you monetize social networks and social games? Similar to the online games
space, there is a growing consensus that the answer is by complementing
advertising with a virtual goods micro-transaction business model. Social
networks and start-ups are positioning themselves accordingly. Hi5 has announced
its own virtual currency. Facebook is now implementing “credits” and MySpace seems
to be working on their own payments platform. Jambool provides virtual
currency, while Gambit, Zuora and Spare Change offer a variety of direct payment
methods. Users can pay for virtual goods by completing offers or surveys thanks
to SuperRewards, OfferPal and Sometrics while Zong and MobillCash let them pay
with their cellphones. Live Gamer provides a publisher-supported secondary
market for virtual good trading. It is only a matter of time until services
emerge that optimize electronic storefronts – layout, inventory, pricing and
promotions – and virtual goods marketing campaigns.
pitch for the micro-transaction business model is simple. There is a higher user
monetization relative to advertising revenues because of the type of engagement
that occurs in social communities and games. Central to this argument is the
metric for user monetization: Average Revenue per User (ARPU).The figure below shows several public
estimates of annual ARPUs.
The apparent wide discrepancy is misleading because of the different ways of
defining ARPU. If analyses based on ARPU segmentation, such as average ARPU
levels by game/app type and characteristics, or by social platform and region,
will inform key decisions about design and user acquisition marketing budgets,
these inconsistencies may result in wrong and costly decisions.
The R in ARPU
Bill Gurley estimates Facebook’s annual ARPU of $2.57 by
dividing the company’s annual revenue by its monthly active users. One might
mistakenly take this number as the ARPU of a Facebook user, yet this value does
not factor in that the user is also monetized by third party applications –
both through ads and micro-transactions. Developer Analytics estimated in August 2008
that more than 20 Facebook Apps had monetization potential of $2,000 per day.
Following the terms in its contract with application developers, Facebook
virtually sees none of this revenue. The only micro-transaction revenue that
Facebook itself generates is through its virtual gifts, which accounts for
annual revenue. In other words, $2.57 is how much Facebook, as the platform,
monetizes on an average user, not the monetization value of a Facebook user. If
Facebook wanted to increase its own ARPU, it could simply develop more of its
own apps with micro-transaction models or it could change terms of contracts
with developers in order to get a larger cut from their revenue.
Liew from Lightspeed Ventures estimates ARPU for Jagex’s MMO Runescape
(freemium game) as $0.84/month/user.
In contrast, all user monetization in Runescape hits Jagex’s top line as they have
no third party apps.
there no public estimates on the monetization value of a Facebook user? It is
hard to get data to estimate the aggregate revenue across all Facebook app developers.
The U in ARPU
SXSW conference, Susan Choe, CEO of Outspark (a publisher of Free-to-Play online games),
announced $50 monthly ARPUs, creating strong reactions until the audience
started concluding that she was probably referring to ARPPU – average revenue per
paying user. This illustrates the definition
issue with “users”. Different definitions of a user dramatically skew the ARPU numbers:
Registered users: They sign up or install
game/app, but may use it very infrequently (if at all) and they never pay.
Minimal or non-existent monetization.
Active users: They use app or play game with a
certain frequency, but never pay for anything. Monetization only through ad
Paying users: They pay for purchasing digital
assets or for subscriptions at least once or with a certain frequency.
within these categories, companies might define users differently. The
differences in the numbers because of varying definitions are in the orders of
magnitude. As an example, in his ARPU vs.
ARPPU blog post,
Raph Koster estimates monthly ARPUs in freemium successful models as
$0.50-$1.50, versus $30-$35 monthly ARPPUs for subscription games.
to Jeremy Liew’s Runescape ARPU estimate, he reached $0.84/month/user by
dividing the monthly runrate ($5MM) by the 6MM Runescape players, 5MM of which
play for free. If he had used, the 1MM subscribing paying users, he would have concluded
with an ARPU of $5.00/month/user.
Proposed Standard Definition
these inconsistencies can be addressed if as an industry we were to adopt a
standard definition. Here are my thoughts around a standard definition but
would like to hear yours.
Average Revenue per User where:
Revenue is defined to include all monetization
of the user within the social networking platform, virtual world or game,
All revenue models: advertising,
micro-transactions, subscriptions, player-to-player, etc. This introduces a
“share-of-wallet” mentality where the revenue model ARPU can be specified (e.g.
advertising ARPU, micro-transaction ARPU)
All parties that monetize on the user within a
platform, world or game. Hence, the ARPU of a Facebook user includes both
revenues to the Facebook platform and to its third-party application
User is defined as a registered user – a user
who has signed up or installed software
Part of the ARPU optimization process will
include the conversion of registered users into active ones, and in turn, into
Time horizon is specified (e.g. monthly ARPU
versus annual ARPU)
Average Revenue per Paying User same as ARPU, but where:
Paying User is defined as any registered user
who made any payment since signing up, whether for a purchase or a
The process of payment will have required the
user to set up a payment method (e.g. input credit card details, link to Paypal
account). Hence, the barrier for further payments is significantly lower.
proposed definition includes several key caveats:
Differences in registration process (e.g.
filling in long list of user details versus auto-registration by visiting a
site) will still make apple-to-apple comparisons slightly misleading
At times, subscription and micro-transactions
are not fully separated. In some games and worlds, paying a subscription also
gets you a certain amount of virtual currency for micro-transactions
Difficulty of ARPU measurement across several
parties (e.g. a platform and hundreds of application developers) and across
ARPU definition will require more specificity,
e.g. monthly micro-transaction ARPU
micro-transaction business model gets more traction, we will see a spike in
claims of ARPU figures. These will vary wildly – at times because of their
nature, at times because of the metric definition. Caveat emptor.
About the author
Pourshasb is director of corporate development at Live Gamer. His background
includes Business Development at MTV Networks, where he led M&A deals with
social media properties, and a Senior Project Manager role in strategy
consulting at Oliver Wyman, specializing in Emerging Markets. He holds an MBA
from Harvard Business School,
during which he worked part-time at venture capital firm General Catalyst,
helping launch an online advertising company. Other work experience includes Goldman
Sachs and PWC, and he also holds a Masters in Engineering from Imperial College,
Gamer is leading the way in legitimizing player-to-player virtual economies,
working in partnership with publishers and developers to realize the growth and
impact RMT of virtual goods has on game design, player experience and online
Above the Crowd, How to Monetize a Social Network, 3/9/09 http://abovethecrowd.com/
Inside Social Games, 8/26/08 http://www.insidesocialgames.com/2008/08/26/facebook-games-make-money-according-to-developer-analytics/
Alley Insider, 11/11/08 http://www.businessinsider.com/2008/11/facebook-stock-now-worth-about-4-billion-
Jeremy Liew, Light Speed Ventures, 6/9/08 http://lsvp.wordpress.com/2008/06/09/successful-mmogs-can-see-1-2-in-monthly-arpu/
Raph Koster, Metaplace, 3/16/08, http://www.raphkoster.com/2009/03/16/arpu-vs-arppu/