GaaS Whitepaper 2011

Please see analyst certification (Reg. AC) and other important disclosures on pages 416-417 of this report.
Think Entertainment: Gaming
Multi-Channel Games-As-A-Service II: Ubiquitous
Games In The Cloud
THINK SUMMARY:
We reiterate our thesis on Multi-channel Games-as-a-Service and project
strong growth alternate business models that we think are needed to support
the shift in games consumption away from Games-as-a-Product to
Games-as-a-Service. While we expect the worldwide video game market to
grow at a 7% CAGR over the next five years, we expect a shift in share of
platforms for the games - away from consoles to online and mobile (we expect
console games' share to be down to 39% in 2014 from 61% in 2009), and away
from Western markets (down from 54% to 50%) to Asian markets. We expect
social and mobile game to emerge as the fastest-growing segments, with
CAGRs of 35% and 24%, respectively, for the next five years.
KEY POINTS:
• We reiterate our thesis on Multi-channel Games-as-a-Service, which lets
players enjoy games at any platform (social networks, online, mobile, PC,
console) of his or her choice with the games experience optimized for each
platform, and gives the player the ability to change the platform but still pick
up the game from where he or she left off.
• To complement games moving from product to services, we expect business
models to evolve as well. We expect to see more games on subscription,
time-based, virtual goods, and hybrid models. We are particularly
encouraged by the free-to-play model, which enables perfect price
discrimination (a holy grail of marketing), and helps curb piracy and grow
community.
• So far, we have seen strong growth in virtual goods with free-to-play, and we
expect advertising to emerge as another significant opportunity as the
standardized ad units evolve. We expect the virtual goods markets to grow at
a 22% CAGR to $20 billion by 2014.
• While we have seen strong growth in social games on Facebook, we believe
that the social games off Facebook (including other social networks, and
platforms such as mobile, online, console) and improving monetization could
lead another leg of growth for social games. Overall, we expect the
worldwide social game market to grow at a 35% CAGR over the next five
years to reach $12.1 billion by 2014.
• We estimate that the mobile game market will grow at a 24% CAGR to reach
$7.1 billion by 2014. We expect mobile game growth to be driven by
continued momentum in Japan and strong growth in the U.S. and European
markets.
• We expect to see solid growth in online games, driven by rising Internet
penetration in emerging markets (Brazil, Russia, India, and China) and a
continued shift of user preferences. We estimate the worldwide online games
market will grow at an 9% CAGR, driven by 14% growth in the free-to-play
market and 2% CAGR for subscription and time-based models, to reach
$16.9 billion by 2014.
• However, we expect growth in console games to remain challenged, given
changing consumer preferences. We expect the consoles games market to
be driven by the momentum in larger titles and offset by marginalization of
the smaller titles. Overall, we estimate the console games software market
will decline by a 2% CAGR over the next five years to reach $20.9 billion by
2014.
Reason for Report:
Industry Update
Atul Bagga
415-249-6362, abagga@thinkequity.com
January 24, 2011
Industry Report

January 24, 2011
Industry Report
Multi-Channel Games-As-A-Service II:
Ubiquitous Games In The Cloud
Source: Getty Images
Atul Bagga
415-249-6362
abagga@thinkequity.com

January 24, 2011
Industry Report
Table Of Contents
Executive Summary....................................................................................................................................................5
Summary Market Size Estimate Tables For Video Game Industry ...................................................................7
Prologue................................................................................................................................................................... 11
Section 1: The Emergence Of Multi-Channel Games-As-A-Service................................................................. 14
Chapter 1: The Emergence Of Multi-Channel Games-As-A-Service ...................................................................... 15
Market Size Estimates For Overall Video Game Industry .............................................................................. 17
Chapter 2: Virtual Goods ......................................................................................................................................... 19
Definitions........................................................................................................................................................ 20
Why Do People Buy Virtual Goods? ............................................................................................................... 22
Why Are We Excited About Virtual Goods Business Model? ......................................................................... 24
Emerging Trends In Virtual Goods.................................................................................................................. 31
Market Size Estimates For Virtual Goods Market........................................................................................... 32
Chapter 3: Social Games......................................................................................................................................... 34
Why Are We Excited About Social Games ..................................................................................................... 35
What Have We Seen So Far?......................................................................................................................... 37
Emerging Themes In Social Games ............................................................................................................... 41
Market Size Estimates For Social Games ...................................................................................................... 48
Chapter 4: Online Games........................................................................................................................................ 50
Demand Drivers For Online Games................................................................................................................ 51
Market Size Estimates For Online Games...................................................................................................... 55
Chapter 5: Mobile Games........................................................................................................................................ 57
Drivers For Mobile Games .............................................................................................................................. 58
An Interview With The Senior Vice President of Mixi...................................................................................... 61
What Have We Seen So Far........................................................................................................................... 64
Emerging Themes In Mobile Game ................................................................................................................ 67
Market Size Estimates For Mobile Games...................................................................................................... 69
Chapter 6: Console Games ..................................................................................................................................... 70
Emerging Themes In Console Game Market.................................................................................................. 73
Market Size Estimates For Console Games................................................................................................... 75
Who We Think Will Succeed: Characteristics Of Winners In Games As A Service................................................ 76
Next Frontier ............................................................................................................................................................ 79

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Industry Report
Section 2: Video Games Market By Regions ...................................................................................................... 80
China............................................................................................................................................................... 83
Japan............................................................................................................................................................... 84
South Korea .................................................................................................................................................... 85
U.S. ................................................................................................................................................................. 86
Europe............................................................................................................................................................. 87
Section 3: Profile Of Publicly Traded Companies In Video Game & Video Game Eco-system ................. 88
Publicly Traded Games Companies By Market Capitalization ........................................................ 89
Publicly Traded Games Companies By Revenue ................................................................................ 90
Section 4: Interviews With Private Gaming Companies .................................................................................. 149
An Interview With The Co-Founder And CEO Of Aeria Games ................................................................... 150
An Interview With The Founder And CEO Of BOKU .................................................................................... 155
An Interview With The CEO Of CrowdStar ................................................................................................... 159
An Interview With The CTO Of Facebook..................................................................................................... 163
An Interview With The Founder And CEO Of GameDuell ............................................................................ 167
An Interview With The CEO And The President Of hi5 ................................................................................ 171
An Interview With The COO Of IGG ............................................................................................................. 178
An Interview With The CEO Of IMVU ........................................................................................................... 183
An Interview With The Founder And CEO Of Jambool................................................................................. 188
An Interview With The Founder And CEO Of Kabam................................................................................... 192
An Interview With The Founder And CEO Of Live Gamer............................................................................ 196
An Interview With The CEO Of Meez ........................................................................................................... 201
An Interview With The Founder And CEO Of Mind Candy........................................................................... 205
An Interview With The Co-Founder And CEO Of myYearbook .................................................................... 209
An Interview With The Founder And CEO Of OutSpark............................................................................... 213
An Interview With The CEO Of Playdom ...................................................................................................... 218
An Interview With The Founder And CEO Of PlaySpan............................................................................... 222
An Interview With The Founder And CEO Of Q Entertainment.................................................................... 226
An Interview With The Founder And CEO Of Rekoo.................................................................................... 229
An Interview With The Founder And CEO Of Serious Business .................................................................. 233
An Interview With The CEO Of Sulake ......................................................................................................... 237
An Interview With The CEO Of WildTangent................................................................................................ 241
An Interview With The Co-Founder And CEO Of World Golf Tour............................................................... 246
An Interview With The CEO Of Zapak .......................................................................................................... 251
An Interview With The Co-Founder And Co-CEO Of Zoosk......................................................................... 256
Section 5: Profile Of Private Companies In Video Game And Video Game Eco-System.......................... 260
Glossary of Terms.................................................................................................................................................. 412

January 24, 2011
Industry Report
Executive Summary
"I see no good reasons why the views given in this volume should shock the religious sensibilities of anyone."
Charles Darwin, The Origin Of Species, 1869.
In May 2009, we laid out our thesis on Multi-channel Games-as-a-Service that let players enjoy the game at any platform
of his or her choice with user experience optimized for each platform, and give the player the ability to change the
platform, but still pick up the game from where he or she left off (for details and background see our report, “Emergence
of Games-as-a-Service,” dated 05/09/09). In this report, we reiterate our thesis of Multi-channel Games-as-a-Service or
ubiquitous games-in-cloud and estimate strong growth alternate business models that are needed to support the shift in
games consumption away from games-as-a-product to Games-as-a-Service. While we expect the worldwide video game
market to grow at a 7% CAGR over the next five years; we expect a shift in share of platforms for the games - away from
consoles to online and mobile (we expect console games’ share to be down to 39% in 2014 from 61% in 2009); and away
from Western markets (down from 54% to 50%) to Asian markets. We expect social and mobile game to emerge as the
fastest-growing segments, with CAGRs of 35% and 24% respectively for the next five years.
Emergence Of Games-As-A-Service:
We reiterate our thesis on the next-gen Multi-channel Games-as-a-Service, which will let players enjoy the game at any
platform (social networks, online, mobile, PC, console) of his or her choice with the games experience optimized for each
platform, and give the player the ability to change the platform, but still pick up the game from where he or she left off. Not
only will the player be able to play the game on all platforms, but the game play will be optimized for the device. Overall,
we expect the worldwide video game market to grow at a 7% CAGR over the next five years to reach $54 billion by 2014.
However, we expect a significant shift in market share by platform. We estimate the console game market share will
decrease to 39% of the total video game software sales by 2014 from 61% in 2009.
Emergence Of Alternative Business Models
To complement games moving from product to services, we expect the business models to evolve as well. We expect to
see more games on subscription, virtual goods, and a hybrid of virtual goods and subscription model. We are particularly
excited about the free-to-play, which enables perfect price discrimination (a holy grail of marketing), and helps curb piracy
and grow community. So far, we have seen strong growth in virtual goods with free-to-play, we expect advertising to
emerge as another significant opportunity as the standardized ad units evolve. We expect the virtual goods markets to
grow at a 21% CAGR to $20 billion by the year 2014.
Continued Momentum In Social Games
While we have seen strong growth in social games on Facebook, we believe that social games off Facebook (including
other social networks, and platforms such as mobile, online, console) and improving monetization could lead another leg
of growth for social games. Overall, we expect the worldwide social game market to grow at 35% CAGR over the next five
years to reach $12.1 billion by 2014.
Expect Mobile Games Growth Driven By Rising Smartphones Penetration And Offset By Declining Featurephone
Market
We estimate the mobile game market will grow at a 24% CAGR to reach $7.1 billion by 2014. We expect the mobile
games growth to be driven by a continued momentum in Japan and a strong growth in the U.S. and European markets.
Expect Solid Growth In Online Games (Outside Social Networks)
We expect to see solid growth in online games driven by rising Internet penetration in emerging markets (Brazil, Russia,
India, and China) and a continued shift of users’ preferences toward consuming games as an online service and away
from packaged goods. We estimate that the worldwide online game market will grow at an 8% CAGR, driven by 13%
growth in the free-to-play market and 2% CAGR for subscription and time-based model, to reach at $16.6 billion by 2014.
While Console Games Is Expected To Remain Challenged
On the other hand, we expect the growth in console games to remain challenged, given changing consumer preferences
toward the Games-as-a-Service segment and socially connected environment away from consoles. We expect the

January 24, 2011
Industry Report
consoles game market to be driven by the momentum in the larger titles and offset by marginalization of the smaller titles.
Overall, we estimate the console games software market will decline by 2% CAGR over the next five years to reach $20.9
billion by 2014.

