With an up-to-$750 million acquisition of Playdom by Disney, an up-to-$400 million acquisition of Playfish by Electronic Arts, the acquisition of Tapulous by Disney, and hundreds of millions of dollars in venture investments, virtual goods are impacting businesses across the media landscape. Virtual goods, and the companies that create them, may be bringing the largest disruption entertainment, communication, and e-commerce infrastructure businesses have seen in years.

Inside Network is proud to announce the release today of a new original research report by Justin Smith and Charles Hudson that presents a comprehensive examination of the size and future of the virtual goods market in the United States, entitled Inside Virtual Goods: The US Virtual Goods Market 2010 – 2011. This is Inside Network’s second annual edition of the US Virtual Good Market report. The big picture? The US virtual goods market will reach $2.1 billion overall in 2011.

Where will the virtual goods market go in 2011 and what are the biggest opportunities left unclaimed? How will existing players fare as Facebook continues to reshape the social gaming landscape, and larger and more sophisticated players enter the market? Inside Virtual Goods: The US Virtual Goods Market 2010 – 2011 provides deeper insight into monetization, development, and the key questions facing the space in 2011 than you’ll find anywhere else.

Get the Annual Membership Get Annual Membership (Includes Report + 3 Additional Quarterly Issues): $2,495 OR Buy Single Report: $995

About the Report

Inside Virtual Goods is a new report researched and created specifically for entrepreneurs, investors, and analysts interested in the growth of this exciting new category of online commerce that is fueling the growth of games-as-a-service businesses. During a research phase spanning the last few months, co-authors Justin Smith and Charles Hudson have spoken with dozens of executives and entrepreneurs from all parts of the ecosystem in order to form what we believe are the most detailed estimates, analyses, and predictions for 2010 and 2011.

We focused and organized the report around the following areas:

1. Social Networks, Applications, and Games - The explosion of the virtual goods market on social networks is one of the biggest stories of 2010. We delve deeply into the trends, stats, key players, opportunities, and challenges facing the space this year and next.
2. Casual MMOs and Virtual Worlds - Virtual worlds and casual MMOs continue to grow as a meaningful share of the virtual goods opportunity in the United States. Our study breaks down the key drivers for success in this segment, trends in monetization and engagement, and the prospects for the future.
3. MMOs and Free-to-Play Online Games – Developers in the MMO / MMORPG space have been among the earliest adopters of the free-to-play model. We explore why free-to-play MMOs are succeeding, revenue and user trends, and the key issues facing this space as we head into 2011.
4. Console Games – The console market is one of the most interesting new areas where microtransactions are beginning to establish a meaningful foothold in the market. Our study looks at the key opportunities and challenges facing this emerging space going into 2011.
5. Mobile Games – Mobile application developers that have been early adopters of the free-to-play model are now seeing significant growth in 2010. Our study breaks down the key opportunities and challenges facing this emerging space going into 2011.

Each section contains:

1. A brief history on the evolution and growth of this space in the US, including a description of key players.
2. Estimates on the size of the US virtual goods market in 2010 in that area.
3. A diagnosis of the key opportunities and issues facing the growth of that space, including our outlook and projections for 2011.

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

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

The annual membership, which includes the report and three additional quarterly updates, is USD $2,495. Alternatively, you can obtain just this report for USD $995.

The annual subscription brings you a total of four comprehensive reports comprising months of original research. Recent reports have covered:

1. The Future of Social Gaming. Social games make up over half of the US virtual goods market. This report provided detailed coverage of exactly how this industry has managed to thrive, who its most valuable players are, and deeper insight into monetization, development, and customer acquisition than you’ll find anywhere else..
2. The Spending and Usage Patterns of the Social Gaming Audience. Who are the millions of users whose time, money, and engagement have made social games into household names and their developers into technology industry celebrities? This report presented the only independent, original research into user profiles, behaviors, and attitudes toward social games and virtual goods.

