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Virtual goods have a bright future in the explosive social gaming segment. But does advertising? Not based on comments from several of the industry’s biggest players.
Advertising was hardly mentioned during the early sessions of the New York Games Conference today, as several analysts and industry leaders laid out their predictions for the gaming industry over the next few years. When the subject of monetization came up, virtual goods and other forms of microtransactions were mentioned as the primary business model for social games -- at least in the near term. Yet, there was little doubt among experts that social gaming -- already a mass medium unto itself -- would continue to grow exponentially.

According to Atul Bagga, director and senior analyst at ThinkEquity, a whopping 55 percent of Facebook users play games. In addition, a stunning 40 percent of page views on that social network are game related. “We are only just scratching the surface,” said Bagga. Among his predictions were that Facebook would soon start seeing more immersive, hardcore-type games that appeal to niche audiences, as opposed to Zynga’s massively popular Farmville, which is played by 65 million people each month.

Another key trend: Social aspects of gaming are spreading beyond Facebook to multiplayer titles like World of Warcraft and console games, as more players connect their PlayStations, Xboxes and Wii’s to the Internet. Currently, the business model for most Web-based social games is a play-for-free system that encourages users to purchase virtual goods that enhance play -- or to charge for access to premium content. But for games that users pay for in advance (like console games), or subscription-based titles such as Warcraft, the current monetization models are being challenged as gamers play these games for increasingly longer durations, said Bagga. “Users play the same game over and over again,” said Bagga. “You have people playing World of Warcraft for 150 hours....vendors need to monetize that [time]. A lot of people are leaving money on the table.” Perhaps tellingly, however, Bagga did not suggest advertising as a potential means of monetizing such prolonged play. Nor did Steven Chiang, studios president at Zynga, during a keynote interview today. Chiang repeatedly emphasized the play-for-free/microtranscations model, adding that the majority of Farmville users do not pay to participate in the game. Chiang said that Zynga was developing a slew of new titles, but he downplayed the idea that the firm would create immersive, console-like titles. “We are looking for ideas that people can understand in about five seconds,” he said. When asked about the company’s relationship with Facebook -- which has recently toned down the number of notifications users receive about their friends activities in Farmville, Mob Wars and the like -- Chiang looked to dodge any controversy. “They want to create the best user experience for their customers,” he said. “We are all about the user experience.”

Betting on rising revenues as gaming goes social

The social gaming market is beginning to show signs of maturity, with Screen Digest predicting that its explosive growth will moderate in coming years. At the same time, major media and entertainment players are getting involved in the business and buying some of the most promising social gaming startups.Google has teamed up with Zynga for a social gaming property that the search engine has in the works, and it has acquired social app maker Slide. Both are signs that Google is making moves toward the social networking business, likely with a focus on games. Another social gaming company, Playdom, has been acquired by Disney. As eMarketer senior analyst Paul Verna commented, this is a sign that Disney is “betting that social gaming won’t die off as a passing fad, and that Facebook and other social venues will continue to support these games.” As the social gaming industry consolidates, there are two attractive revenue sources for the companies that buy in. The smaller of the two is ad support, which eMarketer predicts will bring in $142 million in the US this year.

Virtual goods sales will account for a larger slice of the pie, according to ThinkEquity.

“Over the past year, social gaming has become a cultural phenomenon and a revenue driver for an industry that is otherwise struggling to maintain growth,” said Verna. “Facebook was on the ground floor of this trend with Zynga, and other top companies such as Google and Disney are now jumping in. “I don’t think we’ve seen the last of this wave of consolidation,” he added. “I expect other social networks, internet portals and entertainment companies to shift resources toward the social gaming space while they still see it as a potential money-maker.”

Ad support will drive 12.3% of mobile gaming revenues by 2014

Americans spend nearly a quarter of their time online on social networking sites and blogs, up from 15.8 percent just a year ago (43 percent increase) according to new research released today from The Nielsen Company. The research revealed that Americans spend a third their online time (36 percent) communicating and networking across social networks, blogs, personal email and instant messaging.