January 24, 2011
Industry Report
Summary Market Size Estimate Tables For Video Game Industry
"Difficult to see. Always in motion is the future."
Yoda, Star Wars: The Empire Strikes Back
Exhibit 1: Worldwide Video Game Market Size Estimates By Platform ($ Million)
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
Console 23,575 22,792 22,948 22,260 21,592 20,944 -2%
PC 1,993 1,990 1,988 1,986 1,985 1,985 0%
Online - Subscription 5,053 5,589 5,785 5,901 6,019 6,140 2%
Online - Free-to-Play 4,883 6,292 7,670 9,083 9,985 10,735 14%
Social Games 1,756 3,659 6,107 8,425 10,213 12,071 35%
Mobile Games 2,288 2,961 4,319 5,593 6,289 7,069 24%
Less: Social Mobile Games* 620 1,213 2,242 3,062 3,846 4,553 39%
Total 38,929 42,071 46,575 50,186 52,237 54,391 7%
Source: ThinkEquity LLC Estimates
* Our estimate for social game and mobile game both include the estimate for social-mobile game. We are, therefore,
netting social-mobile market size estimate to avoid double counting it in the total video game market size estimate.
Definition Of Categories:
Console Games Available on dedicated games consoles such as Xbox 360, PS3, Wii
PC Games Available in box version or digital download; users pay upfront for the game
Online – Subscription Games can be client-based or Web-based. Game client could be free or paid and maybe
downloaded and/or sold as a boxed product. Users need the Internet connection to play the
game and need to pay to play the game either monthly (subscription) or by hour (time-
based).
Online – Free-to-Play Games can be client-based or Web-based. Game client is free for users. Users need an
Internet connection to play the game but game play is free. Users may purchase virtual
goods to enhance their game experience.
Social Games Social games that are played on social networking sites such as Facebook, MySpace, Orkut,
QZone, Renren, Kaixin001, vKontakte, etc. Social games could also be played on mobile
social networks such as mixi, Gree, DeNA, Plus, Openfient, Apple Gamecenter, etc. (In the
table above, mobile social games are excluded from the social games category.)
Mobile Games Mobile games are played on mobile devices – smartphones, feature phones, mp3 players,
eBook readers, tablets (but not including the games on consoles like DS or PSP). Games
could be available as a product (download for a fee) or as service (either free-to-play or pay-
to-play). It includes social games on mobile social networks such as mixi, Gree, DeNA, Plus,
Openfient, Apple Gamecenter, etc.
Source: Respective company Websites for the images and ThinkEquity LLC

January 24, 2011
Industry Report
Worldwide Video Game Market Size Estimates By Region ($ Million)
Exhibit 2: Total Video Game Market
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
China 3,672 4,340 5,348 6,274 7,110 7,853 16%
Europe 8,207 8,837 9,748 10,531 10,809 11,083 6%
Japan 6,587 7,006 7,723 8,034 8,316 8,572 5%
South Korea 2,926 3,595 3,783 3,970 4,092 4,231 4%
U.S. 12,833 13,379 14,514 15,452 15,683 16,082 5%
Rest of World 4,703 4,914 5,460 5,925 6,227 6,571 8%
Total Games Market 38,929 42,071 46,575 50,186 52,237 54,391 7%
Exhibit 3: Virtual Goods Market
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
China 2,834 3,475 4,283 5,077 5,826 6,450 17%
Europe 729 1,443 2,073 2,759 3,145 3,513 25%
Japan 888 1,341 1,944 2,287 2,603 2,862 21%
South Korea 890 971 1,109 1,250 1,361 1,478 11%
U.S. 738 1,483 2,220 3,062 3,516 4,010 28%
Rest of World 297 567 947 1,356 1,652 1,961 36%
Total Virtual Goods 6,375 9,280 12,577 15,791 18,101 20,274 22%
Exhibit 4: Social Game Market
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
China 91 328 706 1,060 1,347 1,677 50%
Europe 394 903 1,405 1,965 2,365 2,745 32%
Japan 724 1,111 1,767 2,094 2,416 2,719 25%
South Korea 37 54 110 182 241 309 55%
U.S. 412 989 1,614 2,355 2,828 3,350 36%
Rest of World 97 274 505 769 1,015 1,272 47%
Total Social Games 1,756 3,659 6,107 8,425 10,213 12,071 35%
Exhibit 5: Online Game Market
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
China 3,491 3,923 4,540 5,093 5,648 6,051 11%
Europe 915 1,205 1,462 1,730 1,814 1,895 12%
Japan 1,172 1,375 1,453 1,524 1,569 1,602 4%
South Korea 2,778 3,422 3,558 3,682 3,788 3,894 3%
U.S. 1,138 1,385 1,645 1,917 2,011 2,109 11%
Rest of World 443 571 796 1,038 1,176 1,323 23%
Total Online Games Market 9,936 11,881 13,455 14,984 16,004 16,875 9%

January 24, 2011
Industry Report
Exhibit 6: Mobile Game Market
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
China 90 111 159 227 260 315 30%
Europe 516 608 826 1,125 1,229 1,363 22%
Japan 598 972 1,619 1,914 2,268 2,494 27%
South Korea 132 148 191 247 256 280 17%
U.S. 845 995 1,350 1,839 2,010 2,313 23%
Rest of World 106 127 175 241 264 304 24%
Total Mobile Games 2,288 2,961 4,319 5,593 6,289 7,069 24%
Exhibit 7: Console Game Market
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
U.S. 9,899 9,602 9,698 9,407 9,125 8,851 -2%
Europe 6,052 5,870 5,929 5,751 5,578 5,411 -2%
Japan 3,778 3,589 3,553 3,446 3,343 3,243 -3%
Rest of World 3,847 3,731 3,769 3,656 3,546 3,440 -2%
Console Games Market 23,575 22,792 22,948 22,260 21,592 20,944 -2%

January 24, 2011
Industry Report
Additional Tables
Exhibit 8: Worldwide Social Game Market Size By Monetization ($ Million)
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
Virtual Goods 1,493 2,988 4,907 6,707 8,116 9,539 34%
Advertising 263 672 1,199 1,718 2,098 2,532 39%
Total 1,756 3,659 6,107 8,425 10,213 12,071 35%
Exhibit 9: Worldwide Online Game Market Size Estimates By Business Model ($ Million)
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
Free-to-play 4,883 6,292 7,670 9,083 9,985 10,735 14%
Subscription and Time Based 5,053 5,589 5,785 5,901 6,019 6,140 2%
Total Online Games Market 9,936 11,881 13,455 14,984 16,004 16,875 9%
Exhibit 10: Worldwide Virtual Goods Market Size Estimates By Platform ($ Million)
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
Online (off-Social Networks) 4,883 6,292 7,670 9,083 9,985 10,735 14%
Social Network 873 1,774 2,665 3,645 4,270 4,986 29%
Mobile 620 1,213 2,242 3,062 3,846 4,553 39%
Total 6,375 9,280 12,577 15,791 18,101 20,274 22%

January 24, 2011
Industry Report
Prologue
“Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms. They speak of
electronic town meetings and virtual communities. Commerce and business will shift from offices and malls to networks
and modems…Baloney.
Do our computer pundits lack all common sense? The truth is no online database will replace your daily newspaper…
Discount the fawning techno-bubble about virtual communities. Computers and networks isolate us from one another. A
network chat line is a limp substitute for meeting friends over coffee. ”
Newsweek, February 27, 1995
Video game companies’ shares used to be Wall Street darlings; shares for companies like Activision and EA used to trade
at 30x PE. Investors saw the video game industry as a growth industry and, more importantly, as an industry that was
largely insulated to economic recessions—and rightly so, we think. In 2001-2002 when the overall economy was reeling
after the dot com bust, console games revenue grew 15% again in 2007 and 2008, when overall economic growth slowed
down to about 1%, video game grew at 30%.
Exhibit 11: Industry Growth And GDP
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
Video Gaming (LHS)
GDP (RHS)
Source: NPD, Bureau of Economic Analysis
Exhibit 12: Enterprise Value/Sales Multiple U.S. Video Game Companies Shares
0
1
2
3
4
5
6
7
Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09
ATVI
ERTS
TTWO
THQI
Source: FactSet

January 24, 2011
Industry Report
Then something went wrong.
During 2009, console games revenue was down 10% Y/Y, according to NPD. Until October 2010, console games revenue
is down another 8% Y/Y, according to NPD. During the same time, another set of companies were emerging from
nowhere, companies like Zynga, Playdom, Playfish, Crowdstar, Bigpoint, and IMVU. While traditional gamers, investors,
and publishers sneered/dismissed these opportunities, these companies appear to have emerged as meaningful
businesses and given validity to the space, in our view. We think that online, mobile, and social are no longer considered
fringe video game business. At all major industry conferences, we believe the most popular topic of discussion is online.
Austin GDC is now GDC Online, which we think is clearly a validation of the space.
If we plot the companies by three years revenue growth over 2008-2010E (2010E based on the Street estimates), only
one U.S.-based company (Zoo Entertainment), one Europe-based company (Gameloft), and one console games
company (Zoo Entertainment) makes the list of top 15 companies. All the other spots are taken by the Asia-based
companies – Japanese mobile social games companies (Gree, DeNA, mixi), Chinese online games companies (Tencent,
NetEase, Perfect World, ChangYou, Kingsoft, NetDragon), and South Korean online games companies (NeoWiz, NCSoft
and NHN).
Exhibit 13: Top Companies By Revenue CAGR (2008-2010E)
0%
10%
20%
30%
40%
50%
60%
70%
80%
0% 20% 40% 60%
EBIT Margin
RevenueCAGR(2008-2010)
Gree Inc.
DeNA Co. Ltd.
Zoo Entertainment Inc.
Gamevil Inc.
Perfect World Co. Ltd.
mixi Inc.
NHN Corp.
NetDragon Websoft Inc.
Tencent Holdings Ltd.
Neowiz Games Corp.
NCsoft Corp.
Netease.com Inc. ADS
Changyou.com Ltd.
Kingsoft Corp. Ltd.
Gameloft S.A.
Bubble size scaled to the market-cap of the companies
Source: Consensus estimates via FactSet and ThinkEquity LLC