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

Table of Contents

Get the Annual Membership

The annual membership, which includes the report and three additional quarterly updates, is USD $2,495. Alternatively, you can just download this report for USD $995.

Get Annual Membership (Includes Report + 3 Additional Quarterly Issues): $2,495

OR Buy Single Report: $995

List of Related Companies: 6waves, A Bit Lucky, Acclaim, Activision, AdParlor, Aeria Games, Amazon, Applifier, Appstrip, Artix Entertainment, Bebo, Bigpoint, Blackhawk, Boku, Boomerang Networks, Booyah, Challenge Games, CrowdStar, Digital Chocolate, Digital River, Disney, Electronic Arts, Facebook, Frogster, Gaia Online, Gala-Net, Gambit, Gameforge, GMG, Google, GratisPay, gWallet, HeyZap, Hi5, IMVU, InComm, iovation, Jagex, Kabam, Kontagent, Limasky, Lolapps, Meez, Metaplace, Microsoft, MindJolt, MySpace, News Corporation, Nexon, ngmoco, Nintendo, Offerpal Media, OMGPOP, Outspark, Papaya Mobile, PaymentPin, PayPal, PeanutLabs, Playdom, Playfirst, Playfish, PlaySpan, Rekoo, Riot Games, Rixty, RockYou, Rovio, Scoreloop, Second Life, SGN, Six Degrees Games, Slashkey, Slide, SocialGold, Sometrics, Sony, Sony (Free Realms), Sparkplay Media, SponsorPay, Sulake (Habbo Hotel), Super Rewards (Adknowledge), SupersonicAds, SurfPin, Tapulous, Tencent, TheBroth, ThreatMetrix, Three Rings (Puzzle Pirates), TokenAds, TrialPay, Turbine, Viacom (MTV), Viacom (Neopets), Viximo, WeeWorld, Wooga, ZipZapPlay, Zong, Zynga

D3Publisher is promoting its upcoming summer title for Xbox Live Arcade and Nintendo DS, Puzzle Quest 2, with a Facebook match-three game, Puzzle Quest 2: Mage Trainer.

And the app is worth playing in its own right.

Other examples of Facebook apps that have served as promotions for console titles include the complex and ultimately epic Sony role-playing, The Agency: Covert Ops, EA’s Dante’s Inferno RPG and its more simple Indiana Jones 2: The Adventure Continues. The apps were utilized to promote an upcoming massively multiplayer online shooter, and action-adventure and cinematic adventure console console games, respectively. Some have continued on in popularity long after the launch of the titles they were made to promote game — The Agency is still at over 300,000 monthly active users, for example.

As far as Puzzle Quest 2: Mage Trainer goes, it is dubbed a prequel to the upcoming puzzle-RPG title of roughly the same name. In this particular rendition, however, users are only granted a variant of the sorcerer class (there are four in the main game), and rather than moving about an over-world from puzzle to puzzle, players are presented with a familiar Bejeweled-like screen.

Oh, but no, this is not Bejeweled Blitz. This is what the popular PopCap game would be like if you were to go head to head in a battle mode against goblins, ghouls, and other nasty critters. That’s right. Using the same match-three mechanic, Puzzle Quest 2 has the player and their non-player monster opponent take turns matching colored gems. Here’s the catch. There are five colors, skulls, and armored gauntlets. For each gem destroyed, one “mana” of that color is given to the player (so if you match three red gems, you gain three red mana).

Above the player’s portrait is a number representing their health, and below it are your available attacks and spells. Each spell consumes one turn and requires a certain amount and color of mana to wield. For example, the first spell granted is called Mage Strike and it requires three red, and three blue mana. Furthermore, it does one extra damage for every three blue mana points the player has. With these added effects, players can actually formulate attack strategies on how best to defeat their enemy.

In regards to the skulls and gauntlets, the former does damage to the opponent based on how many skulls are destroyed (there are also exploding skulls that do more damage and blow up adjacent gems), while the latter grants you the ability to use a simple, low-damage melee attack once you have unlocked it.

