the Dollar Shave Club YouTube channel. The use of video to not only tell a funny and edgy story, but to be the primary marketing conduit for selling the product, was absolutely fantastic.  And the whole debate about "bricks versus clicks" and anecdotes about Warby Parker and Hointer were, in a word, very enlightening.  But what stood out most to me was the professor's Breeze presentation about the various business models and Zynga in particular.

Professor Talbott's summary about the revenue model was spot on, but there really is more to the story... 

I had the pleasure of hearing a presentation from Zynga's former COO a few months ago.  Their revenues are clearly based on game sales, but typically Zynga earns far more on the game down the road and not at launch.  That is contrary to say something like EA's John Madden NFL 25, which will earn the crux of its revenue when it hits shelves in August. 

Dissimilar to EA games, Zynga launches their games initially with as minimal an investment as possible, and then ramps up their studios to create additional content for that game. The reason is that they know their players are casual gamers and will finish the game or typically get bored with it more quickly, and therefore players need a compelling reason to keep spending on it.  And that is the ticket -- these players spend their money on "virtual goods" provided within the game.  In fact, the virtual goods sold garnered Zynga nearly $1B in revenue in 2011, which was about 95% of their total. Now that is a powerful model.

For example, Zynga's hit FarmVille had several new services added post-launch.  And as those revenues grew, so did their studio in order to make more such content.  All of the points in the graphic on the left are expansions of FarmVille that enabled the sale of "virtual goods" and bolstered revenues for the company. Point being, it is not just about the game content and initial sale for Zynga, but rather about the additional sales it can garner within the game.  Zynga is acting as a virtual merchant by selling additional content.

Additionally, what has really helped Zynga's model explode over the last few years is the growing number of mobile internet users and the widespread use of tablets.  Smartphone audiences have been projected to reach 151M users and tablets to reach 106M users by the middle to end of 2013. And 14% of smartphone gamers (i.e. Zynga's demographic) spend about $25 per year on virtual goods.  And over 10% of them are spending over $100 in the same period!

There is a lot of money in the online gaming space, there is no question.  And I look forward to business models yet to come knowing that...especially when we consider the legalization of online wagering, as already being done in Delaware, New Jersey, and Nevada.  Wow!