The game industry is still living in compressed time. It went through more gyrations and disruptions in a year than it usually does in a generation. The revolution in games is on our doorstep, but several of the big companies trying to start it have failed to execute. They proved that ambition alone isn’t enough to take on the status quo.

But traditional game makers can’t be too smug. We saw the bankruptcy of THQ and the weakening of many of the strongest video game franchises. Social, mobile, and online forces will continue to reshape the business in the coming year, but nobody was free of trouble.

The good news is that the number of gamers continues to soar (past a billion), and, sometime soon, somebody is going to hit a phenomenal home run. That is why that, in spite of some phenomenal crash landings, entrepreneurs and investors are still going big with new game startups. Those startups aren’t raising as much money as they once did, but the entrepreneurs running them still have fire in their bellies.

We’ve gone back through the archives of GamesBeat for the past year and dug up the stories that made the biggest impact. Here’s our list of the biggest game stories of 2012.

1. Zynga goes into a free fall

In tandem with Facebook’s disappointing initial public offering, Zynga missed its second quarter earnings targets. Demand for its games weakened, and the company’s stock price tanked 40 percent in a day. It never recovered during the year, and the toll was felt by every gaming company. In the third quarter, the results were disappointing again.

The problem for game startups is that Zynga’s value fell by 75 percent, crushing down the values of similar companies in both the public stock and private markets. Game company valuations plummeted, and it is no surprise that the pace of investments slowed in the latter part of 2012. Zynga tried to claw its way back up to recapture the glory days of its IPO. It launched a spate of new titles like FarmVille 2 and moved into mid-core games via acquisition. But the payoff isn’t clear just yet.

2. Mobile goes big

Zynga tried to move into mobile in a big way, but so did everybody else. The migration was huge, since many believed that smartphones and tablets would replace consoles. Rovio’s Angry Birds soared past a billion downloads, and the franchise took off in new directions with Angry Birds Space and Angry Birds Star Wars, not to mention a whole line of new Hasbro toys. Social game companies like Kabam successfully diversified beyond Facebook and invaded mobile — its Kingdoms of Camelot: Battle for the North turned out to be the No. 1 grossing app on the Apple App Store. About 86 percent of Flash game developers expanded into mobile. Like King.com, most of them tested their titles on the web and Facebook and then moved the successful games over to mobile.

By the third quarter, mobile-game startups accounted for 42 percent of all investments in the industry and 22 percent of the transaction value, according to Digi-Capital. That meant that mobile game investments were popular, but they were also smaller since mobile-game studios are still relatively small.

But the mobile market wasn’t easy. Indie game makers could make it big, but they often needed help. Mobile marketers tried everything the could to get their products noticed, but Apple had to crack down on the methods that weren’t good for consumers. Still, mobile promised to be huge. In the U.S., 44 percent of people were playing mobile games. And mobile became the fastest growing segment in games.

3. Kickstarter launches a crowdfunding revolution

While Zynga’s crash hurt funding, developers found a new fountain of money in their own fans. Tim Schafer’s Double Fine Productions tapped the crowdfunding site Kickstarter to fund a new adventure game. It raised more than $1 million on its first day and wound up raking in $3.3 million in 30 days by March 13. Brian Fargo’s inXile Entertainment jumped on the opportunity and raised nearly $3 million for Wasteland 2, a sequel that no traditional game publishers would touch. Jordan Weisman’s Harebrained Schemes raised $1.8 million for Shadowrun Returns. Kickstarters for a variety of other games such as Obsidian, Leisure Suit Larry, Pitfall, and others also took off, creating a revival for mid-sized game development studios.

Soon enough, crowdfunding wasn’t just a way to run around the gatekeeper publishers. It was an agent of disruption, giving more creators control over their destinies at a time when larger game companies had become risk averse. Ouya proved that as it raised $8.3 million for its Android-based video game console.

And Kickstarter wasn’t the only show in town. Gamesplanet Lab launched its own crowdfunding effort for games. Gambitious focused on raising crowdfunding and seed investment for game studios. And Chris Roberts’ Star Citizen took off in part through web-based donation system.

