Inside Social Apps 2010 ended today with a panel on investing opportunities in social applications and games. While most of the investors weren’t too bullish on the short-term opportunities for small developers, they do believe there are all sorts of short and long term opportunities.

The panelists:

Maha Ibrahim, General Partner, Canaan Partners
Nick Lawler, Managing Director, Maverick Capital
Rick Thompson, Co-founder, Playdom, and Investor
Tim Chang, Principal, Norwest Venture Partners
Atul Bagga, VP Equity Research, ThinkEquity (Moderator)

Bagga: Rick, you’ve been working in this space for years, can you share any more about your perspective today?

Thompson: Two years ago if we were here talking about 40% penetration rates, I would have been forced to sober up. Today, it’s also remarkable that DAU traffic has been flat for the last 6 months. The basic reason is that Facebook has severly dialed back its virals. I’m impressed that we’ve been able to hold our own.

Viral has taken a back seat. People are taking more time to develop game mechanics, and building original games. This paradigm shift takes time for us to get our heads around, and to adapt to. I think this will take several months and we’ll be back to growth.

Long-term, my guess is that 90% of users will be in social gaming.

Bagga: Where will the growth come from?

Thompson: Facebook will double. ARPU will double. The focus will be on compelling, engaging user experience.

Bagga: Virality is going down. How do new companies compete?

Ibrahim: This is a really big challenge. It will be a lot harder for new entrants. Even with non-gaming developers with big audiences, there’s an almost inevitable shift to social gaming. Having users is a huge barrier to entry. But I also think it’s inevitable that Facebook will return to a more viral state; they’ll eventually realize that they need to expand.

Chang: Everybody’s for sale right now. Do you raise money or flip to Zynga? There are a lot of merits to getting acquired now. The three legs of the stool have been virality, cross-promotion and advertising. The virality leg has been cut out.

Thompson: I agree with tim that the stool has been unbalanced. But I think strictly looking at the Facebook platform, they have other levers. This ties into my investment thesis for creatives launching new studios. I think it will be made more friendly. Making the platform less transparent would help, because otherwise you’re a target as soon as you start growing. I could see Facebook coming up with custom ad programs for innovative new apps — a little runway, that would also put money in Facebook’s pockets. I think there’s a host of things that Facebook could do, just as virality has changed the game.

The game is not over for the indies, because they’re fundamentally also in fb’s best interests.

Ibrahim: I agree about Facebook, but not about independent developers. Right now, it’s not a great environment to be an independent developer growing apps. But there are also some opportunities for a large audience, like internationalization, that are untapped by even the big guys. If you’re in Turkey or Korea or other large social markets or gaming markets, the opportunities are still good for small developers. Others are developing social apps in contenxt of mobile or console — inevitably consoles are going away, but they have huge market share. If you could make a console game more social, maybe dumb down, there’d be a big licensing cost but still an opportunity.

Bagga: We’re seeing developers who are big off of Facebook getting more serious about Facebook. In this environment, how do you evaluate a new business and company?

Ibrahim: So much of other games — like most casual games — is about the title franchise. Those gamers don’t associate the title with those companies. They think about it being unique and intriguing. As those copmanies move to social, hopefully they’ll be able to attract that audience to Facebook, from converting users from sometimes non-paying to paying, some model like that. But fact that it’s a popcap game won’t hold a lot of weight.

Lawler: Tencent’s investment in DST was big news. Expect Chinese and Korean developers to have a much bigger influence in the US. In a lot of ways, they invented the virtual goods model. The business is big in china and grew 40%. They have large scale gaming operations, money, and they have big markets. They look at the situation and they think they still have competitive advantages. They all have large cash balances, and very high growth expectations, especially the public companies. Investors expect some of them to grow 50% every year. Eventually they’ll start looking at markets like the US for this future growth. I think they have lots of expertise and I would be surprised if they didn’t take a more active role over the next eyar or two.

Bagga: On the one end you have games like World of Warcraft that have relatively few users but monetize each user well, and on the other end you have social games that have lots of users but monetize relatively few of them. Is there somewhere in the middle?