As players play and win, they will gradually increase in level. This, so far, does not appear to do much for difficulty, – though luck can often be against you – but the big bonus is that players unlock new and more powerful spells to use in their battles.

To add to the strategy element of Mage Trainer, players can earn extra turns by matching four-of a-kind, and an extra turn plus a “wild card” that matches any colored gem with a five-of-a-kind. Marry this with the Bejeweled-made-standard of combos, plus the fact that you can study the board and remove the colored gems the enemy needs to attack, and you have a very deep and strategic strategy/puzzle game.

Unfortunately, the game isn’t perfect. Frankly, its social elements, like most console promotion titles, is rather lacking. All it consists of is inviting friends and tracking each others’ scores via a leaderboard. Considering that there is a bright green button entitled “Challenge Friends!” it felt like a brilliant opportunity to throw in some synchronous battles in there somewhere. You know, a literal challenge. Disappointingly, that is not the case, and if it is, it sure isn’t very obvious when the Challenge button still goes back to the invite a friend prompt; even after one has accepted.

Beyond this complaint, it would be nice to be able to pick and choose what spells and weapons can be used. As it stands, players appear to be granted default abilities as they level up. Perhaps, this is just something reserved for the DS and Xbox Live main games, but it would still be nice to have all the same.

Regardless of any issues we have with Puzzle Quest 2: Mage Trainer, it is still a fun, easy-to-learn and addictive game to play, if you’re into the casual gaming style. Moreover, it’s complex and deep enough to satisfy the more strategy-oriented mainstream gamers looking to mess with a free title. Having launched into open beta less than a month ago, Mage Trainer is currently earning just shy of 10,000 monthly active users. With these growing numbers, it ought to do its job well when Puzzle Quest 2 launches in June. And, like The Agency, it could stay a Facebook hit, especially considering the popularity of some other puzzle games on Facebook.

Apple plans to launch a “social gaming network” this summer, along with a number of other major upgrades coming in its 4.0 version of the iPhone operating system. It’s also launching an ad network that is designed for apps and uses features like location to target ads.

The company downplayed these business moves — focusing much of the announcement on product upgrades like multi-tasking that many consumers will be thinking about first. But it is more than ever trying to be a software platform company that relies on the web, not just a hardware and operating system maker. Here’s a closer look.

Game-Related Features Announced Today

Gaming has not been especially social on the iPhone, so far. Today at the launch press event, the company said new “Game Center” features will include some of the standard functionality seen in game console systems, games on social networks and in third-party mobile social platforms including Aurora Feint’s Open Feint, Scoreloop and Ngmoco’s Plus+.

“We wanted to make this even better — we’ve added a social gaming network.” said Scott Forstall, senior vice president of iPhone Software, at the launch event today in Cupertino, Calif. “We do automatic matchmaking, we’ll find others with a similar ability and match them against you. You can see how you’re progressing in a game with achievements.”

It’s not clear how these specific features will work, but the signs indicate that they will. Aurora Feint and Ngmoco have been reporting social game-style growth on their own iPhone apps, and in some third parties who use their mobile social platforms. They’re offering games for free and in many cases monetizing using virtual goods. These games monetize using their iTunes to; in Ngmoco’s hit new game, medieval city builder We Rule, you pay for virtual currency that you use to buy virtual goods.

Having nailed the virtual currency platform revenue model already with iTunes, Apple is also getting in to ads today — another way for developers to monetize. Apple founder Steve Jobs demoed the company’s new iAds system, which basically provides interactive ad formats that developers can build into their games and other apps, that advertisers can run ads in. An important point is that these ads can use all the regular app features, like the accelerometer or location — so ads can be targeted for local businesses, for example. Developers will get a 60% cut. Apple will host the ad content. Jobs’s explanation for this move: “What some [app developers] are starting to do is put mobile ads in their apps… and most of this advertising sucks. We want to help developers make money with ads so they can keep their free apps free.”

