PopCap is a venerable casual gaming company. It bootstrapped itself up over the past decade without ever raising a round and it has an unbroken string of hits — titles like Bejeweled, Zuma and Plants vs. Zombies. And now, it’s making a big move into social gaming, raising $22.5 million from Meritech Capital Partners, along with investors Larry Bowman and John McCaw.

The Seattle company has recently been focusing on Facebook, and relatively successfully. It launched Bejeweled Blitz on Facebook last Christmas, based on the original puzzle game. The app grew fast over the spring and summer to plateau at around 7.41 million monthly active users today. It launched Zuma, a pinball shooting game, on Facebook in July, and also built a version on its own site using Facebook Connect. However, it appears to have taken the app offline in mid-August to focus on the Connect version.

The company pioneered a business model where users download a game and play it for an hour, but they have to pay to unlock it if they wanted to play longer, as Dean Takahashi notes over on VentureBeat. The company has sold more than 25 million units of Bejeweled alone this way. But social games are free, and make money on virtual goods.

This is why the 260-person, well-established company decided to raise another round. Here’s the statement from chief executive David Roberts:

We’re excited to have additional working capital that lets us be more aggressive with our expansion into social media and reaching new geographies. Meritech is a premier late-stage investment firm with a portfolio that includes some of our most important business partners such as Facebook, and adding John McCaw to our investor roster is of huge strategic importance with his deep connections in the mobile and financial communities. We’ve been pursued by investment firms for many years and have resisted taking outside capital, but we liked Meritech’s style and believe there’s a tremendous opportunity to grow and evolve our business at a time when many other video game firms are retrenching.

While virtual goods have been driving revenues in Asia and Europe for years, 2009 will be remembered as the year virtual goods-based businesses began to scale in the United States. Virtual goods may be bringing the largest disruption entertainment, communication, and e-commerce infrastructure companies have seen for a long time.

That’s why I’m excited to announce today a new in-depth research report with partner/co-author Charles Hudson that is exclusively focused on the size and future of the virtual goods market in the United States, entitled Inside Virtual Goods: The US Virtual Goods Market, 2009 – 2010. It will be released next Wednesday, October 14, but is available for discount pre-order now.

Purchase this report Buy PDF: $995 $695 USD* OR Buy PDF + 1 Year of Quarterly Updates: $1,995 $1,395 USD* * Pre-order discount ends October 13, 2009. All pre-ordered reports will be delivered on October 14, 2009.

About the Report

Inside Virtual Goods is a new report designed specifically for entrepreneurs, investors, and analysts interested in the growth of this exciting new category of online commerce that is fueling the growth of games-as-a-service businesses. During our research over the last several months, Charles and I have spoken with dozens of executives and entrepreneurs from all parts of the ecosystem in order to form what we believe are the most detailed estimates, analyses, and predictions for 2009 and 2010.

We focused and organized the report around the following areas:

1. Social Networks, Applications, and Games - The explosion of the virtual goods market on social networks is in our view one of the biggest stories of 2009. We delve deeply into the trends, stats, key players, opportunities, and challenges facing the space this year and next.
2. Casual MMOs and Virtual Worlds - Virtual worlds and casual MMOs continue to grow as a meaningful share of the virtual goods opportunity in the United States. Our study breaks down the key drivers for success in this segment, trends in monetization and engagement, and the prospects for the future.
3. Hardcore MMOs and Free-to-Play Online Games – Developers in the MMO / MMORPG space have been among the earliest adopters of the free-to-play model. We explore why free-to-play MMOs are succeeding, revenue and user trends, and the key issues facing this space as we head into 2010.
4. Emerging Areas: Consoles, iPhone, and Subscription MMOs- As the virtual goods business model becomes more well understood, it is beginning to show up in new and interesting areas of the games and entertainment landscape. We highlight a few of the more promising areas where virtual goods are emerging as a promising opportunity.

Each section contains:

1. A brief history on the evolution and growth of this space in the US, including a description of all key players.
2. Estimates on the size of the US virtual goods market in 2009 in that area.
3. A diagnosis of the key opportunities and issues facing the growth of that space, including our outlook and projections for 2010.

In addition, prior to delving more deeply into each market segment, we’ve provided an overview of the emerging payments ecosystem that is growing to serve these new businesses. Traditional e-commerce infrastructure providers only offer a partial solution, and the virtual goods payments layer is currently in a major state of flux. In the report, we describe the variety of solutions that have been brought to market to date, and the key challenges facing the industry from a payments perspective as a whole.

