Social game companies light the way for old-guard casual game makers

[This is part two of a two-part story on how new platforms and social game companies are changing the casual gaming market. See the first part here.]

Attendees at the Casual Connect conference in Seattle last week were envious of how the social game companies have stolen a march on the old guard casual game companies.

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It’s clear that social game companies operate differently than traditional casual game companies, and no company illustrates this better than Playfish. Playfish has learned that games on social networks are completely different from games on portals. They’re an ongoing service, not a finished product that you ship and forget about, says Playfish co-founder and chief operating officer Sebastien deHalleux (right). They’re constantly revised by a team that sticks with the game long after it makes its debut.

The San Francisco company was founded in the fall of 2007 by a team of veterans who worked at Glu Mobile. They came up with original titles on Facebook that found huge audiences.

Now, more than 37 million people are playing eight Playfish games on Facebook. There are about eight million daily active users. That’s a huge reach for a company that hasn’t even hit its two-year anniversary. The astounding part of the company’s track record is that all eight of its games have hit the top 20 on Facebook, which now has well over 14,000 games available.

It explains why Playfish has raised $21 million. The company has 200 employees and is profitable, says deHalleux.

On Facebook, it’s easy to upgrade a game with the latest fixes and improvements. The metrics on player behavior are available for the game developers to study and learn from. It’s easy, for instance, to find the point in a game where players are dropping out. The developers fix the problem and then work on the next place where players drop out.

And while marketing muscle could drive audiences to portals and sell lots of games, the users take control of distribution themselves on social networks. They do so by recommending games to their friends. Viral distribution becomes the No. 1 way that games are discovered. It’s so powerful that Playfish doesn’t spend any money on marketing.

Not only do the developers have to create a great game. They have to find a great way to get it noticed through viral distribution. Companies need both the DNA of great game developers and the DNA of great web app makers to be able to create great social games, deHalleux says.

This new kind of social game became a sensation on Facebook this year because the business model came together. Facebook has grown to more than 250 million members. Every time a member looks at a Facebook page, it generates an ad that in turn generates revenue for Facebook.

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Hence, Facebook itself doesn’t have to take a big cut from the developers on its platform. Its ranking system and viral discovery means that the best games can rise to the top, so Facebook doesn’t worry that there are too many apps on its site. That allows it to accommodate lots of games.

Gareth Davis, program manager for games at Facebook, says casual game companies have to take advantage of the unique characteristics of the platform. They won’t succeed, he says, if they simply port their catalog of games from the web. Davis says Playfish is a great example of exploiting the uniqueness of the Facebook platform. It handles the virality by word-of-mouth among friends, and it monetizes through models such as virtual goods.

And while there are too many games, too many game makers, and too many publishers in this age of game abundance, the one constant is that an innovative game will stand above the pack. That’s what Playfish has figured out.

Monetization and virality will set the platforms apart

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Facebook is thriving in part because it embraced the virtual goods models, where third-party companies such as PlaySpan supply the currency system so that goods in the game can be inventoried, tracked, exchanged, sold or cashed in. As this model kicked into high gear this year, it replaced the pure ad-driven models of the web or the try-before-you-buy model of casual downloadable games. On Facebook, virtual goods could generate $500 million in revenues this year, according to estimates in our past stories.

“Virtual goods is a hot space,” said Andrew Schneider, president of Live Gamer, which just yesterday announced it was acquiring virtual goods provider N-Cash of South Korea.

The game companies that are making money from virtual goods have figured out how to keep users hooked, in much the same way nightclubs make money by creating the impression of scarcity and exclusivity, Chang says. If nightclubs hang a velvet rope outside and hire a bouncer, people start lining up. Inside, the nightclubs charge you more if you want table service with a bottle of wine. And if you want to get into the VIP area, you have to pay more. That’s how the motivation and monetization works in virtual goods transactions as well.

While Facebook has this system in place, Apple just started offering it with the iPhone 3.0 software. Mark Pincus, chief executive of Zynga, wants Apple to move faster toward mimicking the monetization options on Facebook, with better virtual goods and other sorts of models as well.

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Shervin Pishevar, chief executive of Social Gaming Network, notes that the iPhone platform is young and it has been evolving in the right direction. While Facebook has institutionalized social recommendations into its platform, Pishevar believes the iPhone has similar characteristics, where games spread because friends tell each other about the coolest apps they download. Over time, he is confident the fast-growing iPhone can be as important as Facebook.

There are other monetization schemes in place such as special offers from companies such as Super Rewards, Offerpal, Peanut Labs and others. But virtual goods, which had its origins in the Korean online game industry, is finally coming into its own in the U.S. with social games.

Trying to adapt

Casual game companies aren’t simply letting social game companies take their customers without a fight. Mochi Media drew a big crowd to its party and saw good response as it unveiled its virtual goods platform for Flash-based web games.

