Playdom Raises $43M, And Lessons for New Entrants

...from a combination of NEA, Lightspeed, and Norwest Partners.

Thus the three big social game providers all now have huge pockets -- Zynga has raised a similar amount, and of course Playfish is now owned by EA.

Playdom has been profitable virtually since its first game launched, and has never taken investment capital before, and has instead bootstrapped itself; my guess is that their calculation is that to remain competitive with Zynga and Playfish, they also need a big warchest. Exactly how that money gets used, except in terms of pissing it away on marketing to "compete" with Zynga, is unclear to me.

Here's the basic issue: social network games succeed because they spread virally and quickly through the social network, and therefore marketing costs for them have largely been minimal. Yes, you will see lots of Zynga adds on Facebook, but a) Facebook ads are remarkably cheap by comparison to most Internet ads, b) this helps keep Facebook okay with the social network games, which in some ways undermine the utility of their network, and helps stave off the day when Facebook will demand a piece of the action, and c) it's also a way of jump-starting a new game, acquiring a core of players who will then help spread it virally.

Because of the viral nature of social network games, it's unclear where the pressure point that allows capital to win is located. That is, at retail, it's obvious: ramp up the budgets and graphic quality to squeeze out less well-capitalized competitors, and produce lots of games to grab limited shelf-space and further squeeze out competitors. But in principle, a novel social network game can spread very rapidly, even if produced by a new entrant; how do social network game companies use capital to provide a sustainable competitive advantage, that is, the ability to ensure their own growth while fucking up any newcomers?

The ad spend on the networks is part of the answer -- newcomers can't afford to splash out that way. Cross-marketing among games you provide is another -- if you look at a Zynga game today, there's a banner cross-promoting lots of Zynga's other games, and the theory is that you'll jump to a Zynga vampire-themed game instead of a competitor's vampire-themed game because you "trust Zynga" (you fool you). And instant cloning is the third -- if anyone else starts to get traction with a new game, Zynga and/or Playdom will roll out their own version ASAP, and hopefully convert their own playerbase to it before the newbie gets traction.

By raising this much money, Playdom is basically saying "We're going to play Zynga's game," instead of looking for some other route to continued success on social networks.

The problem with this approach, though, is that both companies are, in essence, working against the thing that brought them quick success -- virality -- by trying to undermine others' ability to use that same aspect of social networks.

The lesson for people considering joining this market: Under no circumstances launch with a game that can be quickly and easily cloned by Zynga and Playdom, e.g., a social network RPG which they can copy by reskinning their existing RPG software. Go instead for something that will force them to use take their scarce engineering talent off other projects and build something from scratch if they want to clone you; and have a marketing plan to hit critical mass with your game before they can respond, so that you wind up in the #1 slot in your particular niche, instead of being relegated to #3 or lower by their clone.