live-gamerLive Gamer is doubling down on the hot-growing virtual goods market with its acquisition today of Twofish for an undisclosed price. In doing so, Live Gamer is making itself a big predator in one of the hottest parts of the video game industry.

twofish-logoThe combined company will now be able to give game publishers a one-stop shop for virtual goods transactions, said Mitch Davis, chief executive of New York-based Live Gamer. That’s important for fast-growing companies that are combining games and social networks.

The companies’ platforms can give game makers everything they need to create a currency inside a game for buying and selling items. With virtual goods, game publishers can let gamers play online games for free and charge players only when they want to buy, say, a more powerful weapon in a game.

Virtual goods has been heating up all year. Live Gamer started as a secondary virtual goods market, allowing players to trade goods directly to each other inside a game. Last month, it acquired a primary virtual goods platform maker, N-Cash in South Korea, for an undisclosed price. That platform lets game publishers sell goods directly to players.

With both secondary and primary virtual goods platforms, Live Gamer is now a major player in what venture capitalist Tim Chang of Norwest Venture Partners has called the hottest business model of 2009. Asian companies such as N-Cash have been mining the virtual goods business model since 2001, but only in the past year have North American companies started cashing in on the new way to make money.

In the recession, the model of offering free ad-based games has been suffering, paving the way for virtual goods to take off on Facebook, MySpace, and online games such as Sony Online Entertainment’s Free Realms, which has signed up close to five million players since its launch in April.

“We knew this would happen,” said Lisa Rutherford, president of Twofish, in an interview. “The speed of it is exciting. We are at an inflection point where companies like Facebook, Apple, and PayPal are all saying that virtual goods is important.”

Twofish started seeing explosive growth at the beginning of 2009, Rutherford said. Davis said that about 90 percent of players usually don’t buy virtual goods in free-to-play games. But the 10 percent who do may spend anywhere from $20 to $50 a month. And a tiny sliver of fans spend crazy sums of money each month, said Peter Moran, a general partner at DCM, one of the venture capital firms that watched the developments closely. In the last month, the 70 game company customers of Live Gamer, Twofish and N-Cash have performed three million transactions in dozens of countries.

In related deals, PlaySpan bought SpareChange, a virtual currency provider on Facebook, and AdKnowledge entered the special offer market with its acquisition of Super Rewards, which is an alternative payment system where players can play a game for free but must participate in special offers if they want to get rewards in games.

Besides PlaySpan, rivals include Jambool and Fatfoogoo. The latter is a European firm that is making inroads in the U.S. And big game companies have the option of creating their own virtual goods systems. But Davis hopes that Live Gamer will take the hassle out of the hands of publishers.

Palo Alto, Calif.-based Twofish raised $4.5 million in October from Triplepoint Capital, Rustic Canyon Ventures, and Venrock. Rutherford said that Twofish’s investors were pleased with their return on investment.

Davis said the Twofish team will continue in Palo Alto. The combined company will have about 79 employees. Twofish Board members, Michael Kim from Rustic Canyon Ventures and Twofish co-founder Sean Ryan, will join the Live Gamer’s board. Live Gamer’s combined companies have hundreds of customers and partners.

It’s not clear how much Live Gamer paid for both N-Cash and Twofish. But my guess is the company has managed to raise some money and hasn’t announced it yet.