For more details, check out the full table of contents below.

Although the report will not be released until next Wednesday, October 14, we are offering a special pre-order discount for those who purchase now. The pre-order price of US $695 is available now until next Tuesday, at which point the price will go to US $995.

In addition, we will be releasing quarterly research and updates on key developments in the space. A one-year subscription is now available for US $1,395 until next Tuesday, at which point the price will go to US $1,995.

Charles and I are looking forward to continuing to cover the evolution of the space over the coming year. We look forward to hearing from you!

Table of Contents

1. Introduction

• How We Got Here: A Brief History of Virtual Goods Worldwide
• Defining Terms
  • Registered users
  • Active users
  • Average revenue per user (ARPU)
  • Average revenue per paying user (ARPPU)
  • How do different developers manage their businesses?
• Growing Virtual Goods Markets in the US
  • Social Networks, Applications, and Games
  • Casual MMOs and Virtual Worlds
  • Hardcore MMOs and Free to Play Games
  • Emerging Areas: Consoles, iPhone, Subscription MMOs
• Methodology

2. The Virtual Goods Payments Ecosystem: An Overview

Buy Now

Although the report will not be released until next Wednesday, October 14, we are offering a special pre-order discount for those who purchase now. The pre-order price of US $695 is available now until next Tuesday, at which point the price will go to US $995.

In addition, Inside Virtual Goods will be releasing quarterly research and updates on key developments in the space. A one-year subscription is now available for US $1,395 until next Tuesday, at which point the price will go to US $1,995.

Purchase this report

Buy PDF: $995 $695 USD*

OR Buy PDF + 1 Year of Quarterly Updates: $1,995 $1,395 USD*

* Pre-order discount ends October 13, 2009. All pre-ordered reports will be delivered on October 14, 2009.

While many larger developers have built their own, in-house analytics tools, Mixpanel offers a real-time service that pinpoints interactions in apps — especially gaming apps — like buying or sending items, battling and other mechanics. For many developers, it might be a better alternative to building their own analytics tools.

Mixpanel is already working with “more than 5″ gaming companies plus one unannounced larger company, according to cofounder and former Slide employee Suhail Doshi. Some clients have nearly one million monthly active users in their games, and Mixpanel is getting an interesting look inside. In the average game, 48 to 65 percent of users play initially then come back a week or two later. The average role-playing game (think: the Mafia genre) has a user life-span of around six weeks. However, others can go as long as 18 months. Given Mixpanel’s subset of data, one has to wonder what sort of churn larger game developer shops are seeing.

The company also has more details on how to use Facebook’s own features to bring in new users. Users who come to an application through the news feed tend to convert the best, nearly 5 percent better than a user coming from a notification. Invites, meanwhile, do better than notifications by 2 to 3 percent. The conclusion, according to Doshi: “Developers should really focus on taking advantage of utilizing the newsfeed in creative ways.”

In terms of geography, the company has also noted strange discrepancies between the United Kingdom and other parts of the English-speaking world. “We see users from Australia and U.S. convert into games better than those from international countries (no surprise),” Doshi adds, “but for some reason UK visitors seem to be converting worse than some international ones.”

By real-time the company is speaking pretty literally, showing updates within 10 seconds after they occur, according to Doshi. Features also include a way to track “funnels,” or the path that users take to convert into some sort of goal (like paying for a virtual good), tools for tracking visitor retention, custom tracking, and an API for data export. Long-term, the company wants to analyze any sort of social web activities that more traditional analytics services don’t handle. Mixpanel’s service is also available for web apps, but has more recently made a point of growing along with the social gaming market. On Facebook, it competes against other analytics services from companies, like Kontagent, although the latter company is focused more on A/B testing and honing viral channels.

Mixpanel records every time users create an event, and charges by the volume of these data points that a client developer receives. Plans run from $25 for 100,000 data points per month to $200 for 2,000,000 per month.

It has raised seed funding from Y Combinator.

Last week, we learned that Playdom is on track to make $50 million in annualized revenue from virtual goods. Yesterday, VentureBeat added something more: The social gaming company is looking to raise a round “in the double digits” that would value it at between $100 million and $200 million. “I think they’re going to be able to get that valuation,” added a source in the report. Playdom didn’t comment when we asked.

