October 16, 2009

Industry Report

Think Entertainment: Gaming Reason for Report:

Social Gaming: Revising Our Market Size Estimate Industry Update
Atul Bagga
To Reflect Rapid Growth
415-249-6362, abagga@thinkequity.com
THINK SUMMARY:
Over the last six months, growth in social gaming has exceeded our
expectations (DAU for the top five developers up 5x during this period), which
has rendered our original market size estimates conservative. We estimate the
current market size for social gaming at about $60 million per month and
expect it to grow at approximately 45% CAGR over the next three years to
reach $2 billion by 2012, driven by a combination of strong growth in usage
and improving monetization.
KEY POINTS:
• Usage of social games has taken off much stronger than we expected
(please see our report, "The Emergence Of Games As A Service" published
on May 4, 2009). Daily Active Users (DAU) for the top 10 social gaming
companies has increased more than 5x over the last six months, driven by
the viral nature of these games, aggressive marketing campaigns by a few
gaming companies, and emergence of a few new genres of games, most
notably Farm and Aquarium games.
• The popularity of gaming on social networks is evident from the fact that 20
of the top 25 applications on Facebook are games (as measured by Monthly
Active Users or MAU; source: Developer Analytics), compared with 16 of the
top 50 applications six months ago (as measured by MAU; source:
Facebook). We believe that the usage (as measured by MAU) is even more
skewed toward games now compared with six months ago.
• Our conversations with a number of social gaming companies suggest that
the monetization curve is concentrated to the large players—with only about
3-5% of the active users directly paying for the games. The ARPU curve for
the direct paying users seems to resemble any other free-to-play online
game, i.e., heavily concentrated on the top users. Looking ahead, we believe
that there may be some room for improvement in the conversion rate (from
active users to active paying users) driven by availability/increasing
popularity of newer payment methods (e.g., Facebook credits, more prepaid
cards, and mobile payments).
• We are seeing a pick up in indirect pay, i.e., users paying for the virtual
currency by opting for advertisers' offers (lead generation for marketers such
as Netflix, Blockbuster, etc.) or taking online surveys. We estimate that the
conversion rate could be slightly better for indirect paying users—at about
4-5% (versus 3-5% for direct paying users) albeit with relatively lower ARPU.
• All in all, we estimate the current social gaming market size to be
approximately $60 million per month (run market of $720 million per year)
and expect the market to grow at about 45% CAGR to reach $2 billion within
the next three years.

Please see analyst certification (Reg. AC) and other important disclosures on page 5 of this report.
 October 16, 2009
Industry Report

Over the last six months, growth in social gaming has exceeded our expectations, which could render our
original market size estimates conservative. We estimate the current market size for social gaming at about $60
million per month and expect it to grow at approximately 45% CAGR over the next three years to reach $2 billion
by 2012, driven by a combination of strong growth in usage as well as improving monetization.

Social Gaming Growth Has Far Exceeded Our Expectations: Usage of the social games has taken off much stronger
than we expected. Daily Active Users for the top 10 social gaming companies has gone up more than 5x over the last six
months, driven by the viral nature of these games, aggressive marketing campaigns by a few gaming companies, and
emergence of a few new genres of games, most notably Farm and Aquarium games.

Exhibit 1: Daily Active Users (Million)

Oct-09 May-09
Zynga 47.1 6.7
Playfish 12.1 4.7
Slashkey 5.8 1.8
Crowdstar 4.0 0.2
PopoCap Games 2.8 0.6
TwoFishes Interactive 2.1 0.2
TallTree Games 2.1 -
Playdom 1.9 0.4
Rawr! Games 1.8 -
Serious Business 1.2 0.4
Five Minutes 1.0 -
Total 81.9 15.0
Source: Developer Analytics

Exhibit 2: Monthly Active Users (Million)

Oct-09 Jan-09
Zynga 148.6 21.5
Playfish 56.9 19.2
Playdom 12.7 1.0
Total 218.2 41.7
Source: AppData.com/InsideSocialGames.com

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Industry Report

Games Are Now By Far The Biggest Category Of Applications On Facebook: The popularity of gaming on social
network is evident from the fact that 20 of the top 25 applications on Facebook are games (as measured by Monthly
Active Users or MAU; source: Developer Analytics), compared with 16 of the top 50 applications six months ago (as
measured by MAU; source: Facebook). We believe that the usage (as measured by MAU) is now even more skewed
toward games compared with six months ago.

