Our notes on today’s news and analysis:
Mahaney Jacks Up Kindle Estimates, But Amazon Is Still Losing Its Shirt
Citi’s Mark Mahaney:
“The summary takeaways from our new Kindle estimates are:
1) We believe Amazon is on track to sell approximately 2MM Kindles in 2009 (up from our prior estimate of 1.5MM);
2) We believe that Amazon is on track to sell approximately 30MM-35MM Kindle books in 2009; and
3) We believe that Amazon could record $1.6B in Kindle device and book sales in 2010, which would amount to approximately 5% of its total revenue.”
Our Take: The adoption of the Kindle is impressive and appears to be surpassing expectations. However, we are still waiting to see how Amazon turns this into a profitable franchise since the hardware margins are low and e-book sales unprofitable.
Recently, one publisher signed an exclusive deal with Amazon to distribute some of its e-books and gave the author 50% of net sales (more than double the typical rate). If sales on Amazon are strong this could set a precedent for authors to go direct to Amazon, which would clear the way for more profitable content deals.
That said, analysts who are raving about EPS contributions of $0.50 a share are counting on publishers to drastically cut the wholesale price of e-books, thus allowing Amazon to finally start selling them profitably. We have seen no evidence that that is happening. On the contrary, publishers are doing everything they can to avoid cutting prices.
Comcast Rolls Out Web-TV Service (WSJ)
Comcast has rolled out its TV Everywhere service nationally. This is cable’s attempt to extend its franchise to the Internet and avoid being disrupted by Internet distribution:
“The service, dubbed Fancast XFinity TV, gives customers who subscribe to both Comcast’s video and broadband Internet services access on the Web to cable shows like “The Sopranos” and “The Closer” and full-length movies like “The Dark Knight” and “Slumdog Millionaire.” The technology requires users to log in to confirm their Comcast subscriptions, but there is no additional charge.”
“With the rollout, the new Comcast service is offering about 2,000 hours of programming from 27 TV networks on Comcast’s Fancast Web site. Comcast is also negotiating with media companies to add more TV networks and shows to the service.”
The programming options are fairly robust now and if Comcast is able to add additional program its offerings will get stronger compared to online competitors like Hulu. Given that Comcast will soon own a big piece of Hulu, of course, this isn’t all good news.
In our opinion, TV Everywhere is a Jerry-rigged idea, designed for the benefit of cable companies rather than people. There will undoubtedly eventually be a way to get just about all video programming over IP-distritribution, but we doubt cable companies will be able to maintain their chokehold over the distribution.
Russia’s DST leads $180m investment in Zynga casual gaming company (FT)
Casual gaming is a real business. This deal likely values Zynga at $1-$3 billion, and the company is reportedly generating north of $250 million of revenue.
The other interesting trend here is that Russia’s DST is barging into the Valley and becoming the go-to funding source for some of the largest private companies. DST now owns 5% of Facebook, in addition to its new Zynga stake.
Below, a Lightspeed Venture Partners interview with another casual-gaming company, Playdom:
Atul Bagga, ThinkEquity, (AB): Please explain your business and why investors should care about Playdom?
John Pleasants, CEO, Playdom (JP): We are in the social gaming space, which is defined as online games that live primarily inside existing social networks. Our products are a combination of games and social interactivity and it’s the hybrid of the two that makes them differentiated from traditional games that tend to be more immersive and generally more focused on production qualities, graphic capabilities. Social gaming is a free-to-play model, so it attracts a broad demographic of people.
There are now hundreds of millions [of] people playing social games, and as a category, social gaming is still in infancy. So it’s a disruptive model. Relative to traditional gaming, this model has lower cost of production and higher returns, because you can very quickly capitalise on your user base, and it’s a live service, so you change and evolve your product over time. You don’t have the risk of spending a lot of money and time building a product then shipping it and hoping people come. You’re mitigating all of that risk in the traditional entertainment model, and hence, we have a superior model for entertainment, production, and distribution.
AB: Can you explain how do you make money—virtual goods, advertising, what could be the mix between these different revenue streams and how do you see it trending over a longer term?
JP: We are primarily a virtual goods model. People acquire items in order to accelerate in a game or to unlock new parts of the game and limited edition items. That represents 90 per cent of our revenue. Between five and 10 per cent of our revenue comes from advertising. I think that the revenue mix will always be dominated by direct consumer payments.
AB: How much of the virtual goods revenue comes from direct payment versus indirect payment and maybe if you can share your thoughts on indirect payment that lead generation offers, et cetera?
JP: A vast majority of our revenue comes from the direct payment. We want to have direct billing relationships with all of our customers. Offers can be a good thing for people who can’t or don’t want to pay but are willing to invest time or some personal information. Only about 15% of our revenue comes from the indirect payments. As long as the offers are clean, legitimate and transparent, they can be acceptable. But if they are less than transparent and manipulative, they don’t create a good user experience and they are not good for us.
AB: You mentioned that about five or 10 per cent of revenue coming from advertising. What kind of advertisements are these—are these video ads, in-game ads, banner ads?
JP: These are primarily adjacency ads to our existing products. We’ve done a few things, sort of in-game experiences, but it’s rather limited. And advertising has not, to date, been a focus for us. We do not even have one person in our company dedicated to advertising at this time.
AB: If we look at the Chinese online gaming space, it seems like highly immersive massive multiplayer online games are better monetized than the casual games. And given that your games are shorter duration, more casual; what gives you the confidence about the ability to monetise these games?
