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.

Casual gaming leader Big Fish Games unveiled a new Facebook game earlier today called Treasure Quest, that is capitalizing on a type of game design that we’ve seen more often lately: adding a new layer of gaming on top of the main game.

This meta-game could include a portal, an avatar, a universal currency and other features that can connect any game with other games. It lets game developers build persistent features for users to pay attention to, and invest in, rather than just having them play a single game and then be done.

Established social gaming companies and newer entrants alike have been testing out these cross-game tie-ins. But it’s not yet clear if the concept is just a neat idea or, or more a key new way to attract and retain users.

There are a variety of ways to approach adding a gaming layer on top of a single game. Treasure Quest is special for its attention to the mini-games. It’s a portal to a variety of different high-quality mini-games, as we reviewed in detail earlier today, designed around a “treasure quest” concept.

Although the game just launched and is in early beta, it is focusing more on the mini games rather than trying to be something grand. For now, each player has an avatar that stays with them on the app regardless of what mini-game they’re in.

You can unlock and buy new clothing and other gear for your avatar as you earn it. You need to play games to build your avatar. But you can only get the virtual currency required for clothes and gear, “Gold,” from playing the games, or playing the “Gold Spin” slot machine, which can give you more gold each time you complete a mini-game.) You can also buy the Gold directly using your credit card or PayPal, or pay by mobile account with Zong, or submit a coupon code.) Although the avatars are decorative in the early stages, later ones include power-up items that can be used in the mini-games.

Treasure Quest also includes options to share your high score from games with friends, and invite them to try out the app. The point of the extra layer is to make the whole experience more social, and help the developer make money.

The relative lack of focus on the meta game is made up for by the fact that each min-game “is about as in-depth as most Facebook games are in and of themselves,” as we noted earlier. Basically, Big Fish is pointing its firepower at building the best casual-style social games they can, as vice president of social games Will O’Brien explained to us when we caught up with him last week. This is what the company has been traditionally good at. Then, it plans to expand the variety of social features within each mini-game, and build out the additional layer as it sees how the app does.

The point, for now, is that a user can find and love even just one of the mini-games, and come back every day for that, then get hooked on others as they play around more. Over time, they might decide to buy some of the currency to get ahead a little faster. Given that many of the mini-games are reminiscent of Big Fish titles, expect it to expand to include all sorts of additional mini-games in the future. And expect the meta layer to become much more meaningful

The Rise of Games within Games on Facebook

Treasure Quest may have some of the best mini-games in place today, but there are a range of other companies that have been doing the same thing in the past months.

Perhaps the most obvious one is Treasure Madness, a loosely similar app. That game is very focused on letting you search for treasure as the main game, but it also has mini-games within it, based on simple casual game standards. Note that while Zynga recently launched its own game about treasure hunting, it opted to instead adopt the farming mechanic as a complementary part of the game — like most other Zynga games we can think of, mini-games are not present. However, the simple mini-games in Treasure Madness were overshadowed by the meta game of digging up earth looking for treasure.

MindJolt Games, which was recently bought by a group led by former MySpace executives, established itself with an even simpler take on the concept. It has been syndicating hundreds of casual gaming titles straight into a single Facebook app, with none of the customization that Big Fish has done. There are currently no avatars, no virtual currencies, etc. — just a single app. However, from the few hints we’ve gathered about the new management’s plans for the app, we expect it to serve as much more of a platform in the future. It has already said it is working on new ways for independent developers to make money through it, for example.

An even closer example to what Big Fish is doing is the new NanoVerse concept from Digital Chocolate. As we covered last month when it launched, NanoVerse isn’t just an avatar and a virtual currency but an entire cast of characters. Users can buy characters in packs of virtual cards, reminiscent of Magic: The Gathering, and receive different powers for each character in specific NanoVerse titles. Many of the game styles and characters are actually modeled on existing Digital Chocolate games from over the years on the other platforms, similar to how Big Fish has derived its mini-games from its previous hits. One of the main differences between it and Big Fish is that the latter company has a much simpler conceptualization of characters in the meta layer — the only ones are users’ avatars.