Top 10 Sectors by Share of U.S. Internet Time
RANK	Category	Share of Time June 2010	Share of Time June 2009	% Change in Share of Time
1	Social Networks	22.7%	15.8%	43%
2	Online Games	10.2%	9.3%	10%
3	E-mail	8.3%	11.5%	-28%
4	Portals	4.4%	5.5%	-19%
5	Instant Messaging	4.0%	4.7%	-15%
6	Videos/Movies**	3.9%	3.5%	12%
7	Search	3.5%	3.4%	1%
8	Software Manufacturers	3.3%	3.3%	0%
9	Multi-category Entertainment	2.8%	3.0%	-7%
10	Classifieds/Auctions	2.7%	2.7%	-2%
	Other*	34.3%	37.3%	-8%
Source:Nielsen NetView – June 2009-June 2010 *Other refers to 74 remaining online categories visited from PC/laptops **NetView’s Videos/Movies category refers to time spent on video-specific (e.g., YouTube, Bing Videos, Hulu) and movie-related websites (e.g., IMDB, MSN Movies and Netflix) only. It is not a measure of video streaming or inclusive of video streaming on non-video-specific or movie-specific websites (e.g., streamed video on sports or news sites).

“Despite the almost unlimited nature of what you can do on the web, 40 percent of U.S. online time is spent on just three activities – social networking, playing games and emailing leaving a whole lot of other sectors fighting for a declining share of the online pie,” said Nielsen analyst Dave Martin.

Additional findings include:

• Online games overtook personal email to become the second most heavily used activity behind social networks – accounting for 10 percent of all U.S. Internet time. Email dropped from 11.5 percent of time to 8.3 percent. (Source: Nielsen NetView)
• Of the most heavily-used sectors, Videos/Movies (which includes video-specific and movie-related websites only – and is not inclusive of video streaming behavior elsewhere) was the only other to experience a significant growth in share of U.S. activity online. Its share of activity grew relatively by 12 percent from 3.5 to 3.9 percent. (Source: Nielsen NetView)
• June 2010 was a major milestone for U.S. online video as the number of videos streamed passed the 10 billion mark. The average American consumer streaming online video spent 3 hours 15 minutes doing so during the month. (Source: Nielsen VideoCensus)
• Despite some predictions otherwise, the rise of social networking hasn’t pushed email and instant messaging into obscurity just yet. Although both saw double-digit declines in share of time, email remains as the third heaviest activity online (8.3 percent share of time) while instant messaging is fifth, accounting for four percent of Americans online time. (Source: Nielsen NetView)
• Although the major portals also experienced a double digit decline in share, they remained as the fourth heaviest activity, accounting for 4.4 percent of U.S. time online. (Source: Nielsen NetView)

Email Remains Top on Mobile Internet Activities
The way U.S. consumers spend their Internet time on their mobile phones paints a slightly different picture to that of Internet use from computers. In a Nielsen survey of mobile web users, there is a double-digit (28 percent) rise in the prevalence of social networking behavior, but the dominance of email activity on mobile devices continue with an increase from 37.4 percent to 41.6 percent of U.S. mobile Internet time.

Portals remain as the second heaviest activity on mobile Internet (11.6 percent share of time), despite their double digit decline and social networking’s rise to account for 10.5 percent share means the gap is much smaller than a year ago (14.3 percent vs. 8.3 percent). Other mobile Internet activities seeing significant growth include music and video/movies, both seeing 20 percent plus increases in share of activity year over year. As these destinations gain share, it’s at the cost of other content consumption – both news/current events and sports destinations saw more than a 20 percent drop in share of U.S. mobile Internet time.“Although we see similar characteristics amongst PC and mobile internet use, the way their activity is allocated is still pretty contrasting, added Martin. While convergence will continue, the unique characteristics of computers and mobiles, both in their features and when and where they are used mean that mobile Internet behavior mirroring its PC counterpart is still some way off.”

Honda Motors Co. and McDonald's Corp. are making a push into social gaming to promote their brands, as Madison Avenue begins to take notice of the latest Web craze that is drawing growing numbers of people to games on social networks. Honda is kicking off a campaign Aug. 23 for its new sporty hybrid CR-Z on "Car Town," a recently launched social game on Facebook aimed at car enthusiasts. The game is from Cie Games, a company that is backed in part by Rick Thompson, the co-founder of Playdom Inc.

Some marketers and ad executives say games offer a better way to pitch products on social networks rather than just have people sign up to be friends with a brand. Gaming allows Honda "to be more commercial than we can be on Facebook," says Tom Peyton, Honda's brand manager. As part of its campaign, Honda will have in-game ads on "Car Town," including billboards embedded in the game that pitch its CR-Z. It will also have a custom Honda showroom in the game, with a screen inside the room playing Honda commercials. "Car Town" is based on car collecting, with players using credits to buy virtual cars to customize their own garage. Mr. Peyton declined to comment on how much the ad push cost. Ad executives say that in-game placements cost less than $1 million.

