Square Enix May Go Social: With Japanese developer, Square Enix, this week, raising $400 million in funding, a recent analysis by Screen Digest suggests that a major acquisition may be in the company’s future. The belief is that the mainstream developer will be following in the footsteps of Electronic Arts, in reference to its recent purchase of social developer Playfish. At the moment, the speculations are all merely rumors, but based on past confirmations from President and CEO Yoichi Wada, the company has looked into social gaming before, and according to analyst Ed Barton of Screen Digest, Square also has a total of $880 million, on hand, and ready to spend.

Zynga Players Help Haiti: Though it is not possible for everyone to head to Haiti and help out, Zynga game players are doing their part, having raised $1.5 million in five days. More than 300,000 individuals contributed to the U.N. World Food Programme (WFP) by purchasing limited edition virtual goods within FarmVille, FishVille, Mafia Wars, and Zynga Poker. 100% of all proceeds went directly to WFP, with $1 million coming from FarmVille alone.

TAITO Chooses OpenFeint for Social iPhone Apps: TAITO Corporation, a wholly-owned subsidiary of Square Enix and major Japanese mobile game developer, has chosen Aurora Feint’s OpenFeint platform to empower its mobile titles with social capabilities. TAITO is also a major partner to one of Japan’s mobile social network operators, DeNA- creator of Mobage-Town – with whom Aurora Feint also partnered with last October.

$1.38 Billion Invested into Online Game and Virtual Goods Firms: The downtrodden economy didn’t hurt everyone as a recent report, the 2009 Virtual Goods Investment Report by Engage Digital Media, is stating that the past year tallied somewhere around and over, $1.38 billion in investments for online games and virtual goods-based businesses. The number of companies said to have received investment is at 87, but of that total, 29 did not disclose the amount of money involved. These values were not actually included in the $1.38 billion estimate.

gWallet Launches Early-Stage Venture Fund: Another announcement this past week came from virtual currency monetization company, gWallet. The company will be launching a new, early-stage venture fund called gWallet Ventures to invest in social gaming companies as well as attempt to drive new innovations within the social gaming realm. Currently, investments are said to range from $100,000 to $1 million per company and will also be tied with the monetization options gWallet already provides.

ISN Virtual Worlds Announces Oasis Foundation Virtual World Project: Thursday, ISN Virtual Worlds announced the first steps in rolling out the Oasis Foundation Virtual World Project (the Oasis Foundation is an Italian nonprofit organization focused on the medial care of the elderly and disabled). The virtual world will be built on top of the Second Life Grid and will be intended to provide the elderly with a form of community interaction.

According to ISN CEO, Mattia Crespi, the project already has $3.5 million in funding, which will not only pay for the development, but management as well that will consist of staff from ISN, Oasis, and even the community. Furthermore, the world will contain learning sessions for the “Oasis Virtual University” and will hold content such as producing virtual goods, culture and releigion, machinima, and even family assistance and help from psychologists.

AppStoreHQ Uses Twitter for App Discovery: With over 100,000 applications, AppStoreHQ is looking to help people discovery new and interesting iPhone applications. via Twitter. By looking at Twitter’s public stream, it will actually make recommendations based on who is tweeting about what in regards to iPhone applications. In a nutshell, every time anyone links (in a positive light) to an app it is treated like a vote, thus the more apps are tweeted about, the more recommended they become. Unfortunately, for the system to work properly, keywords such as “iPhone” or “AppStoreHQ” must be within the actual tweet to find it.

To further prune down recommendations, the system also looks to see what games you might be tweeting about. Based on how many apps you tweet about, the recommendations become more specific to what it determines as something you might like. Moreover, clicking app links as well as favoriting them on AppStoreHQ will also affect  how recommendations are made.

CrowdFlower Raises $5 Million: CrowdFlower, a provider of “labor-on-demand,” announced that it has closed a $5 million Series A round led by Trinity Ventures and Bessemer Venture Partners. The company makes use of what it calls “machine learning algorithms” to provide quality control to crowdsourcing, making it easier and less expensive for companies to find online labor. With the new funding, the company is looking to expand its repertoire of client solutions as well as provide its services worldwide.

What will be the most significant changes in social gaming this year? We joined a panel of social gaming executives last night at a packed event in the Googleplex in Mountain View, California to discuss. Our overall conclusion? We’re mostly quite optimistic. Check out the video to watch us make our predictions.

We also got a chance to hear from product leaders at Orkut, the Google-owned social network that’s big in Brazil and India. While the site is facing competition from Facebook and other services, like Twitter, it continues to be a big and under-appreciated opportunity for social game developers. It has 80 million monthly active users, the single largest majority of whom are between 18 and 24 years of age. While a range of your usual range of games have gotten big on Orkut’s developer platform — farming, aquarium care, etc. — there are only a few of them. As competition increases on Facebook, Orkut can be a good place for companies to gain additional traction, experience and revenue.