Lawler: I think they’ll probably do both. Leading japan company DeNA has opened up its mobile platform to third parties, they also have their own games, and they’ve taken their own games to Mixi and elsewhere, where they’re now monetizing at very high levels, doing $30 million in revenue a month. That’s both on their own network and on third party networks, with ARPUs that would rival any US game company. Then you have some chinese companies doing interesting things with the business model. They started with subscriptions but they’ve moved to primarily item-based VG — and now they have hybrid models. A company like Tencent has a virtual item model but it’s selling subscriptions where you get some set usage for particular items. You’re creating a hybrid which presumably has lower churn than strict item based models.

Chang: Asian games have been based on downloads. The US has pioneered Flash and browser-based play. Now when Asian game companies realize the power of social, you’ll see them take off with browser games — games with high production value, that are free.

Ibrahim: Many companies have strategies to move off Facebook. They don’t want to be beholden to whatever tariff is coming down road, benefits of the tariff aside. You also have the asian companies looking at getting in, even as social gaming companies are looking at moving off. It’s a delicate dance that all of these companies are going to need to do when they converse with many of the Asian acquirers that are coming.

Lawler: Is there room for independents? Until churn rates come down, there’s still room for indies. Any time you ahhaveve a substantial change to platform, there will be disruptive opportunities. You can look to video gaming for examples of that. Any time a new console has launched you had large new franchises getting created built on original game play.

Bagga: Who will look at acquisitions?

Chang: The publishers are companies like Zynga, Playdom, CrowdStar, and Ngmoco on the mobile side. EA has already bought Playfish.

There’s Ubisoft, THQ and other traditional game companies looking. All the media companies have mandates out to their bankers — CBS, Disney, Viacom [He goes on to list basically all big US media companies].

On the Asian side, they’re all aggressive. In china there’s Perfect World, Giant, Tencent, and others. Japan has companies like DeNA and Softbank. And there’s the big Korean game companies.

There’s also the new war between Apple, Google and Facebook, and maybe Yahoo if they get their act together.

Bagga: How do you value these companies?

Ibrahim: Chinese companies have money and they’re doing the valuing. There are few comparables — so high. Venture investors always care about top line revenue growth. If it’s showing a nice ramp, especially with social network, that helps — there’s also the hype cycle. We’re at the top of it. We’ll see very, very attractive valuations for companies.

Chang: Investors have normally looked at DAU base, revenue and earnings. It’s nice to do P/E. But not all DAU are created equal. Some monetize much better. China games have massive player bases but the ARPUs are infinitesimally small. Japan has a small market and very high ARPUs. So Chinese developers having been going to Japan, localizing flash games at much higher ARPU rates.

Bagga: What sort of room is there for social gaming monetization growth?

Ibrahim: When you look at the Chinese and Korean models, games are much more engaging. The k-factor might be lower, but engagement will be higher. Naturally in more affluent countries, this will lead to higher ARPUs at the end of the day. The trend is away from highly viral high-churn games.

Chang: Some of these games in Asia can monetize up to 10% of users, which is especially strong if you can get some part of that as a subscription. If Facebook is 1% to 3% of the total, it’s possible you can still get up to 10%. If Facebook has half the world’s internet population on it and half are in games, that could mean up to 3 to 4 times revenue growth.

Bagga: What about other platforms, like the iPhone OS 4?

Thompson: For the last few years I’ve viewed mobile as a secondary opportunity, as a way to reengage social gamers. With OS 4, I’m totally coming around and joining mobile camp. Apple has shown they really get it and want to play in social gaming with the new Game Center, invites and notifications. Put that on top of a healthy social graph — phone contacts. And if Apple does, then Android will. I had my iPad, I love it, I have games Ican play on the road, and in a way I can’t play on Facebook. I’m being won over. I appreaciate they have another platform working to earn our business. I’m thinking if not next year then the year following, mobile will be like what web-based social games are now.

Chang: The iPhone app started off with no virality. So developers came up with their own ways of cross promotion and incentivized game play. Now, Apple is adding in virality while Facebook is taking it away. I wonder if we’ll developer-driven social platforms come back on Facebook?

Ibrahim: Mobile has been bad because of the carriers. As carriers invest heavily in their networks, there will be huge advancements on infrastructure. Also in smartphones and battery life. This will enable very usable mobile games.

Bagga: Is this good for social gaming?

