sgs-1Like a new mafia clan in the formative Facebook game Mob Wars, the social gaming industry has carved out its territory, flexed its muscles, earned respect and laid out a map of the turf it will conquer.

The second annual Social Gaming Summit in San Francisco showcased the growing maturity and diversity of the social gaming landscape. One of the bright spots of the recession-pounded Silicon Valley economy, social gaming has seen rapid growth in users, revenues, employee hiring and the creation of a true ecosystem. With more than 500 people attending the summit, the turnout was better than expected and much higher than last year’s event. It reminded us of something out of 1999, when Internet startups were growing at an accelerated rate, or 2007, when venture capitalists were still pumping money into all sorts of consumer-facing “Web 2.0” startups.

Of course, it would be a mistake to get overly excited about a relatively small segment of the tech economy, which, by itself, is still only a sliver of the $50 billion worldwide video game industry. There is no need to set it up for failure with bubble-like expectations. Indeed, a variety of sources tell us there are a lot of chief executives of other casual game companies who will likely lose their jobs this year because they can’t live up to the promises they made to investors upon raising money in 2007 and 2008. We notably haven’t heard that about social gaming companies. The fact that they use connections between friends on social networks to drive engagement has emerged as the new, key factor in their success.

The summit showed that what is happening in social games is real. There are sustainable, profitable businesses being created on a variety of social platforms, which include Facebook, MySpace, Hi5, Friendster and casual portals on the web. Video game veterans have jumped from their jobs at big companies to join the social gaming startups.

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And it is remarkable how fast the growth has been. Zynga was founded in January, 2007, and launched its Facebook poker game in July of that year. Two years later, the company has 13 million poker players and more than 50 million active monthly users across all of its games. It is making money — it doesn’t disclose exact revenues, but we’ve heard it could make more than $50 million this year (others have heard it could be more than twice that). Zynga has 300 employees in four studios, 50 contractors and it has 80 or 90 open positions. On Facebook, there are more than 30 games with more than a million users, according to Justin Smith of Inside Facebook.

“All of the big [gaming] companies are making social games now,” said Gareth Davis, program manager for games at Facebook. “A year ago, it wasn’t even on their radar.”

Zynga is now part of the social gaming establishment and it has fended off challengers such as Electronic Arts, which is losing some of its talent to the social gaming industry. Zynga and rivals such as Social Gaming Network are expanding into iPhone games. Indeed, SGN has become one of the largest iPhone developers since it began focusing on the platform last year. That market is growing fast as well and it has some elements of social gaming’s virality, but it isn’t yet as profitable as Facebook games, said Mark Pincus (pictured far right), chief executive of Zynga. One of the big reasons is that Facebook’s 200-million strong social network enables the viral distribution of games on a scale that the iPhone just can’t match yet. While there are at least 14,000 games on Facebook, according to Smith, and 56,000 games on the iPhone, it’s far easier to discover Facebook games through friend recommendations.

sgs-4It is this reality — that you’re playing games with your own friends in real life — that makes social gaming so powerfully addictive, Pincus said. Those friends spread the word. That is how Playfish was able to get five million users for its Restaurant City game in just five weeks. Playfish was able to do that even though it doesn’t use artificial, spam-like means to spread its games fast.

Yet some social game companies choose to do that. Playdom and Zynga, for example, spend money on ads to acquire new users as they make up for users who become inactive. Facebook has clamped down on the worst cases where games automatically spammed invitations to an entire friends list over the last several years. So the resulting viral spread of games is more genuine and thus more sustainable. But buying customers has almost become a standard practice, since so many fickle customers move on quickly to try the dozens of new choices they have every day. If anything, social gaming has proven to be one of the most brutal competitive markets in commercial history.

Survival of the fittest

But companies are carving out niches with clever strategies. SGN has begun to cross promote its games and link its Facebook and iPhone titles. Playdom escaped the fierce competition by moving to MySpace before larger competitors on Facebook. It now has eight of the top 25 games on the former site.
Hi5’s game strategy includes making it easy for strangers to play each. It recognizes that people don’t always want to play with their real names. Andrew Sheppard, executive producer of games at Hi5, said that when he’s playing a mafia game, he doesn’t want to whack a Facebook rival whose picture shows she’s a mother of twins.

