Social Games See Just 1-3% of Players Convert to Paying Customers, says CrowdStar

Lazard Capital Markets recently held a conference with Peter Relan, chairman of social games company CrowdStar (Happy Pets, Happy Island, Happy Aquarium) to talk about the state of the growing social gaming category. Social games are usually free to play and rely on a combination of advertising/offers and micro-transactions for virtual items to generate revenues. The micro-transactions business has worked out fabulously well for some companies in the space, like Zynga, but CrowdStar pointed out that just 1-3% of users actually convert to paying customers. 

This, of course, could be viewed as a good thing, since it means there's plenty of room for growth in an industry that has already been rising fast. "...we believe that there is significant runway remaining for social games to grow assuming continued distribution growth (on Facebook, smartphones, browsers and other social networks) and increasing conversion rates in other demographic groups," said analyst Colin Sebastian. "We currently forecast social game revenues (virtual goods, advertising and offers) to nearly double in 2010 to $1.3B worldwide." 

The typical demographic in the casual and social spaces has been older females. Relan noted that the #1 paying demographic in Happy Aquarium is women aged 35+. If companies like CrowdStar, Zynga, Playfish and Playdom can bring in more males, especially those in the console gaming sector, that would certainly widen the demographic range. The problem, however, is that console properties don't seem to be as relevant in the social gaming sphere. "Relan highlighted that risk exists when attempting to migrate console game properties to a social game environment as the user demographics are very different. Also, social game users care more about the social mechanics of a game instead of the depth and quality of game play, which is inverse to console game players," said Sebastian. "Other than EA, we note that legacy game publishers have very little penetration in the social networking segment of the market and are likely to invest in these platforms this year."

Another area of the social games business that's been seeing more activity is the payments space. Companies that facilitate the micro-transaction payments seem to pop up everyday, but it might be Facebook itself that takes over. Relan said he expects the recent Facebook Credits platform to become much more widespread. CrowdStar's Happy Aquarium was actually one of the first social games to use Facebook Credits, and Relan said that FB Credits would launch throughout the site in the coming months. "The launch of FB Credits is expected to generate a sizeable take rate for Facebook in the 30% range vs. 5%-10% for alternative payment options. However, CrowdStar expects that diminishing payment friction and increasing conversion rates will ultimately offset the loss in revenues," Sebastian noted.