The social media streams have blown up overnight with the news that Facebook has bought the company making the Oculus Rift VR hardware for $2BN. That’s not what this post is about, although I’ll touch on that later. Rather, there are a few aspects to running a game on Facebook of which many developers and likely almost all consumers are unaware. No platform is completely free of bias (Apple curates the App store, Google Play sells advertising, etc.), but Facebook is particularly nefarious in the way that they put their thumb on the scales, and it’s something that I think more people should be aware of.
First off, it’s no secret that Facebook takes 30% of revenue off the top for all RMT (real money transactions, the equivalent of in-app purchases on iOS). That’s actually become fairly standard, but it definitely skews the economics of publishing. If you’re looking at a true indie, self-published game vs. publishing on FB (or iOS, which charges the same 30%), that margin can easily make the difference between sustainability and collapse. The question you have to ask is, what do you get for that 30%?
The answer, by and large, is that you get access to the users of that platform. In the case of iOS, you get some limitation on the number/variants of hardware and software that you have to deal with, but no such advantage exists on FB or Android. Access to users doesn’t mean anything, though, unless you can actually reach them. In the last five years, FB has systematically shut down viral channels that game developers used. The techniques that early players on the platform used to grow their user bases are simply not available anymore.
For a lot of FB users, this represents progress: not getting spammed in your newsfeed because one of your friends is playing a game; getting newsfeed stories grouped together when you are playing a game; culling repetitive posts; better control over what’s on your timeline, and so on. However, for the game businesses that used these tools, each channel that gets shut down is another vector for advertising that no longer exists.
That’s fine for FB. The thing is, their business takes over where the viral channels end. In other words, the advertising that used to be so cheap, easy, and ubiquitous is now securely behind a paywall, and the guardian of that gate is FB themselves.
Let’s do a little math. The classic formula is that if your lifetime value (LTV) for a player – the amount of money on average that a player will spend over their lifetime with the game – is higher than your cost of acquisition (CPI) – how much you spend to bring in a player – you’re in a virtuous cycle where you can spend more money to bring in more players and scale up your profit. If your CPI is $1 and your LTV is $2, in theory you can scale your population and profit by a dollar for every marketing dollar you spend. In theory.
The problem is that as you scale up your population, the CPI goes up – users are harder to come by, so you have to spend more to get them. Whereas in the early days of FB games, CPI was measured in pennies and dimes, now it’s easily $2+. So, that game that could make bank at an LTV of $1 is now a losing proposition.
Why does the cost keep going up? Because FB is arbitraging advertising costs. Aside from mining data and selling it, this is probably the most profitable thing that they do. Pretty much all of that CPI goes to FB, either directly through purchasing ads, or indirectly through using FB ads managed by a third-party and otherwise feeding players’ connections to FB. So, let’s say that you can manage an LTV of $3. In theory, you might be able to build a business on that (although not easily). Remember, FB gets 30% off the top ($0.90), so at a CPI of $2, your margin is literally 10 cents per player.
Meanwhile, FB is grossing $2.90, plus you’re feeding engagement with their platform. Everything you do to increase monetization and retention in your game is actually feeding monetization and retention for FB as well, and in most cases, they’re getting the far, far better end of the deal. Because, remember, whether or not a player ever pays a penny in your game, you’ve already paid FB for that user. Whether your game reaches sustainability or not, FB gets paid.
And, in fact, there is nothing to keep FB from constantly (albeit slowly) ratcheting up the advertising costs, increasing your CPI and their profit margin; remember, the money they make from your acquisition of users ($2) far outweighs the money they make from your users buying things ($0.90), plus it’s reliable income. As you try to scale your population to reach sustainability in your business, you pay that money to FB, scaling their profits while your margins shrink.
This is not to say that there are not success stories on FB. Battle Pirates is posting some of its highest revenue numbers ever, and it’s been out for three years. What you’re not seeing, though, in the social games space, is a lot of innovation, new companies, new games, or new success stories. Most of the people who are making bank on FB were there early, and the more successful ones went cross-platform years ago.
As a platform, FB is a bit of a venus flytrap. It looks fine from the outside, but the more involved you get, the better they can suck you (and your audience) dry. They are, figuratively, killing the very organisms that made their ecosystem possible in the first place. As Greg Costikyan said, the walls are closing in.
So, some people are upset about FB buying anything they like, because they recognize this predatory dynamic in FB’s relationship with its developers. That is probably a very, very small fraction of the outrage, though. More likely sources include:
- Post-indie syndrome. You know when that band you loved and was totally cool suddenly became mega-popular and everyone knows about them now, so they’re not cool anymore? Yeah, that’s what happens when FB buys a company you like.
- Envy. Someone founds a VR company and gets to be an instant billionaire, but I still have to work for a living? Screw that guy.
- Not understanding Kickstarter. Kickstarter did not fund Oculus as a business; they provided publicity and a way for people to get dev kits. However, for the people who put money down thinking they were getting early access to the next big thing, they now feel like they’ve lost an opportunity that they paid for. This is an illusion, but still emotionally powerful.
- False consciousness. All mega-corporations are evil! I’m better than you capitalist drones because I shop at the organic farmers market (although my clothes are still made by workers in the third world).
The real impact of this acquisition won’t be knowable for years. However, that will not stop people on the internet from publicizing themselves via having an opinion about it.