While small teams can make social games, by no means are they easy to build. It’s still hard for developers to raise money. And not only do they have to get the game right, they also have to get the “viralness” right. That is, they have to build the mechanic that will help the game spread, said John Pleasants (pictured above, center), the former chief operating officer of Electronics who last week became the CEO of Playdom. Pincus of Zynga said that his company invested $2 million in developing the role-playing game Guild of Heroes. But it shelved the game after it found that it didn’t have the right viral features. Companies have to be nimble in social games because iteration happens extremely fast. Social game developers create prototypes within days or weeks. They test them and then quickly revise them to match what users want. Pleasants said that the Playdom team responded to requests from players of Sorority Life; for example, the mostly female gamers wanted to drive cars in the game. The engineers created the cars, and in a short time, Playdom sold about $100,000 worth of pink Volkswagens. Console game makers can’t move nearly as fast, partly because they don’t have direct connections with their customers, nor do they have the company DNA to iterate so quickly.

As the popularity of Sorority Life suggests, social gamers aren’t the same as the players of console games. Much like the customers for the Nintendo Wii, many of the social gamers are from new demographics for gaming: women, older players, and people who don’t identify themselves as gamers. Social games are thus expanding the video game market, even as other sectors contract in the recession. This audience is so different and the games are so new that the top video game companies can’t completely dominate the market.
sgs-3This means that social gaming is a relatively level playing field. Slashkey, an unknown developer, shook up the ranks of top games on Facebook when it launched Farm Town, a farm game which now has more than 9.5 million players. With hits this big, indie developers can usually quit their day jobs and move on to become full-time developers. That’s because developers are able to make a living with Facebook games through a variety of business models.

Business models that work

Offerpal and Super Rewards extend special offers to players, where advertisers pay good money to the game company if its users are willing to fill out a survey or apply for a new credit card. Some of those offers have been slammed as spam-like or exploitive, but the offer companies say they’re working on a variety of ways to make the offers truly useful by screening out the bad user-ad matches. The mechanism of advertising offers is here to stay as a part of the business landscape, as long as it is not overly abused through serving aggressive advertising.Other ways to make money include selling virtual goods, such as clothing for characters or more powerful weapons, through micro-transactions, where it maybe costs a quarter in real money to buy something. The quarters add up over time. Adam Caplan, chief executive of Super Rewards, said he knew of one gamer who spent $30,000 on virtual goods in two different games. Anu Shukla, chief executive of Offerpal, says that as many as 30 percent to 40 percent of the players of role-playing games will bite on offers, which can result in huge payday for the developers who spend all of those extra hours developing the complex games. Ads or product placements are other ways to monetize games. Developers like the guys behind Farm Town thus have a choice among models and can focus on the one that suits them best.

Pincus said he welcomed the arrival of Farm Town because it draws new players into the market. Jeremy Liew, a partner at Lightspeed Venture Partners, noted — to the audience’s great amusement — that Zynga welcomed Farm Town with its own knock-off game, FarmVille, which launched Monday.

FarmVille started spreading among Zynga employees last Friday; it had built up to more than 500,000 users as of Monday. That was the best launch of a game that Zynga ever had, Pincus said. But the ease with which Zynga cloned the Slashkey game points to a problem in the market: copycats. It’s so easy to iterate on games in a matter of weeks that no hit title lives without competition for a long time. This keeps the competition brutal, and it means that everyone has to crank out large numbers of titles if they want to avoid being overrun by this week’s hot game. The copycat problem is starting to escalate, as evidenced by a lawsuit between Zynga and Playdom in the mob game market.

That’s why there is widespread admiration for Playfish, a 100-person company that has more than 30 million players on Facebook. Sebastian DeHalleux, chief operating officer of Playfish (pictured above, left), says the company has focused on making high-quality original games that aren’t so easily copied. Its seven games have all been long-running hits on Facebook, a record that is unmatched. And that’s why the company, founded in October, 2007, has been able to raise $21 million in venture capital. De Halleux says that long-term success comes from creating games where the users are there because they are deeply engaged, not because they fell for some gimmick.

Another big problem is that the developers never know when Facebook will change its interface and terms of service for developers. Some have seen their traffic killed as the unexpected design changes go into effect. But Davis at Facebook said that the company is doing what it can to encourage the spread of games on its platform.

Davis thinks that Facebook Connect, the technology that lets developers embed Facebook identities in non-Facebook sites, will help spread social gaming far and wide this year. Microsoft, Sony and Nintendo have all embraced the technology to some degree. That means the consoles will go social and it will eventually be possible to play the same game across multiple social game platforms — the realization of a possibility that had us intrigued two years ago, before the platform had even fully launched. At some point, the silos of the social game industry will all be connected by some kind of common tissue.

Some wags think that ultimately all games will be social. That’s a little too breathless for us to endorse. But you can expect to see old-line video game veterans leave their cherished console games and join the Young Turks in social games for a long time to come.

Eric Eldon contributed to this article