In recession, social gaming comes of age (Part 2)

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.

It 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.

In recession, social gaming comes of age (Part 1)

Like 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.

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.”