We should note that Big Fish already has a couple titles running on Facebook, including Faunasphere and My Tribe. Both of these games are currently unconnected to Treasure Quest. Given Big Fish’s ambitions here, though, it’s easy to imagine the company federating users Treasure Quest identities, letting them take their well-developed avatars and virtual currency earnings to other games. Digital Chocolate is also going in this direction, having just launched somewhat similar cross-game functionality with its first two NanoVerse-themed games, NanoStar Castles and NanoStar Siege.

It’s not just newer competitors in social gaming who are trying these concepts out. While most developers who have grown up with social games have kept their apps very straightforward, we’ve been seeing more examples of tie-ins across social games from large developers. Zynga’s FarmVille and Mafia Wars share a Hot Rod Tractor, for example, a virtual good that has functionality in both games even though they have very different themes. Playfish, Zynga and other developers have also long experimented with letting users buy universal currency for use across their respective games.

Conclusion: Some Sort of Future, But a Big One?

However, no established social game developer has given more than passing attention to adding an additional layer on to their games, to date. It’s not clear why. Are they missing something that newer competitors are seeing in the market? Or maybe they are worried about the complications of adding another layer on top of their games?

Facebook itself is a sort of meta game — or rather, the real-life connections on the service have certain game-like qualities. People don’t think about it as competition, but there are elements that are game-like, such as comparing who has more friends or who can post the funniest or most interesting link or status update, or just uploading envy-inducing photos. There are cooperative aspects, like people working together to spread the word about a Page or a group they all favor, or getting friends who aren’t on Facebook to join. With all that activity happening on Facebook itself, social game developers have opted to provide the simplest additional types of games that they can; they can’t add too many on top of the real one.

And yet, the meta titles that have been out so far suggest there is something to the concept. MindJolt’s traffic reached at 21.5 million monthly active users and 3.65 million users in the last month, according to our AppData service (although it is since seeing more of a fall). Treasure Madness has held pretty steady at 2.5 million MAU, although DAU has dipped to 618,000 recently — the impact of Zynga’s competition? Anyway, the concept of treasure hunting and mini-games does seem to have worked well enough in those cases.

Maybe it’s just that the biggest social game developers don’t need to bother with the layer concept at this point. Maybe it’s better suite to smaller companies with existing portfolios? We’ll be covering as the efforts of these latest experiments progress.

Playdom has picked up its latest high-profile hire: David Sobeski, previously a senior vice president at Yahoo, where he ran the Open Strategy and Data platform, and Microsoft, where he worked on Vista, Exchange, msn.com and Internet Explorer. He’ll be the company’s new chief technology officer.

As with several other social gaming hires that we’ve seen, Sobeski doesn’t have much (if any) experience working directly on games, at least on his resume — though the press release is careful to note that he is at least a hobbyist. Playdom likely has other concerns besides game design, though. The company’s first big hit on Facebook, Social City, ran into a number of technical problems during its growth, leading quite a few players to complain about the game experience.

Social City still ended up with over 12 million players, making it Playdom’s largest game on Facebook, but the company will no doubt want to do better next time. Sobeski’s experience working on major platforms and product launches will help Playdom’s games scale up more smoothly in the future.

Last summer, Playdom lured its current CEO, John Pleasants, away from Electronic Arts, and in December it hired a top brokerage analyst away from Thomas Wiesel Partners to serve as its new CFO.  More recently, it also began making more noise around its efforts on Facebook. Besides Social City’s launch, Playdom also recently bought the startups Offbeat Creations and Three Melons, and invested in MetroGames.

All of these moves could be paving the way for an IPO for Playdom, as we first suggested last year. Sobeski’s hire, to indulge in a little more speculation, can also be seen through this lens — having a C-suite filled with former executives of large companies certainly helps convince investors of a young company’s viability. Of course, that’s just one possibility — we’ve also been hearing that News Corp., the owner of Fox (and MySpace), may be interested in acquiring Playdom.

Big Fish Games is one of the largest casual game developers on the web, and today it’s launching an ambitious effort to get big on Facebook with an app called Treasure Quest.