Monetizing Mobile Apps

When you add up what Apple announced today, you get the sense that the company wants a piece of the social gaming action that Facebook has been enjoying. The social features will help smaller developers grow more than they have been, potentially, because friends can tell each other and users can find competitive or cooperative players at their own skill level. That in turn means more people to sell virtual goods or show advertising to.

Facebook, and to some degree other social networks, has benefited from providing an ecosystem that allows developers to find users for free, then monetize them primarily through virtual goods. Facebook has made money from this platform because its advertising system allows developers to buy advertising from it that allows them to reach new game players. It is also working on its own virtual currency, Credits, to run inside third party games and get a cut of virtual goods revenue.

Note: To get an in-depth look at the size of the US virtual goods market, and the social gaming market specifically, check out our in-depth market research reports: Inside Virtual Goods: The US Virtual Goods Market 2009 – 2010 and Inside Virtual Goods: The Future of Social Gaming 2010.

The first comparison many are making here is to Xbox Live or other console-driven gaming systems. Those include the same sorts of basic features like leaderboards and achievements that Apple is planning to introduce. And so far, games and game distribution on the iPhone has looked quite similar to these systems. But Apple showed a graph of the number of gaming apps (50,000) versus dedicated competing devices like Nintendo’s DS (4,321) and Sony’s PSP (2,477), with a very clear point: Its platform is significant for lots of third parties, and the others aren’t. Console systems tend to be dominated by a few big players who can afford to build the most complex, highest quality games and market them to typically serious gamers who buy the devices.

So far, Apple’s system has had many of the characteristics of a console system, as distribution has been through Apple’s App Store — just a few leaderboards, and favorited items from iTunes employees. Apps have grown because they’re high-quality, cheap, easily accessible, and people do hear about them through word of mouth. But Game Center could make the iPhone operating system a better place for social games that grow by friends and like-minded people to share games. That in turn will help the free-to-play model work even better, and make its developer ecosystem even more attractive. As Jobs said today: “Well, we’ve got a lot of free apps — we like that, users like that, but these developers have to find a way to make some money, and we’d like to help them.”

Apple Has Bigger Plans

Parsing Jobs’ comments, you can find all sorts of clues about the company’s developer and web focus.

When talking about how mobile apps work, he seemed to be targeting Google: “On a mobile device, search is not where it’s at, not like on the desktop. [Users are] spending all their time on these apps — they’re using apps to get to data on the internet, not generalized search.”

When answering an audience question about make apps easier to discover on the App Store, he seemed to hint at significant upgrades, that could include features for games beyond the Game Center: “A few things: number one, the App Store is not part of OS 4 or any release, it’s a service and it’s programmed on the server side, and we can enhance it without waiting for a major release. … We’re constantly interested in improving that, and do so fairly frequently. In terms of discoverability, we’ve added things like Genius recommendations, but I also see an infrastructure evolve to help users find apps.

When asked if iAds shows Apple wants to be an ad agency, Jobs said both no and yes: “We do not have plans to be a worldwide ad agency. We don’t know a lot about advertising, but we’re learning. We tried to buy AdMob, but Google snatched them up because they didn’t want us to have them, so we bought another smaller company, Quattro. But we’re babes in the woods.”

Apple has a long way to go before it’s a full-blown web service like Google or Facebook, but its deeper and deeper moves into areas like developer platforms and advertising suggest it could be planning more offenses against web companies in the future. Developers can get early access to the new version of the OS, here.

Images and quotes from the presentation via Gdgt and MobileCrunch.

[The following began as a comment left by gaming veteran Tadhg Kelly on a post we wrote last week about Zynga's Café World, a clever clone of Playfish's Restaurant City. Café World had 8.6 million monthly active users at that point, only a week after launching. Today, a week later, it has 15.9 million, according to our AppData service. In the article below, Kelly explores the history of cloning in the gaming world and the ramifications for social games in the future.]

