Article from SFGate.
“Just a few weeks after “Mafia Wars 2” went live on Facebook, Din Shlomi got tired of playing the game.
A self-described hard-core gamer from northern Israel, he spent years playing the original “Mafia Wars,” building a virtual criminal empire and fighting online gang wars. But Shlomi says the sequel – launched to great fanfare – has too many bugs (some missions couldn’t be completed) and he ran out of challenges at a certain point.
“Like every Zynga game, it can be very addicting,” Shlomi says, “but once you hit level 50 there was nothing to do. It was literally like hitting a ceiling.”
Two years after Zynga’s “FarmVille” enticed millions of Facebook users to plant fields of digital crops, social gaming has mushroomed into a multibillion-dollar industry. The San Francisco startup is weeks away from an initial public offering in which it hopes to raise $1 billion.
While expectations for the social game market remain robust – it will generate $14.2 billion in revenue in 2015, up from $6.1 billion this year, estimates Lazard Capital Markets – the business is experiencing its first growing pains. Hundreds of developers now compete for the clicks of online gamers who are spending shorter periods of time immersed in each game.
To stand out, Zynga and others spend several million dollars developing titles and millions more marketing them, which increasingly puts a squeeze on profit margins. And hits are harder to come by.
“The economics just aren’t what they used to be,” says Josh Williams, president and chief science officer at Kontagent, a consultant on social games.
“The cost of customer acquisition is going up, and that means there is going to be pressure on margins,” says Atul Bagga, an analyst with Lazard.
Slipping profits
Although Zynga continues to enjoy high-speed growth – revenue was up 80 percent in the third quarter, to $306.8 million – profit fell 54 percent, to $12.5 million, from the same period a year earlier.
“Mafia Wars 2” had all the makings of a blockbuster. Its development team, which grew to 80 people, worked for nearly a year on the game, heralded in an October media launch at the company’s new Townsend Street headquarters. (The lobby contains a 1970s Winnebago and a tunnel lit with color-pulsing LED tubes.) The game peaked at more than 2.5 million daily active users in October. Since early November, the virtual organized crime adventure has shed more than 900,000 players, according to research firm AppData.
Sales of “Mafia Wars 2” have not met the company’s own expectations, according to people inside the company who were not authorized to speak on the record. Executives are second-guessing one another about what went wrong. Zynga declined to make Chief Executive Officer Mark Pincus or other senior executives available for comment, citing the company’s quiet period before the IPO.
“I think they are learning that the sequel doesn’t work,” says Michael Pachter, a research analyst at Wedbush Securities.
The number of daily active users in a game is a critical metric of its profitability, according to Pachter, because daily users are more likely to spend on virtual items such as machine guns and shields. “The more frequently they come back, the more likely they are to pay.”
Less than 10 percent of “Mafia Wars 2” players are playing every day, far below Zynga’s 20 percent average for most games, Pachter says. The drop-off may stem from players becoming bored with the same old thing.
“All the old ‘Mafia Wars’ guys who finished everything you could do came over here and said, ‘This is the same game with different missions.’ They are already tired of it, so they are dropping off,” Pachter says. “I think it’s a good case study for what can go wrong.”
Keeping the numbers up means more marketing, and the expenditures don’t always pay immediate dividends. A prime example is Redwood City game developer Electronic Arts, which has pushed to become Zynga’s closest rival. EA found its first major social gaming success with “Sims Social,” a Facebook version of the company’s popular real-world simulator.
Pushing for daily users
Since the title’s release in August, it has attracted 33 million users, with 19 percent of players returning each day. “Sims Social” has become the second most popular game on Facebook after “CityVille.” Yet EA has spent so much money aggressively marketing the game to millions of Facebook users that it is not yet profitable, according to a person close to the company.
Typically, software makers get about 40 percent to 70 percent of their players through ads, and spend between 25 cents to $1.50 for each of those users, according to Kontagent’s Williams. For a game like “Sims Social,” which has reached more than 10 million daily users, EA may have spent at least $10 million on marketing, he says.
Saturating the market with ads is crucial to attracting a wide audience, says Kontagent’s Williams. The strategy, however, squeezes margins and makes it harder to profit from the game over the long term.
“I would estimate that only about 30 percent of social games whose developers are spending money on advertising are hitting a positive return on investment,” says Hussein Fazal, CEO of AdParlor, a consultant on Facebook advertising campaigns.”
“Impact investing will need to scale to an enormous level for these solutions to be achievable,” said Eric Kessler, founder and principal at 
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