Chang: I think it will be seamless. Mobile and social have converged in Japan. HTML5 should run native mobile and online social games.

Audience question: What are the requirements for independent developers who can make it? Lots of DAU, a capital reservoir?

Ibrahim: I think the window will open again, Facebook has every reason to. But for the time it’s been closing, and Facebook has had many reasons for that. One of my portfolio companies amassed 30 million users through other apps and now it’s doing social games. They can pump these social games into that installed fan base. It’s hard to start from scratch. It feels like starting a destination site. Once you get to some level of scale and originality, then a company like Zynga wil give you an offer, etc.

Farmville requires much more DAU to monetize than others. But it’s about a lot more than DAUs — that class will change over time.

Chang: Many of us are talking about the gamification of life, of viral mechaincs, things like that. Areas like health and wellness… lumos labs… Enterprise is ripe for game. You can imagine a customer service center, using a FarmVille-style system to have employees “harvesting” calls, like FarmVille. That could make the job 20% more enjoyable and reduce employee churn.

Audience question: What do developers need? Where are there still opportunities?

Thompson: Everyone stumbles on scaling software and apps. I’m sure there’s a fit there.

Ibrahim: My cause celebre is payments. People who want to pay but can’t, who don’t have a credit card or whatever. That’s a huge area of focus for larger game companies. Most take it in house. They realize that’s an area they can innovate on. It’s not that hard. A lot of offer companies will get commoditized. But when you think about opening new markets, that payment thing sticks out like a sore thumb.

We had a strong international showing today at our Inside Social Apps 2010 conference, and this included leading developers coming out of China. As Facebook has grown around the world, social games on its platform have also spread. The example of their success has in turn inspired other social networks to open up their platforms to developers, notably happening on Mixi in Japan and RenRen in China.

We examined how developers are building businesses around the world in the “Thinking Globally: How to Monetize International Audiences” panel.

Here’s who was on it:
Rex Ng, CEO, 6 waves
Season Xu, Co-founder and COO, Five Minutes
Patrick Liu, Rekoo
Ron Hirson, Co-founder and SVP Product, Boku
Benjamin Joffe, Founder, +8* (Moderator)

And here are our highlights.

> Continue reading on Inside Facebook.

The mobile panel at our Inside Social Apps conference today was confident: mobile is the right bet. These are companies that, in some cases, had a choice of developing Facebook games or going to the iPhone. Today, they’re much smaller than a company like Zynga or Playfish — but growing quickly.

Here’s the panelist list:

Jason Oberfest, VP Social, ngmoco
Keith Lee, CEO, Booyah
Doug Bewsher, CMO, mig33
Shervin Pishevar, Chairman, SGN
Eric Goldberg, Managing Director, Crossover Technologies (Moderator)

Despite the high level of agreement across the panel that mobile will blossom very soon, there was some disagreement over what it will look like.

Bewsher thinks that there will be many platforms, just as there are in his overseas market. To Pishevar, the market will soon divide into different smartphone camps like iPhone and Android — replaying the Mac and PC split from the 1990s. And the iPhone remains the enabler — Apple’s new Game Center is “the fuel that we’ll all be able to grow on,” he said. “We couldn’t do it until we had all the pieces.”

The last part of the panel went to audience questions, during which several independent developers got up to ask how to advance in their market. The answer: create promotional materials and buzz for your game ahead of time, just like a traditional game. And Pishevar welcomed other companies to contact SGN or Ngmoco for cross-promotion.

Two pieces of advice were more specific to the iPhone. The first is that hitting the charts is critical. An app has to reach the top 50 to succeed at all, and inclusion in the top 25 is the cutoff for really getting traction. Once in that upper echelon, users will tend to flood into an app. And Oberfest, asked whether the social component in iPhone games is really needed, responded that it’s more than helpful: making games social is “critical”.

Our keynote speaker at the Inside Social Apps conference today was Mark Pincus, chief executive and co-founder of Zynga. Pincus wanted to talk about how to grow the industry — his theme throughout the talk centered on cooperation between developers, with the aim of quickly creating a much larger market for social games.