Rumors about a funding, possibly at a $200 million valuation, first surfaced in early April. At that time, the company said it was putting off any fundraising until the summer. Now it’s October, and the company has proven that it can create at least some successful games on Facebook, as well as retain its pole position on MySpace. Popular games include the Mobsters series and Sorority Life. In total, the company claims to have 28 million monthly active users. It has also grown from 43 employees in April to 110 now, with an additional office in San Francisco to support its headquarters in Mountain View, California.

Playdom might seem like the sort of company that an older, larger, traditional gaming company would want to acquire in order to get a foothold in the social gaming market. This new funding suggests Playdom is more interested in continuing to compete against top rivals like Zynga and Playfish — and seeing where that takes it. After all, we wouldn’t be surprised to see Zynga go public sometime next year. If it does, and if Playdom can continue growing its market position as well, the company may be able to fetch a higher purchase price or even attempt an IPO itself.

FarmVille is, as usual, leading our list of the top 20 Facebook gaming applications this week. Over the last seven days, continued its summer-long spurt, adding 3.44 million this week to reach 53.7 million monthly active users. In all, the list was top-heavy with games based in some sort of virtual environment, with farming being the most popular of the genre. In all, ten of the top 20 games featured some sort of virtual environment.

		Name	MAU	Gain	Gain, %	Developer
1.		FarmVille	53,699,607	+3,443,061	+6.9	Zynga
2.		Friend Facts	3,250,293	+3,164,733	+3 698.9	Topzy
3.		YoVille	18,535,441	+936,428	+5.3	Zynga
4.		My Fishbowl	4,768,917	+576,204	+13.7	TwoFishes Interactive
5.		(Lil) Farm Life	4,317,991	+535,763	+14.2	Greenpatch Inc
6.		Restaurant City	15,879,276	+532,228	+3.5	Playfish
7.		Pet Society	18,888,308	+514,113	+2.8	Playfish
8.		Mafia Wars	25,952,418	+496,830	+2.0	Zynga
9.		Write in Pictures	423,249	+423,249	+0.0	Write In Pictures
10.		Sunshine Ranch	1,881,221	+384,897	+25.7	Rekoo
11.		Animal Paradise	3,143,308	+374,211	+13.5	Rekoo
12.		開心農場	3,496,079	+364,858	+11.7	ELEX
13.		Country Story	7,052,381	+291,881	+4.3	Playfish
14.		Friends For Sale!	6,450,479	+238,002	+3.8	Serious Business
15.		Texas HoldEm Poker	17,891,298	+220,455	+1.3	Zynga
16.		Mobsters 2: Vendetta	2,831,269	+189,850	+7.2	Playdom
17.		Birthday Countdown	577,795	+177,491	+44.3	Internet Design Zone
18.		Quiztastic!	729,135	+171,093	+30.7	Playfish
19.		How Sexy Is Your Name Calculator	361,797	+139,302	+62.6	Internet Design Zone
20.		Jungle Jewels	720,693	+134,141	+22.9	GameDuell Inc.

Another recent trend is the rise of Chinese-language apps and China-based developers. Continuing from last week, TwoFishes Interactive‘s virtual aquarium, My Fishbowl, was in the top five. It gained 576,000 to total 4.77 million. While the game is available in multiple languages, most users appear to be speaking Chinese. Beijing-based Rekoo had two games on the list, virtual ranch Sunshine Ranch at number ten and virtual zoo Animal Paradise at number eleven. The former grew 385,000 to 1.88 million, the latter grew 374,000 to 3.14 million. Following at number twelve was 開心農場 or “Happy Farm,” a Chinese-language virtual farming game made by ELEX.

And a final note: Friend Facts came in at number two on the list because it is categorized as a game — the app mines Facebook data to give you random stats about friends, but it’s not a game in a traditional sense.

IMVU has had a quietly growing business, and now the company is talking about it. A virtual world, of sorts, inside a PC desktop client, its product lets users create titillating avatars, decorate them, then chat with each other in virtual rooms. Although it launched in 2004, IMVU has recently been fine-tuning its virtual goods business, and to great effect. It has doubled revenue this year, became profitable earlier this summer, and is now making $2 million in revenue a month. The company is on track to bring in $25 million in annualized revenue.

