The confluence of a few forces throughout the consumer technology landscape over the past few years has created a marketplace for consumer products that is hostile to new social platforms. I categorize these three forces into three broad buckets:
- The advertising “Duopoly” of Facebook and Google — and their walled gardens of targeting data that advertising clients cannot access and thus cannot export for use on other platforms — has served as a hard distribution gate to growing a user base. In order to build a user base, especially on mobile, a company requires a considerable amount of capital to invest into Facebook and Google advertising before it can achieve any appreciable scale. And increasingly, as companies grow their spend on these channels, diminishing returns on advertising performance create a hard ceiling for overall scale: very few social apps (but especially ad-monetized social apps) feature the long-tail freemium monetization distributions that can deliver the requisite escape velocity needed to break out of hyper-targeted advertising segments, which is the only way to support spending lavishly on Facebook and Google ads. This phenomenon has been captured in the notion that some non-trivial proportion of all VC funding is now spent on Facebook and Google advertising;
- The mobile platform “Duopoly” of Google Play and the iOS App Store, which is rarely identified as a duopoly but certainly is one, has created a soft distribution gate that feeds into the advertising dynamic described above (the only way to aggregate a user base on mobile is to spend heavily on paid user acquisition) and also keeps developers under the yoke of Apple and Google in terms of not only how they monetize (with the 30% IAP tax, which, to be fair, is deteriorating as developers rebel against it) but also in how developers access user data, how developers are able to build moats around their IP and brand terms (eg. targeting other apps’ names as keywords with Apple Search Ads, Spotify vs. Apple, etc.), and how developers are able to build lasting relationships with users across multiple apps (the “no-app-store-within-an-app” prohibition). The Apple and Google soft distribution gates create an environment in which it is difficult to organically aggregate and maintain an audience for a social product — and if, as has been long rumored, Apple does deprecate the IDFA (its proprietary advertising identifier), all of these points will be aggressively intensified;
- General (and justified) public mistrust with the way large technology companies safeguard user data has resulted in the passing of onerous data protection legislation like GDPR, the CCPA, and what most knowledgeable people agree is an impending national-level policy related to user data protection in the United States. Popular wisdom asserts that these policies benefit large technology incumbents who have already collected personal data on the billions of people that own smartphones — since that population isn’t growing appreciably, the largest tech companies don’t need to college this data in the future and thus possess a powerful competitive advantage over new companies who cannot collect it. This data is incredibly useful for advertising and monetization purposes, and upstart social product developers cannot collect it and also must bear the significant overhead of ensuring compliance with these byzantine regulations. Data protection is a competitive gate.
The result of all of this is that new social products cannot aggregate user bases to the scale needed to represent true competition to Facebook and Google in this environment. Some might cite TikTok as an example that this isn’t the case, but my belief is that TikTok supports this thesis: TikTok subsumed Musical.ly, a social video start-up that it acquired for $1BN in 2017; TikTok is owned by ByteDance, a Chinese company that is valued at $75BN and which is rapaciously acquisitive; and TikTok grew its US user base via roughly $1BN in advertising spend over 2018. TikTok’s story seems representative of a best case scenario for a social product in the current climate, which is not growing as an independent company to a scale that supports hundreds of millions or billions of users to an eventual IPO, but rather of an acquisition by a behemoth and incorporation into an existing product structure.
Facebook has mastered this acquisitive maneuver (Instagram, WhatsApp, etc.), and their ravenous appetite for incipient traction is perhaps more noteworthy for when it doesn’t work: Facebook acquired tbh, a three-month old social communications app with 2.5MM DAU, for a reported $100MM and shuttered it just nine months later.
These distribution and competition challenges have killed the market for new social products: the combined effect of the three forces outlined above has made it impossible for social apps to reach mainstream scale.
These forces, in concert, act somewhat like a filter: the need for substantial amounts of money to be spent on user acquisition before a social app reaches a size that even makes it interesting to advertisers results in a failure to launch for most mobile apps. But then, even if they are able to grow to a level of meaningful scale that makes them attractive to advertisers, the fundamental dynamics of the mobile platforms prevent them from aggregating audience across properties into a portfolio that resembles a platform. And finally, data protection and privacy regulations present an existential risk to companies as they grow and become targets of opportunistic litigation.
It’s generally dangerous to say “this time it’s different,” but it seems almost impossible that an upset that was seen with Facebook completely deflating MySpace’s user base could happen in 2019. The open web is fundamentally different than the mobile ecosystem, which is powered by proprietary, fortified platforms, and the challenges of that climate are amplified by the advertising Duopoly’s distribution power. The compounded barriers represented by the advertising Duopoly, the total control that the platform owners exert over their ecosystems, and the disproportionate burden that privacy regulations pose to new entrants have effectively killed new social products.
Gaming is different
In my book, Freemium Economics, I labeled the social components of products that allow them to become viral as the “Three Cs”: collaboration, competition, and communication. The mechanics that facilitate these three forms of interaction are hallmarks of social apps: they allow for network effects to take root, for virality to power product growth and supplement paid user acquisition, and for products to become sticky / habit-forming. Communication and collaboration might immediately call to mind a social media product like Snapchat or Instagram or Pinterest, but competition is almost the exclusive domain of gaming, and the modern gaming landscape has evolved to assimilate those other two elements of social interaction in a way that has rendered gaming the new social media.