Exhibit 3: Top Games On Facebook – Now And Six Months Ago

Game Developer MAU Rank
Oct-09 Apr-09 Oct-09 Apr-09
FarmVille Zynga 59.0 NM 1 NM
Mafia Wars Zynga 25.9 9.5 3 9
Pet Society Playfish 19.9 10.6 5 8
YoVille Zynga 19.5 5.3 6 18
Farm Town Slashkey 18.7 NM 7 NM
Texas HoldEm Poker Zynga 18.2 12.3 8 7
Restaurant City Playfish 16.6 NM 9 NM
Café World Zynga 15.9 NM 10 NM
MindJolt Games MindJolt 14.9 3.2 11 31
Happy Aquarium CrowdStar 12.4 NM 12 NM
Roller Coaster Kingdom Zynga 8.9 NM 15 NM
Fish World TallTree Games 8.4 NM 16 NM
Bejeweled Blitz PopCap Games 8.3 NM 17 NM
Country Story Playfish 7.8 NM 18 NM
FARKLE Viral 7.6 NM 19 NM
Barn Buddy TheBroth 6.6 NM 20 NM
My Fishbowl TwoFishes Interactive 5.2 NM 21 NM
(Lil) Farm Life Greenpatch Inc 5.2 NM 22 NM
Happy Farm Elex 4.0 NM 23 NM
Animal Paradise Rekoo 3.5 NM 24 NM
Geo Challenge Playfish 1.4 4.0 221 25
Word Challenge Playfish 3.6 3.5 113 29
Who Has The Biggest Brain Playfish 2.7 3.5 191 29
Bowling Buddies Zynga 1.8 3.7 167 33
Street Racing Zynga 2.0 2.7 91 36
Vampire Wars Zynga 3.8 2.6 50 39
Kidnap Context Optional 1.0 2.5 192 42
Friends For Sale Serious Business 6.6 2.2 37 44
Mob Wars Mob Wars 1.7 2.1 90 45
Poker Palace Trevor Smith 1.6 1.9 144 46
Minigolf Play Playfish 0.9 1.9 313 48
Source: Developer Analytics (as on 10/15/09) and Facebook (as on 04/21/09)

Not Surprisingly, Conversion Rate (From Active Playing To Active Paying Users) Remains Pretty Small; We
Expect Some Improvement With Availability/Increasing Popularity Of Newer Payment Methods: Our conversations
with a number of social gaming companies suggest that the monetization curve is concentrated to the large players—with
only about 3-5% of the active users directly paying for the games. The ARPU curve for the direct paying users seems to
resemble any other free-to-play online game, i.e., heavily concentrated on the top users. Looking ahead, we believe that
there may be some room for improvement in the conversion rate (from active users to active paying users) driven by
availability/increasing popularity of newer payment methods (e.g., Facebook credits, more prepaid cards, mobile
payments).

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Industry Report

Indirect Pay Contributing Almost 30-50% Of The Social Gaming Revenue: We are seeing a nice pick up in indirect
pay, i.e., users paying for the virtual currency by opting for advertisers offers (lead generation for marketers such as
Netflix, Blockbuster, etc.) or taking online surveys. We estimate that the conversion rate could be slightly better for indirect
paying users—at about 4-5% (versus 3-5% for direct paying users) albeit with relatively lower ARPU.

We Expect A 45% CAGR For Social Gaming Market Over The Next Three Years: All in all, we estimate the current
social gaming market size to be about $60 million per month (run market of $720 million per year) and expect the market
to grow at about 45% CAGR to reach $2 billion within the next three years.

Exhibit 4: Market Size Estimate For Social Gaming

Current 2012E
Annual
Monthly Run Rate
Population (million) 341 341 368
Internet Penetration (%) 74% 74% 77%
Internet Users (million) 252 252 284
Social Network Penetration (%) 63% 63% 70%
Social Network Users (million) 158 158 198
Gamers on Social Network (%) 30% 30% 40%
Gamers on Social Network (million) 47 47 79
Direct Paying Users (%) 3.0% 3.0% 5.0%
Direct Paying Users (million) 1 1 4
ARPU - Direct Paying Users ($/month) $20 $20 $25
Market Opportunity - Direct Paying Users ($ million) $28 $340 $1,191
Lead Generation (Offers/Surveys) Penetration (%) 4.5% 4.5% 6.0%
Lead Generation Users (million) 2.1 2.1 4.8
Avg Number of Lead Gen/User/Month 3.4 3.4 3.4
ARPU/Lead Gen ($/month) 3.7 3.7 4.4
Market Opportunity - Indirect Paying Users ($ million) $27 $324 $868
Ad Supported Users (million) 47 47 79
Hours Game Play/Week 5 5 5
Ads Served/Hour Game Play 20 20 20
Total Ads Served (billion) 21 248 413
CPM $0.25 $0.25 $0.30
Market Opportunity - Ad Revenue ($ million) $5 $62 $124
Social Gaming Market Size ($ million) $60 $726 $2,183
Source: ThinkEquity estimates

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Industry Report

Important Research Disclosures

Analyst Certification
I, Atul Bagga, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the subject
securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific
recommendations or views expressed in this research report.

The analyst(s) responsible for preparing this report has/have received compensation based on various factors, including the firm's total
revenues, a portion of which is generated by investment banking activities.

Rating Definitions
Effective October 7, 2009, ThinkEquity LLC moved from a four-tier Buy/Accumulate/Source of Funds/Sell rating system to a three-tier
Buy/Hold/Sell system. The new ratings appear in our Distribution of Ratings, Firmwide chart. To request historical information, including
previously published reports or statistical information, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600
Montgomery Street, San Francisco, California, 94111.

Buy: ThinkEquity expects the stock to generate positive risk-adjusted returns of more than 10% over the next 12 months. ThinkEquity
recommends initiating or increasing exposure to the stock.

Hold: ThinkEquity expects the stock to generate risk-adjusted returns of +/-10% over the next 12 months. ThinkEquity believes the stock
is fairly valued.

Sell: ThinkEquity expects the stock to generate negative risk-adjusted returns of more than 10% during the next 12 months. ThinkEquity
recommends decreasing exposure to the stock.

Distribution of Ratings, Firmwide

ThinkEquity LLC

IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [B] 120 67.40 14 11.67
HOLD [H] 51 28.70 2 3.92
SELL [S] 7 3.90 0 0.00

This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The
information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. The
opinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Past
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