Advertising on social games so far hasn't been a big business. It has taken a back seat as game developers such as Zynga have largely generated revenue from selling virtual goods to gamers. The virtual-goods business is expect ed to generate approximately $920 million in the U.S. in 2010, up from $336 millio n in 2008, according to ThinkEquity LLC, a research firm. But advertising is beginning to "gain steam," says Debbie Williamson, an analyst with eMarketer Inc., a New York research firm. "Advertisers still want to reach big audiences and they are noticing just how many people are playing these games," adds Ms. Williamson.

In June, "Farmville" had 9.4 million unique visitors in the U.S. who spent an average of 36 minutes on the site, according to Nielsen. "Car Town" says it had 500,000 users in its first week of operations and has over two million users since launching the game two weeks ago.Ad spending on social games and social-media applications is expected to increase 20% this year to $220 million, according to eMarketer. "We have dabbled" in advertising but "now we are starting to see some heat" in that part of the business, says Vish Makhijani, Zynga's senior vice president of business operations. Analysts and ad executives say advertising is likely to play a bigger role as established media companies such as Walt Disney Co. jump into the space. Last week, Disney said it would buy online social network Playdom, owner of titles such as Social City and Sorority Life. Companies such as Microsoft Corp., the Cascadian Farms unit of General Mills Inc. and General Electric Co.'s Universal Studios Home Entertainment have also been experimenting with advertising on social games. In March, Microsoft gave away free "Farm Cash" to "Farmville" gamers who became a fan of their search engine Bing on Facebook. More than 425,000 new fans joined Bing's Facebook page in one day and 70% of them visited the search engine within the next month, Microsoft says. Some of the early ad plays have come under scrutiny. They include so-called offers marketing, when free virtual goods are offered to gamers in exchange for accepting certain marketing offers such as signing up for a subscription or filling out a market-research survey. The practice has been criticized as deceptive advertising because some of the offers appeared to trick consumers into signing up for subscriptions. A spate of lawsuits followed. Gaming companies will have to tread lightly to avoid oversaturating games with ads, ad experts warn. In the past, ads cluttering online games have been met with complaints from gamers. Dustin Johnson, a creative media executive at Interpublic Group's Mullen says: "Social-media games are a natural phenomena and the more advertising, the less likely the games will be successful, so it's a fine line that media companies will have to navigate."

Explosive growth gives way to moderation

Thanks to the massive popularity of Facebook and the addictive appeal of real-time simulation games, gaming on social networks has gained widespread adoption.

According to a BlogHer/iVillage study, about 22 percent of adult U.S. Internet users played casual games daily in March 2010. A study from ThinkEquity estimated that 79 million people will play social games in the U.S. in 2012, up from 47 million in 2009. As the social gaming audience continues to grow, so will revenue from direct and indirect payments and advertising, resulting in more than $720 million, according to ThinkEquity. By 2012, the market is expected to reach $2.18 billion.

U.S. direct-paying users are expected to generate $1.19 billion in revenue by 2012, up from $340 million in 2009. Indirect-paying users -- defined as those who opt-in to advertising offers attached to social games -- will inject $868 million into the industry in 2012, up from $324 million in 2009. Social game advertising revenue will double to $124 million in 2012. "Social gaming represents opportunity for marketers," said Paul Verna, a senior analyst at eMarketer. "In the coming months, expect to see more marketers muscling into the social gaming space through brand marketing tactics such as display ads, video ads, custom games, in-game enhancements, product placements and sponsorships."

This ia a guest post by Justin Davies, founder of NinetyTen, a UK-based consultancy providing mobile community and location aware solutions to companies. Davies also founded the now defunct BuddyPing, an early mobile social networking community based on the realtime location of users.

Not to sound too much like my grandad talking about the War, but when I was doing this, it was all about sending a text message to a person walking past Starbucks with a half price voucher.

Back in my day, we had to pay for location information, none of this “SimpleGeo” or “Google Latitude” malarkey you youngsters have these days.The only phones that had a GPS chip was a prototype N95 I had to beg Nokia for, and some Blackberry phones. Yes dear Location Based enthusiast, these are bright times, and this does finally seem to be the year of location (though, admittedly, this has been the case for the past 3 years). I don’t know if you’ve noticed, but location is big news at the moment. The location players are building solid relationships with big business and tapping into an enthusiastic, engaged and mobile user base. Location is a an exciting, but tough space to thrive in. Location, and realtime location at that, is a rather large privacy issue which, when a service becomes popular, starts making people question just how sensitive their information is. Early Adopters are notoriously OK with sharing information, they get the idea that when you post a photo on Facebook, it will be seen by everyone in your feed by default. Unfortunately, any argument to an end user that they can control that information using Lists aren’t really arguments after all.