4. Nintendo’s kicks off the new generation

Nintendo’s run with the motion-sensing Wii was phenomenal, with more than 98 million units sold to date. But for the past couple of years, sales have lagged and Nintendo finally got a replacement console on the market with the launch of the Wii U on Nov. 18. Nintendo aimed to disrupt gaming again by incorporating tablets and asymmetrical gameplay into its new console. It initially sold out, with more than 400,000 units sold in its first week. But that doesn’t look so good in the context of some serious new competition. Apple’s new iPhones and iPad tablets routinely sell more than 2 million or 3 million units on opening weekend. Nintendo executives put on brave faces, but critics have been bearish on the Wii U throughout the past year. Those critics, such as our own GamesBeat editor-in-chief Dan “Shoe” Hsu, point out a number of weaknesses in the console, such as the lack of a killer app. Analysts expect it to sell out for the holidays, but the questions is how long it will keep selling for. So far, the Wii U hasn’t set the world on fire.

5. OnLive’s collapse

No company held more promise than OnLive, which came on the scene in 2009 with a plan that astonished everyone. OnLive’s “cloud gaming” solution would allow people with low-end computers to play high-end games that were processed in a remote data center and then streamed as videos to the players’ screens. The cloud would allow players to log into their games from anywhere and play as long as they had a good Internet connection. OnLive beat its milestones and surprised the skeptics, launching its service in 2010. It came up with a lot of improvements, but it lost a number of big game publishers such as Electronic Arts as rivals such as Gaikai came on the scene. OnLive’s membership base grew slowly, and it had a tough time competing against free-to-play online games.

So the company kept raising money at a high valuation to keep the lights on. By 2012, the company had burned through more than $200 million in funding. It had more than 200 employees but failed to break even. It hit the wall in August, running out of money. An investor bought the company and ousted founder Steve Perlman. The company went through a bankruptcy alternative and lost many of its employees. It is trying for a comeback but in a much reduced state.

Perlman has moved on to his wireless broadband startup, but his failure to warn people about the collapse was unpopular with employees. This fall sent a shock wave through the cloud-gaming industry, and it was a case of a solid company racing too far ahead of its own revenues until it shattered its own dream.

6. Curt Schilling’s 38 Studios falls apart, forcing him to auction off his bloody sock

Curt Schilling was a baseball hero who pitched his team to a 2004 World Series victory with a wounded foot. After he retired, he started 38 Studios, a game startup with the audacious goal of creating a massively multiplayer online fantasy role-playing world that could challenge Blizzard Entertainment’s World of Warcraft. He poured more than $50 million of his own money into Project Copernicus, and he hired comic artist star Todd McFarlane and fantasy novelist R.A. Salvatore. It was the ultimate bet on the MMO business. But it wasn’t meant to be.

Schilling took $75 million in loans from Rhode Island in exchange for moving his company there from Massachusetts. But the company’s first game, Kingdoms of Amalur, was a mediocre success, and it ran out of money in June. It laid off more than 300 people abruptly and then filed for bankruptcy. Schilling had to auction off most of his property, including his bloody sock. Instead of killing off WoW, 38 Studios became a cautionary tale for states that provided rich incentives to risky startups.

7. Social casino games take off

Everybody loves a bubble. Speculation that online gambling might be legalized led to a feeding frenzy in the adjacent market of non-real-money social casino games, where people spent money on virtual goods but couldn’t cash their winnings out. Games such as Zynga Poker had taken off over the past five years. But when the Justice Department ruled in December that online gambling could be legal, the floodgates opened. IGT paid $500 million in January for Double Down Interactive, a social gaming company with only 70 employees. After that jackpot, the speculators moved in. Dozens of new startups received funding for their social casino and sports betting games. Analysts report that social casino games will generate $1.6 billion in revenue this year, and that will steadily grow over the next several years. Betable has cut deals with five social casino game companies to convert their titles into real-money gambling games. Zynga’s crash took some of the air out of this bubble, but many are still betting that online gambling will give a big boost to the social casino game companies and visa versa. Zynga itself is betting big on online gambling, and so is Facebook. Will the bubble pop in 2013, or will the marriage of social casino games and online gambling pay off?