Here are the prediction panelists:

- Daniel James, Co-founder and CEO, Three Rings
- Wilson Kriegel, VP of Business Development and Ad Sales, Outspark
- Lisa Marino, Chief Revenue Officer, RockYou
- Mark Rose, Director of Product, Payments and Platform, Playspan
- Jonathan Flesher, VP of Business Development, Zynga
- Eric Eldon, Editor, Inside Social Games

Ali Moiz, chief operating officer at social market research and monetization company Peanut Labs, moderated the panel. We didn’t get a chance to hear his predictions at the event, so he’s provided them to us, below.

1. Non-premium apps that generate “viral” traffic and make money largely off display ads will take a big hit as a category. There will be individual apps who figure out how to go viral, but in aggregate this category will decline atleast 25% in terms of MAUs.

2. Social games will be affected as well, though not as much as 1 since they can compensate through ad-spending and a higher % of returning users. Competition will heat up since there are less free/viral users to go around. Ad spend and user acquisition rates will increase, rewarding those developers with deeper content that monetizes better.

3. Friend app invites/requests will become largely ineffective. Their proposed placement according to current FB screenshots means they will be checked as frequently by users as “Updates” currently are in the Inbox, i.e. almost never. Expect this viral channel to become ineffective compared to today.

4. Developers will spam email en-masse in desperation, resulting in that channel becoming useless and ignored. Relevant email updates will likely get drowned out by email spam generated by other apps. Already there are email providers offering to “sell” Facebook emails collected from apps. I’ve been pitched rates of $150 per 1 million verified FB emails by 3rd-party vendors. At those rates, there will be massive spam flooding the system next month via email.

5. The newsfeed will be the main viral channel left for most apps. Apps will genuinely have to push out more relevant and highly engaging content to get exposure. Current newsfeed spam methods will become less effective when everyone starts spamming the newsfeed next month.

Back in November we took a look at a freemium massively multiplayer title, Hello Kitty Online (HKO). Truth be told, the online game, with its virtual goods, community features, questing, and so on, proved to be quite the guilty pleasure. However, its beta status had led to significant complaints in the form of poor new user instruction. In short, the player had no idea how to actually play. To that end, Sanrio Digital took a rather curious approach to rectifying the problem: By teaching users via Facebook.

The app is Hello Kitty Online: The Introduction and it came to our attention as one of the Top 20 Emerging Facebook Games. Of course, the term “game,” here, is used a bit loosely as it is primarily a tutorial for the downloadable, full version.

As a tutorial, HKO certainly covers all its bases and shows a new player how to accomplish all the usability issues that came up as complaints in the initial review (interface, professions, combat, etc.).

The Introduction is presented in a very entertaining, voice-acted format, complete with quality visuals that actually present the user as being part of a Survivor-type game show. As they progress through each stage of learning, they become closer to “winning” the contest. However, while the cut scenes are most amusing (and perfect for the younger, target audience of this game), the actual teaching of play is mere listening and reading as an automated arrow points at each icon and asks for an occasional click.

For the record, it does look good, and helps a new user a lot compared to what existed before, but it is a little boring. Frankly, though, before everyone gets up in arms, this is coming from the point of view of an adult. Someone younger and enthralled by Hello Kitty will likely become too captivated with the visual spectacle to notice. That said, a little more interaction (some play rather than a periodic click) still might help retain all the information better.

But the general lack of game play doesn’t stop the app from getting users to share their activities in the app. After each chapter completion, players can broadcast their “victory” to their Facebook feed, effectively advertising the main game. Furthermore, when users finish all the chapters and win the game, their reward is “permission” to go to Sanrio Harbor (the entry point when you start HKO), giving Facebook users a direct link to the main game’s download page (though the link is always at the top of the screen anyway).

Notably, however, the tutorial does not completely lack gaming. It also comes with a simple, Bejeweled type of mini-game called Hello Kitty Blocks. Players match up three blocks of the same type to remove them and try to fill a progress bar – via removing said blocks – before time expires. It’s nothing complex or in depth, but it does have leaderboards, and adds yet another social graph-empowered link to the primary MMO.

With currently around 105,000 monthly active users, Hello Kitty Online: The Introduction is unlikely to be a huge app, but it will be curious to see how effective it is as both a teaching and advertising tool. Best of luck, and we’ll see you in Sanrio World.

Facebook is quite the melting pot in this week’s list of top emerging games that still have less than a million users. Speak a foreign language? You’re covered. Religious? Check. Prefer violence? Just check out MMA Pro Fighter from Digital Chocolate. If there’s one thing that’s not well-represented, overall, it’s new games from major developers.

