Arkadium CEO plans to adapt to social gaming’s popularity

It’s a time of big change in the game industry, but Kenny Rosenblatt is used to it. In 2001, he co-founded Arkadium with his wife Jessica Rovello. The New York-based company originally started as a casual game site. But that wasn’t successful. Instead, Arkadium made money licensing its games to well-known brands. So it shifted into “advergaming,” where a game is embedded with ads and essentially becomes a walking advertisement. Now the company has more than 200 Flash games which it licenses out to brands. We interviewed him about the changes happening in the game industry and his own shift into social games.

VB: Can you describe the business?
KR: We create intellectual property, or games. We now have the largest library of Flash games that we wholly own. We license those games and our platform to destination sites that want an online game offering. We describe that as a white-labeled Pogo in a box (so named after Electronic Arts’ Pogo.com casual online game site). Some of our clients are Lifetime, Hearst, MyYearbook, Classmates.com, and about 40 others who use our platform. We serve 6 million gamers a month, with hundreds of millions of game plays per month.
VB: How did the year go for you? It was a rough year for advertising.
KR: 2009 went well for us, despite the recession. We were still profitable and there is something to be said for that. Our business model held up in a very tough time. A lot of that has to do has to do with our business of licensing and customization. As long as customers were using our games, our revenues were stable. Where a lot of companies were dependent on CPM (cost per mil, or the measure of ad revenue per 1,000 users), which was falling, the revenues fell with the industry. It’s a blessing and a curse. We held still in a tough time.
VB: How does the monetization work?
KR: Our monetization is licensing. Our clients monetize via advertising. Since our clients are big media companies, they have sophisticated ad sales staff that can sell pre-roll ads (or videos that appear before a game is initiated). They can get CPMs of $15 or more. That works out well for them because they get extra ad impressions and more time spent on the site. Users stay at a site longer when they are playing games. That works out well for our customers and their ad partners. That’s been our model for the last seven years. It has worked very well for us. We have grown from two employees to 90 now. About 35 are in New York and the rest are in the Ukraine.
VB: How are you adapting?
KR: The exciting thing for us is that we have a new product that monetizes gamers through other means besides just advertising. We can have subscriptions, micro-transactions, and analytic tools that understand the gamer better and serve more relevant ads to the gamer. That provide us upside on our client’s success. Historically, if our clients licensed games do very well, we still got the same licensing fee. As our clients do well now, we can share in that.
VB: MyYearbook just did a deal with IMVU on creating a universal virtual currency. Is that appealing?
KR: MyYearbook has a currency called “lunch money.” Our game solution works with their lunch money economy. You can use that lunch money for lots of different things. So now you can take your lunch money and change it into other currencies? I see that being very difficult to manage because you have to keep a close eye on your economy and make sure that value is converted correctly. It’s a complicated thing. You need bankers. It’s a financial revenue model that should be managed by Wall Street guys. We could do that too. Our virtual currency is called treats. You earn them playing games and can buy them in the future. We have no immediate plans to interact with existing currencies. It seems like a lot of technical integration that may not be worth it.
VB: What lies ahead?
KR: We see 2010 as a big change where we will push more into social networks and iPhone and Android. In Q1, we will release our first social game. And we will have an iPhone and downloadable version of that game as well.
VB: Is that where everything is moving?
KR: You can’t deny what is happening on social sites. One challenge of the traditional casual web site game market over the past 10 years has been getting distribution. Game developers had to do deals with big casual game web sites like Oberon or Big Fish Games to get distribution and enough eyeballs looking at your product. Now, on social networks, you eliminate the aggregator. However, it’s not easy to get the eyeballs that Zynga and other social game companies already have. We see social networks as an exciting way for us to get to the end user. At the same time, we know that you need some type of marketing plan to succeed. You can’t put up a game and get five million monthly active users. These companies like Playfish and Zynga have huge online marketing teams that study the viral effects of games. But the nice thing is that what we have done for the last nine years is only one step away from what these social game companies are doing. We have been building online games in Flash. We have been building web software for that amount of time. So the transition to social is not as much of a stretch. Building online games is our core competency.
VB: Are you creating new games for Facebook or taking older properties and relaunching them?
KR: Our first game is Mahjong Dimensions laucnhing on Facebook in Q1. Then there are six new games behind it
which use new intellectual property. They are social in nature. It’ s hard to take a single player Flash game and make it compelling in a social network if you are not taking advantage of social features. You saw that when PopCap released Luxor on Facebook and it didn’t do well. Then they launched Bejeweled Blitz where you could play it for just a minute in a social challenge. It did much better. All of our games will be designed for social play and so you can monetize them in different ways.
VB: What are your predictions about virtual goods revenue?
KR: We see it growing. But if you dive into the numbers of the social game companies, the conversion rates are similar to casual games where 1 percent conversion was usual. That was considered pretty good. Two percent was great. The same is true on Facebook. When you add in the offers, and that funds your virtual wallet, then it expands the conversion rate. A lot of people are hesitant to pull out a credit card. But they will fill out an offer. Offers have gotten a terrible rap over the last couple of months. So we will not launch with offers now. It’s just a direct funding.
VB: Are you going to acquire Facebook developers?
KR: No. We think we have the team to become a premium Facebook game developer. We have identified a marketing and analytics company to partner with to get distribution and eyeballs. We don’t think we can compete without that type of partner. We will release who that partner is in Q1 and talk about how we could grow our reach.
VB: Do you mean companies like RockYou?