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Last week was the worst ever for social gaming company Kixeye. A former black contractor wrote in a Tumblr post (since taken down but reprinted here) that he was subjected to racist comments during a stint at the company earlier this year. Will Harbin, chief executive of the hard-charging San Francisco company, said he investigated the matter and fired three employees and a manager for behavior that didn’t meet standards.

Harbin said there were a few “bad apples” who had created a “micro culture” at Kixeye that was unacceptable and embarrassing, but most of the 300-plus employees are hard-working and conscientious. He said the behavior the contractor described — the parts that have been verified as true — are not defensible. Kixeye only has around  9.2 million monthly active users on Facebook. But it’s one of the most profitable game companies on the social network because it makes free-to-play hardcore games such as War Commander and Battle Pirates that monetize exceedingly well.

Harbin granted us an exclusive interview to discuss what happened. We discussed not only the incident, but the culture of racist comments that travels in some circles in online games when you play anonymously with strangers. Here’s an edited transcript.

GamesBeat: So tell us what happened and what you did.

Will Harbin: Tuesday, I was alerted to a Tumblr blog post by a former contractor of ours who worked in our [quality assurance (game testing)] department. He accused us of racial discrimination. He included quotes. Some of the names were changed, but it was enough for me to go in and figure out who this person was and where they worked on the team. So I started there and immediately did a personal investigation.

GamesBeat: He had not come to you before that?

Harbin: Definitely not.

GamesBeat: So that was the first time you’d (ever heard these allegations?)

Harbin: He was here a few months ago. As far as I know, the blog was posted on Tuesday. Anyway, through the investigation, number one, there was no record of any complaint. Number two, obviously I started with the manager of that group, his manager. While I found that the vast majority of the things in the blog to be suspect in terms of accuracy, I did find examples of very inappropriate behavior and unacceptable behavior according to Kixeye standards.

I immediately terminated this person’s manager. Over the next 24 hours, as I conducted more interviews, I did find that there was basically a small team … a micro-culture had effectively developed within Kixeye of this handful of people who had demonstrated some embarrassing, offensive conduct and behavior that I didn’t think was acceptable. I don’t think these people were racist or discriminating. It was a multi-cultural and multi-gender group. Multi-everything. But…

GamesBeat: It didn’t meet your standards?

Harbin: No. It didn’t meet the standards of Kixeye. Or any other company that I’m aware of. So I terminated them. That was the initial, immediate resolution around that and our investigations. Also, just to make sure that we have the full story, my vice-president of HR is working on it, and we’ve hired an outside investigator to come in and conduct interviews and do a very thorough investigation around the claims. So the thing was posted. It’s unfortunate that it was made public. I certainly don’t want people to think that this is indicative of a broader cultural problem at Kixeye.

GamesBeat: You have an aggressive company and an aggressive business. You want people to be doing kick-ass work producing kick-ass games. But there’s a difference between that…

Harbin: …and racist and offensive behavior. Those are completely different things. One is a matter of taste and a matter of marketing direction, so to speak. The other is a matter of law. And it’s not just law. I don’t want people to be uncomfortable working here. I want this to be a very comfortable working environment. I want everyone to love waking up and coming to the office every day, just like me. I want people to remember this as the best job they’ve ever had, and I want other people to come in here and have the best job they’ve ever had. We just want to make great games and great products, and we want to have great people working on them. I think a lot of people through this are confusing our external marketing message with our internal company culture. We’re a very diverse, multi-cultural company that has come together around one passion, which is making great games. That’s it.

GamesBeat: It’s not a frat house with inappropriate behavior all the time.

Harbin: Absolutely not. This is the furthest thing from any bro-gramming, frat house type of culture. I’d encourage anyone who’s made those kinds of allegations to come around and look at the office. We’re all nerds. Maybe people confuse our recruiting videos, or some of the confidence and the audacity to call out hypothetical competitors like that, for some sort of bro-tastic culture. I don’t know how to describe it. But I think people confuse the marketing message with how our internal culture works here.