January 24, 2011
Industry Report
Exhibit 14: Games Companies By Revenue CAGR (2008-2010E) ($ Million)
Rank Ticker Company Name Country Market Cap EBIT Margin Revenue CAGR
as on 15-Nov-10 CY2010E 2008-2010E
1 3632-JP Gree Inc. Japan 2,699 55% 69%
2 700-HK Tencent Holdings Ltd. China 42,067 51% 55%
3 2432-JP DeNA Co. Ltd. Japan 4,121 48% 54%
4 095660-KR Neowiz Games Corp. Korea 932 26% 51%
5 ZOOG-US Zoo Entertainment Inc. U.S. 32 9% 50%
6 036570-KR NCsoft Corp. Korea 4,318 47% 43%
7 063080-KR Gamevil Inc. Korea 139 55% 31%
8 NTES-US Netease.com Inc. ADS China 5,254 47% 29%
9 PWRD-US Perfect World Co. Ltd. China 1,511 41% 28%
10 CYOU-US Changyou.com Ltd. China 1,623 62% 24%
11 2121-JP mixi Inc. Japan 747 20% 22%
12 3888-HK Kingsoft Corp. Ltd. China 614 39% 16%
13 035420-KR NHN Corp. Korea 7,702 45% 14%
14 GFT-FR Gameloft S.A. France 440 10% 11%
15 777-HK NetDragon Websoft Inc. China 229 11% 11%
16 COOL-US Majesco Entertainment Co. U.S. 25 1% 11%
17 9684-JP Square Enix Holdings Co. Ltd. Japan 2,205 14% 10%
18 GAW-GB Games Workshop Group PLC UK 214 12% 7%
19 3812-JP GameOn Co. Ltd. Japan 55 10% 6%
20 GME-US GameStop Corp. (Cl A) U.S. 3,305 7% 4%
21 9697-JP Capcom Co. Ltd. Japan 891 13% 3%
22 6460-JP Sega Sammy Holdings Inc. Japan 4,071 14% 2%
23 GA-US Giant Interactive Group Inc. ADS China 1,583 59% 1%
24 GAME-US Shanda Games Ltd. ADS China 1,809 30% 1%
25 THQI-US THQ Inc. U.S. 291 0% 1%
26 UBI-FR Ubisoft Entertainment S.A. France 1,237 2% 0%
27 9766-JP Konami Corp. Japan 2,467 9% 0%
28 GMG-GB GAME Group PLC UK 401 3% -1%
29 ERTS-US Electronic Arts Inc. U.S. 5,204 6% -1%
30 ATVI-US Activision Blizzard Inc. U.S. 14,611 29% -2%
Source: Consensus estimates via FactSet and ThinkEquity LLC
We believe it is clear that the online game market potential is much bigger based on these facts: (a) As compared to an
installed base of about 200 million of video game consoles (current and the past generation combined), there are more
than 1.7 billion Internet users in the world. (b) Games is the top category of application on Facebook and Apple AppStore,
(c) There are almost 200 million users playing the top five Facebook games, and users are not just playing these games,
they are also spending time on these Websites. According to a recent Disney survey of 3,000 children aged 8-14, nearly
80% spend the majority of their time online playing games.
Games-as-a-Service is not a new phenomenon—it has been the dominant model in Asia (China, South Korea), where
games are mostly sold online and as a service. Even in the West, titles like World of Warcraft have been immensely
popular. However, the strong growth in Facebook games in 2009 really drove the usage and the investors’ attention to
Games-as-a-Service to the next level, in our opinion. Now, almost every traditional video game company is talking about
its aggressive online and social games initiatives.
Traditional box-sale models do not work well with Games-as-a-Service, and we are seeing evolution of other business
models such as virtual goods, time-based, subscription, and hybrid. We particularly like the virtual goods model. While it is
a relatively new model in the West, the virtual goods market is already a multi-billion dollar industry in Asia, e.g., almost
70% of games revenue in China comes from the sale of virtual items. The virtual goods model has seen a sharp growth in
the Western Hemisphere, driven by the social games, which we estimate grew at about 200% in 2009.

January 24, 2011
Industry Report
Section 1: The Emergence Of Multi-Channel Games-As-A-Service

January 24, 2011
Industry Report
Chapter 1: The Emergence Of Multi-Channel Games-As-A-Service
“The U.S. Postal Service reported a 3.5 billion dollar loss in the last quarter. Experts say that, eventually, the post office
could turn a profit if this e-mail thing turns out to be just a fad.”
Jay Leno, August 2010
We believe that people in today’s Internet generation are trying to stay connected with their friends at all times. With
increasing capabilities and functionalities of smartphones, users are connecting with their friends on their mobile devices
while on the move (think Twitter, Facebook, Google, FourSquare, Gowalla) and via computer while at work, school, or
home.
Video game will be no different, in our opinion. We believe that just as people want to stay connected with their friends on
social networks, players want to stay connected with their friends on virtual worlds/game environments. With the next-
generation of gaming phones, we expect to see convergence between social game, mobile game, and online game. We
believe this convergence makes sense not only for core gamers who may want to track their guild activities, but even for
the casual gamers who may want to use the same avatar (a representation of the gamer in the game environment) on all
platforms to make progress within game levels and to share achievements irrespective of the platform.
We think that next-gen Multi-channel games will let players enjoy the game at any channel of his or her choice and give
the player the ability to change the channel, but still pick up the game from where he or she left off. For example, “Jane”
can play a game on her console at home, and when she leaves for work, she can continue to play the same game on her
mobile device. While at work, she can check the stats, send a message to one of her guild friends, or even play the game
on her work computer without the need for a separate download and while using the same avatar that she used in her
console or mobile device. Not only will she be able to play the game on all channels, but the game play will be modified in
all three instances to make the best of available hardware and to maximize the gaming experience based on the players’
device preference at that time.

January 24, 2011
Industry Report
Exhibit 15: Emergence Of Games-As-A-Service
FreeFree--toto--PlayPlay
Pay to PlayPay to Play: Upfront Purchase; Subscription
Virtual
Goods
Ads
Premium
Content
Subscription
Others – App
Install,
Incentive
Marketing
PC
Gaming
Console
Gaming
Mobile
Gaming
Online
GamingSocial
Gaming
Multi-Channel Games-As-A-Service
Source: ThinkEquity LLC

January 24, 2011
Industry Report
Market Size Estimates For Overall Video Game Industry
"There is no reason anyone would want a computer in their home."
Ken Olson, president, chairman and founder of Digital Equipment Corp., 1977
We expect the overall video game market to continue to grow at a 6% CAGR over the next five years. However, we
expect a major shift in how games will be consumed over the next five years. We expect the growth to be fastest in the
social games segment at a 32% CAGR, followed by mobile games, at a 24% CAGR. We expect the console game market
to continue to decline at a 2% CAGR during the same period.
As a result, we expect the share of the emerging platform to continue to rise at the expense of console games software.
We expect the inflection point to occur in 2011, when we expect the share of console games to fall below 50% of the total
game market (down from 61% in 2009). By 2014, we expect roughly two-thirds of the games software revenue to come
from platforms other than games consoles.
Exhibit 16: Worldwide Video Game Market Size By Platform (US$ Million)
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
Console 23,575 22,792 22,948 22,260 21,592 20,944 -2%
PC 1,993 1,990 1,988 1,986 1,985 1,985 0%
Online - Subscription 5,053 5,589 5,785 5,901 6,019 6,140 2%
Online - Free-to-Play 4,883 6,292 7,670 9,083 9,985 10,735 14%
Social Games 1,756 3,659 6,107 8,425 10,213 12,071 35%
Mobile Games 2,288 2,961 4,319 5,593 6,289 7,069 24%
Less: Social Mobile Games* 620 1,213 2,242 3,062 3,846 4,553 39%
Total 38,929 42,071 46,575 50,186 52,237 54,391 7%
* Our estimate for social game and mobile game both include the estimate for social-mobile game. We are, therefore,
netting social-mobile market size estimate to avoid double counting it in the total video game market size estimate.
Exhibit 17: Worldwide Video Game Market Share By Platform
0%
20%
40%
60%
80%
100%
2009E 2010E 2011E 2012E 2013E 2014E
Mobile Games
Social Games
(excl. Social
Mobile Games)
Online -Free-to-
Play
Online -
Subscription
PC
Console

January 24, 2011
Industry Report
We expect China to continue to lead the growth in the video game industry with 14% CAGR over the next five years,
driven by rising Internet penetration and rising ARPU (as a result from improving per capita income); followed by Japan at
5% CAGR, driven by higher monetization (given our projection of game consumption shifting from mid-session games to
persistence games that drive better life-time-value); and emerging markets (such as India, Brazil, Russia) driven by rising
Internet penetration and consequently a shift of consumer spending from pirated games DVDs to legitimate online games.
Exhibit 18: Worldwide Video Game Market Size By Region ($ Million)
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
China 3,672 4,340 5,348 6,274 7,110 7,853 16%
Europe 8,207 8,837 9,748 10,531 10,809 11,083 6%
Japan 6,587 7,006 7,723 8,034 8,316 8,572 5%
South Korea 2,926 3,595 3,783 3,970 4,092 4,231 4%
U.S. 12,833 13,379 14,514 15,452 15,683 16,082 5%
Rest of World 4,703 4,914 5,460 5,925 6,227 6,571 8%
Total Games Market 38,929 42,071 46,575 50,186 52,237 54,391 7%
Exhibit 19: Worldwide Video Game Market Distribution By Region
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009E 2010E 2011E 2012E 2013E 2014E
Rest of World
U.S.
South Korea
Japan
Europe
China