Pincus’s talk was both different from and complementary to the presentation given earlier in the day by Sebastien de Halleux, who co-founded Playfish. Where Halleux seemed skeptical that independent developers will be able to survive in social gaming, Pincus is more optimistic, and much of his advice seemed to relate to newer developers.

Note: You can check out tweets from this and other conference sessions via the #isa2010 hashtag on Twitter.

There were three key requirements for a future “app economy” that makes more money for developers identified by Pincus:

• Persistent navigation: a consumer experience that includes an app bar accessible anywhere on the web. Games could be the primary driver and beneficiary of navigation.
• User communication channels: developers need to help establish new channels like chat, and perhaps even create their own, although the latter may not benefit the user.
• Universal social feeds: streamed information that services and users edit for their own needs — meaning you can remove FarmVille from your feed.

To an extent, all three of those factors are outside of the control of individual developers. Facebook itself should be working on each of these ideas — which it has, to an extent, with its various user feed updates and its new Like button, which Pincus called “the most innovative social mechanic created in the last couple of years.” But there’s much more work for Facebook to do.

Pincus also picked up on a theme that we heard earlier in the day from Vish Makhijani, his company’s chief operating officer. Makhijani said that users have stuck around games like FarmVille for significant periods of time, despite Zynga not yet nailing the perfect social formula. According to Pincus, there’s a positive correlation between retention and the number of friends a user has on a game. In short, it’s not the game that people are interested in after a while — it’s their friends.

The goal, for Pincus, is building a game that, unlike a traditional console game or an MMO like World of Warcraft, the players never leave. “I don’t know if we’ll get there,” he said, “or if that’s a single game or a network of games. We’re all going to have to figure that out.”

From there, Pincus dove into his advice to other developers. He had five ideas for building a strong franchise:

• A hit game is one that friends will share with each other and use to express one another.
• Bold beats make games endure: figure out a way to introduce a feature that excites and ignites your users, that you can do in less than a month. Two examples from Zynga: the Moscow city pack in Mafia Wars, which let them test new ideas; and in FarmVille, functional buildings with mini-games around them.
• Metrics leading to new feedback loops: “A successful bold beat will permanently change your engagement and retention. An unsuccessful one will do it temporarily. We don’t want to be on a treadmill where we’re not adding a new dimension,” Pincus said. And a game can never be static: “It’s equally important that we kill features.”
• Don’t lose the sense of delight: In other words, keep the artistic, creative side in games — an idea Pincus has emphasized more in his speeches following criticism of Zynga’s focus on analytics and feedback loops.
• Innovate on social ROI: Pincus thinks social virtual goods are something people should “copy more.” Sweet Seeds for Haiti brought 400,000 new buyers and raised $3 million.

To reach a new level of growth, the industry must work together to create the apps economy and a social gaming experience — one with enough consistency between products that developers can put their focus into working on games. Cooperation is important to make players feel like their efforts are useful — Pincus suggested that a FarmVille player should be able to turn their grapes into wine that’s served on Restaurant City, an EA title.

Pincus ended with a piece of advice to an independent developer who asked about Facebook clamping down on user policies: “All of us start as small app developers, and it’s always a tough competitive environment,” he said. “I don’t believe when people say oh, it was easy a month or three months away — when we started, we saw Slide and RockYou, the wall and drink apps, and we scratched our heads and said, oh my god, how are we going to get games to spread virally? They just aren’t viral. Now people say, oh, it’s easy because games are viral, but how do you spread a travel app? If you’re starting from zero today, you have a terrific opportunity and channels to drive great engagement where there’s a fundamental reason why your game is that much more fun with people’s actual friends there. If you build the next Settlers of Catan, I don’t think it matters if you have easy channels or not.

Leaders from payments companies active on Facebook shared their sometimes-conflicting views on how they see payments evolving, in a spirited panel today at our Inside Social Apps 2010 conference. Here are the highlights.

The single biggest question was how Facebook itself plans to grow its virtual currency, Credits. The company has been testing out Credits with a wide range of third parties since last year, following up on its initial tests running Credits in its Gift Shop.

Note: You can check out tweets from this and other conference sessions via the #isa2010 hashtag on Twitter.

> Continue reading on Inside Facebook.

