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In: Software Development

So what's so fascinating about the Social Gaming space beyond the entertainment factor for those of us who enjoy the occasional game?

Simple: just about every company in the space is astoundingly profitable.

In dissecting the success of companies like Playfish, Zynga, Playdom, MindJolt, etc – a few things become clear very quickly: Their expertise is more about viral marketing than it is about game development. They've mastered massive user acquisition at lowest possible costs while introducing simple business models to generate revenue. Even more importantly, they own the relationship with users / players which is not only critical to their promotional strategies but also to game development and future business models. In other words, their success formula looks something like this:

Success = Simple Gaming + Cloning + Virality + Freemium Business Model + Direct User Relationship

Simple Gaming – The simplicity approach taken on by game developers, both in terms of access and game mechanics, has significantly facilitated user adoption and repeat visits. Access, which for all companies is browser-based, is also about being on or off platform. On-platform games (those on Facebook, MySpace, etc) get to leverage massive and easy-to-target user bases. Off-platform games have more flexibility with game development at the expense of "viral-ability". On the game mechanics front, enabling users to quickly understand game play, making that game play light touch, interactive and competitive have been key aspects in triggering user adoption and return. The light and casual approach to game mechanics has also dramatically reduced game development times (3-6 months for most developers), but has also facilitated a cloning wildfire.

Cloning – Very much a legacy of traditional gaming as the Ataris and Nintendos of the world can teach us. Although easy to frown at companies who regularly release cloned games, cloning is arguably a smart business approach in early stage and immature markets. After all, people like to play instantly recognizable concepts just as they like to watch familiar formats on TV (what's the last original Reality or Game Show format you've seen?). Additionally, if the uptake of Facebook games is of any indication, a cloned game is more likely to fulfill areas of the market that have not been reached by the original game developer than it is to erode at that developer's existing market. For example, when Zynga introduced Café World earlier this month (16M users in its first two weeks), it did not visibly impact Playfish's Restaurant City user and growth counts. As the market matures with users demanding games with more depth and sophistication – cloning will become more difficult and as a consequence, an un-sustainable model. The first test of this may come with the recently announced Facebook version of Sid Meier's Civilization classic.

Virality – Let's be clear upfront: Zynga and Playfish have both invested millions in advertising to gain their initial player critical mass. They have also mastered making the most out of that initial investment, using virality to significantly reduce additional user acquisition costs. As on-platform companies, they have leveraged the numerous embedded viral opportunities Facebook provides – integrating and automating status updates, wall posts, suggestions, friend pokes etc. They have also cleverly turned their games into advertising platforms of their own. Games cross-promote each other (which is half the reason why Zynga reached 16M in the first two weeks after launching Café World) and they encourage user-returns through time-based play, friend challenges and those annoying reminder messages.

Freemium Business Model – Play is free across the most popular games to eliminate barriers to entry. The interactive and competitive characteristics of social games (ie, friends wanting to top each other) has facilitated the introduction of "virtual currency". Virtual currency can either be purchased for cash or acquired by registering for services offered by advertisers (and in many cases unfortunately, offer-scams) – and is used by players to buy virtual goods that help them reach new levels faster, access advanced play areas, gain special powers or even for vanity purposes (decorating your virtual environments and avatars). Sounds flaky? Zynga is rumored to be on a $ 100 million annual run-rate for 2009, while Playfish is allegedly on track for a $ 75 million result. According to Venture Beat, even the hundred or so garage-shop game developers present on Facebook are making between a quarter and half a million dollars per annual.

Direct User Relationship – Unlike traditional gaming companies whoave up user-relationship to retailers, social gaming companies interact directly with their users. This has given them a couple of invaluable advantages: 1) access to a huge amount of data and metrics, and 2) immediate feedback on game features. Social Gaming companies are there in the position to quickly improve and extend game play (most introduce games at 25% completion), increase virtual good conversions and particularly – provide a set of data that can yield much better value for advertisers and for the creation of new business models.

Looking ahead, new business models and new levels of game sophistication are bound to arise as the market matures. Media Buyers may figure out that engagement is more than clicks and impressions and use social gaming to interact with their audiences over a headline period of time with "advert-games" (Imagine a TGI Friday's own Restaurant City) or integrated advertising (earn enough points for a virtual Audi to move up to the next level). As users begin to demand better games, gaming companies will need to match their existing skills in viral marketing, with new ones in software development and while we're at it, patenting. This may also happen through acquisitions led by traditional gaming companies (as I write, EA is in rumored acquisition talks with Playfish for over $ 250M). Niche games are likely to arise the way niche social networks are already doing so thanks to Ning and Drupal. A fantastic first example is Mind Candy and their Moshi Monsters game targeting young children. As an off-platform company with a focus on education and parental-control, one of Mind Candy's potential growth paths could be joining forces with school systems to provide teachers with managed fun environments for assigning and reviewing HOME-work.

As with any emerging industries, predictability is extremely difficult. Then again, so is instant profitability …

Originally published on http://digitalpopuli.com