As always, the list is from AppData, and we run another post on InsideFacebook to talk about the non-game applications. Take a look:

	Name	MAU	Gain	Gain, %
1.	開心寶貝	708,918	+281,729	+39.74
2.	Temple of Mahjong 2	374,338	+128,089	+34.22
3.	Sanalika	214,568	+125,929	+58.69
4.	Blessings†	133,408	+118,404	+88.75
5.	Oyun	175,425	+115,549	+65.87
6.	Spot The Difference	422,603	+109,866	+26.00
7.	Band of Heroes	742,508	+98,763	+13.30
8.	Doorbell	980,468	+90,286	+9.21
9.	Ninja Warz	740,870	+73,772	+9.96
10.	Hello Kitty Online : The Introduction	105,118	+73,724	+70.13
11.	The True Age Test	512,931	+71,985	+14.03
12.	開心花園	504,812	+70,016	+13.87
13.	Warstorm	481,925	+67,776	+14.06
14.	MMA Pro Fighter	145,210	+62,865	+43.29
15.	歡樂癲地 Funland	677,717	+58,166	+8.58
16.	Friend Block	960,356	+55,500	+5.78
17.	Frosmo	260,123	+51,303	+19.72
18.	My Fishbowl	423,046	+50,545	+11.95
19.	Xx..Me 2 u bears..xX	234,327	+49,961	+21.32
20.	MiniPlanet	252,723	+48,240	+19.09

One possible reason that there are relatively fewer big developers represented than usual is that the top four games from last week have all passed a million MAU, and thus moved off the chart. In order, they were: Garden World, Wild Ones, Three Kingdoms Online and My Town. Note that the newbie company behind that last, Broken Bulb Studios, also has Ninja Warz coming up at number nine this week.

Number five last week, 開心寶貝 smoothly moved up to become the top game; along with 開心花園 and 歡樂癲地 Funland, it makes up a trio of Chinese-language games. 開心寶貝 (number one, in case you’re having trouble following) is still growing strongly and will soon graduate off the list to join the small, but growing pool of Chinese-language apps with several million users. Incidentally, Temple of Mahjong 2, while in a language we can understand, is also Chinese-derived and growing quite quickly; it now appears to be the largest Mahjong game app on Facebook

Three and five, Sanalika and Oyun, are both in Turkish — perhaps evidence of yet another foreign language trend. In between them is sandwiched Blessings† a semi-religious “poke” app that probably shouldn’t be in the games category.

One more game to take note of is Hello Kitty Online : The Introduction. Yes, it’s an official Sanrio product, and yes, there is an incredible amount of pink involved in it. Sanrio is a bit late to Facebook, having introduced a Hello Kitty game to the iPhone last year. But judging from the name of the game, they intend to catch up on lost time.

With a business model of helping online gamers to exchange cash for virtual goods, Rixty has raised a $1.24 million seed round of funding from a group of early stage investors. The company works with Coinstar, the coin machine company, and convenience stores in more than 20,000 locations, letting users purchase credits or pre-paid cards that they can redeem in online games.

Many gaming companies have been working to get a place in physical locations. Most of the large social gaming companies have deals with pre-paid card providers like InComm and convenience stores like 7-11 or larger retailers like target. Like virtual candy, game credits are a convenient and impulsive purchase. For example, if you’re buying real candy at your neighborhood store with your pocket change, and you’re going home to play your favorite online game, then why not buy access to some virtual goods to help you do better in the game. Rixty’s credits can be used across games.

Deals with Coinstar and regional convenience stores, like Stripes and Cumberland Farms, help the company reach customers that competitors can’t, according to head of business development Jason Hovey.

The San Francisco company has cut deals with a diverse group of game companies. In Zynga’s FarmVille, for example, you can redeem Rixty in Offerpal’s offer window, above the advertising offers. Here’s the list: Aeria Games, Atlus Online, Bigpoint, Blue Frog Gaming, Challenge Games, DoubleDing, Flowplay, G4Box, Games Campus, HitGrab Labs, IGG, ijji, Kru Interactive, Mochi Media, Ndoors Interactive, Inc., NetDragon, Ntreev, Offerpal, Orbis Games, Outspark, Perfect World, Roblox, THQ*ICE, Three Rings, Wicked Interactive,

Javelin Venture Partners led the round. Accelerator Ventures, First Round Capital, Freestyle Capital, Nueva Ventures and SoftTechVC participated.

Last week, we talked to the chief operating officer of iPhone game publisher SGN, Randy Breen, for our review of the company’s two big games, the flight simulators F.A.S.T. and Skies of Glory. Two days later, he was promoted to CEO, while founder Shervin Pishevar moved to the role of chairman — a transition Breen says was planned since he was hired.