Its take on virtual goods is notable for relying on users themselves. IMVU has 40 million total registered users, with six million monthly uniques — and what it claims is the world’s largest catalog of virtual goods. It lets users create their own 3-D goods in the form of clothing and other decorations for avatars and rooms. Then it lets creators resell these goods within the game and on their own web sites. The result is that users have created around 3 million virtual goods while the company itself has only created 2,000. By this point in time, 150,000 people have signed up to be item creators, 175,000 goods are purchased per day, and in the last month 35,000 people have sold at least one item. Meanwhile, users create 4,000 unique new items every day. And these items sell, as the top 10 items sold are only 0.2 percent of the total sold.

In terms of money, 80 percent of revenue comes from direct transactions, while the other 20 percent is advertising (the company includes offers in the latter category). The company didn’t even hire an advertising sales guy until the company became profitable this summer.

So what made the difference?

In an interview last week, chief executive Cary Rosenzweig told us that the company has focused on fine-tuning the interface where users buy virtual currency, and has seen “overnight” jumps in revenue as a result. In July, for example, it began letting users try on virtual garb before purchasing. If users liked what they saw, they could buy the good with the click of a button.

It also introduced offers in March, although he says offer-takers are a new, separate group of customers — they are not first taking offers then eventually paying with cash. As many other web have discovered, “the first ten minutes are critical” — the initial interface and the currency integration are areas that the company will “work on forever,” Rosenzweig adds.

Where to now? The company has a wide range of users — not just the teens it was designed for — including 35 percent between the ages of 18 and 24, and 23 percent age 25 and older. As company co-founder Eric Ries detailed in this excellent post last month, IMVU has inadvertently become a place not just for young people to chat with each other, but with older adults to chat with each other. Out of these users 69 percent are female, and 62 percent are located in the US.

The company plans to expand in a few different ways. It wants to introduce more ways for people to access the service, including clients for Macs and mobile phones, as well as social networking applications. It also is looking at expanding into other languages. Within the service, it is also looking at what other features people might like — such as games.

Rosenzweig hopes to build a $100 million business, possibly by 2012. He doesn’t look to virtual worlds like Second Life for inspiration, though. Full-blown virtual worlds are more expensive to run, as they require that the entire world be synchronized. Because IMVU has rooms, those rooms only need to be activated when people are actually using them, meaning less load on the company’s servers.

Industry estimates put virtual world profitability at around 10 percent, but Rosenzweig aims for a lot more than that. His model is something like Chinese online gaming site Changyou, which makes nearly 50 percent profit through virtual goods.

So, with profitability, IMVU in a position to do major expansion. It raised $10 million last January in a round led by Best Buy, and still has most of it in the bank, Rosenzweig told us. This funding followed two previous rounds from Allegis Capital and Menlo Ventures; the total raised so far comes to nearly $30 million. Going forward has 59 employees — who, along with Rosenzweig, all got mohawk hair cuts when the company broke even earlier this year. With profits funding further expansion, look for the company to make more of a market presence, even as other virtual worlds struggle to make money. As Rosenzweig quipped at one point in the interview, not everyone in the industry is “going to get a mohawk.”

A while back, a game by the name of iSamurai was released for the iPhone: It turned the mobile device into a make-shift katana as two people synched up to hack and slash at each other in a virtual sword fight. Suffice to say, this was fun, but what about those that prefer a more modern era of combat? Well, that’s where an interesting new game from mobile developer Com2Us called Sniper vs. Sniper Online comes into play.

While the game isn’t out yet, from what we’ve heard about, it looks like a lot of fun. The primary concept has players challenging one another in sniper battles within various 2D environments such as a single building, village, forest, temple, or city. These levels vary in difficulty and your objective is to snipe your opponent before he or she snipes you.

The game starts with you looking out from your vantage point, with a simple tap bringing out a pair of binoculars. From here, the trick is to find whomever you are playing against before they find you, and they will be noted by a black outfit and, hopefully, binoculars in their hands.

A second tap brings up the actual rifle. The aiming is done completely with the iPhone itself, picking up every subtle movement and tapping an icon to shoot. Granted, it is a bit tough to control at first, but is very intuitive, nonetheless. Once one of the two combatants gets hit, an indicator will show where they were shot and the respective snipers will relocate. If you get hit first, the game helps you out with some directional clues as to where the enemy is currently hiding, making for a decent balancing mechanism for new players.

Suffice to say, it is a lot of fun to play, and depending on the level, your target could be right across the street or only a few pixels high. Furthermore, the action can be further stirred up with co-op modes where two people can team up to fight a team of snipers. Frankly, the only thing missing is a plastic sniper rifle peripheral.