The user was not educated by the service provider, and let’s face it, shoving privacy in everyone’s face all the time puts up a barrier to hip kids, because you sounds like their Dad.

(Source: The Next Web)

In the uTest report, one of the most obvious, and at the same time staggering things, is that privacy is so much bigger an issue than whether I am the Mayor of the Starbucks outside work. I don’t want my boss to know I am the person that spends the most time at the coffee shop and not at my desk.

Privacy will always be an issue with large, connected networks of people. Flattening the physical world into our laptops and phones will always cause problems because we forget who we are connected with.Status updates by their very nature are 140 characters or so long, they are not built to have a huge amount of thought put into them, let alone who will eventually see or not see them. If you throw location into the mix, then even the most innocuous location update, or historical patterns (Mayorships) can land you in warm water before you have realised it.

I’ve double booked drinks with a friend, and in my celebratory state after drinking with the preferred option, have managed to inform the world, and more importantly the person I kicked to the side that I was not in a very important, 5 hour meeting that has overrun, but was actually “lovin’ these mojitos right now!” with damning photographic evidence. This is not to say that location services are doomed. Far from it, as more people are considered early adopters, they educate people on the benefits of open communication, and educate them on the merits of privacy as not only a mindset, but as a tool. There will need to be better privacy controls within location based services for them to become truly mainstream. I want to share my location with my family when it is relevant for them to know, but I don’t want to have to think about what lists I should send my location to.

Back in the day, this was one conversation that I took part in over and over again about Location. We knew location was a key piece of information for someone to interact with the world, and it opened up a new way of discovering content that was more relevant. I could finally type Pizza in an LBS system, and it would tell me about things nearby (this was the demo I always used to give for location based search). One thing that was missing from location we found was context. A simple idea of context in location is the “I am at Work”, “I am at Home” problem. If I searched for “Pizza” when in work mode, it’s probably because I want a work lunch with clients. If I did it when I was at home, I’d want to know about delivery pizza.

These different contexts would potentially help with who I would want to share a status update with, something I often think about getting round to figuring out with historical location information, along with times and keyword analysis of a location stream. Is there a way of understanding a user’s context based on information about them? Would this also be a privacy issue? This is where Foursquare, Gowalla and new services like Pappd have changed the dynamic of sharing location, they have Game. Adding Gameplay into location provides a safe mindset to share your location freely to a wider list of people because they are part of the same game.

The same goes for Flickr displaying the location of your photos. Your taking a photo of the location and sharing it with other people goes hand in hand. If I take a photo at a gig and share it, you can tell from the photo where I am. My location guard is down, and I feel comfortable people would know where I was. The fact I am sharing my view of the world right now visually has dampened my concerns about privacy, and the Gameplay Flickr uses is “upload better photos than other people”. Utilising Gameplay does something else that helps the with sharing our location. It importantly helps me learn how other people’s location is shared with me. Understanding how other people’s location is shared with me, helps me understand intrinsically how much information is shared and seen by other people at me.

With every game, there is always a winner. With a very large amount of people playing the game, we have to democratise the winning. Remember, it’s not the winning, it’s the taking part that counts! With the bewildering success of couponing, vouchers and group buying recently, rewarding people for taking part is a logical way to give them something back for engaging with you and other users. Foursquare has done something very interesting with this and managed to reward not only the users of the platform, but also the places they check in to. Providing Starbucks with information about who passes through their stores (anonymised of course!), and allowing them to analyse how often people checkin, view historical data, and also have the potential to reach those people on the move is something that those venues want. Badly.

The checkinee and checkiner both win in this situation, and this builds an ecosystem around the platform. It’s a smart move, because as both sides see more benefit from using Foursquare, they will dedicate more time to interacting with the community. This I would hazard a guess is why rumours of big players courting the founders over the past few weeks have come from. They are solving one of the biggest issues about monetising location and getting the big chains, and the little guys interacting with Foursquare’s userbase on a level playing field.

As a parting shot dear reader, if you are thinking about being the next Gowalla or Foursquare, think outside the box. The world is a very large, and spherical place, mapped by a long/lat address. What about developing countries, where the penetration of mobile data usage far outstrips that of broadband, or even dial up modems? 99% of all location services I have seen are targeted squarely at Early Adopters. If you are looking for the next big thing in location, one that attracts people in the millions, look at the developing markets, because connecting people in disparate locations, and giving those people a way to share information is a great start.