JP: Well, it really all comes down to reach in different behaviours. You’ve got game room phenomena over in China and Korea, so people go in games rooms and play these online games. We don’t have that phenomenon here because we have a lot of personal computers in the home and people can buy downloadable games. In our markets we have 300-plus million people on Facebook alone, so that’s the equivalent of our game room. That’s where everybody has congregated and we’re simply going there and offering them a free model. While hardcore gamers, like a World of Warcraft have limited reach, games like a Maple Story or a Mobsters 2 or a Sorority Life game reach much broader demographics.
AB: Can you talk a little bit about who is your target customer.
JP: Target customer is anybody who lives inside the social networks, which these days feels like anybody. Facebook has users from 13 to 80 years old and it has equal distribution between men and women. Each of our game has a different demographic. Sorority Life appeals more to women; Mobsters 2 appeals more to men; Poker application appeals to a gaming or casino demographic. So if you took the aggregate of it, it’s broad-based and follows the populations of the social networks, with a primary target of 18 to 35.
AB: Can you give us some sense on how big this market could be and maybe if you could share some of your assumptions around market-sizing estimates?
JP: I think the western market is somewhere between $0.5-1.0 billion today and it can be $3-5 billion over the next three years. It’s growing more than 100 per cent a year and all the metrics are moving in the right way. That starts with Internet penetration worldwide, followed by social networking penetration, followed by per cent of users of social networks that play games, followed by per cent of people who pay inside of these games, followed by how many games they play per month, followed by ARPU per paying user. Add it all up; they’re all growing and if each of those things goes up you know 20 or 30 per cent or whatever the respective numbers are, it adds to 5-10x of the category over a three to four-year period of time.
AB: Can you share some of the metrics with us—typical conversion rate between playing users versus paying users; typical ARPU?
JP: It’s all over the map, but we see conversion in the range of 1-4%. Our ARPU per paying user tends to be about $20; but when you average it all in with all the non-paying people, it is about $0.20-0.25 cents per month.
AB: What is your growth strategy? Is it more about getting in more social network, clocking-up ARPU, or adding more games to get a bigger audience?
JP: Yes, the latter; more games, bigger audience. We have 15 games now and we hope to well more than double our size over the course of the next year. We have also acquired (Lil) Fram Life through our acquisition of Green Patch.
AB: Can you talk about your mobile strategy? Now that Apple has opened up its platform for in-game transaction, how does that change the landscape?
JP: We have our Mobsters product both online, as well as on the iPhone. We have booster packs that come off of that and that product is doing well for us. We have recently acquired Trippert Labs, which gives us dozens of applications on iPhone. Micro-transactions are an important part of this economy; it’s how it works, so I’m very excited that Apple is opening up their platform and enabling more Flash over time to live and exist inside the iPhone environment. Our games are live services and a consumer should be able to access them from any device they have, whether that’s a mobile device or a Notebook or a PC.
AB: Who do you think represents the biggest competitive threat for Playdom?
JP: Surely, Zynga and Playfish both are very similar companies as ours. Some of the independent developers can come up quickly and do nice jobs. Some of the big media companies are trying to get into this, foreign companies especially from China are aggressively moving into this space as well.
AB: What is the key source of differentiation for Playdom that is difficult for others to replicate?
JP: You have to make the products, and you have to know how to run a live service, and you have to have the infrastructure to manage the scale, which I think is one of our strengths. The other thing is that we’ve a very good combination of Internet people, gaming people, creative people, and live services people. You have to get the right blend of talent that can keep these things.
AB: Can you talk about the Facebook Credit? How does that change the payment landscape and what does that mean for a social gaming company like yours?
JP: I think that if Facebook were to create a universal payment system for a platform as large as theirs, I can imagine it would grow the ecosystem and drive conversion rates. Look at what happened to Amazon when they did 1-Click Ordering. I think it could have [a] material impact on our business.
AB: When you look out a couple of years, what do you see as the biggest challenges for Playdom?
JP: Our company has tripled in size in the last three months and when you’re growing like that, just staying high quality and high efficiency while driving absolute volume and throughput is a challenge. We are on a path to increase the size of our company by 5-10x in one year from a not-so-insignificant base. And in doing that you can create chaos or you can create a beautiful piece of art, that is the challenge.
AB: Can you give us some sense of how big Playdom is and how fast you might be growing?
JP: We have about 28 million users a month right now. We have about 220 full-time people, rapidly growing. We have north of $50 million in revenue this year. We are profitable.
AB: Of 25 million people that you mentioned, what’s the breakup between Facebook and MySpace?
JP: I’m guessing 60/40 on MySpace because we [have] 13 applications on MySpace and six on Facebook; but our revenue distribution tilts a little bit more toward Facebook.
AB: If you look out three years from now, where do you see Playdom? Do you see yourself as a public company, as an independent private company, or as a part of any bigger platform?
JP: We’re still a very young company with very big dreams and we’re trying to build a great self-sustaining enterprise. There are all kinds of things that could happen along the way. We’re not building the company to be sold rapidly. We’re trying to create IP. We’re trying to create a strong and lasting infrastructure. We can be a company that is worth billions of dollars by having hundreds of millions of revenue and having high profit margins. And mostly we’re trying to build great products that people love to play and enjoy playing and hopefully make their lives happier and meet more people and all the things that come from social gaming.
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