Hoping to get some new insight into SGN’s future, we cornered Breen for a longer interview. While the company isn’t pre-announcing the new titles it’s working on, there was plenty of other ground to cover — Breen’s background with gaming giant EA, the similarities between social games and World of Warcraft, Facebook’s successes, and the future of SGN.

Be warned that the interview runs a bit long, so we’ve hidden part; just click through below for the rest.

Inside Social Games: What’s your reaction to Google’s new Nexus smartphone and the impending Apple tablet? How would larger screens impact mobile game development?

Randy Breen: The Nexus One is missing a lot of things that Apple does well, like screen rotation based on the accelerometer. Still, it’s interesting. SGN won’t develop for all smartphones as a category, but web-enabled devices will always be of interest. They mean our products can be built differently. The console version has to be built like a movie, a three year endeavor for the end product. A tablet would make our games bigger and more expensive, but that’s inevitable at some level.

ISG: You mentioned that most of the development for SGN’s flight sims was done externally, by Revo. Will you stick with that model in the future?

RB: EA in the early days was modeled after the record companies, so everything was external; over time they became almost the exact opposite. I happen to think that it’s a good model to be able to do both internal and external development.

We’re looking for small developers that want a publisher to help them get to market. We have expertise with certain kinds of problems, we can co-develop, we can continue to support the product beyond their interest. I think it allows smaller teams who may not have the visibility they need to get into the Apple app market, the PR and marketing, achieve things they wouldn’t be able to otherwise. As the market expands, the number of things the developer has to be responsible for increases in complexity and scope, so over time you’ll see more of these relationships.

There are a lot of people in the iPhone and social gaming markets that came out of the console market. They see these same trends. All of us are looking back to what’s happened in the past and looking to apply it in the future. If you’re looking at the products in the charts, in some cases they’re brands of bigger companies, but they’re often like products that have been successful elsewhere.

ISG: Console game makers, following the PC market, are experimenting with user-generated content in games. Does SGN have any plans in that direction?

RB: It’s a challenge to figure out how to do that in a way that’s acceptable to Apple’s standards, but it’s an interesting approach. I’m interested in things the community can contribute that are simple, that more people can participate in. Multi-player games effectively introduce the concept on the fly. Instead of an AI character controlled by the device, another object, vehicle or character is controlled by the player. The interactions are, in effect, crowd-sourcing.

The best example is Counterstrike. People still play it online. I think what’s interesting is that the levels are simple, the paths through the world are simple, but they’re organized in a way that drive people psychologically to take advantage of those paths. Focusing on that level layout for instance, instead of what I can make a character do, creates a lot more possibility for the people playing in it.

ISG: What’s the equivalent to World of Warcraft, MMO-style gaming addiction in simple mobile or social games?

RB: The addiction is directly related to the questing systems: the brain activity around discovering what you need to do, going out and achieving that goal, getting a reward, then finding what you need to do next. It’s a triangle of behavior that’s ingrained in all of us for very basic things, searching for food for instance. The community and the links you create keep you engaged and drive the behavior.

One of the more insightful things I’ve heard came from a friend a few years ago. He said that in real life, you may know the things you need to do but you don’t know how to do them. The hardest things in life are complex. With an MMO, generally, you can achieve the highest ranks in the game by just going through the steps and paths in the game. It takes time and requires dedication at some level, but it leads to an absolute outcome. It’s more achievable than real life, and you can do fantastic things. When you strip out the front end from an RPG, you’re left with dice rolls. You could break it down in a spreadsheet.

That’s what a game like Mafia Wars [on Facebook] essentially creates. The interesting thing is that you’re still motivated by that simple triangle I described. Push button, get thing, go do another thing, get award, go on to the next thing. You see people that may never have played RPGs getting into the game mechanics. They may not understand what’s going on, but they get some fulfillment out of leveling.

The thing I think is funniest is that I also know plenty of hardcore gamers that are leveling in these simple games. It works for them too. It worked for me. I got into this routine, where I’d get up and think, “I better push the button to exploit the timer and progress as fast as they allow me to.” It’s that infrequent but routine use that’s interesting, and that’s what’s powerful about social experiences in terms of their game mechanics. You can build them into the routine of your life in a way you can’t with these more hardcore experiences.

(more…)

In the last few months a number of casual gaming companies have created social games. Four of the titles, that we know of,  have broken 1 million monthly active users, including: 1) Bejeweled Blitz by Popcap Games at 9.83 million, 2) Bubble Popp by GameDuell with 3.11 million, 3) Jungle Jewels by GameDuell at 2.62 million and 4) Icy Tower  by Muskedunder Interactive at 1.12 million.