January 24, 2011
Industry Report
Chapter 2: Virtual Goods
"I have traveled the length and breadth of this country and talked with the best people, and I can assure you that data
processing is a fad that won't last out the year."
The editor in charge of business books for Prentice Hall, 1957.
Gamers are willing to spend money, in our view. Thousands of gamers spend hundreds and thousands of dollars to go to
E3 and Blizzcon just to get a sneak peek of the upcoming games. In our opinion, the Games industry in the West has not
done a great job of monetizing these users. On the other hand, we see what we believe is a great example of user
monetization in the East. Chinese per-capita spending on video game is 50% higher than that in the United States. The
gap between spending looks even more significant if we think about the discretionary budgets of the families, i.e., income
after essential spending (food, house, clothing). There are multiple explanations for higher spending in the East, but one
of the major factors, in our opinion, is the virtual goods model, which contributes a very small percentage of the U.S. video
game revenue but almost 70% of the video game revenue in China.
Exhibit 20: Average Game Spend As Percentage Of Per-Capita Income
Games Spend as %of Per-Capita Income
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
2003 2004 2005 2006 2007 2008 2009 2010E
U.S.
China
Games Spend as %of Per-Capita Income (ex. Food)
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
0.45%
0.50%
2003 2004 2005 2006 2007 2008 2009 2010
Source: National Bureau of Statistics of China, EuroMonitor International, Internet World Stats, and ThinkEquity LLC
estimates
We have reasons to believe that the virtual goods model is one of the reasons for strong growth (and, therefore, higher
spending) in China. One example, Mir2, one of the largest MMOs in China saw an average 40% revenue growth during 3
years after the model was transitioned to free-to-play in 2005 versus 32% growth from 2001 to 2005 during the
subscription-based period. This is not an isolated example. Even in the West, companies like Turbine experienced a
significant growth in Dungeons and Dragons Online and Lord of The Ring Online, as did Sony with EverQuest, when they
changed the model to virtual goods from pure subscription-based.

January 24, 2011
Industry Report
Definitions
Digital Goods
By digital goods, we refer to items that users can buy in the virtual environment that may be a replacement of items from
the physical environment such as books, music, software, games, images, and videos. The cost of goods for digital goods
would be significantly higher than that of virtual goods, given there may be royalty and development. The main difference
between digital and virtual goods is that digital goods may be available in non-digital format (or non-virtual) as well, such
as books, DVDs, while virtual goods are available in digital format and may not be used in the real environment at all.
While we acknowledge that some may want to include digital goods (or some digital goods) in their definition of virtual
goods, we are not including digital goods in our definition of virtual goods for the purpose of this report.
Exhibit 21: Examples Of Digital Goods
Source: myamericanperspective.com, Apple, Amazon.com
Virtual Goods
Virtual goods refer to the items that a user can buy in a virtual environment that may not have use in the physical
environment. Cost of goods for these items may be close to zero unless there is a royalty associated (such as for branded
virtual goods). The main characteristics of the virtual goods are (a) they are available only in digital format, (b) may be
sold digitally online, and (c) should have contextual meaning.
We define two main categories of virtual goods
- Vanity Virtual Goods such as gifts or decorative items. The driver for vanity goods is often self-expression either
aimed for a specific person or, in most cases, to a large group. While some people may be baffled with the concept of
spending real cash on a virtual item, we equate buying behavior of vanity virtual goods the same as that for luxury
branded goods. Just like people who want to express themselves in the real world are willing to spend extra dollars for
a branded good, people who are comfortable expressing themselves in the virtual world will be comfortable spending
on virtual goods.
- Functional Virtual Goods such as performance accelerators (consumables or long lived). Functional virtual goods
are items that a player may need to advance level in a game. Since people have already been trained to pay for non-
tangible products (downloaded games, digital music, ebooks), spending on functional virtual goods was an easier first
step toward virtual goods. In addition, a large underground market for World of Warcraft’s gold already reflects on the
people’s propensity to pay for virtual goods and also has trained gamers to pay for functional virtual goods, in our
opinion.
Exhibit 22: Virtual Goods

January 24, 2011
Industry Report
Zynga (http://farmvillefreak.com), Sulake (http://www.viralblog.com)

January 24, 2011
Industry Report
Why Do People Buy Virtual Goods?
"But what...is it good for?"
Engineer at the Advanced Computing Systems Division of IBM, 1968, commenting on the microchip.
We believe that people buy virtual goods for the same reasons people buy physical goods.
Self Expression in the Virtual World
Similar to people who are comfortable spending on luxury brand items to express themselves in physical environment,
virtual inhabitants are comfortable spending real dollars to express themselves in their virtual environment. Self
expression through virtual items becomes even more important in the virtual environment, given that the users cannot
express themselves through emotions/body language in a virtual environment. To make up for that issue, users can buy
virtual goods to express themselves either through dressing up their avatar, changing physical attributes of the avatars
(hair color, eye color, body type etc.), or decorating their virtual space.
Exhibit 23: Self Expression In Virtual World
Source: LOLApps, IMVU (http://blog.tapjoy.com)
Socializing/Flirting/Gifting
One of the primary reasons users join a virtual world is to socialize, to make new friends and/or to flirt. While users cannot
express their feelings to others via body language or facial emotions, they can achieve the same through gifting virtual
items. Most discovery-focused social networking sites offer features like “wink,” “smile,” and gifts like virtual flowers,
birthday cakes, etc.
Exhibit 24: Socializing Or Flirting In Virtual Environment
Source: http://www.flytrapgames.com, Zoosk (http://blog.zoosk.com)

January 24, 2011
Industry Report
To Gain Competitive Advantage
The third common reason (and the biggest reason in terms of dollar sales from virtual goods) why people buy virtual
goods is to gain competitive advantage through improving performance or features, in our view. For video game players,
the goal is usually to beat another player or system and advance level. Through virtual goods, users can acquire more
powerful weapons, potions that temporarily increase defense/attach a mechanism to defeat opponents and help advance
level.
Exhibit 25: Virtual Goods To Gain Competitive Advantage
Source: Zynga, Perfect World

January 24, 2011
Industry Report
Why Are We Excited About Virtual Goods Business Model?
"This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is
inherently of no value to us."
Western Union internal memo, 1876.
My “love affair” with micro-transactions started long before I had heard of virtual goods, long before I played online games,
heck, long before even I knew much about the Internet.
In the late 80s and early 90s, we saw a revolution happening in the consumer goods space in India. We saw the
consumer goods vendors' ability to grow the market multi-fold by reducing accessibility barriers, by offering products in
smaller byte size, or as we call them now, micro-transactions. Without passing any judgment on right or wrong, the sale of
flavored chewing tobacco (gutkha) grew multi-fold within just a couple years after packaging innovation made it possible to
sell gutkha in 5 grams pouches for about $0.01 (1/20
th
the cost of previously available packs) and brought it within reach
of the mass market. Similarly, the shampoo market grew after the small one use packs were made available for as little as
$0.01, within reach of mass markets. I believe that just as innovation in packaging resulted in increased consumption of
chewing tobacco and shampoo in India, innovation in the business model (virtual goods) could grow the consumption of
video game content for audiences around the world.
Exhibit 26: Transformation Of Market By Unit Packs (Shampoo, Chewing Tobacco)
Source: http://www.usabilitymatters.org , www.eastwestbazaar.com , www.desistores.net
We like the free-to-play virtual goods business model for three main reasons: (a) we believe that the virtual goods model
enables perfect price discrimination for customers, (b) we believe that the virtual goods model helps control piracy and
build community, and lastly and probably most importantly, (c) we believe that virtual goods model could help publishers
enhance the lifetime value of their users.

January 24, 2011
Industry Report
An Interview With The Chairman & Managing Director Of Multi-Flex Lami-Print Limited
We turn to Anil Dang, Chairman and Managing Director of Multi-Flex, one of the largest packaging manufactures in India
for some historical perspective.
Atul Bagga (AB): Please explain what is Multi-Flex?
Anil Dang, Chairman & Managing Director, Multi-Flex (AD): Multi-Flex is the fourth-largest flexible packaging manufacturer
in India. Flexible packaging is packaging that is not rigid and usually made from plastic films, aluminum foils, and
paper. Some of the applications of flexible packaging material are things like candy wraps, bag of chips.
AB: How long you have been in this business, and can you give us some historical perspective on this industry?
AD: I have been in this industry since 1987. Since late 80s, the flexible packaging industry in India grew at more than
25% per annum and is currently about the size of $5 billion per year. The industry continues to grow at about
25%.
AB: What are the drivers of growth, then and now?
AD: Drivers of growth have not changed in the last 20 years. The key growth drivers have been better shelf life,
temper proof packaging, better aesthetics, and, most important of all, ability to sell units pack with flexible
packaging. Ability to sell unit packs the most important because in India, mass market cannot afford to spend high
upfront for bigger packs and rely on unit or single packs that are available at much reasonable prices.
AB: Can you talk about a few applications and how that drove the growth for the industry?
AD: Sure. A couple breakthroughs were in Shampoo and Gutkha (flavored chewing tobacco). Gutkha and paan
masala (mouth freshener) used to be sold in the tin boxes, package size used to 100-200 grams, and it used to
cost about Rs.20-30 per box. Unfortunately, spending Rs.20-30 was out of reach for a majority of population, but
the manufacturers had no other option to reach the broader audience. Then in mid 1980s, flexible packaging
started gaining ground, and it allowed the vendors to pack Gutkha in smaller size, typically 2-5 grams, which they
could sell for Rs.0.50-1.00. By offering a byte size pack, all of a sudden, Gutakha was in reach of a mass
audience who can easily spend Rs0.50 multiple times a day. Today more than 95% of the Gutkha is sold in unit
packs. Gutkha and paan masala (mouth freshener) industry account for almost half of the total flexible packaging
industry in India.
Similarly, we saw a huge spurt in shampoo industry. Until mid 1980s, shampoos used to be sold in glass bottles,
weighing about 200-500 ml that used to sell for Rs.30-50 each. With the advent of flexible packaging, shampoo
manufacturers were able to pack shampoo in a single-use sachet, about 5-7 ml that would retail for about
Rs.0.50-1.00, which opened the floodgates for shampoo consumption in the country. Before sachet packs,
shampoo was considered luxury item, used mostly in the mid- and higher-income users and with single-use pack,
vendors were able to penetrate mass markets including rural areas. Today, almost 70% of the shampoo is sold in
single-use unit packs.
Similarly, we are seeing the same phenomenon in many other consumer industries such as cosmetics, food
products, candies and others, basically any consumer item that has appeal for the mass markets.
AB: Thank you so much for speaking with us and sharing insights.