KR: Yeah, they have tens of millions of users. They could use that as a distribution network. Six months ago, it cost 25 cents to buy an installation of one app on Facebook. Now it is $1.50.
VB: I hear it’s tough on the iPhone, where it costs $3 in ads to get 99 cents from a user.
KR: That’s not a business I want to be in. Competing in the iPhone world is tough, given the large number of developers that are there. We are taking a slightly different approach there. We are not crossing our fingers and hoping our app rises on the leaderboard. We will focus on driving sales to earn that top spot. Through our Facebook channel, we can drive sales of our iPhone app and use the monthly actives to sell it. We aren’t just hoping it gets listed. It is similar to what PopCap is doing with Bejeweled Blitz. That’s a marketing channel for the brand.
VB: Yes, companies like Backflip Studios have used free games to market their paid games.
KR: You have to build an installed base. Then you can monetize it. That’s the big trick. That hurts premium game developers who only want to charge for their games. It’s hard to compete with companies that just want to gain market share through free apps.
VB: It’s still pretty early in the market and it’s still possible to break in?
KR: Absolutely. It’s just the beginning. There is no doubt the top 20 have advantages of having an installed base that they can market to. But the the viral channels are there. They are changing. You can succeed and break into the space. It’s a lot harder. But it is still possible. Every week there is a new developer that I have never heard of before getting into the top ten list. If your game is great, you should have the marketing plan because the big guys will come in and copy it and distribute across their channels. That will put you our real fast.
VB: What will a more mature market look like? If we are in the beginning now, what will it look like at the end of next year?
KR: the game experiences will be richer, deeper experiences. Right now, the games that are developed are based on the login history of Facebook users. People log in for five minutes a day. The games are adopted to take advantage of that. Bejeweled takes 25 minutes to play. But Bejeweled Blitz takes one minute and it takes advantage of these patterns. Most games today are simulations where you set things up and then you come back and see how it did. Over time, there will be more engaging experiences where you play for an hour. I also think there will be a large connection between the mobile and social aspects. You can take a mobile device, play the game, and see the changes reflected in the computer version. The revenues now come from virtual goods and micro-transactions. I think there will be a lot more creative revenue models that will come.
VB: What do you learn from international game markets like China, where a lot of the FarmVille style games came from?
KR: In Korea and China, games and the new business models have been taking off and we’re trying to get them to work in the U.S. It’s happening slowly. Part of the reason that it happened slowly was the aggregators of casual games stifled innovation. They never allowed for multiplayer games or collaborative games. So the social networks come and the innovation is a lot more open. The old guard in casual games is irrelevant.
VB: In casual downloadable games, they are trying to hold the line at $7, which is the new price for game downloads compared to $20 in years past.
KR: It’s so scary. It may drop to $2.99. Once a price war starts, it’s a scary place to be. The production values are increasing. It may take $200,000 to make a premium downloadable game. Five years ago, it sold for $20. Now it’s only selling for $6.99.
VB: Are there companies you admire for their ability to adapt?
KR: PopCap did a fantastic job of transitioninng from a casual game developer to a multifaceted company with  with Facebook, iPhone games, Xbox Live Arcade Games and others. They can reap the rewards. I think that Big Fish and Real Networks and Oberon have not moved as fast as they need to do. They will probably need to make acquisitions to make up for lost time. And they will be expensive. These social game companies that are being acquired are being pursued by every venture capitalist and private equity firm out there.
VB: It must still be a great time to start a Facebook developer firm?
KR: It is a good time to start a Facebook development firm. But you have to understand how it works. The marketing and analytics for what it takes to succeed in social are more important than game design. Some terrible games on Facebook have millions of monthly actives but are not fun to play. You need great game designers, strong marketing and analytics, and some way to get distribution.