While the MAU for these games are nowhere close to those of dominant contenders coming from social game developers, they are still interesting case studies that demonstrate which aspects of a casual game development mentality work on Facebook and which don’t.

What works

Addicting Skill Based Gameplay: Thumbs Up

All four casual games ported to Facebook are skill-based games. Bejeweled Blitz and Jungle Jewels are puzzle games that reward users for aligning certain gem combinations quickly. Bubble Popp scores users for popping as many bubbles as possible in a limited number of shots and gives users bonus points for popping diamond bubbles. Icy Tower rewards user for reaching higher levels of the tower before time runs out.

Like casual games from time immemorial all of these games use scoring to capitalize on users’ competitive desires and thus engagement. They do this by providing scores and leveraging users’ social graph to popularize these scores between friends (and in some cases between other users of game who are not friends). Not all of them do this well.

Viral Distribution: Thumbs Down

With the exception of Bejeweled Blitz, all of these games miss many opportunities for integration of viral hooks. Jungle Jewels and Bubble Popp do not auto-prompt you to share score information at the end of each game with a popup Facebook message. Instead, the sharing option is blended in with other options on the results screen.

Another of these casual games, Icy Tower, has no scoring wall messaging at all. Users who beat a high score of one of their friends send their friend a Facebook notification, a viral element that does not leverage the social graph of either the person who beat the high score or the one who was beaten as these notifications are not visible to all of their friends.

Bejeweled Blitz, however, does a very good job with viral distribution. Like the other games Bejeweled Blitz is a classic casual game that has seen much success outside Facebook. However, the makers of the Facebook version of Bejeweled Blitz understood that the key to a successful social game is interaction with other Facebook friends. Because of this they have not only made high score posting to Facebook walls easy and obvious but have also added many other social features such as the “Jewel Jabber” which allows you to trash talk your friends who are playing the game on their walls. Also unlike the other games as well as many social games — where the copy for the message inviting friends to the game is often bland and uninspiring — the copy for Bejeweled Blitz taps into users’ competitive motivations.

Monetization: Thumbs Down

Being skill-based scoring games, they don’t lend themselves to virtual items. Because of this, three of the games Bejeweled Blitz, Bubble Popp, and Jungle Jewel have no real system for monetization except for what seems like incentivizing users to leave Facebook to go to their own game sites. According to PopCap’s director of online products, Jon David, the company has had success with this, although he declined to tell us how much. He also said that theyhave plans further to monetize Bejeweled Blitz.

One exception to this strategy is Icy Tower which uses pre-game and interstitial advertising to motivate users to purchase or fill out offers for its in-game currency. This currency can then be used for customize the Icy Tower avatar.

It is unclear how successful either of these strategies have been.

And the Final Score Is… One Thumb Up, Two Thumbs Down

This brings the total score of these four casual games ported to social networks to -1. As we can see from their successes viral distribution is possible for skill based games but the viral events and messaging must be carefully thought out. As for monetization, skill-based score casual properties have fewer monetization opportunities. However, there are many other casual game properties that are better suited for monetization. We look forward to seeing more of these on Facebook in the coming year.

Sana Choudary runs Traffichoney. It works with casual game companies who are having the challenge of understanding how to build social games, helping them understand how to use and optimize viral channels and social game design to build popular social games. To contact her or learn more about what Sana is up to please visit Sana’s blog at www.traffichoney.com

Fish World, a fish care taking Facebook app in a sea of other virtual aquarium titles, has always been one of our favorites when it comes to this underwater genre. Developer Tall Tree Games continues to press forward on the simulation theme with a similar, land-based app called Garden World.

Though virtual gardens have never seen the digital “gold rush” that farming and aquariums did, they have appeared in limited quantity from time to time — after all, many of the game mechanics are the same.

Players enter into world that is like Fish World (or many farming games, for that matter): You get a plot of land, and you can tend it to earn points with pruning shears instead of an aquarium sponge, or a weeding rake. This familiarity allows users to easily jump in and start decorating their virtual space with little to no learning curve. Using concepts from the farming genre of Facebook games, players buy a planter, plant a seed, water it, and after X amount of time, it blooms.

Once a plant has bloomed, two choices are presented. If they so desire, the user can merely sell the plant or flower for a small profit. However , what makes the game more interesting is that fully matured flowers will produce pollen. By dragging the pollen from one grown flower to another that is “Ready for Pollination,” you can actually cross-pollinate and discover plants that are otherwise unavailable for purchase in the game’s standard store.