January 24, 2011
Industry Report
Virtual Goods Model Enables Perfect Price Discrimination
Unlike fixed fee-based models (such as subscription or outright purchase), the virtual goods model allows vendors to price
discriminate their customers by letting players choose the value they assign to the game. By making games free-to-play,
vendors are able to attract a larger audience. Players with free time on their hands (like students and cost-cautious
players) will spend time/effort to advance levels in the games, while players who need instant gratification of moving up
the ladder (like ex-core gamers and core gamers) will rely on virtual goods. While we acknowledge that some of the
players who would’ve spent $60 for the game may not spend the equivalent amount in the free-to-play model, we argue
that the free-to-play model will encourage some otherwise non-paying players to spend on the game and some hardcore
players to spend much more than what they would’ve spent with the fixed fee model.
Exhibit 27: ARPU Distribution Curve Of ZT Online, A Free-To-Play Game By Giant Interactive
(20)
-
20
40
60
80
100
120
140
160
- 500 1,000 1,500 2,000
Users ('000)
ARPu($/Month)
Source: Company reports and ThinkEquity LLC

January 24, 2011
Industry Report
Perfect Price Discrimination: Holy Grail Of Producers Pricing
Shown on the left is a typical supply-demand curve in a
normal functioning market. The demand curve is represented
by the red line and the supply curve is represented by the
blue line. Equilibrium occurs at a price point where marginal
cost equals marginal revenue, i.e., where the demand and
supply curve intersect. However, at the equilibrium price
point, a number of customers benefit as they only have to pay
the market clearing price, which is lower than their perceived
value of the goods. The amount that these consumers (with
low price elasticity) end up saving is called consumer surplus
(represented by the yellow shaded region).
Producers use a variety of price discrimination techniques to
minimize consumer surplus and maximize producer surplus.
Simply speaking, price discrimination suggests that producers
can offer the identical goods or services at different prices.
The simplest form of price discrimination is used by retailers
in the form of discount coupons. With the simplest form of
price discrimination, a demand curve is divided into two parts
and a higher price is charged to the consumers with low price
elasticity while a lower price is charged to consumers with
high price elasticity.
The “Holy Grail” for the producer is to achieve perfect price
discrimination, i.e., charging every consumer the price that he
or she is willing to pay, thus fully eliminating consumer
surplus. With the marginal cost of virtual goods close to zero,
there is effectively no “supply” curve – goods are readily
supplied at all price points.
Supply
Demand
Price
Quantity
Halo 3:
Standard
Pricing(1)
Hardcore gamers could
spend incrementally
more, if desired
Yet Still, Lost
Revenue
$60
$75
$90
$
Supply
Price
Quantity
Equilibrium
Point = All
Customers Pay
One Price
Consumer Surplus
= Lost Revenue
$
Supply
Demand
Price
Quantity
Source: ThinkEquity LLC estimates, respective company Websites

January 24, 2011
Industry Report
Effective Way To Control Piracy And Build Community
Although the lure of converting pirated copies into legal copies by effective anti-piracy measures may seem lucrative, a
couple real-life examples suggest that the conversion rates remain insignificant with anti-piracy measures. On the other
hand, anti-piracy measures generally cause inconvenience and, thus, user dissatisfaction for legitimate buyers, which risk
the popularity of the games. For example, Electronic Arts’ “Spore” was one of the top ranked games at Amazon, but was
also a highly pirated game. As Electronic Arts put stringent anti-piracy controls into place, the number of illegal downloads
was reduced, but so was the ranking. However, the free-to-play model enables vendors to build community and
momentum without worrying about piracy. We believe the question that game vendors will have to answer is, are they
willing to sacrifice community around the game and potentially jeopardize the popularity of the game to be able to sell an
insignificant number of titles or can they find alternative ways to monetize users who wouldn’t want to pay hard cash for
the game? We believe that vendors (especially the newcomers, without the legacy of owned IPs) will be willing to eschew
the loss of upfront sale and embrace the alternative monetization models such as virtual goods.
Exhibit 28: Userbase Of A Few Top Online Games
0
10
20
30
40
50
60
70
Million
World of Warcraft
- Global
Subscribers
TLBB -
Registered
Accounts
Happy
Acquarium - MAU
Farmville - MAU
Source: Company reports, Developer Analytics

January 24, 2011
Industry Report
Increase Longevity And Improve Games’ Stickiness
Unlike a fixed fee game, where players are only putting in effort to advance levels, in the virtual goods model-based
games, players advance levels though effort as well as through spending hard cash on virtual goods. And so, with every
virtual goods purchase, players are increasing their investment in the game and, thus, increasing switching costs for
themselves, increasing the longevity of the games. In addition, the free-to-play model attracts more users (lure of free)
and the larger community itself becomes a draw for new players.
This was evident in the example of Shanda, a Chinese video game vendor that was able to grow revenue and increase
useful life of its games by converting the business model from a subscription model to a free-to-play model.
Exhibit 29: Annual Revenue Contribution From Shanda’s Legend Of Mir 2
$0
$50
$100
$150
$200
$250
$300
2004 2005 2006 2007 2008
Year
Revenue($million)
Source: Company reports (Shaded area represents the game was converted to free-to-play model)
Ability To Grow ARPU:
The virtual goods model, by definition, delimits ARPU. Unlike the subscription model or outright purchase model where
users pay a fixed fee for one-time purchase or monthly (or hourly) subscription, users in virtual goods pay based on their
engagement level with the game—the more they are engaged, the more they value the game, the higher their spending is
likely to be. The virtual goods model gives vendors the ability to link customers’ perceived value with the price of the
game. It’s no surprise then that smart companies can do a perfect segmentation of the market and optimize the price-
demand curve of their product.
Arbitrage Between Time And Money
We believe that virtual goods could offer a significant arbitrage between time and money of the player. Imagine if you
started playing a free-to-play virtual goods game while you were in school. You probably had a lot of time on your hands,
but may not have had monetary resources, so likely you spent nothing or very little in dollars but you made that up by
spending a lot of time on the game. Now fast forward a couple years, you have a job and, arguably, your time commitment
for the game has gone down but, at the same time, your disposable income is up. Assuming that you are still passionate
about the game, you may not spend as much time as you did when you were in school, but you would now make it up by
spending dollars to buy power items to advance levels. You can extend the sequence through the lifecycle of gamers, and
with every milestone (job, relationship, family expansion), arguably the player’s time commitment for the game is going
down, but if his passion for the game remains intact, she or he can arbitrage time with money.

January 24, 2011
Industry Report
Exhibit 30: Average ARPPU Of Chinese Gamers
-
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
2003 2004 2005 2006 2007 2008 2009 2010
ARPU(US$/Year)
Source: Company reports and ThinkEquity LLC

January 24, 2011
Industry Report
Emerging Trends In Virtual Goods
"We don't like their sound, and guitar music is on the way out."
Decca Recording Co. rejecting the Beatles, 1962
Virtual Goods On Console
During 2009, console games sales were down 10% in the U.S. (according to NPD), down 15% in UK (according to
ELSPA), and down 3% in Japan (according to Enterbrain). Interestingly, while console game sales are down, the average
console gamer has continued to spend 8-12 hours/week playing games which is in the same range as that in 2009 and
2008, according to a survey by IDC. We postulate that the emergence of online and multi-player games have increased
the stickiness of these games on consoles, thus, giving more value to the consumers than before. According to Activision,
during the first five months of the launch, Call of Duty: Modern Warfare 2 was played 1.75 billion hours on Xbox Live
alone; we estimate that the average user plays online, multi-player Modern Warfare 2 15-20 hours/week. Similarly, Halo
Reach was played 12 million hours within three days of launch. While users have been able to stretch the value from
video game purchases, video game software publishers have not fully captured their share in the value chain, in our view.
While we are encouraged with these companies' more-aggressive DLC strategy, which we believe carries higher margin,
lower development costs, and relatively lower risks, we believe that companies will also try to capture more economies in
online gameplay of the popular franchises.
Virtual Goods On Mobile
Consistent with our theme of Multi-channel Games-as-a-Service, we believe that mobile will emerge as an extension of
the online world and as such users will exhibit similar trends on mobile as they do on the Web.
User-Generated Content
We believe that user-generated content could offer wider choices that make sense for users who are looking to express
their individuality. On the other hand, managing a user-generated content market and economy could be trickier than
managing a vendor generated-content/economy.

January 24, 2011
Industry Report
Market Size Estimates For Virtual Goods Market
"I think there is a world market for maybe five computers."
Thomas Watson, chairman of IBM, 1943.
We expect the worldwide market for virtual goods to more than triple to $20.3 billion by 2014, up from $6.4 billion in 2009.
We expect the growth to be led by emerging markets for virtual goods i.e., U.S., Europe and Japan. We expect the US
and European markets to grow at 28% and 25% CAGRs, respectively, largely driven by growth in social games and online
free-to-play games. We expect the Japanese market to grow at a 21% CAGR over the next five years, largely driven by
the growth on mobile platforms. On the other hand, we expect a relatively matured market for China to continue to grow at
17% CAGR over the next five years, driven largely by rising Internet penetration, especially in the rural regions, and
expect Korean markets to grow at a relatively modest rate of 11%, driven largely by a continued shift in the video game
consumption from a subscription-based to a virtual-goods-based model. We also expect strong growth in emerging
regions (such as Brazil, Russia, India), which will grow at a 36% CAGR over the next five years, largely driven by rising
Internet penetration in these regions.
Exhibit 31: Worldwide Virtual Goods Market Size Estimates By Region (US$ Million)
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
China 2,834 3,475 4,283 5,077 5,826 6,450 17%
Europe 729 1,443 2,073 2,759 3,145 3,513 25%
Japan 888 1,341 1,944 2,287 2,603 2,862 21%
South Korea 890 971 1,109 1,250 1,361 1,478 11%
U.S. 738 1,483 2,220 3,062 3,516 4,010 28%
Rest of World 297 567 947 1,356 1,652 1,961 36%
Total Virtual Goods 6,375 9,280 12,577 15,791 18,101 20,274 22%
Exhibit 32: Worldwide Virtual Goods Market Share By Region
0%
20%
40%
60%
80%
100%
2009E 2010E 2011E 2012E 2013E 2014E
ROW
Korea
Japan
Europe
US
China

