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While the enthusiast gaming market is somewhat stagnant, the casual gaming market is on a spurt, growing 20 percent each year. Casual games are smaller and cheaper to develop than blockbusters like Halo, but also less lucrative. However, while the profits from casual games appear smaller, their low development costs and potentially high profit margins also provide a better opportunity for startups.

“Casual gaming” is loosely defined as anything easy to learn that doesn’t require a big time commitment, like Solitaire, Bejeweled or Diner Dash. Games like those have 200 million active players, and pull in $2.25 billion yearly, according to a new Casual Gaming Association report.

By contrast, enthusiast games — the Halos and World of Warcrafts of the world — have an audience of 20 million, but manage to pull in a cool $20 billion. Yet the report, issued today, suggests that casual gaming might have the most growth potential for companies.

Pinning down exactly who receives the profits from casual gaming is difficult. While Microsoft’s famed Solitaire franchise is the most played casual game ever, with more than 400 million people having spent time shuffling their own cards, Microsoft didn’t directly profit — the game is simply a long-running perk for owners of Windows computers. Free play is typically considered a cornerstone of the casual gaming market.

Yet there are a handful of gaming portals that do profit, and account for most of those billions of dollars, including AOL Games, Club Penguin, MSN Games, China’s QQ, and Yahoo Games.

Although some money comes in from advertising on gaming sites, there are other revenue models. PopCap, for instance, distributes Bejeweled for free on PCs, but sells the game on mobile phones. Other companies allow free play on the website but charge for downloads, limit the number of levels that can be played without paying, charge for multi-player versions or sell subscriptions.

Last week, we sat down with Robert Norton, the new VP of business development at King.com, to talk about how his company is approaching growth in the market.

King.com makes much of its money from “skill games” on its own site like Cartoon Shootout, which charge players small amounts (often around a dollar) to play in tournaments against others. King.com also powers games for Yahoo, RealNetworks and NBC, among others, and just opened a new site called MyGame.

However, Norton says that in the future, players will begin to embed games on their own pages, whether that’s a Facebook profile or a personal webpage, and that casual games will become much more personalized.

Imagine uploading a picture of yourself into a game and then playing your own character, as JibJab does with its video series “Starring You”, which places a picture of your head on various dancing cartoons. It may sound silly, but Norton says the actual implementation is more clever, and well disposed to virally spreading through social networks.

Of course, professional development is still a sought-after commodity for these companies. Kongregate, home to Desktop Tower Defense, the latest casual gaming craze, has been collecting independent developers. King.com’s new site, MyGame, also seeks to recruit skilled developers, along with reaching out to users to create some content of their own.

Although Yahoo Games is the 40 pound gorilla of the casual gaming market, these companies seem to believe that players will slowly move away from casual gaming portals, and towards some of the newer ideas they’re betting on.

A final opportunity is in broadening the group that actually pays to play. Although casual game players are evenly distributed through the population, women account for 74% of all paying players, just as young males dominate the hardcore gaming market. Both segments of the gaming industry would like to move into each other’s paying base.

For more on an upcoming casual game site, check out our post on Metaplace.

Kongregate, a gaming Web site that targets young men and woos game developers with incentives, has raised over $5 million to support its growth.

It lets developers compete to create games, and rewards the best of them.

The San Francisco-based company launched publicly in March (our coverage), and has grown since then to include nearly 1,500 games from 750 independent game developers. It is nearing a million unique visitors per month, 85 percent of whom are male, and mostly in their early twenties or younger.

Kongregate allows any game developer to submit a Flash or Shockwave-based game to the site, then chat with and receive ratings from users as they play the game. It makes money from both advertising and from games with virtual goods for purchase. It licenses games from developers, and gives them a cut of any earnings.

With the additional funds, Chief Executive Jim Greer says the company will expand its developer platform to allow for more complex multi-player shooting and strategy games. It will fund promising game developers to build games, and allow other companies to fund games on the platform too. Developers of the most popular games will get up to 70 percent of earnings. Right now, developers get between 25 and 50 percent based on how popular the game is, and how closely the company works with Kongregate.

Other, much larger online gaming sites also target young men, such as Microsoft’s Xbox Live Arcade. These sites don’t allow people to develop and launch their own games and make money, says Greer.

The most popular online gaming sites, such as King.com or EA’s Club Pogo (where Greer used to work), have user bases that skew towards older women — these sites count their users in the tens of millions, but have also been around for years, not a few months. Club Pogo makes over $100 million a year, according to Greer, largely from people paying subscriptions to access certain games.

This round was led by Greylock Partners but the company has already received funding from angel investors including Reid Hoffman, Joe Kraus, Jeff Clavier (who blogged about the company here), Richard Wolpert, and others.

Updated

Kongregate, of San Francisco, launches tomorrow with a host of Web games targeted at young males with social networking components pushing new bounds.

Kongregate is signifiacant because it targets a group that until now hasn’t been served by online social games. Social gaming has been the domain of women, especially older women (served by companies like Club Pogo, owned by Electronics Arts). Young males searching social action games have had to download large software programs to their computer, such as World of Warcraft. Or they’ve played on Xbox Live, where games cost in the millions of dollars to develop — they have social components, but users have little input into the development of those games, and features.

Kongregate calls itself the YouTube of game platforms. It is entirely Web-based, and users provide input. Kongregate lets gamers chat with each other, and even chat with the developers of the games. Anyone can submit a game to Kongregate to be licensed. Kongregate lets gamers comment on and rate the games; hot games climb to the top of the home page. Kongregate’s management then offers contests, giving users who perform points and cards they can use to enter elite play-offs. Developers, meanwhile, get a cut of any profits, which come from advertising.