The game also has an offline, single player mode for those that is of a less competitive nature. While offline, players can practice by picking off terrorists in a campaign mode or play in a myriad different mini-games. Unfortunately, these look to be pretty much just for practice, or areas without an internet connection, and lack the competitive allure that the multiplayer brings. Regardless, the game still looks pretty good. Though Com2Us doesn’t seem to have a release date on their website, this is one game to watch for in the near future.

Baseball Superstars 2010 is the second in an iPhone social baseball game series from Korean developer Gamevil, and it’s so fun that when we reviewed it we forgot about lunch.

There’s more to the game than typical baseball video game features, like seasonal play mode or home run derbies. Gamevil is known for its RPGs (i.e. the still growing HYBRID: Eternal Whisper), and evidently that prowess carries over into this portable sports title.

Players are able to create their own pitcher and batter and build up these characters in a game mode called “My League.” In order to improve said characters, one must put them through a myriad of training exercises. Okay, realistic, but dull… until you get to the rest of the RPG features. You actually need to keep your players happy (4 batters and 2 pitchers), help them work together, and build moral by participating in social events (i.e. dates) and spending your annual game salary on everything from new bats to new shoes. It seems silly, but it is strangely alluring and actually allows the player to connect with their team of avatars on some personal level – something that cannot be said about other sports games.

Of course, despite the draw from this RPG element, the game gets even better. Superstars almost feels like a satire on baseball, because this game has a collection of some of the most outlandish characters and game mechanics you will ever see in a video game. Not wanting to spoil any surprises, but some of the more memorable moments include a robot-looking space man… thing, a demon, and a pitcher that decided to turn the baseball into a bomb. Yes… a bomb. Don’t ask how… just go with it.

Wait, there‘s more: This game is fun to play alone, and thankfully, it can be made better with multiplayer. Unfortunately, the game is not multiplayer in the sense that Madden Football is multiplayer (live) but Gamevil utilizes an asynchronous versus system that lets you go online and play against another player’s team. Granted, you don’t play them, per say, but you do download all of their players’ statistics and pit your team leveling, as it were, against theirs.

Suffice to say, this game is fantastic fun, whether you like sports games or not. It has all of the sporting elements of a traditional baseball game, but the RPG features are so out there, it certainly doesn’t feel like one. It’s fun. It’s addictive. It’s memorable. And it’s well worth the $6 price tag.

Inside Social Games extends a big thank you to our fantastic sponsors for supporting the continued growth of Inside Social Games. Check them out below!

Offerpal Media is a leading managed offer network for social applications and online merchants.

TokenAds is ad-based monetization platform for credit based games, MMOs, communities and social applications.

Sometrics is a leading provider of virtual currency monetization solutions for social app and game developers.

Firecue helps developers monetize through virtual currency with free surveys and advertising offers.

Allopass is a leading micropayment service for social application and game developers.

GratisPay is a leading virtual currency monetization solution for social applications and online games.

Fatfoogoo offers scalable monetization solutions to developers of casual games, virtual worlds, and social networks.

Super Rewards is a leading monetization solution for applications and games running on social networks like Facebook.

AdParlor is a leading advertising network designed specifically for social networking sites.

Kramaley Games is a leading developer of social games on Facebook.

EA, Hasbro roll out offline goods for premium online content — In an interesting twist on virtual goods, game-maker EA and toy-maker Hasbro have launched an online site for the latter company’s Littlest Pet Shop franchise. Kids can buy real stuffed animals, then use an access code on the animal to access premium features on the site.

Offerpal gets surveys — The offers company introduced a new standalone component of its virtual goods monetization service, where users can earn virtual currency in exchange for filling out surveys. It’s a sort of service that companies like Peanut Labs have offered for years. Offerpal is also integrating surveys in with its other, established offer services.

Zong partners with Mochi Media — Mochi’s Flash-based games will now let users purchase its virtual currency, Mochi Coins, using Zong‘s mobile payment service. This way, users can buy Coins by billing their mobile phone accounts. Besides social games on Facebook and MySpace, Zong is also used in gaming sites including IMVU, Gaia Online and Outspark.

MyYearbook uses virtual goods for charity drive — Teen-focused social network myYearbook has built its own applications, and it used one of them, “Causes,” to fundraise for 16 charities. Users “donated” the social network’s Lunch Money currency to causes like grains of rice, research hours, and more. It raised $250,00 in total.