While social games as a sector has exploded onto the scene as the new thing in recent times, there are some parts of how the sector operates which are very old-school. Chief among these is rampant cloning. Cloning has a very long and ignoble history in games for a couple of reasons:

It’s much easier to develop a game when you know what you’re aiming for.

Developing a new game is a complex undertaking because the target can be unclear. It’s not just how to develop it, it’s what are you trying to develop in the first place and how sure can you be that it’s any fun at all?

However developing a version of an existing game removes half of that complexity and reduces it to an engineering problem. You already know it will be fun because you can use the previous version as a reference point. Developers and publishers generally like that sort of certainty.

Many developers like to copy other games as a way to learn how to code better.

Indeed it’s considered a part of learning how to develop games that you will at some point copy another game in order to learn how good games work. Tetris has been copied and recopied by every amateur developer you can think of for the last 20 years because the game mechanics are so instructive.

Many publishers like selling a recognisable concept to their audience.

Game publishers like a game that they can sell, and that means one of three things:

1.     An instantly recognisable concept

2.     A instantly recognisable brand

3.     A game concept so brilliant that it conveys itself

In an ideal world all games would be the third option but in actuality that is very rare. Wolfenstein and Doom are examples of games that managed that. For most other developers and publishers, however, they exist within the first or second option most of the time.

Invention is hard. What many developers do is opt for instant recognition through cloning either a specific game or following its genre. Game genres are simply a gathering of conventions from some source games that were cloned so much that they became standardised.

When Doom appeared there was no formal First Person Shooter genre. Now there is. Many games have cloned, adapted and expanded upon Doom’s roots. All game genres have similar roots.

Cloning is hard to defend against from a legal standpoint.

When Pong was released by Atari back in the 70s, it spawned many clones. Atari spent a great deal of effort trying to stop this sort of thing but discovered they couldn’t. Pong and Bejewelled and a bunch of other casual games have gone on to be cloned by just about everyone since because the games were very easy to clone.

Cloning is not generally considered to be copying.

Copying is lifting not just a game’s mechanics but also its look, feel and intellectual property. Legally speaking the reason why cloning has always been hard to prevent is that the law does not protect ideas. It protects the expression of ideas.

Cloning is a major source of innovation, through adaptation and improvement

Cloning has a sliding scale. Many of the cloned copies of Bejewelled are carbon copies that essentially swap artwork styles and brand name but are otherwise identical. On the other hand, Puzzle Quest certainly takes inspiration from Bejewelled but rolls a whole RPG out of it and so has become a unique and interesting game.

Cloning and Social Games

Zynga has managed to create a clever commercial engine for their games and a vast userbase as a result. But their tactics of the last year have relied heavily on cloning to get there. They tried original development but that did not go well (see their $2m fantasy title).

However they are not the only ones by a long shot. Playdom’s games are also largely clones, in many cases clones of clones. Playfish, often thought of as the more original social game studio, has based several of its games on Nintendo and other casual games and have also recently gotten into the virtual farming market with their own clone.

The RPG format in particular has been cloned far and wide into dozens of themes. Many of the other successful games are quite simply adaptations of existing concepts already in web games and transported into social networks. Farming games, rpgs, Poker, etc are some examples.

It is fair to say that the vast majority of social games are actually clones of other social games or casual games to a greater or lesser extent.

Is Cloning a Problem?

So cloning is everywhere. But is it actually a problem?

Zynga seems to be approaching 150m users. They may have a catalogue of games that have clear origins in other games. They may be making money hand over fist.

The Zynga difference is that Zynga have become experts at funnelling. They do this through spending an awful lot of money on advertising externally, and also use their own games as advertising platforms for their other games. Zynga is able to generate enormous user adoption of their games very quickly as a result (as seen by the recent explosion in Café World users). The same is true of Playfish, who cross-promote all of their games with a sidebar but don’t advertise as much.

This also means that the monthly active user (MAU) figure may be a false metric, as it only counts per game, not per developer. So Zynga may have 150m MAU on paper, but if those users are each across 3 or 4 Zynga games, the company’s MAU may actually be as low as 50-60m actual people. (This is also why it’s better to use DAU as a way of judging real activity in games on Facebook).