Our second gaming-related talk at Inside Social Apps was given by Sebastien de Halleux the co-founder and COO of Playfish, which was acquired for $400 million last year by EA. Halleux, who also previously a director at Glu Mobile, wanted to give a retrospective of gaming, with a view to predicting the future.

The take-home message: social games will very quickly balloon out into gaming as a whole, so that the industry is expanded for everyone. But at the same time, the idea of “social games” will quickly disappear. “Nobody ever talked about social games outside this room, so this was a short-lived phenomenon,” Halleux said.

Note: You can check out tweets from this and other conference sessions via the #isa2010 hashtag on Twitter.

Halleux, of course, has a very different view from most of our other panelists. While social gaming companies have hired a number of executives away from Electronic Arts, Halleux went the other direction, joining the gaming giant after it bought Playfish. So when he says that traditional games will take on a social component that rivals what’s on Facebook, he may be talking about something that’s already happening inside EA.

The merger between traditional and social gaming is creating what Halleux calls the Moore’s Law of gaming. “Access barriers are coming down at a fantastic rate,” he says. “This isn’t about destroying value, it’s about expanding the game industry beyond $20 billion. You lower the barriers, increase the audience, and build a bigger industry.”

Right now, social gaming makes up about $1 billion of that US total, whereas some individual franchises in the traditional world, like Grand Theft Auto, make that much by themselves. Halleux put up a slide showing his calculation that a social game with 100 to 200 million monthly active users (MAU) and 40 to 80 cents of average revenue per user (ARPU) could make a billion. FarmVille, for reference, is at 81 million MAU.

But the changes won’t be good for everyone — larger players are already advantaged, and independent developers will be increasingly marginalized. That’s partially because, as we covered in the first panel, the indies can’t invest as much in advertising or engineering as their larger competitors. The other side of the equation is brands.

In 2008, according to Halleux, the biggest game on a mobile platform was Koi Pond, which was independently developed and relatively shallow. In 2009, the top mobile game had become a major franchise: the Sims 3, by EA. And in the first month of 2010, while eight of the top 10 iPhone apps were games, seven of those eight were major pre-existing brands.

People naturally gravitate to brands, but there may be a feeling among social game developers that there’s more of an open field in their industry. To date that has been true, but Halleux clearly thinks that brand recognition and loyalty will quickly take over on Facebook, just as it has in the broader gaming industry. For a young social gaming company hoping to become the next Zynga, that could be bad news.

Halleux finished off his talk by recapping his four specific predictions for the future:

• In 24 months, almost all Facebook games will be recognizable brands
• There will be much more consolidation in the space as smaller players have a tougher time
• We’ll stop talking about social games — instead, all games will gain a social component
• Innovation and growth will take off in a way that nobody can predict

That last point is the ray of hope for both indies and larger gaming companies. The traditional gaming industry plays to a well-known crowd of gamers. But with the explosion of interest in social gaming, the industry has become a hundred times larger, and thus open to new things. “In an industry that’s very formulaic, we have a wide open green field in front of us,” said Halleux.

Our Inside Social Apps 2010 conference kicked off this morning with a panel of top social gaming executives: Peter Relan, chairman of CrowdStar; Keith Rabois, executive VP at Slide; Vish Makhijani, COO of Zynga; Kavin Stewart, VP of product at LOLapps; and John Pleasants, the CEO of Playdom.

Our own Eric Eldon moderated, and got some interesting answers from the panelists about monetization, international markets, the next big hit and more. Full edited interview notes are below; we’ll start off here with a recap of the high points.

Note: You can check out tweets from this and other conference sessions via the #isa2010 hashtag on Twitter.

Most of the panelists agreed that 2010 will bring better social features and potentially more complexity to social games, along with more options for asynchronous interaction between players. Right now, players don’t directly interact and have little effect on each other. Synchronous interaction is also a possibility, but not all of the panelists agreed that it should be a feature in social games.

Independent developers have a tougher future ahead. In 2009 and earlier, many of the top developers were small independents who shot to the top with viral hits. Now that Facebook has changed its policies to discourage the most viral features, the independents will need to find financing to pay for advertising and other marketing, as well as the engineering ability for challenges like making more complex platforms scale.