January 24, 2011
Industry Report
In terms of platform, we believe that online (off-social networks) will maintain the dominant share of the virtual goods
markets, given the sizable markets and growth potential in China and Korea and emerging potential for MMOs in the
Western World and emerging markets. We estimate online virtual goods markets (excluding social games) to grow at a
14% CAGR to reach $10.7 billion by 2014, up from $6.3 billion in 2010. We expect the virtual goods on social networks to
grow at 29% CAGR to reach a $5.0 billion market worldwide by 2014, up from $1.8 billion in 2010. We expect the fastest
growth in virtual goods to come from mobile game markets, driven by a continued strong growth momentum in mobile
social games in Japan and growth in the U.S. and Europe. We expect mobile virtual goods to grow at a 39% CAGR over
the next five years to reach $4.6 billion by 2014 up from $1.2 billion in 2010.
Exhibit 33: Worldwide Virtual Goods Market Size Estimates By Platform (US$ Million)
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
Online (off-Social Networks) 4,883 6,292 7,670 9,083 9,985 10,735 14%
Social Network 873 1,774 2,665 3,645 4,270 4,986 29%
Mobile 620 1,213 2,242 3,062 3,846 4,553 39%
Total 6,375 9,280 12,577 15,791 18,101 20,274 22%
Exhibit 34: Worldwide Virtual Goods Market Share By Platform
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009E 2010E 2011E 2012E 2013E 2014E
Mobile
Social Network
Online (off-Social Networks)

January 24, 2011
Industry Report
Chapter 3: Social Games
"The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in
particular?"
David Sarnoff's associates in response to his urgings for investment in the radio in the 1920s.
Social games bring a fundamental shift in video game—away from a single player shooting aliens or killing monsters to a
fun activity where one is playing with one’s real life friends in a virtual environment. Social games enables players to play
against their real life friends and provide a place to hang out in a game environment, thus, taking the games back to their
roots as fun activities. We believe that social networks have been the “hottest” trend in the 21st century, exhibiting the
fastest growth of any media. According to Nielson, more than two-thirds of online users have participated in a social
network over the past year, and we expect this number to continue to rise. The trend is not limited to the young users
anymore, and people ages 35-54 years have shown the highest growth of any demographics, according to the user
demographic statistics by Facebook. Despite significant size, strong community, and solid ecommerce platforms, most
social networks have struggled with monetizing their users. Most social networks have traditionally relied on banner and
text ads for user monetization; however, given low conversion rates (less than one-tenth of a percent), display ad rates for
most social networks hover at about $0.10-0.25 CPM (cost per thousand impressions). We believe that online games
provide a natural way for social networks to monetize users through in-game advertising and, more importantly, through
virtual goods sales. We believe that not only will games help social networking sites monetize their users, but they will
also help to increase the stickiness of these social networking sites.

January 24, 2011
Industry Report
Why Are We Excited About Social Games
“With over 50 foreign cars already on sale here, the Japanese auto industry isn't likely to carve out a big slice of the U.S.
market.”
Business Week, August 2, 1968.
“For the first time ever, we're letting them [users] engage in games with their real friends in their real social networks.
Gaming is a fundamentally social experience, not a single-player experience, and not a technology experience. We are
bringing gaming back to its roots.”
Mark Pincus, Founder & CEO, Zynga
“Today, audiences want to be connected. They expect games to have a strong social component and they want the ability
to customize and express themselves through their entertainment experiences.”
Bobby Kotick, CEO, Activision-Blizzard
Broadening Market To Include Non-Gamers
“Target customer is anybody who lives inside the social networks….Facebook has users from 13 to 80 years old and it
has equal distribution between men and women…In our markets we have 300-plus million people on Facebook
alone….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.”
John Pleasants, CEO, Playdom
We believe that similar to the Nintendo Wii, which broadened the console game audience to families from mostly males,
social games further broaden the game market to include non-gamers. Today’s generation is connected on social
networks. According to comScore, more than two-thirds of Internet users are also on social networks, and the number is
still growing. The popularity of social networking sites is not just limited to the Y generation, more and more people 35
years of age and older are joining these social networks. The latest statistics regarding Facebook users show that the
number of users in the 35-54 years of age population has increased 10x versus 88% growth for the 18-34 years of age
group since October 2007. Not only are more people joining these social networks, but they are also spending more time
on these social networks. According to Hitwise, the average user is now spending approximately 27 minutes/day, up 71%
Y/Y. We believe the reach and the demographic of users on these sites make social networks fertile ground for game
vendors to acquire users, build awareness, and create buzz through viral marketing.
Viral Marketing
“Over 95% of our growth is viral. In fact, when we launched our first title a year ago, we started by inviting 100 of our own
friends and we've grown from there to over 60 million registered players across our games organically.”
Kristian Segerstrale, CEO, Playfish
For online game vendors, social networks offer an inexpensive way of marketing their games to new users and improve
stickiness through viral distribution. We believe that social networking sites level the playing field for small developers to
compete with large companies like Electronic Arts (recall the success of Scrabulous, developed by two brothers in remote
corners in India, which became a rage on Facebook through viral marketing).
For social networking sites, games provide an easier way to monetize their users, in our view.
Despite significant size, strong community, and solid ecommerce platforms, most social networks have struggled with
monetizing their users. With ARPU hovering in the $0.10-0.25/month range for most social networks versus as high as
$150/month for some online games, social networks do look under-monetized. Most social networks rely largely on
banner and text ads for user monetization, but, given low conversion rates (less than one-tenth of a percent), display ad
rates for most social networks hover at about $0.10-0.25 cost per thousand (CPM) versus as high as $35 for video ads
and $8 for display ads for in-game advertising. We believe that online games provide a natural way for social networks to
monetize users through in-game advertising and, more importantly, through virtual goods sales.

January 24, 2011
Industry Report
Games can also help social networking sites strengthen community bonding among their users.
We believe that not only will games help social networking sites monetize their users, but they will also help to increase
the stickiness of these social networking sites. Games are known to bring communities closer, to encourage user
interaction and active participation (e.g., more than two million user-generated content on Spore, and more user-
generated content on Halo than YouTube videos produced in a month), which is the lifeblood for social networking sites.
Broadening The Monetization Potential Beyond “Level-Up” To Self Expression
By including real-life friends in the gameplay, social games are not just about achievement bragging-rights but also about
self-expression and thus allow vendors to tap into not just the wallet share for games but also wallet share of expression.
We believe that just as people are comfortable buying the luxury goods to express themselves in the physical world, the
connected generation will be comfortable spending on virtual goods in the virtual environment.
Exhibit 35: Video Game Versus Expression – Market Size For Video Game And Luxury Goods
0
50
100
150
200
250
$Billion
Video Game Luxury Goods
Source: Bain & Company, PWC

January 24, 2011
Industry Report
What Have We Seen So Far?
"Airplanes are interesting toys but of no military value."
Marechal Ferdinand Foch, Professor of Strategy, Ecole Superieure de Guerre, 1911
Strong Growth In Social Games Being Driven By Facebook
We estimate that social games revenue grew 5x in 2009 and again doubled in 2010, largely driven by a strong growth in
social games on Facebook. Facebook usage has gone up from 150 million to about 500 million over the last couple of
years, according to Facebook. At the same time, penetration of games within Facebook users has grown substantially
over the last 12-18 months—with over 40% of Facebook users regularly playing games, according to data from Developer
Analytics. Social games maintained their strong momentum and social games usage on Facebook grew 23% over the last
12 months, despite a 25% drop in usage immediately after the policy changes at Facebook that negatively impacted
acquisition and retention rates (according to Developer Analytics).
Exhibit 36: Top Social Games Companies On Facebook By Daily Active Users (DAU)
Oct-10 Oct-09 May-09
Zynga 46.9 47.1 6.7
Playfish 8.4 12.1 4.7
Playdom 6.1 1.9 0.4
Crowdstar 5.9 4.0 0.2
PopCap Games 4.3 2.8 0.6
Booyaa 3.1
6 Waves 2.7
Digital Chocolate 2.7
Moment of Truth 2.2
MindJolt 1.9
RockYou 1.9
Wooga 1.8
Happy Elements 1.6
Metro Games 1.4
Pencake 1.4
ELEX 1.3
Cie Games 1.2
iWin 1.1
ZipZip Play 1.1
Country Life 1.1
Slashkey 1.0 5.8 1.8
Ninja Saga 1.0
Nightclub City 1.0
Five Minutes - 1.0
Rawr! Games - 1.8
Serious Business - 1.2 0.4
TallTree Games - 2.1
TwoFishes Interactive - 2.1 0.2
Total 101.1 81.9 15.0
Source: Developer Analytics

January 24, 2011
Industry Report
Growing Popularity Of Persistent Games
Of the top 36 games on Facebook, 31 games were persistent games as of 11/02/10 versus 8 of the top 16 games in April
2009, which reflects on the growing consumer preference toward persistent games, in our opinion. In fact, outside of
Zynga’s Poker, none of the mid-session games from last year’s list of top games were able to make it to this year’s top
games list on Facebook.
Rising Production Value Of Social Games
Our conversations with a number of developers suggest that the cost of production of social games has risen multi-fold
over the last couple years, mostly driven by toughening competition and the increasing sophistication level of users. We
believe that as users will have more choices, social game companies will have to step up investment in the quality of the
games (graphics, gameplay, customer service), effectively increasing the production value of the games.
Exhibit 37: Rising Production Value Of The Facebook Games
Source: Zynga, Allfacebook.com
Believe Facebook Single Most Important Destination For Social Games
“With our limited resources, we need to pick our battles very carefully. Today, the best platform to develop for is still
Facebook given its large market size and low friction of distribution.”
Siqi Chen, Founder and CEO, Serious Business (Acquired by Zynga in February 2010)
With over 500 million active users, Facebook is a significant platform for publishing games. On the other hand, game
developers have not yet found any other credible platform for publishing social games, and given the fast growth of games
on Facebook coupled with higher risks associated with new platforms, vendors have focused their efforts largely on
Facebook, and we haven’t yet seen any comparable social games platform emerge in the west.

