Raja Jasti’s Blog - Renaissance Thinking

Virtual goods/gifts is the primary business model for social games. Advertising and offers are the other two means of monetization for the fast growing social gaming industry. Emarketer estimates the ad spend on social games in 2010 to be $220M.

For most social games, the primary revenue stream has not been advertising. Instead, virtual goods are dominant. However, companies such as Zynga and Playdom are realizing that their games are logical advertising destinations for marketers wanting to get the attention of rabid fans.

eMarketer expects that marketers will spend $220 million worldwide to advertise in social games and social applications in 2010, rising to $293 million in 2011. These figures do not include ads within mobile applications.

eMarketer’s estimates may end up being conservative as the social game business increases its footprint. According to Next Up Research, nearly 80% of Zynga’s revenues come from virtual goods. Even so, the large audience of games such as Zynga’s Farmville is attracting advertiser attention.

For companies such as Zynga, “Advertising will be an important part of the business model,” said Zynga CEO Mark Pincus, speaking at the Fortune Brainstorm Tech conference in July 2010. However, he added that he believed that future social game advertising types would need to be “invented” rather than being the same things advertisers have already seen.

WSJ reports that Google is preparing to launch a gaming social network to take on Facebook.

Google Inc. is in talks with several makers of popular online games as it seeks to develop a broader social-networking service that could compete with Facebook Inc., according to people familiar with the matter.

Google has been in discussions with top developers to offer their games on a new service it is building, these people said. Those developers include Playdom Inc., Electronic Arts Inc.’s Playfish and Zynga Game Network Inc.—a company in which Google recently took a financial stake, these people said.

It is unclear when Google may launch the new gaming offering and the plans aren’t finalized, but people briefed on the matter said the games would be part of broader social-networking initiative that is under development by the Mountain View, Calif., company.

In an interview this week, Google Chief Executive Eric Schmidt declined to confirm the development of a social-networking service that would incorporate social games, rumored to be called “Google Me.” When asked if Google’s service might resemble Facebook’s, Mr. Schmidt said “the world doesn’t need a copy of the same thing.”

Google’s push into social games represents the latest attempt by the Web-search leader to capture users and advertising dollars that are increasingly flowing to social networking, an area dominated by Facebook, Twitter Inc. and others.

For social-game developers, a successful Google offering would mean they wouldn’t be so heavily dependent on Facebook, where the vast majority of users access the games. Consumers’ appetite for social games is booming— Zynga’s “Farmville” game has more than 60 million active monthly users—and that is attracting bigger players looking to tap new sources of growth. On Tuesday, Walt Disney Co. acquired Playdom for $563.2 million plus up to $200 million more if performance targets are reached. And retailer GameStop Corp. agreed to buy online game distributor Kongregate Inc. for an undisclosed amount.

Disney CEO Robert Iger said Tuesday in an interview that his company views social games as a way to reach consumers in a fragmented media landscape. “People are consuming product in new destinations, on new devices,” Mr. Iger said. “You’ve got to put your product on those devices.”

Social games are less complex than those played on consoles like Microsoft’s Xbox 360 or Sony PlayStation 3. Individuals use the games to interact with online friends in their networks. The developers make money through advertising and by offering users a way to pay for virtual goods in their games that could, for example, help them manage a virtual farm or defeat rival mobsters.

Game developers pay Facebook 30% of the earnings from virtual-good purchases in their games. Google already has an online payment mechanism called Checkout that, in theory, it could use to collect payments for social games on its platform.

A Facebook spokesman said the company wouldn’t speculate about Google’s initiative but said the company expected new social-networking efforts by others and “looks forward to seeing what others have to offer.”

Social gaming is clearly the future of gaming and a key driver for the social networking industry. It has one of the most profitable business models on the web. Recent moves by Google and Disney testify this. Expect more moves from other media companies.

NYT has a feature on Zynga today.

ORIENTATION for new employees of Zynga, the fast-growing maker of Facebook games like FarmVille and Mafia Wars, can be a heady affair given the company’s outsize ambitions — all of which are embodied in Mark Pincus, Zynga’s 44-year-old founder.

In a pep talk this month, Mr. Pincus told his company’s newcomers that he had set out to build an enduring Internet icon, one that was synonymous with fun.

“I thought, it’s 2007, and this can’t be all that the Internet is meant to be,” he said. There has to be more than “a garage sale, a bookstore, a search engine and a portal,” he added in a good-natured putdown of the Web giants eBay, Amazon, Google and Yahoo.

And lest there be any doubt which of those giants Zynga aims to match, Mr. Pincus said the opportunity to build an online entertainment empire was “like search before Google came along.”

So far, he seems on track. The Zynga Game Network, as the company is officially called, is the hottest start-up to emerge from Silicon Valley since Twitter and, before that, Facebook. Unlike Twitter, which has meager revenue, Zynga is on a path to pocket $835 million in revenue this year, according to the Inside Network, which tracks Facebook apps.

While Facebook needed four and a half years to reach 100 million users, Zynga crossed that mark after just two and a half years.

The company has ballooned to nearly 1,000 employees, up from 375 a year ago, and now has some 400 job openings. And investors, including Google and the Netscape founder Marc Andreessen, have put about $520 million into the company. Though some of the money was used to buy out early investors and employees, it’s still a huge sum in Silicon Valley.

Zynga has been valued at more than $4.5 billion, putting Mr. Pincus, who has retained voting control over the company, on a path to become Silicon Valley’s next billionaire. And, not surprisingly, Zynga has caught the attention of people beyond Silicon Valley.

At a recent gathering of media and technology moguls, Jeffrey Katzenberg, the C.E.O. of DreamWorks Animation, was asked what he would do if he were to start his career over. “I said I would like to be Mark Pincus,” he recalled in an interview. “He has nailed the next killer app, the next compelling thing that’s going to happen” in media.