GamesBeat: Speaking of confusion and what could have been going on in the minds of some of these people. … I think of Xbox Live and how there have always been racist and sexist comments you hear from people that you play with online. The confusion might be that that’s okay in the workplace…

Harbin: I can’t control what people say in their free time. I don’t have visibility into what people do in their free time. But we’ve made it very clear that sort of behavior is not acceptable in the workplace, during working hours. That is exactly why I terminated the four people I did.

GamesBeat: And you have some training that’s started as well?

Harbin: We already had training started a while ago. Obviously, we’re doing more now. We started by rolling out harassment training, sensitivity training, diversity training, and so on to the managers. Now we’re branching that out to the individuals as well and making sure that’s reinforced. In addition to that, it’s not just about what not to do. We want to be sure that people are good managers. We’re augmenting that with good quality leadership and management training. We’re helping people figure out how to create a good, open, accepting working environment, versus trying to just say, “Here’s what not to do. Here’s how you avoid a lawsuit.” That’s not what we’re aimed at. We’re trying to make a great working culture.

GamesBeat: You’re trying to stay a startup, as well as become a bigger company…

Harbin: Well, there are good things and bad things associated with a startup. We want to maintain high efficiency and productivity and fun. Those are things that you typically find in a good startup, and we want to keep them here. We can combine some of the best of both worlds. We want to take the good from a larger company and the good from a startup and combine them in one. That’s why we keep smaller game teams. It’s easier to manage. People have more clarity. There’s better communication and more transparency. People have more responsibility.

GamesBeat: You’ve communicated more than you have to, and more than most companies do when they’re in this sort of a situation. What’s the reasoning behind that? Why do you want to say as much as you have?

Harbin: I care a lot more about perception in the industry and perception of our employees. I do care what people think about Kixeye. I care what potential recruits and candidates think about Kixeye. I care about what the friends and family of employees at Kixeye think. I think I can do it in such a way as to be transparent and communicate with the public about things like this, without being legally risky.

We have a great company here. It’s well-run. There are going to be hiccups along the way given how fast we’ve grown, but we are doing everything in our power to make sure it’s a better place every day. It only took us 24 hours to swiftly and appropriately react. I don’t think many companies of our size can say that they’ve done something like that. I’m not going to play by any kind of standard PR handbook and just deny and defend and try to be political and distract people. I like to be direct.

If someone alerts me to a problem, I’m going to investigate it, and if it’s a problem I’m going to take care of it. Again, the reason we terminated these people was not for discrimination. We terminated them for offensive and unacceptable behavior at Kixeye. Someone alerted me to a problem, I investigated, I came to a resolution, and I did this extremely quickly. That investigation is ongoing.

GamesBeat: You have an independent person looking at this now?

Harbin: Yeah. I think one other point to clarify a bit more, just to put a sharper point on it: we did it because it was the right thing to do. It would have been easier, and in fact we were advised, to defend the position and stay out of the press. We felt that it was extremely important to go directly to the root, and to communicate that.

GamesBeat: Just for the record, there is no litigation so far?

Harbin: No.

GamesBeat: Is there anything else to clarify?

Harbin: No. Again, my hope is that we can show more people what a great culture and working environment we have here, as demonstrated by the people here and the products we’re creating. You can’t control every aspect of every person, but as soon as we find out about problems, we deal with problems. We’re committed to self-improvement in all aspects of the company. We’re also scaling extremely rapidly, and as we grow our teams, it’s important to make sure that all the management practices are in sync. This is obviously an example of an area that we need to improve. One team went off in their own direction, and the minute that we caught wind of that fact, it was calibrated.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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Social gaming firm Kixeye said that four members of its staff, including a manager, have been fired after an investigation into claims of racism.

The move comes after a former contractor who is black complained about abusive behavior in a blog post written under the name of Qu33riousity. Yesterday, Will Harbin, the chief executive of San Francisco-based Kixeye, promised to investigate further and said he had taken “substantial corrective action.” In a post, he elaborated on that today.

Harbin said he learned of the allegations yesterday at the same time that others did — after the contractor’s post went live.

“Immediately after I learned of these allegations, I personally interviewed members of the team to figure out what this was about,” Harbin wrote.