This is easily the best part about Garden World, and on multiple levels. Each pollination requires 24 hours to occur. However, users are prompted with the option, for one Gardenbuck (Garden World’s buyable virtual currency) to have the result instantly. Since these flowers seem to be cheap to plant once discovered, yet sell for a hefty profit (our first discovery costs 15 coins as a seed and sells for 65), such a purchase does help get the user ahead in the game more quickly. Of course, if they don’t buy it, it is still a fantastic way to add depth through discovery to the game.

Like in Fish World, all actions earn experience – be it watering, weeding, or planting – and your level is displayed in a leaderboard of all your friends who play with you. With these two combined features, the game creates the standard social competition between users, but also grants them a reason to visit and aide (i.e. weeding) each other’s virtual menageries.

The primary monetization method for Garden World is through the virtual currency Gardenbucks. A number of high quality and nicer looking items can only be bought or earned through offers using this method; the earnable in-game coins cannot be used. It just seems that too many items have to be bought with the virtual currency that requires real money or offers. If the player opts for the in-game coins their garden, at the very least, looks sub-par. This was a chief complaint of users in Fish World, and something we pointed out regarding the sale of holiday virtual goods.

Granted, most of the items that cost Gardenbucks are functional and grant an edge (i.e. fertilizer), but the decorative – the expressive – items that cost virtual currency feel so much better than the in-game coin ones, and that leaves the user at a loss. When a player sees an object they can earn, a goal is established, and thus they keep playing to reach the goal. If the best objects have to be bought, then that goal never forms, thus there is less of a point in playing, thus users leave. The idea is to suck them into the game world enough so that they want to buy currency; while the developer might be making some money through making Gardenbucks near mandatory, it seems it could make even more if it enticed, instead.

The other chief complaint is minor — and common to social games — but no less obnoxious. Tall Tree Games is well aware of the social graph and the fact that players are more likely to start playing a game if they see their friends playing it. To that end, the player is constantly barraged with events in game that they are asked “Would You Like to Share?” Yes, sometimes they would, but having it pop up every two minutes because a squirrel wanders into the garden gets very tiresome.

Still, overall, Garden World is a nice application when it comes to virtual spaces. It’s simple, easy to learn, and fun to create a quaint little garden for oneself, and based on our most recent application data, there are over a million monthly active users that would agree.

With daily active uniques in the double digits and revenues climbing toward $1 billion in 2010, social games are exploding in the U.S. But, in China, revenue from virtual goods has already grown into a multi-billion dollar business. Estimates hover around $5 billion USD in revenue for 2010 from virtual goods.

In fact, China’s biggest internet media company, Tencent, recently revealed that “internet value-added services,” or virtual goods, made up 78% of the company’s total revenue for Q3 2009. And that was no fluke – every quarter since early 2006 has seen virtual goods’ share of total company revenue steadily climb and stay far ahead of every other revenue stream for the company. Mobile and other telecom services (including premium content like ringtones) came in a distant second at 13%, while online advertising only contributed 9% to total Q3 2009 revenue.

As the market leader, Tencent’s success with virtual goods monetization likely indicates continued expansion and value for all players in China’s virtual goods ecosystem.

Does this mean those involved in the U.S. virtual goods industry can look to China’s successes as a promising prophecy of their own future?

Probably. More on the growth of social gaming within the U.S. virtual goods industry is available through the research report Inside Virtual Goods: The Future of Social Gaming 2010. Meanwhile, in China, virtual goods are still most popular outside of the social game experience. Tencent, for example, owes the majority of their staggering virtual goods revenue to their popular QQ instant messaging service. Not exactly a social game, the chat service is nonetheless a social experience where users express their online personalities with unique avatars and avatar accessories.

Virtual goods are a maturing multi-billion dollar industry in China, but we believe virtual goods in social games are just beginning their takeoff. Happy Farm by Chinese developer Five Minutes is China’s most popular social game, and is seeing around 23 million daily active uniques (DAU is the number of users who log in within a single 24 hour period, and currently the most accurate indicator of users’ engagement with a given application). Five Minutes’ Happy Farm is syndicated across RenRen-Kaixin, and 51.com, a few of China’s biggest social networks. As of mid-2009, the game is even on Facebook.

Other Chinese social networks, including QZone and Kaixin001, have launched their own ‘happy farming’ knockoffs, most likely developed in-house since neither network has yet opened its platform to third party developers. Notably, Happy Farm’s numbers are on par with Farmville’s current 27 million DAUs on Facebook (up-to-date stats courtesy of AppData).

Nonetheless, when compared to traffic, engagement, and revenues from the QQ instant messaging service, it’s clear that social games like Happy Farm still have much untapped potential. It’s precisely the wild success of virtual goods monetization in avenues like QQ’s instant messaging service that indicates that there is significant potential for virtual goods to make similar gains for social gaming in China.