And what’s more, the forces that have limited the ability of social products to aggregate audience either don’t apply to games or are not nearly as acute for them. One reason for this is that the rigid edges that differentiate “mobile games” from all other classes of games have softened as gaming goes cross-platform. Fortnite serves as a great example of this: it exists on mobile but it certainly isn’t a “mobile game,” and notwithstanding the fact that Fortnite is a global phenomenon, Epic can acquire users wherever its connection to them is the strongest and the least expensive. The platforms that serve games outside of mobile — Steam, the Epic Store, etc. — are every bit as difficult to penetrate as the App Store and Google Play, but there are more of them, and cross-platform game developers can aggregate audience across them in a way that benefits their presence on mobile. Game streaming, although it is by no means a proven concept, would magnify this reality: if games, even those played on mobile, aren’t subject to the distribution gates of the mobile platforms, then they can acquire users anywhere.
Additionally, the constellation of product types that makes up the gaming ecosystem is mostly complementary and universally beneficial to overall engagement with gaming. At the nucleus of the gaming ecosystem is great content, but every subsequent layer of products that surrounds it enhances and intensifies the user experience of gamers. Examples of this are Twitch, Discord, etc. that facilitate the Three Cs without directly connecting to gameplay and, perhaps most importantly, do so even for people that don’t play games. Games themselves might compete with each other, but the gaming ecosystem is so much wider than just games, and much of that ecosystem serves to intensify the social interactions that happen within games.
Compare this dynamic to social media, where the largest players have actively sought to prevent complementary products from gaining traction, as with Twitter killing TweetDeck, the independent Twitter account management software that it acquired, and Facebook blocking Vine’s access to Facebook friends lists. The biggest social media companies protect their privileged, entrenched positions by razing these incipient ancillary ecosystems and salting the earth beneath them: developers now know that building anything on top of the large social media platforms is a non-starter. The exception here might be Snap, which is fairly progressive with respect to its developer platform. YOLO, the anonymous Q&A app, was built on top of Snapchat’s platform and exploded virally to the #1 Top Downloaded position soon after release, but as with most social apps that aren’t supported with paid user acquisition, its popularity quickly waned.
Games are not immune to the distribution pressures highlighted above, but they have an advantage over social products that need to monetize via their own proprietary ad platforms: they can produce workable unit economics at launch and scale profitably. An ad platform is only worth anything at a significant level of scale: no one wants to go through the hassle of onboarding a new ad channel if they can only reach a limited audience on it (I discuss this idea in more depth in “the Quality vs. Volume fallacy“).
That is to say: if I launch a new social app tomorrow called ChatFace, I won’t be able to get any advertisers interested in running ads in my app until it reaches something like 50MM installs, and even then, I’d likely have to give them a discount on CPM just to run a trial, because trials incur operational costs and overhead. But games aren’t limited in their monetization in this way because they either sell users in-game items or sell ads via ad networks that aggregate ad impressions across many games.
This ability of games to scale growth profitably from launch means that games can exist and be viable enterprises at any level of scale: from 100,000 DAU to 100MM DAU. And because of this, games don’t need to rely on constant injections of outside investment until they generate revenue. Even on mobile, which is certainly a hypercompetitive advertising marketplace, many games are able to support their own growth from Day 1 through revenue re-investment into user acquisition.
Which raises another point: advertising has become a workable path to monetization in gaming over the past 2-3 years as mobile data plans have become cheaper around the world and smartphone hardware has become advanced enough to support streamed video advertising. This shift in consumer capacity is wholly responsible for the genesis of the hypercasual games category, which offers users superficial gameplay mechanics that can be intuited immediately and monetizes entirely through advertising. Hypercasual games are very much a proof point that games have a fundamental distributional advantage over any other type of social product in the modern consumer technology landscape: although their per-user monetization is low, because they are so universally relevant, their per-user acquisition costs are also low and they tend to benefit from significant virality, creating productive unit economics that support profitable user acquisition.
And games advertising is massive: I recently published an analysis in which I valued the games advertising market at $100BN. This enormous advertising market exists almost separately from the one in which other types of apps compete, and even when they overlap, games completely overwhelm almost every other app type simply because they monetize so effectively.
And games typically aren’t reliant on user data to the same degree that advertising platforms are, so their liability from privacy regulations is much more limited. Even when user data is used in games, behavioral data is much more valuable than demographic data, because every player of a game by definition has an affinity for games. In this presentation from GDC 2016, I discuss how I built an intelligent cross-promotion platform in my role as the VP of User Acquisition at Rovio, the company that makes Angry Birds: because so much signal is captured in the fact that someone plays games, no demographic or personal data is needed to target smart ads. Contrast this with social products, which have very little a priori understanding of a user’s tastes and affinities for other product types and must use demographic features to find relevancy signals; it’s easy to understand why legislation like GDPR impacts social products so acutely.
Games as the ascendant consumer product category
It’s easy to look at the success of Fortnite or PubG or League of Legends and conclude that a game can be a gargantuan, lucrative business. But in assessing the combined impact of the market forces I outlined above, I don’t think it’s unreasonable to determine that games will be the ascendant consumer technology product category of the next several years. As more of the social interactions that were typically captured by social media products — the Three Cs — move into either games or the ancillary products that support games, gaming will become ever more prominent as both a social structure and a technology investment theme.