There is, however, a large undeveloped market remaining: the international market. None of the panelists felt like they had really mastered the international market yet, and they even had different visions of how they should profit from international users — Keith Rabois of Slide, for example, said that his company is most interested in seeing users in developing countries create virtual goods that can be sold to users in developed countries.

Another potential way for an independent to break in — or for an established company to reach a new level of growth — is the possibility of a “network effect” through Facebook Connect, according to Peter Relan of CrowdStar. By using Connect, social game companies could potentially create a huge community outside Facebook, that is nevertheless enabled by the social network. This is already starting to happen with Zynga’s FarmVille.com, which now has millions of monthly active users off of Facebook.

Finally, there was an interesting question from Dean Takahashi of Venturebeat about whether Zynga could be worth $5 billion, as SecondShares.com recently speculated. The answer: yes, it very much could be. The panelists are all expecting huge growth over the coming year, making social gaming even larger than the existing $1 billion market we’ve estimated.

Here are the full edited panel notes:

ISG: When FB took away 3rd party notifications, what did you do?

Vish: We focused more on just delivering content. Changes may result in a dip in traffic, but people come back one way or another. We’ve found a relatively high replacement effect.

ISG: What’s your approach now to the market?

John: We’ve been growing a lot, so we’re trying to just catch up with ourselves — we have 9 studios now with their own mandates and budgets, and in theory they run almost like independent companies. Then there’s an intelligence center that focuses on monetization, analytics and so forth. Our smallest studio is around 10 people, the biggest around 45.

Peter: We’re differently organized. I’m not from the game industry, so I’d never heard of a studio before. We’re centralized, with one studio that builds all our games.

ISG: What are the big trends in 2010? So far we’ve seen treasure hunting, city building games — what’s next?

John: I think you’ll see more mash-ups between different mechanics out there. And all of us in the industry need to continue to make our games increasingly social. Last year was the year that virality was most important; now Facebook’s platform changes are forcing a positive change. We’re only in the first or second inning of becoming social. In our newest game, Social City, the social stuff is limited, with neighbor dating being the mainstay. But when we look at the platform, we think there’s a lot more we can do. Intellectual property and and multi-player will also become more important.

Kavin: I think the question about how to become social is really important. What we’d like to think is how the actions in the games influence what’s happening. Right now you can go help your neighbors farm, but it doesn’t seem to have a significant impact. So instead suppose that you have various characters; you could go to your friend’s environment and piss off one of his characters, then when he logs on he’ll see a message about that. It would be having the environments that you’re in really interact with each other in a way that generates conversation.

Vish: We haven’t nailed it yet, but we’re getting incrementally better. We’ve found from our own research that different things appeal to different folks; some are more social, some are looking for something deeper. But they’re also sticking around and doing things with their friends, despite the fact that we haven’t yet nailed the right piece of software.

ISG: Are social games getting more complex in general?

Vish: We’re at almost 800 people now. Our games have hit the mass market, so it’s tough to tune to just one thing. So we have social threads for how to develop, as well as deeper ones. Being that 5 minute experience in your browser is something we have to stay in touch with.

Peter: There’s going to be a bit of coverage of all the genres. I think this year you’ll see continuation of the genres. What’s difficult to predict is the next big hit, a huge cultural shift toward an aspirational new game. Nobody knows which one that will be, and it’s out there for whoever gets it.

ISG: Facebook Credits: What are the pros and cons?

Kavin: I think the best thing about credits is that for the first time it really feels like our interests are aligned with Facebook’s. The only disadvantage is that it’s still early, and they’re still figuring things out.

Peter: The big picture is that 98% of your users are non-paying. What Credits focuses on are those paying users. In that category, you have the coverage. Among the non-paying users, there are a lot of people without a credit card, so you’ll see more people paying with offers.

ISG: Right now credit cards are the biggest revenue stream, followed by offers and then advertising. Will it stay that way?

Keith: There’s a theoretical day when everyone will have a credit card linked to their account, but that’s years away. Facebook takes that 5-10 year view, while we’re in the month or quarter. So at the moment Credits is not an ideal system. There’s a big gap between the reality and the vision.

Vish: I think you’ll be surprised how fast things move. We have a gift card, for example. Aside from the oddness of seeing our brand in these stores, we’ve been surprised by how fast it has been picked up. Our games as an industry have an ability to tap into that desire to engage.