Overview of China’s social networking services and app ecosystem

• The total social networking market in China is estimated at 124 million users.
• Major social networking services include: QZone (Alexa rank in China = 2), RenRen (Alexa rank in China = 14)+Kaixin (Alexa rank in China = 119) (both RenRen. com and Kaixin.com are owned by same parent company, Oak Pacific Interactive), Kaixin001 (Alexa rank in China = 9), 51.com (Alexa rank in China = 54), Xiaonei (became renren.com) (note domestic SNS copycat issues).
• Market share of top 5 social networking sites (SNS): QQ alumni (50%), Renren (37%), Sina Space (36.6%), 51.com (27.1%), and Kaixin001 (26.4%) (from China Internet Watch).
• Most Chinese networks promote online social networking as a reflection of real-world relationships. Each friend request is chaperoned by a prominent “Report a stranger” feature and a bolded warning not to accept requests from people you don’t know.
• RenRen-Kaixin and 51.com are the only two platforms to offer an open API to app developers.
• RenRen-Kaixin platform has by far the most active development with 448 active applications in its directory.
• Others like Kaixin 001 lag behind at 44 active applications.

A note on RenRen.com and Kaixin.com:

You’ll noticed that we refer to RenRen.com and Kaixin.com as RenRen-Kaixin. Both social networks, RenRen.com and Kaixin.com, are owned by the same parent media company, Oak Pacific Interactive. Users may log in to either social network with credentials associated with the other network. Both networks feature identical app directories and leaderboards, and both are open to third-party developers.

Finally, you may be wondering what happened to a popular social network called XiaoNei.com. In August of last year, parent company Oak Pacific officially changed XiaoNei’s name, which indicates ‘school campus,’ to the more universal RenRen, which means ‘people’ or ‘everyone.’

A note on data availability:

Analysts still don’t know exact DAUs for most games because most platforms retain strict no-comment policies about their app traffic. Analysts do know that Happy Farm, China’s biggest syndicated social game, sees an estimated 27 million DAUs across the platforms on which it operates.

Additionally, it is notoriously difficult to obtain accurate stats on Chinese internet properties, and what is out there is often self-reported or, occasionally, compiled by state-run agencies. We relied primarily on Alexa rankings for the social networks mentioned in this article. The service is not always accurate and should be read as rough estimates.

Virtual goods are huge while social games have room to grow

What kinds of games are the biggest hits? While there are plenty of significant cultural differences between Chinese and American consumers, when it comes to social games, it appears that there are more similarities than differences. We love farm games. We love fish games. We love pet games. And, by “we,” we do mean the universal ‘we’ that is interchangeably American, Chinese or nearly any other social network user around the world.

Farm games, particularly Happy Farm, dominate the leaderboard. We’ll get into specifics by platform in later posts. Suffice it to say, for now, for American developers already familiar with proven social game mechanics that promote virality and addictiveness, Chinese audiences are not far out-of-reach.

If there are now more internet users in China than anywhere else, and China’s mature virtual goods market dwarfs the $1.6 billion we’ve recently estimated for the U.S., then how can there still be room to grow in social gaming? Quite simply, all but one of China’s biggest social networks have closed platforms, a decision that has dramatically limited the number and types of applications available on these networks. In China, other types of online games have been, and are still, very popular. Do Chinese internet users prefer more traditional online game experiences to social games for cultural reasons then?

We don’t think so. As noted earlier, RenRen-Kaixin and 51.com are China’s only social networks that have opened their APIs to third party developers. RenRen-Kaixin boasts a healthy 448 active applications in their directory. Several of these applications enjoy DAUs in the multimillions, and more still are inching their way up to one million. By comparison, Kaixin001, another of China’s major social networks (not to be confused with RenRen-Kaixin, with no ’001′), has just 44 applications in its directory, all developed in-house. While QZone and Kaixin001 have made attempts to replicate popular games in-house, their app directories contain only a few dozen applications overall, and these include non-game apps as well.

While existing social games don’t yet feature extensive in-game communication or other more social features, Chinese users seem happy to communicate with other players via game-related message boards and through the social network’s standard communication channels (inbox and chat). According to Kai Lukoff, in-game chat is likely coming soon. Games on the social networks already leverage user’s social connections far more than other types of online games; as developers build in additional social features, games will attract – and retain – more users.

There’s one more reason why China’s already popular social games still have more room to grow, and it also happens to be one major similarity between China’s social gaming ecosystem and that of the United States. Social games appeal to a vastly different demographic – young, professionals who aren’t your typical hardcore ‘gamers.’ Most of these users are under 30, many of them work office jobs with constant internet access, and more of them are women than men. Sound familiar?