Kongregate launched a test version in October, but already has licensed 300 games, many of them compelling, such as Fancy Pants. If you haven’t played Fancy Pants, try to find a few minutes to do so. It’s liberating (your character jumps all over the place), and addictive. You can play Fancy Pants at other sites, but its developer is about to release a sequel, and that will be exclusive to Kongregate.

The company has won seed funding from a number of investors, including Reid Hoffman, LinkedIn co-founder Joe Kraus, co-founder of Excite and JotSpot, Joi Ito, an investor in Technorati, and Jeff Clavier, another angel investment with prior social networking investments.

Founder Jim Greer was previously technical director at Club Pogo, where he watched that company grow to have 1.4 million subscribers paying $6 month or $40 a year. Along with premium features, ads and downloadable game sales, Club Pogo is making roughly $70 million a year, he said.

Greer has the game chops, and knows how to build community. The platform looks spiff for just nine months of work. The trick is whether Greer’s team, mainly engineers, will be able to cut the distribution deals they need with large portals, to win traffic. They’ve picked some investors with good contacts. Kongregate faces two of tough competitors, neither of which offers as many social and open sourced features. But they’re also unlikely to stand still. They are Miniclip.com, which has significant traffic and has several years’ head start, and Shockwave, now part of Viacom, and boasting tens of millions of monthly unique users.

See screenshot of FancyPants page below. Arrows pointing to the right show the social areas, such as avatars of your friends, and the place for chat, and comments; the arrow pointing left shows a contest under way. (Note: The social areas are devoid of friends/avatars and chat in this image, but that’s because we got a sneak peak of the version to be released tomorrow, and nobody was playing yet).

[Update: The seed funding was $1 million, Techcrunch has since reported]

Silicon Valley never sleeps. Here’s the latest tech stuff:

Digg subverted — The news site that ranks stories based on how many users submit them, is being subverted by a group called Spike the Vote. It lets its members conspire to submit certain URLs of stories — thereby lifting the odds those stories will get front-page coverage.

MyBlogLog goes live — This is a site we’ve mentioned before, while it was in testing mode. It hasn’t changed its basic model, so we’ll refer to that earlier story for the full background. MyBlogLog has provided a way for bloggers and other sites to get more information about its visitors. One of its offerings is a “recent readers widget,” which shows the photos/avatars of the recent readers on a site. So for example, every time we show up at blog of venture capitalist Fred Wilson, who has implemented the widget (see lower left hand side), we are surprised to we see our own face. It is opt-in, so if you haven’t signed up to MyBlogLog, your photo won’t be there).

Three of the four major music companies make money off of YouTube deal — This is a bizarre. Vivendi’s Universal Music Group, Sony and Bertelsmann’s jointly owned Sony BMG Music Entertainment, and the Warner Music Group — each quietly negotiated small ownership stakes in YouTube as part of video- and music-licensing deals they struck shortly before the sale to Google, the New York Times is reporting. The music companies collectively stand to receive as much as $50 million from these arrangements, sources told the Times.

Moreover, the music companies rushed to complete the deal ahead of the YouTube deal, in part so that they could benefit in the jump in YouTube’s value, the Times said.

Sounds a bit like extortion, in other words: Wink, nudge, you let us make $50 million, and we’ll let you acquire YouTube and leave you alone legally — for the time being.”

Sneak preview of the Sling Media for Mac — Here.

The $1,200/year online calendar — Trumba has some guts. The Seattle start-up (which we mentioned here), backed by profit-focused firms Kleiner Perkins Caufield & Byers, August Capital and Oak Investment Partners, is lifting its price to $99 a month from $39.95 — even though a host of free competing calendar offerings exist on the market. We don’t get this one. (Via Jeff Nolan).

Paul Graham always makes you think — The essayist has written “The 18 Mistakes that Kill Start-ups” and it’s great reading.

Friendster says it has a new patent — Liz Gannes at Gigaom says social networking company Friendster called her up to chat about the new patent it has , which Friendster says covers uploading a photo and associating it with someone you are connected to on an online social network. Friendster says it should extend to “videos, audio, comments,” and any other content type, supported in public or private forums, within a social network. But we don’t see any reference to video or audio in the patent text, so we’re not sure what they’re talking about. We’ve contacted Friendster to check.

SF’s WiFi project derailed, or seriously delayed, by crazy nut jobs — Or so says David Freeberg. Sounds like Google’s Chris Sacca was right when he blew up in frustration about this earlier.

Google Optimizer — If you are an advertiser on Google, this new tool lets you experiment with different headlines, copy, and images that people see when they click on an ad link and come to your site. This experimentation, Google says, will let you find out which combination results in the most conversions.

Washington is in sad state of ignorance — On Tuesday, we referred to comments made by the AeA’s Bill Archey, a lobbyist for high-tech, bemoaning the ignorance most members of Congress show on technology issues. Eric Schmidt, chief exec of Google, made a similar point Tuesday: Those in the know about technology must spend more time reaching out to governments and helping them understand the Internet’s role in society, he said: “The average person in government is not of the age of people who are using all this stuff,” ZDNet quoted Schmidt saying. “There is a generational gap, and it’s very, very real.”

Kongregate lets game developers make money directly — This is a San Francisco start-up that lets game developers upload their Flash-based games, and gives them a cut in any revenue made from users. It is in a closed testing phase, but is eager for feedback. Founder Jim Greer told us yesterday the company is raising a seed round of capital.