Despite what the title might suggest, this game has little to do with digging up buried treasure, like what other treasure-hunting Facebook games focus on. The app is actually a compilation of eight very well-designed, fun, and thought-provoking games. In fact, each is about as in-depth as most Facebook games are in and of themselves. Some mini-titles may be familiar to Big Fish fans, as the company has borrowed features and elements from past titles. Nevertheless, each still comes with a unique sort of brain teasing challenge and all play into the greater theme of unlocking treasure chests, earning gold, and leveling up.

Essentially, playing each game will get players in-game currency and experience. The idea is to exploit the prospect of virtual spaces, or in this case, a virtual avatar. As players play, they unlock new stores in which they can purchase better and fancier clothing. Of course, this is all purely aesthetic (except, perhaps the “Treasure Hunter Gear” section that has yet to be activated), and seems to be merely a visual way to display one’s prowess in the overall application.

This larger meta-game is Big Fish’s way of making the title social. You can invite friends, show off high scores, and other features, all the while building up your avatar. It can become more meaningful to you the more you play, which in turn gets you coming back, more interested in inviting friends, etc. The meta game means Big Fish has a framework for introducing more mini-games in Treasure Quest, as well as extending the currency and avatar out to other games it has or might launch on Facebook — although the company isn’t saying much about either at this point.

Here’s our initial review of the app. We’ll be following up with more analysis later today, including how the features of the app fit into into Big Fish’s larger plans.

The mini-games take a range of time to do, which means advancing through getting more gold can also take awhile. Some of the games can be played through in a single five-minute session while others can last up to 30 minutes or more. You also often don’t receive experience and currency until you finish the game. This is mitigated to some degree by random, daily, “Treasure Quests,” in which users are tasked with completing random criteria within the conclave of games.

There’s also a quick slots mini-game, called “Gold Spin” you can do after completion of each larger game, which also lets you get more Gold.

Frankly, slow or not, the avatar reward element feels more like an added bonus. The real beauty is in the eight games themselves, and frankly, most people will come to play for those more than the avatar or sharing accomplishments.

Since each game is quite strong in its own right, the full breakdown of Treasure Quest would be a bit lengthy without a bowl of popcorn and a couple sodas, so here’s our in-depth look at the first three. In addition to doing more analysis, we’ll be looking at the other games in a separate article:

The Daily Detective

Have you ever wanted to be one of those private detectives in those old black and white films? Well, that’s the premise of The Daily Detective game. Presented in an film noire fashion (complete with distinctive, detective-music), players are given a daily mystery to solve. Should they choose to accept it, they will be taken to an in-color scene, in which many come from another Big Fish title, Mystery Case Files: Prime Suspects, where they are tasked with the finding of clues.

This first part of the game is more or less a glorified game of Where’s Waldo? as players attempt to find specific pieces of evidence, listed in their notes, within the picture. Since the image is a garbled mess of clutter, it can prove most difficult; so Big Fish does toss a small bone with hints. These come in the form of blurry, black and white photographs. As they locate each item, another clue may be discovered next to, or around it.

This is where the game becomes a real brain teaser, as once you have all your clues, its time to solve the case. Truth be told, it’s actually pretty tough. Clues in hand, the game gives you the summary of the case and the goal. Here is an example from our first one:

Case Summary: A soap star who is a regular on “The Old and the Breathless” must buy a gift for Martha Steward.

Goal: The clues point to the perfect gift. Name it. (Yes, you must type the word in).

Clues: Ivory Chip, Hammer, Key, Musical Note, Steinway.

Upon completion of the case, players get the Gold Spin mini-game, some coin and experience for their troubles, as well as some points towards a detective’esque title. Furthermore, if users are looking for more mysteries to unravel, then they can use their gold in order to buy more puzzles for about 200 a pop.

L.O.B.E

The next game on the list is L.O.B.E. or “the Laboratory of Brain Enhancement.” In order to “finish” this game (meaning earn your Gold Spin), players must earn X amount of gold stars by completing a myriad of mini-games in a similar fashion to Who Has The Biggest Brain? Thankfully, the games are nothing like those found within the Playfish title. In fact, there are a lot more than the predecessor, and while they aren’t quite as visually appealing, they do tend to make the brain work.