January 24, 2011
Industry Report
Exhibit 38: Top Social Networking Websites By U.S. Market Share Of Visits (%)
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10
Facebook MySpace
myYearbook Tagged
Twitter Windows Live Home
Source: Hitwise
Rising Cost Of Customer Acquisition
“The cost of acquisition has gone up significantly. Some of it is due to notifications and some of it is the rising price of
advertising on Facebook.”
Kevin Chou, Founder & CEO, Kabam
We believe that the cost of user acquisition has gone up multi-fold over the last couple of years, which we attribute to (a)
reduced virality of Facebook as a distribution channel, and (b) toughening competition. In March 2010, Facebook closed
down the “Notifications” channel for games apps. Historically, Notifications drove a major part of customer acquisition and
retention and since the closure of this channel, the usage for most games declined almost 20-25% within a couple months
after this change. In order to offset the effect of this channel, vendors had to step up their spending on paid channel of
user acquisition. More numbers of vendors with more numbers of games on Facebook coupled with higher spending by
these vendors on customer acquisition had a double whammy effect on the cost of acquisition. We have heard that cost of
acquisition was as high as $1 per user, up from almost negligible a few years ago.
Social game revenue largely driven by virtual goods, in our view.
“…advertising is a very different operational focus than creating a great game. Advertisers are still on learning curves
about how to interact with gamers, and our teams are set up to create a great gaming experience and not for educating
advertisers.”
Kevin Chou, Founder and CEO, Kabam
While social games are reaching a broad audience and could be an attractive medium for advertisers to reach audiences,
most developers have largely relied on direct pay (i.e., virtual goods) as a way to monetize users, which we attribute to (a)
developers’ single-minded focus on developing quality games and broaden their audience base, (b) being a relatively new
media, standard units for publishing and measuring ads on social games have yet to emerge, and (c) advertisers are still
ramping on social media and separate budgets for social media haven’t yet been carved out.

January 24, 2011
Industry Report
Exhibit 39: Revenue Break-up For A Few Social Game Companies
Advertising
Virtual Goods -
Indirect Payment
Virtual Goods -
Direct Payment
Playdom 5-10% 15% 75-80%
Kabam NA 10% 90%
Rekoo 10% NA 90%
Serious Business 10% 10% 80%
Source: CEO Interviews
Broad-Based Growth On Facebook Games
Unlike the common misconception that social games growth was driven by a few industry leaders, our analysis of the top
Facebook games suggests that the growth was mostly driven by long tail vendors. The number of publishers with more
than 1 million DAU grew to 28 in October 2010 up from 11 in October 2009 and three in May 2009 and drove 100%
growth over the last 12 months as opposed to 3% growth from the top four vendors on Facebook (Zynga, Electronic Arts.
Playdom, and CrowdStar).
Exhibit 40: Combined MAU Of Social Games From Top Publishers (Million)
-
20.0
40.0
60.0
80.0
100.0
120.0
May-09 Oct-09 Oct-10
Publishers With More Than 1 Million DAU
Top 4 Publishers (Zynga, EA, Playdom, CrowdStar)

January 24, 2011
Industry Report
Emerging Themes In Social Games
"The bomb will never go off. I speak as an expert in explosives."
Admiral William Leahy, U.S. Atomic Bomb Project.
Rise Of Vertical Apps (Niche Games) In Social Networks:
While we have already seen the success of horizontal, i.e., casual games (likes of Farmville, Happy Aquarium, Social City,
and others), we believe that the opportunity for vertical games (i.e., hardcore games, sports games, and RPG) is
emerging. Early response for some of the vertical games (such as ERTS's FIFA Superstar, Kingdom of Camelot) has
been very encouraging and likely reflects the potential opportunity for premium games, the mainstay of traditional games
companies, in our view.
Demand Side
“In China, the MMO market started in 2001 with a very simple and cartoon-styled game, "Stone Age." Prior to that
game, people had no idea what the MMORPG was but this game enlightened the Chinese players and since
then, people started to play MMORPG. I would say the same thing is happening here in the U.S. market and I
think that this market will be way bigger than China. Now you see so many players playing Facebook games, and
these players evolve. Two or three years ago, they were just poking each others; in 2008, they were playing Mafia
Wars; in 2009, they were playing farming games; and moving into 2010, the growth rate becomes lower, probably
because players got tired of all the farming and petting stuff, and they're looking for something that is more
sophisticated. I'm not sure if they are ready for the MMORPG games. But I would say that, in the next two to three
years down the road, they will end up there.”
Kevin Xu, Co-founder and COO IGG
We believe that Facebook has been a sort of training ground for new users on this relatively new free-to-play
business model. Arguably, we think it is fair to say that of the roughly 200 million users who are playing on
Facebook, a small majority could be users with gamers instinct i.e., people who “graduate” from playing simple
games and demand a more-immersive game experience in social games.
Supply Side
From the supply side, not only is the cost of customer acquisition rising, the distribution/discovery of applications
is becoming incrementally difficult with the changes in Facebook viral channels (notifications, bookmarks). While
larger companies that have already built large user bases may have inherent advantage (able to cross-sell their
existing users to the new games), new entrants will have to work harder to wow users in order for the
discovery/word of mouth distribution. Even from financial feasibility point of view, the cost of acquisition has risen
significantly (given the changes in the viral channels and rising cost of ads on Facebook) and it now costs close to
a dollar to acquire an active user, and, therefore, the lower ARPU/higher churn apps (typical for the horizontal
apps) may no longer be financially lucrative for the newcomers encouraging them to focus on higher ARPU, high
engagement, low churn vertical apps.
It is, therefore, not a surprise that 9 of the top 50 games are now what we consider vertical games, versus 1 such
game within the top 50 a year ago. Given that by definition, vertical games would attract a niche audience and,
therefore, don’t compare well with horizontal application in terms of the usage or MAU. However, given the higher
monetization with these games, we believe that the revenue break-up of Facebook games may be even more
skewed toward vertical games now versus a year ago.

January 24, 2011
Industry Report
Exhibit 41: Top Games On Facebook By MAU As On 11/02/2010 (Million)
Game Developer MAU Rank
Oct-10 Oct-09 Apr-09 Oct-10 Oct-09 Apr-09
FarmVille Zynga 60.6 59.0 NM 1 1 NM
Texas HoldEm Poker Zynga 35.9 18.2 12.3 2 8 7
Frontierville Zynga 31.2 NM NM 3 NM NM
Café World Zynga 22.2 15.9 NM 4 10 NM
Mafia Wars Zynga 21.7 25.9 9.5 5 3 9
Treasure Isle Zynga 15.5 NM NM 6 NM NM
MindJolt Games MindJolt 13.3 14.9 3.2 7 11 31
Happy Aquarium CrowdStar 13.1 12.4 NM 8 12 NM
Pet Society Playfish 12.8 19.9 10.6 9 5 8
Bejeweled Blitz PopCap Games 12.0 8.3 NM 10 17 NM
Petville Zynga 11.8 NM NM 11 NM NM
Millionaire City Digital Chocolate 10.2 NM NM 12 NM NM
Restaurant City Playfish 9.7 16.6 NM 13 9 NM
Happy Pets CrowdStar 9.2 NM NM 14 NM NM
City of Wonder Playdom 9.0 NM NM 15 NM NM
YoVille Zynga 7.6 19.5 5.3 16 6 18
Games GSN 7.4 NM NM 17 NM NM
Zoo World RockYou 7.1 NM NM 18 NM NM
FishVille Zynga 6.9 NM NM 19 NM NM
Nightclub City Nightclub City 6.7 NM NM 20 NM NM
Happy Island CrowdStar 6.3 NM NM 21 NM NM
Family Feud iWin 6.1 NM NM 22 NM NM
Kingdoms of Camelot Kabam 6.0 NM NM 23 NM NM
Ninja Saga Ninja Saga 5.8 NM NM 24 NM NM
Social City Playdom 5.6 NM NM 25 NM NM
Car Town Cie Games 5.4 NM NM 26 NM NM
Hotel City Playfish 5.3 NM NM 27 NM NM
Baking Life ZipZapPlay 5.0 NM NM 28 NM NM
Bubble Island Wooga 4.9 NM NM 29 NM NM
Fashion World MetroGames 4.8 NM NM 30 NM NM
Zoo Paradise CrowdStar 4.7 NM NM 31 NM NM
Country Life Country Life 4.4 NM NM 32 NM NM
Farm Town Slashkey 4.1 18.7 NM 33 7 NM
Wild Ones Playdom 3.9 NM NM 34 NM NM
EA SPORTS FIFA Super Stars Electronic Arts 3.7 NM NM NM NM NM
Madden Superstars Electronic Arts 2.4 NM NM NM NM NM
Bolded font represents games that were launched after our previous whitepaper, “The Emergence of Games-as-a-
Service” published on 05/04/09.

January 24, 2011
Industry Report
Social Games Beyond Facebook
“Platforms like Facebook and iPhone were not built for games but games took off on these platforms. This idea of creating
games on platforms that aren't built for games can be a really challenging one. For the social games industry to grow and
achieve its full potential, we need platforms that are designed for games.”
Kevin Chou, Founder & CEO, Kabam
We believe that the popularity of social networks in general and that of social games reflects players wanting to play
games with their friends/families and also use games as a way to express themselves, their feelings toward others and
also as bragging rights. We believe that just like how people want to stay connected with their friends on social networks,
players want to stay connected with their friends on virtual worlds/game environments too. We believe this convergence
makes sense not only for non-gamers who see games as another way to stay connected, but also for the casual gamers
who may want to use the same avatar on all platforms and even for core gamers who may want to track their guild
activities (across platforms). We have already seen games like Activision’s “Blur” that uses a Facebook plug-in to help
console users publish their achievements/pictures from the game to Facebook. Fast forward, and we now expect to see
games built from the ground up for the socially connected generation and expect the lines between virtual and real
environment to start to blur (e.g., how about a mission in a virtual environment to save your real-life friend? How about
hanging out/playing arcade/music/dance game at a virtual version of real-life bar that you go to with your posse?).
We believe that there may be room for another platform for social games, especially a platform that is built specifically for
social games. We believe that a platform built specifically for social games may have smaller penetration compared to a
all-purpose social platform (such as Facebook), but may yield meaningfully higher monetization for game publishers. We
have already seen/heard of a number of developments around the next-gen platform for social games, e.g., MySpace and
Hi5 changing the focus of their all-purpose social platforms to entertainment/games focused platforms, Yahoo! Games
and MSN Games adding social feature on their online-games platform, and Google trying to build a social platform.
Exhibit 42: Social Network Users During 2009 – Facebook Versus Others
-
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
US Europe Asia
Facebook
Others
Sources: Business Insights, Company Websites, Insidesocialgames & DIMG Strategy

January 24, 2011
Industry Report
Exhibit 43: Social Networks Worldwide By Active Users - 2009
-
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
Facebook
QQ
MySpace
Friendster
Orkut
Hi5
Twitter
51.com
Linkedin
WindowsLive
NetLog
Sonico
Bebo
Badoo
RenRen
Cyworld
Mixi
Kaixin
Maktoob
Vkontakte.ru
Skyrock
VZGroup
Odnoklassniki.ru
DeNA
Splinder
Gree
Tuenti
Mail.ru
Xing
Sources: Business Insights, Company Websites, Insidesocialgames & DIMG Strategy