“While it’s clear that not everything in the blog post was accurate, I did discover examples of embarrassing behavior that I find inappropriate for Kixeye or any other work environment. As a result, I immediately terminated the manager of the team in question and then three other employees who violated company standards as well. We have also taken steps to provide harassment training to the other members of the team, given the poor example set by their manager.”

Clearly, Kixeye is positioning itself so that it minimizes its legal exposure. VentureBeat has heard other complaints, and we are doing reporting on those allegations as well.

Harbin said, “I am doing my best to create a company where our employees love to work, with a culture of openness and tolerance to different points of view, styles, races, gender, orientation, religion, and cultures. It turns out that a few bad apples weren’t living up to the standards that the rest of us have set for our company. What are we doing to make sure this never happens again in the future? Well, even before this incident, we hired a VP of HR who has implemented a sensitivity training program for all employees. He’s also introduced processes that have strengthened communication channels between management and the employee base.”

Harbin said Kixeye has started anonymous, company-wide surveys in which we gather and have taken action on feedback, complaints and rumors. The company is also doing its own outside independent investigation of the allegations made by the contractor.

As we’ve noted before, Kixeye is a hard-charging company that became well known after it posted a funny recruitment video about its culture of making “games by gamers for gamers.” In the video, Harbin says, “You can say to your grandchildren, ‘I made games that kicked serious ass. Mind-blowing games that left virtual farmers crapping their virtual pants in fear.’” Harbin said at his company you will be able to say you made games that “copied no one” and “compromised nothing” and “had a fucking blast doing it.” The company is known for addictive games like War Commander and Battle Pirates.

The video caption says, “If you’re a rockstar game maker and you don’t want to put your talents toward cow-clicking and virtual pet cuddling, we might have a place for you on our team.”

Kixeye only has around 4.8 million monthly active users on Facebook. But it’s one of the most profitable game companies on the social network because it makes free-to-play hardcore games that monetize exceedingly well.

[Image credit: Kotaku]

Here’s the full text of what Harbin said on Twitter:

I’d like to elaborate on the statement I made yesterday. The facts: in a blog post, a former contractor who was here this Summer made allegations of racial discrimination against KIXEYE. I first learned of this at the same time most of you did – via twitter yesterday early afternoon.

Immediately after I learned of these allegations, I personally interviewed members of the team to figure out what this was about. While it’s clear that not everything in the blog post was accurate, I did discover examples of embarrassing behavior that I find inappropriate for KIXEYE, or any other work environment. As a result, I immediately terminated the manager of the team in question and then three other employees who violated company standards as well. We have also taken steps to provide harassment training to the other members of the team, given the poor example set by their manager.  I am doing my best to create a company where our employees love to work, with a culture of openness and tolerance to different points of view, styles, races, gender, orientation, religion and cultures.  It turns out that a few bad apples weren’t living up to the standards that the rest of us have set for our company.

What are we doing to make sure this never happens again in the future? Well, even before this incident, we hired a VP of HR who has implemented a sensitivity training program for all employees. He’s also introduced processes that have strengthened communication channels between management and the employee base.  We’ve also started conducting regular anonymous, company-wide surveys in which we gather and have taken action on feedback, complaints and rumors. Finally, we are in the process of conducting an outside, independent investigation of the allegations made by the contractor to ensure we have all the facts and take whatever continued, appropriate action is necessary to prevent this kind of behavior from occurring again.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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A lot of folks need to shut up and wait till it airs.

Black in America: The New Promised Land – Silicon Valley, is about the journey of eight participants in the NewMe Accelerator program for black tech founders, who bring their startup concepts to Silicon Valley in an attempt to make it big. The founders get access to mentorship from industry veterans and proximity to the hottest technology companies in the world. This classic bildungsroman tale is spiced up when the founders have to live together in a small Mountain View, Calif. house, which injects a little Real World-style drama into an already meaty storyline.