But so what? Does Zynga’s activity actually affect the original developers? It doesn’t seem to.

A recent example of this is Farm Town and Farm Ville. When Farm Town launched on Facebook it exploded up the charts with no advertising. It was a game concept so brilliant (for the platform) that it conveyed itself. Zynga (and later Playfish, with Country Story) jumped on this new market and applied their commercial model.

Everyone seems to have forgotten that Farm Town still has 19m users. While Café World may have a lot of similarities to Restaurant City, it hasn’t actually taken any Restaurant City users away. Playdom’s Poker title has its own audience, it hasn’t eaten Zynga’s Poker audience.

Unlike the console video game market where games are comparatively expensive and competition between titles is very much a win/lose scenario, social games are free. What we forget in comparing the MAUs obsessively is that players can be both Farm Ville and Farm Town players because it costs them nothing.

Social games are thus not a zero-sum market. The viral channel effect that brought 19m users into Farm Town is very much alive and well and raising new applications all the time.

Strategies to Deal With Cloning

However if you do think cloning is a problem then there are several approaches to tackling it.

Brand

Of all the casual games that have been commercially cloned over the years, one stands out as a highly significant exception: Tetris.

Tetris is not a difficult game to clone, mechanically speaking. It is a very simple game after all, and everybody knows how to play it. Tetris has certainly been copied by just about every college game development graduate at some point but it remains relatively untouched commercially.

This is because Tetris is a strong intellectual property. Tetris, unlike Bejewelled, is a game name which most casual players know very well and as a result they tend to favour the brand. Tetris launched the Game Boy, it is addictive, it had a song named after it and it is iconic and instantly recognisable. So clone developers tend to stay away from carbon copying it because there’s no point.

So a strong brand is good protection against cloning, but it is difficult to achieve.

Legal

The law may not protect game innovation but it does protect expressions of that innovation. That’s why Mattel was able to get Scrabulous taken down: It was so close to the Scrabble intellectual property that they were able to make the case that Scrabulous constituted an infringement.

The other form of legal protection that you could employ is patenting. Patenting requires that you have the means to file a patent, the means to protect it and that your game has a genuine innovation that other games do not yet have. Patents also take years to be recognised, although you can obtain some protection from using the phrase ‘Patent Pending’ clearly.

Patents have protected Slingo (a casual game mashup of slot machines and Bingo) from being commercially cloned for a decade. Nintendo has used patents to prevent anyone from using the insanity mechanic in Eternal Darkness.

Patents are something of an ethical minefield however as they can also stifle innovation. Many developers are not comfortable with that idea because software development is usually iterative and relies on being able to use innovations that went before to do something new.

Game Design

There is a correlation between the apparent complexity of a game’s design and how likely it is to be cloned. Bejewelled is easy to clone because the mechanics are on display. The Sims and Animal Crossing, on the other hand, are not. It takes time to learn how they work as much as how they work well, and this means the actual effort of cloning either of them is probably greater than is worthwhile.

That doesn’t mean that you have to create a huge life-sim game just to avoid being cloned. Some casual games like Peggle have not yet been cloned to any great extent, partly because Popcap learned their lesson with Bejewelled and protect Peggle aggressively, but also because Peggle is very reliant on good physics. Good physics are hard to get right.

The real reason why many games on Facebook get cloned heavily is that they are easy targets. Restaurant City, Farm Town and Mobsters are simplistic games, and this is what makes them clone-able. Their game mechanics are very easy to understand and the kinds of reward that they offer are simple levels and item drops.

Social games to date are mostly just fancy interfaces with very little back end depth. It does not matter in Restaurant City what combination of items and menus you use in your restaurant. It doesn’t really matter what farm orientation you have in Farm Town. Most of the side quests in any RPG have no variation. Most of these games cast aside compound effects and deep design and so they are very easy for any developer to interpret into a rule set and then clone.