January 24, 2011
Industry Report
Improving Monetization of Social Games
We expect to see strong growth in monetization of social games driven by rising conversion rates (from playing users to
paying users) and improving monetization of non-paying users.
Rising conversion rates
In the Western world, the conversion rate for free-to-play online games ranges from 1% to 3% for most social games, in
our estimate. We believe that the conversion rate for social games has the potential to grow meaningfully driven by (a)
rising awareness of the virtual goods model, (b) increasing sophistication of game publishers to drive user engagement
and monetization, (c) sophisticated analytics and product recommendation engines, and (d) widening penetration of
payment mechanisms designed specifically for virtual goods purchases.
How much could the conversion rate grow for social games? Given that social games is a relatively newer market and
therefore may not have the appropriate benchmarks, we turn to a slightly more mature free-to-play market, hardcore
online MMOs, for benchmarking to find the answer to the question. In the Western world, conversion rates for MMO range
between 3% and 10%, less than half of that in the Asian countries (China, Korea, Japan) where conversion rates could
range from 8% to 20%. We believe that the discrepancy in the conversion rate between Asian markets and Western
markets could be explained by a number of factors, including gaming culture (more prevalent gaming culture in Asia),
availability of alternative entertainment options (fewer options in parts of Asia), and lastly and most importantly, in our
opinion, the maturity of the free-to-play markets (free-to-play online games markets are much more mature in Asia than in
the West). We believe that as the Western free-to-play markets start to mature, the conversion rate could get closer to that
in Asia, i.e., the conversion rate for Western world MMOs could almost double. Extending this logic (impact of maturing of
markets on conversion rates) to social games*, we believe that conversion rates for the social games in the Western world
could also double as the markets mature (users, game publishers, game eco-system).
We believe that the following could be drivers for growing conversion rates for social games:
1. Users: We believe that a growing awareness and acceptance of the virtual goods business model within users
will drive higher spending on virtual goods. Especially, we believe that the younger generation, who is comfortable
expressing themselves in virtual environments, could be relatively more comfortable spending money on virtual
goods either to express themselves or as gifts for the like-minded.
2. Publishers: We believe that in the early stages of social games, most publishers were largely focused on building
games and growing audience and not so much on growing monetization. As the markets mature, we expect to
see publishers focus more on growing monetization by applying collective learning from their previous games to
their new games to drive engagement, and virality. We expect to see an increasing role of third-party analytics
and recommendation platforms (such as Kotangent, Turiya, Buzzient) in helping improve publishers’
understanding of consumer behavior and driving engagement and monetization.
3. Payment mechanisms: In our conversations with games publishers, we have heard that they have been able to
raise their monetization every time they integrated a new payment mechanism. Given that the popularity of a
payment mechanism for online games varies by regions/countries (e.g., prepaid cards are the dominant payment
mechanism in Asia, Credit Cards/Paypal are popular mechanisms in the U.S., Online Debit in parts of Europe,
Kiosk payments in Russia and mobile payment in South America), the availability of a wider range of payment
mechanisms could drive users’ accessibility to pay within virtual environments and drive monetization. In addition,
given that virtual goods purchases are largely impulse purchases, we believe that a seamless payment method
with minimal friction could reduce drop-off rates and raise monetization rates. Lastly, we believe that a dominant
or universal virtual currency (such as Facebook Credits) could also help drive users’ propensity to spend on social
games (by enabling users to try spending on new products with the same universal wallet/currency).
Improving monetization of non-paying users
While historically, direct paying users contributed the majority of revenue, we expect to see meaningful revenue growth by
monetizing non-paying users. We are particularly excited about the video ads and the alternative payment mechanisms

January 24, 2011
Industry Report
(such as surveys, tasks, offers). Please see the next section, “Evolution of Advertising As A Meaningful Source Of
Revenue” for more on this topic.
*Note: We don’t expect the conversion rates for casual social games to be in the range of hardcore online games, given
our view that hardcore gamers have a higher propensity to spend because of the relatively higher impressive and
engaging gameplay of MMO versus that of casual social games.

January 24, 2011
Industry Report
Evolution Of Advertising As A Meaningful Source Of Revenue:
“Generally in a mature advertising market, for every dollar from somebody who will pay directly for premium content, there
is a matching advertising dollar available to sponsor free play for the remaining audience who can't or won't pay. So the
rule for valuable content in a mature advertising market tends to converge at 50/50. If you're very high on advertising and
low on commerce, that may be an indication that your content isn't perceived as valuable enough for users to pay for
directly. Inversely, if you're making most of your revenue in commerce and not advertising, it suggests that you haven't
learned how to monetize with advertising.”
Alex St. John, President, Hi5
“There's no weakness in advertising when it comes to social. The standards for advertising on social games are evolving
rapidly, and advertisers have budget for social, but in many cases the notion of conquering advertising while also driving
forward on the game design and micro-currency front is daunting. In most cases, social gaming companies are focusing
their efforts trying to nail the "compulsion loop" with consumers. We've found that advertising is the largest stretch for
many game developers; it just isn't in their DNA…..We fully expect a significant portion of the $65 billion TV ad market to
move to social and free to play gaming.”
Mike Peronto, CEO, WildTangent
While virtual goods continue to be a major source of revenue for most online games companies, we believe that
advertising could become a meaningful revenue source for these companies as the industry matures and as the
standards for ad-units, and standards for the measurement of ad-effectiveness start to emerge. We believe that games
could emerge as a credible media for advertising for a few reasons:
Over Time, Advertising Dollars Match The Usage Pattern
Advertisers are bound to follow where the users go, in our view. However, the process may not be very efficient,
and it could take some time given the general awareness, establishing credibility and resistance to change. While
users’ time started to shift toward online media, it took a long time for advertising dollars to follow the same.
Likewise, with users spending more and more time playing games, we expect the advertising dollars to shift their
spending toward online games.
Lucrative Audience
“While most would generally say that the women 35 years and up are usually the easiest to reach on the Internet
and monetize efficiently, in my experience young male gamers monetize at very high CPMs because they're very
hard to reach, and they are accustomed to spending money on games.”
Alex St. John, President, Hi5
Games enable advertisers to reach a broad and lucrative audience. The hardcore video game audience (18-35
year old, male) is generally considered to be a difficult to reach audience and could carry high CPM. Similarly,
casual games allow advertisers to reach middle age working moms, another attractive segment.
High Level Of Engagement
“At the moment, we are seeing a huge interest in video advertising and in virtual gifting. I see a shift where people
are moving away from the old advertising metrics and they are talking about engagement metrics. For example,
we ran a Nike campaign 12 months ago and every month people write to us asking when the Nike's sneakers are
coming back. There is long tail where the avatars collected those Nike sneakers when the campaign was running,
and they are still wearing them. So it's not just simple advertising at that point, it has moved into turning the
community into advocates for the products.”
John Cahill, CEO, Meez
We believe that advertising in games provides meaningfully higher user engagement than typical banner ads.
Companies like Kongregate note that the advertisers see increased user engagement with ads on online games
compared to the other media.

January 24, 2011
Industry Report
Market Size Estimates For Social Games
"The concept is interesting and well-formed, but in order to earn better than a 'C', the idea must be feasible."
A Yale University management professor in response to Fred Smith's paper proposing reliable overnight delivery service.
(Smith went on to found Federal Express Corp.)
We expect the worldwide social game market to grow more than 3x to over $12.1 billion by 2014, up from $3.7 billion in
2010. We expect social games growth in Japan to be driven by a continued momentum on mobile social games platforms
(such as DeNA, Gree and Mixi) and estimate the market to reach $2.7 billion revenue by 2014, up from $1.1 billion in
2010, a CAGR of 25%. In the U.S. and Europe, we expect the growth to be driven by higher monetization (primarily
through the increasing conversion rate from non-paying users to paying users) and emergence of the mobile social games
platform (such as Facebook on mobile, Apple Game Center, Open Feint, Plus). We estimate the U.S. social market size
will grow to $3.4 billion by 2014, up from about $1 billion in 2010, a CAGR of 36%. During the same period, we estimate
the European social game market will grow to $2.7 billion, up from $900 million, or a 32% CAGR. We expect the Chinese
social game market to be driven by rising Internet penetration, more core game launches on social platforms (such as Q
Zone, Renren, Kaixian001), which we believe will drive up the conversion rates and ARPPU. We estimate the Chinese
social market size will grow to $1.7 billion by 2014, up from about $300 billion in 2010, a CAGR of 50%. For the rest of the
world, we expect the market growth will be driven by rising Internet penetration as well as improving conversion rates. We
estimate the ROW social market size to grow to $1.3 billion by 2014, up from about $275 million in 2010, a CAGR of 47%.
Exhibit 44: Worldwide Social Game Market Size By Region ($ Million)
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
China 91 328 706 1,060 1,347 1,677 50%
Europe 394 903 1,405 1,965 2,365 2,745 32%
Japan 724 1,111 1,767 2,094 2,416 2,719 25%
South Korea 37 54 110 182 241 309 55%
U.S. 412 989 1,614 2,355 2,828 3,350 36%
Rest of World 97 274 505 769 1,015 1,272 47%
Total Social Games 1,756 3,659 6,107 8,425 10,213 12,071 35%
Exhibit 45: Worldwide Social Game Market Size By Region
0%
20%
40%
60%
80%
100%
2009E 2010E 2011E 2012E 2013E 2014E
Rest of World
South Korea
China
Japan
Europe
US

January 24, 2011
Industry Report
While we expect to see stronger growth in advertising revenue for social games over the next five years, as the
companies start to focus on monetizing users (not just user acquisition) and also with emerging standards for ad units and
measurement on social games, we believe that a majority of social game revenue will continue to be driven by virtual
goods. We estimate that advertising revenue on social games will grow at a 39% CAGR over the next five years versus
34% CAGR for virtual goods on social games.
Exhibit 46: Worldwide Social Game Market Size By Monetization
2009E 2010E 2011E 2012E 2013E 2014E
CAGR
(2010E-2014E)
Virtual Goods 1,493 2,988 4,907 6,707 8,116 9,539 34%
Advertising 263 672 1,199 1,718 2,098 2,532 39%
Total 1,756 3,659 6,107 8,425 10,213 12,071 35%
Exhibit 47: Worldwide Social Game Market Share By Monetization
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009E 2010E 2011E 2012E 2013E 2014E
Advertising
Virtual Goods

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