Guided by robot that sounds oddly like Doctor Ludwing von Strangeduck from Duck Tales, users must solve a set of seven brain teasers. Each of these will test a different element of the mind, ranging from math, to logic, to memory, to visual acuity, to… well, you get the idea. Also, each time the games one moves on to a new game, they must first be “scrambled,” which generates a new set of random games to pick from.

As a quick example of just some of the mini-games within L.O.B.E., one includes placing letters within a grid to spell out every single word on a list. However, every letter must be used (think sudoku). Another game involves guiding a mouse to its hole, while picking up all the cheese, Lemmings style. And yet another is sort of like Wheel of Fortune, but you have to place the letters yourself to figure out the phrase. Oh, and each letter given to the player can only be used once.

Each mini-game comes with a maximum number of points the player can earn. This is determined by elements such as accuracy and speed. Moreover, as players play and score higher, they will slowly fill progress bars corresponding to unlocking higher difficulties of puzzles as well as ranks and titles within L.O.B.E. itself.

After all seven mini-games are completed, the player will be presented with another gambling mini-game in which they spend the stars they earned (one star earned for winning a normal difficulty puzzle, three for hard). The stars are used to open seven brains, each costing X amount of stars, and within them are an unknown number of points that range from 20 or less to over 2000.

Fairway Solitaire

The last game, for now, to take a look at is Fairway Solitaire, and so far, it’s a personal favorite. Perhaps it is because of simplicity, but the game is, at its core, like the mobile game Jewel Quest Solitaire. The objective is to play a round of “golf” in the form of solitaire.

Now, this isn’t like the solitaire you play when you’re bored at work. Players are granted a deck of cards, with one card turned face-up. At each “hole,” as it were, are other piles of cards, with on upturned card atop them. The idea is to take a card from these piles that is sequentially above or below the face-up card by your deck. If it is, then it is moved on top of the face-up, deck card.

Following basic solitaire rules, meaning the face down cards on the field do not turn over until the cards atop them are removed, players continue stacking cards sequentially until they have either all been removed, or they have turned over everything in their deck. Granted, the rules are a mouthful, but its actually quite simple, and there’s something about the visual and audio effects for each successful click (represented by a golf swing) that is strangely satisfying.

Each “hole” has a par set to it (and there are nine per course/level), that is represented by the number of cards you should have left that remain uncovered. This is how score is kept. However, it is modified by both streaks of card removal, complete removal of an entire pile, as well as a few elements of randomness.

This is represented by wild cards. Luckily, players do not have to use them, as they can have negative effects such as costing points, but can also have very positive ones. As an example, Fairway Solitaire has both water hazards and sand traps which are depicted by the back face of the cards. The former blocks off all cards to the right of it until all water cards are removed, and the sand trap ones cannot be removed until a card with a sand wedge card is turned over. Of course, if you’re feeling lucky, the wild cards could “evaporate” all the water… just as an example (yes, this can happen).

Additionally, other random cards include various golf clubs that are representative of a number value (i.e. a 9-Iron can be used as a 9-Card). What makes these useful, is that they can be played at any time, the user sees fit, and can be held on to for any hole on the course. Couple this with other random cards, events, and different card layouts on each course, and Fairway Solitaire quickly goes from deceptively simple to rather thought-provoking. Moreover, as players finish sets of course, they not only unlock new ranks and titles for Fairway, but new, and more challenging courses as well (they can also purchase courses with gold in the form of bonus packs).

Conclusion

As you can see by now, Treasure Quest has brought a significant level of both quality and quantity to Facebook. Of course, game portal apps like this are hardly uncommon. Then again, game portal apps in which all the games are extremely fun and well made… that’s a rarity. And ones that effectively tie together a metagame like this one does, are even more so.

Regardless, the tremendous quality of each game belies the overall social features. Yes, each game is a ton of fun, with a type of puzzler for just about everyone. Even the ones that have yet to be looked at include Bejeweled style puzzles, more slots, and daily riddles.  More than anything, though, the games themselves make the overarching catalyst that contains them feel arbitrary and tacked on. That isn’t to say that it is, but it simply cannot compete. Likely, they are just a means to enhance the viral reach into the player’s social graph, which is hardly negative (especially considering that the game never once spams users to invite friends). Nevertheless, it will be curious to see just what new social features will come in the future and whether or not they can hold a candle to the games they contain.