How gaming became the future of social media

July 29, 2010: 10:13 AM ET

Gaming is already wildly popular. A recent spate of deals with Google, Disney, and Gamestop, suggest that social games have the promise to be wildly profitable, too.

by Patricia Sellers and JP Mangalindan

FarmVille. Mafia Wars. Pet Society. With their collective userbases numbering in the hundreds of millions, social gaming is as ubiquitous and mainstream as primetime TV programming.

But for years that wasn't the case -- skeptics disregarded social games, with their Super Nintendo-like graphics and simplified gameplay. Despite early successes like Diner Dash, which game maker PlayFirst announced raked in $35 million revenue almost two years before FarmVille came along, social gaming was branded a fad. Only when Zynga's farming simulator skyrocketed to success and eventually enlisted a whopping 80 million active monthly users paying for virtual goods like tractors, fuel, and animals, would potential investors say otherwise.

Now, not only are those same investors taking social gaming seriously, they're negotiating for a piece of the action. Google reportedly (GOOG) invested anywhere between $100 and $200 million dollars in Zynga, the maker of games like FarmVille, Mafia Wars, and Zynga Poker. The company has reportedly raised around $500 million in the past year, including $150 million from Softbank Capital and $180 million from Digital Sky Technologies and Tiger Global.

Earlier this week, the social gaming love continued: Walt Disney (DIS), which had picked up iPhone gaming start-up Tapulous earlier this month for an unspecified amount, also bought Playdom Social Games, announcing it will pay as much as $763 million -- $563 million upfront and $200 million more if the company behind Facebook games like Sorority Life and Social City reaches certain unannounced growth targets. What's more, Gamestop (GME) purchased online-game maker Kongregate, signaling the retail category killer desire to (finally) capitalize on social gaming's success.

What's the attraction? Attendees of Fortune Brainstorm Tech this past weekend heard earfuls about how social games are transforming media and the Internet. Activision Blizzard (ATVI) CEO Bobby Kotick, who has been playing in the video-game field for two decades, noted that 29% of kids and teens today multi-task while watching TV.

Many media conglomerates see that videogames are an ever-growing piece of the average consumer's leisure activity — and want to get in on them. Games like Zynga's new FrontierVille broke records when it claimed 20 million users in 36 days. In contrast, nearly four years passed before the massive online multiplayer role-playing game World of Warcraft could claim 11 million active players. Hence, the opportunity for interlopers to deliver content on platforms beyond TV and the desktop computer.

Ideally, this will be paid content. This would include products consumers shop for -- maybe via games while they watch TV. "It's a great time for e-commerce again," speculated Demand Media CEO Richard Rosenblatt. Another Brainstorm attendee, Los Angeles-based venture capitalist Dana Settle of Greycroft Partners, said that she jotted down in her notebook: "Interactive TV really is here."

Games happen to be the most clever and efficient way to get Internet users to provide credit card info. "Games are the path of least resistance," said Keith Rabois, VP of strategy and business development at Slide, an online game-and-entertainment company launched in 2005 by PayPal co-founder Max Levchin. Turns out, 55-year-old women are the most lucrative gamers for companies like Slide. They spend gobs of real money on virtual gifts... maybe because they're bored by TV?

Social gaming also presents a much more profitable model than traditional video games ever did. Because old-school games require an initial purchase fee, publishers were effectively capping their revenue stream, notes analyst Scott Steinberg, founder of GameExec magazine and Games Industry TV. Comparatively, social games are free-to-play right out of the gate and therefore initially more accessible, making money via the micro-transaction model: small fees for virtual goods for additional content like new levels of play, exclusive characters, and so on. According to Steinberg, publishers (and their investors) can actually make more money this way. Moreover, in free-to-play games, he sees more users becoming 'super users' who easily spend hundreds of dollars on a particular product. Says Steinberg: "From a publisher's perspective, that's a hell of a lot more attractive than spending $15 a month for an all-you-can-eat buffet of content."

Which brings us back to Disney. Anne Sweeney, who oversees Disney's media networks including ABC, told Fortune before her on-stage interview at Brainstorm that she's more jazzed than ever by the opportunity to get out of the traditional box. "TV isn't just the stationary box in your house," she said. "It's a box of infinite possibilities."

That would be hype if Disney, under CEO Bob Iger, weren't aggressively transforming its growth strategies. Besides replacing ABC programming chief Steve McPherson (in an effort to pull the broadcast network from third place), it is making acquisitions like Playdom and aiming to produce more multi-platform programming like Lost -- which bears the indelible influence of Apple (AAPL) CEO Steve Jobs, Disney's largest shareholder. (See "Steve Job's mark on ABC's Lost.")

"We just can't say we have one business model and that's it," Sweeney told CNNMoney's Poppy Harlow in the video below, shot at Brainstorm Tech. When Sweeney says that Disney is interested in "hybrid" models, it's natural to speculate that she has games on her mind.

Clearly, she's not alone.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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