This past Thursday I was invited by the Black Founders of Silicon Valley to a screening of the documentary, and, to put it bluntly, I have to say that CNN missed the mark. While the documentary shines a bright light on a very taboo subject — race and merit in technology, never does it ask if people are actually going to use the products the founders so passionately believe in. How much traction do these companies have? How many customers? How big is the market? These are the nuts and bolts of business and the types of questions that guide investment decisions. Investors ask these questions to see if products are fulfilling a need or solving a problem. Some of the NewMe startups are solving problems, while others just aren’t.

Silicon Valley thrives on ideas, but there is bias in all of us. The extent to which we project race bias onto ourselves and the world is a subject of endless debate. Black in America does an admirable job of showing how racial prejudice is still alive and well. Two poignant scenes from the documentary really drive this point home. After a late night of hacking on his startup, NewMe co-founder Wayne Sutton is racially profiled by Mountain View police, who detain him and run his record to see if he has a criminal history. The cops couldn’t understand why a black man was walking through a residential neighborhood after dark, Sutton tells the camera crew, in a moment of raw emotion. Maybe it does happen, but it’s really hard to imagine Indian or Southeast Asian engineers being stopped on their way home because it’s late and the police don’t recognize them. Blacks and Latinos in this country know the routine.

In another gripping scene, Vivek Wadhwa, a NewMe mentor, advocates for the NewMe founders to get a white guy to front their companies, and they are gobsmacked. The notion that their ideas will play better if articulated from white mouths, cuts to the quick.

But here’s where the plot line gets a little thin. While the characters themselves were very compelling, their startups concepts were not. Few of the NewMe companies were tackling large problems or seemed to have a truly innovative idea that was going to disrupt existing markets. BeCouply wants to help couples have an epic social life, as co-founder Pius Uzamere says, and while I’ve been single for a while now, I was unaware that couples have a problem socializing. Uzamare’s laptop sports a huge MIT Alumni bumper sticker, and he was student body president, so there’s probably a pony in there somewhere. Could there be more than meets the eye with his mobile app? As with all consumer-facing startups, we’ll just have to wait and see.

Kloud.co was the most technical company of the eight featured in Black in America, and by far had the most defensible product. Kloud.co is a service that will allow its users to search for media of various types across services such as Twitter, Dropbox and Google Docs. Founder Hank Williams is a seasoned entrepreneur who started ClickRadio, a music streaming service, in 2000. Kloud definitely had the most tech behind it, and if Dropbox is $4 billion company, so too could it be. In his website bio, Williams says Kloud will change humanity.

To be fair, all startups stay in a half-baked state until they’ve got lots of users/customers, and have significant funding or both. (Color, for example, one of the most noted failed startups of the year, has $41 million in investment, and still lacks users.) While the “pivot” may be the most overused term in the Valley, most startups change their focus many times before they come up with something that sticks. Only after people have come to rely on the core product does it becomes much harder to change direction. I don’t think that the NewMe startups featured in Black in America are any more or less half-baked than the hundreds of startups I’ve seen. But CNN lays bare the added challenges the founders face because they don’t fit the pattern of previous successful tech CEOs.

In a deft maneuver sure to boost ratings, CNN ensnared TechCrunch founder Michael Arrington in a controversy when they posted a clip of him saying he didn’t know any black entrepreneurs in Silicon Valley. Needless to say, the video caused quite a stir, and Arrington dutifully played along, howling that he’s not a racist and that he was duped by Soledad O’Brien. In making the conversation about one man, CNN ensured that the journalist with the most visible personal platform in tech told everyone that there’s a documentary coming out. Well played.

But one man cannot change the racial makeup of Silicon Valley, even if he helped bring much-needed attention to the subject. Ultimately what is going to change the perception of blacks in Silicon Valley is when a black founder creates a multibillion dollar startup that does what Twitter, Apple or Facebook have done to transform our lives. For potential investors the point is not only to create a company for its own sake, but to create extraordinary returns on investment. Greed is colorblind.

The tenacity it takes to make it as an entrepreneur, and to do so with so many obstacles, is a quality any investor should seek out in founders. At the end of the day, the ideas still have to stand on their own, and if they don’t, it’s not because of race. Customers too don’t care, as long as the product works. CNN does not answer the question of whether NewMe founders are creating something that people are going to use, and this is why it missed the mark.