ISG: Are you finding ways to monetize around the world?

John: We do make money from international countries, but I think it’s a big opportunity. It’s going to be more about localization of games. We just put one of our first games in China, Tiki Resort, and I think it’s doing really well in Hong Kong and Taiwan. You have to have the local language and customization, but we haven’t been able to focus on it enough.

Keith: We look at the rest of the world and say, there’s a lot of artistic content in Indonesia and other countries, where selling $10,000 in virtual goods can make the difference between a family that’s extremely successful and one that’s starving. So we want people to load content into our product and sell it to people in the US or the UK. We don’t want to take money from the international users, we want them to profit.

Peter: The hardest market to crack is China, because it’s very local. The Chinese social networks are interesting, but the Western companies haven’t cracked them.

ISG: Are there still good opportunities for independent developers on Facebook’s platform?

Kavin: The thing you’ll run into is the distribution barrier, if you don’t have enough money to buy ads.

John: Innovation can come from anywhere. But the reality is, if you go back a year and look at the top 25, there were twice as many independents. If you don’t have unbelievable innovation, you need enough muscle to get out there. That means money for ads, a technical system that can scale, understanding how the system is changing, and cross-promotion capability.

Keith: It’s also becoming far more difficult to grow organically. Facebook has made incentivized growth harder. The sharing of content and invitation of friends has to be driven by the voluntary action of the users, and most of the independents pioneered virality. But Facebook has quite a large enforcement staff at this point.

ISG: Where else are you looking besides Facebook?

Vish: We’ve done some experimentation around our experience on FarmVille.com. Facebook is still demonstrating that it has this massive audience, that’s still growing. We under-index Facebook’s growth internationally. [Ed: Vish means that most of his users are still in the US, while Facebook is growing quickly overseas.]

Keith: We invested in a destination site — basically the most vibrant users go to it. On an average day we have 300,000 to 400,000 forum posts per day, completely off Facebook and MySpace. We still invest in MySpace — about half our revenue comes from there, and both our key applications are cross-platform. But even if you look at just the growth, not the base of Facebook, it’s pretty hard to find other companies with that level of traffic.

Peter: I think the interesting X factor is Facebook Connect. There’s the potential of a network effect that occurs off Facebook, but around Facebook. That would be quite interesting for the indies. If you can find Facebook Connect meets something else with a network effect, that would be an open distribution play.
Keith: In the years since we started, Facebook has emerged as, at worse, the second most company in the world [after Google]. It’s really in its own league.

Audience question: How do you see multi-player being integrated? Will there be synchronous play?

Peter: I’m slightly more optimistic. There’s a place that’s much different from hardcore multi-player. I think in the next 12 months something will emerge there.

John: I tend to agree with Peter. I think you may see it as an extension — it won’t be black and white. More like an option to play synchronously.

Audience: Zynga has been estimated at $5 billion. is that realistic?

Vish: We don’t comment on that.

Peter: Maybe I should comment then (laughter). Here’s the difference between casual and hardcore markets: by definition, hardcore is limited to tends of millions of users, WoW is 10-15 million. The scale effects of casual gaming are 10x if not more over time. So I think the Chinese companies that have scale effect in the social RPG markets are valued at several billion dollars each. You start to see that if you have a broad market, there is multi-billion dollar value. I think Activision bought Blizzard [WoW's publisher] in a $1.5 billion dollar sale. It’s different because WoW has revenue but no growth. Where do you go from there? With casual social gaming it’s unlimited. My guess is that it’s not inaccurate.

Audience: What kind of forum do you have with Facebook, as large developers? Do they respond in any way?

Kavin: For our company, I’d say no.

Keith: They solicit feedback.

Peter: They’re bigger than all of us at some level. Well, for Vish and Zynga, maybe not.

Keith: They’ve certainly enhanced the level of dialogue in the last year or two. It’s not clear that even if all five of us agreed something was a disaster they’d change it. If you’re in the way of something that’s Facebook’s macro-vision, it doesn’t matter who you are. But in other things we have a chance to alter policy.

Peter: Two thirds of the pageviews on Facebook today are attributed to games. I think if all of us were not into something, it wouldn’t fly.