What’s Coming In 2010

The current market for virtual goods in China is a massive 4 times larger than in the United States, but is mostly fueled by virtual gifting on networks themselves, avatars for instant messenging services, and other forms of online self-expression outside of social games (customizable rooms or personal ‘spaces,’ wallpapers for mobile and web).

How large is the market for virtual goods within social games? While revenues aren’t yet publicized by Happy Farm’s developer Five Minutes, Chinese audiences have demonstrated strong willingness to purchase virtual goods elsewhere in online entertainment. With Happy Farm’s high engagement numbers on RenRen-Kaixin, the dozens of copycat games it has already inspired, and the sustained popularity of social games as a genre, otherwise closed social platforms like Kaixin001 and QZone are taking notice. In 2010, more of China’s major social networks will likely recognize the potential of social games developed by fast-moving third party publishers, and social games as a category will grow even more rapidly.

With so much promise in the social gaming segment, will there be many new entrants? Probably not, but there will likely be more consolidation as successful developers grow in funding and size. December 2009 saw Happy Farm developer Five Minutes raise $3.5 million from Draper Fisher Jurvetson and Sunshine Ranch developer Rekoo raise $1.5 million from Infinity Venture Partners.

Finally, observers have already commented on the self-expressive nature of virtual goods on Chinese social networks. In 2010, we expect social networks to expand on self-expression by layering on even more social features, and this time through social games. As game developers refine their grasp of the game mechanics that enable maximum stickiness, users will likely see features that encourage more social interactions at a deeper level of sophistication.

In the next post in this series, we’ll take a closer look at the top apps on the RenRen-Kaixin platform. RenRen.com and Kaixin.com are two of China’s biggest social networks both owned by Beijing-based media company Oak Pacific Interactive that are seeing enormous traffic to their shared app directory. Stay tuned!

Since early December, iPhone developer Booyah has been running an almost complete recreation of Booyah Society in the form of MyTown. Since then, this location-based, Monopoly-like app has as been reported, by the company, to have reached #7 within the Apple App Store and has garnered well over 32 million check-ins from over 2.2 million unique, real-world, locations. In fact, Booyah says that it has over 500,00 users, but despite its success, there was still room for more, and MyTown 2.0 certainly brings it to the table.

Frankly, MyTown 2.0 feels like a new game, but truth be told, it isn’t. Sadly, our little avatar buddy is gone – which is likely to upset a few people – but Booyah has expanded on what made the first rendition so addictive: Owning property and earning rent.

Like in 1.0 players are still able to “check in” from any location with a 3G connection. From here, they receive the same familiar list of locals with the option to buy them, and doing so earns them experience towards new levels as well as items that can be used to enhance the next check in (i.e. earning them more experience or cash). Furthermore, the current level still limits how many properties can be owned and how much they can be upgraded. But what is new?

Well, while the avatar is gone, the enhancements all improve the most popular part of the game: Your town. When a player checks in, there is a rather sizable list of businesses that can be chosen from, but now users can actually gather statistics on each one. They can actually see how many people have visited a location, how many own it, view a popularity rating, and even get a trending graph to see if the business is growing, declining, or plateauing. This actually plays a great deal into this core Monopoly-like feature because now players can shop around and make the most intelligent additions to their virtual town based on actual check in information.

In addition to the said stats, players are also able to see a leaderboard of every single person to have checked in at a location as well as leave comments about it. In fact, each business that appears on the check in even comes complete with phone numbers, addresses, and through Citysearch, links to maps, further websites for the location, and even reviews. Not only does this add to the game itself, but actually aides external businesses by allowing traveling players to actually find places nearby that they never knew where there.

As players purchases locations, the former avatar screen is now filled with buildings and structures that fill up a landscape in an, almost, 2D, SimCity style. Each building changes and grows as you upgrade it, and players can even purchase items through an in-app store to add some spice to their town such as a giant Godzilla wannabe.

In fact, this virtual store is also worth mentioning as users can purchase goods using both in-game currency and real money. From the “Store,” real money is used, and allows player to buy items that can increase the number of properties they can own (but can only be used twice ever), make the next one free, or grant significant bonuses on your next check-in.  These items range from $0.99 to $2.99, but if users don’t want to spend real cash, they can still visit the “Virtual Store” and buy a myriad of check-in boosting items using large amounts of earnable in game currency.

Though we are saddened at losing our ninja-looking avatar from MyTown 1.0, his sacrifice certainly wasn’t in vain. The improvements to MyTown are phenomenal and as good as the game was, we certainly think it has gotten better. Heck, browsing through business comments and trends alone has eaten up an hour…. Anyway, if you liked MyTown 1.0, you are definitely going to enjoy 2.0. Granted, some things will be lost in translation, but in the end, the change is for the better and this app comes highly recommended.