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Jameson Hsu, founder of Mochi Media, said he hopes the new platform will help casual game makers monetize their Flash games more easily and give them a reason to keep making them. Mochi Media doesn’t want the ecosystem for casual games to fall apart. While late, it’s a good defensive measure.

PopCap Games is probably one of the best casual game development and publishing companies anywhere. The Seattle-based company got started in 2000 and, as we mentioned, kicked off the Casual Game 1.0 era with the launch of Bejeweled. PopCap has now grown to more than 230 employees and still focuses on producing the highest-quality casual games. It is moving slowly but deliberately into the next-generation social games.

David Roberts, (right) chief executive of PopCap Games, is worried about the huge number of free games hitting the market. And when new games come out, the company can’t charge $19.99 under the try-before-you-buy model, at least not for as long as in the past.

But his team hasn’t changed its focus from doing five to 10 high-quality games each year. The company can be criticized for riding the Bejeweled bandwagon for too long. It sells a version of Bejeweled every 10 seconds now. But it has come up with other hits such as Bookworm, Peggle, and now most recently Plants vs. Zombies. Roberts thinks that cross-audience games with cross-platform approaches are the future.

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Plants vs. Zombies was the work of four people who for the most part labored for three years to create the game. Modeled after a typical Tower Defense game, you have to plant your plants in a way that they can defend your house against invading zombies. Since its debut, the game has been one of the fastest selling and best-reviewed games in PopCap’s history. The company believes the game has sold more than any iPhone game this year, in terms of revenues. It sells under the “try before you buy” downloadable game model, at an average of $15 each. Roberts thinks the game appeals across audiences since it’s fun for both hardcore and casual gamers.

But as deliberate as PopCap’s team is, it has been slow to jump on the Facebook and iPhone bandwagons. There still isn’t either an iPhone or Facebook version of Plants vs. Zombies. (Pictured right: Zombie character outside of PopCap’s party.)

The company has launched three iPhone games and only one Facebook game, Bejeweled Blitz, a speed version of the game where you have to solve what you can in a minute. That Facebook version worked because it could be played in just three minutes and had a viral element: you could share the results with friends and challenge them to do better. Now the Facebook game has 6 million monthly users.

And on the iPhone, PopCap has had to be smart about the way it prices its game. At $4.99, the Bejeweled 2 title sold reasonably well. But the game came back after the company put it on sales for 99 cents for a short period. Roberts says the company could get customers but dumping its catalog onto the new platforms, but, he adds, “they wouldn’t be happy customers.” Soon, an iPhone version of Bejeweled Blitz will be out. Players of that game will be able to play each other, whether they are on the iPhone or Facebook. That’s a harbinger of the future.

Casual Games 3.0

It’s worth remembering that Nintendo has probably done more to advance the casual game market more than any other company. And it has done so with off-the-wall titles like Nintendogs on the Nintendo DS and Wii Sports on the Nintendo Wii. These are hardcore gamer platforms where there is plenty of crossover with the broader mass market that likes casual games.

The company said at Casual Connect that it believes it can still expand the audience for casual games by more than 50 percent, even as Wii sales top 50 million units sold. Yet who is to say if Nintendo could reach an even broader market by decoupling its software from its hardware platforms? That’s not likely to happen anytime soon. But it may be possible in the distant future.

Playfish’s DeHalleux says that Casual Games 3.0 will be defined by a disappearance of platforms, and games will easily cross the boundaries from one sector to another. You will, for example, be able to play a game such as Pet Society on Facebook and not care that the people you’re interacting with are on platforms such as the iPhone, the Palm Pre, the Amazon Kindle or the Xbox 360. The glue for such platform agnosticism is available today with cross-platform bridge technologies such as Facebook Connect or Open Social.

It’s likely to be many years before companies such as Nintendo decide they should spread beyond their own hardware platforms such as the Wii or the DSi, but DeHalleux thinks it will happen as software layers become increasingly transparent and users embrace all sorts of devices for connecting to their games. Karl Mehta, chief executive of PlaySpan, is awaiting the day when many different games connect their virtual currencies into a kind of foreign currency exchange, where game winnings from one game can be used in another. It would be an almost frictionless game market — and a huge free-for-all competitive market.

That may happen as games-as-a-service platforms such as OnLive (Steve Perlman’s upcoming server-based video games on demand service) get off the ground, or as technologies such as Unity Technologies’ browser-based 3-D gaming engines become uniformly accepted. Real Networks is developing what it calls its Emerge platform, which allows it to take a single programming code base and use it across many different game platforms. That will make it easier to take a single game and put it everywhere. Companies like Microsoft are betting that new user interfaces, such as Project Natal’s use of body movement recognition, will keep demand alive for the Xbox 360 and its $60 games, even in an age of game saturation.

However it happens, this kind of meta-gaming nirvana should unlock a new wave of growth. At that point, the casual, social, and hardcore industries will all be on the same platforms and the distinctions among them may become less and less important. Casual game companies can make this future happen. But they can’t sit still.