Social games are by and large extremely dumb software. So if you want to avoid being cloned, the answer is to not design dumb software that can be reverse-engineered in a week.

Does Cloning have a Future?

The current social game market, in particular the Zynga model, has a lot in common with television. Television is also a market in which cloning is also rampant. One channel creates a reality TV show and next season every other channel does one too. One channel creates a house-buyers guide and every other channel too. As with games, the easier the format of the show is to copy, the more likely it will be copied.

The Zynga model is basically applying funnel marketing to direct users from one game to another, like TV channels try to do from one show to the next.

However Facebook is not television. It does not have formalised channels, it is viral. Many web companies over the years have tried at one point or another to fence off users and keep them within their funnel (often with portals) but funnelling inevitably fails because it cannot keep up with changing user tastes fast enough. The internet audience is atomised and full of niches. It is not a constrained and channelled audience. Even Facebook itself seems to understand this with Facebook Connect.

The inherently viral nature of Facebook (and the internet generally) means that every social game developer is always vulnerable. We still exist in a phase of the social game market where the majority of users are still new to Facebook and social networking. Most users on Facebook are less than a year on the platform. Many of them don’t know that there are games on Facebook. Many don’t realise that it’s not Facebook hosting those games.

However, at some point soon the Facebook audience is going to start to mature. They are going to be less interested in dumb software and more interested in finding better quality ways to spend their time. This makes the cloning model very vulnerable.

Atari, the original cloned company, failed eventually because their model had become so reliant on dumb software that they could not contemplate another way of doing business. They eventually crashed, giving way to Nintendo’s much more depth-focused approach. Historically speaking the pattern of all game markets has been similar. The initial rush gives way to substance.

Game depth, original ideas and niche games command much greater loyalty over the long term, and loyal users tend to monetise much more readily and regularly than casual users. Viral channels ultimately reward this more because friends are always more likely to share what they consider to be remarkable and interesting things over average things. Advertising also tends to become less effective over time in all markets, so a brute force approach to marketing will not work so well without the virality to back it up.

Unexpected viral hits will continue to land, but so too will audience maturation, and that’s going to take us to more interesting places. All the top social game companies have built themselves a presence but a presence by itself is only a short term advantage. The real challenge for them is whether they can convert their advantage into a broader vision, or whether they can achieve an exit to a major publisher like EA, and whether any of the major developers and publishers will start bringing their much more mature games to Facebook. I expect we will see a number of such moves taking place in the next year.

Tadhg Kelly is the chief creative officer of Simple Lifeforms, a social games company dedicated to creating the best social games. He is a keen advocate of social games as a new evolution in games and game players, and a noted blogger and article writer to that effect.

[Doom image via Register Hardware; Tetris image via Popgadget; Peggle image via Sarcastic Gamer; Mario Bros. image via Paste Magazine]

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

That’s why I’m excited to announce today a new in-depth research report with partner/co-author Charles Hudson that is exclusively focused on the size and future of the virtual goods market in the United States, entitled Inside Virtual Goods: The US Virtual Goods Market, 2009 – 2010. It is being released for the first time this morning. The big picture? We estimate the total 2009 US virtual goods opportunity at just over $1 billion.

Purchase this report Buy PDF: $995 USD OR Buy PDF + 1 Year of Quarterly Updates: $1,995 USD

About the Report

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

We focused and organized the report around the following areas:

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

Each section contains:

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

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

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

The price of the report is US $995. In addition, we will be releasing quarterly research and updates on key developments in the space. A one-year subscription is now available for US $1,995.

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

Table of Contents

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The price of the report is US $995. In addition, we will be releasing quarterly research and updates on key developments in the space. A one-year subscription is available for US $1,995.

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Buy PDF: $995 USD

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

List of Related Companies: Acclaim, Activision, AdParlor, Aeria Games, Amazon, Artix Entertainment, Bebo (AOL), Boku, Boomerang Networks, Challenge Games, Electronic Arts, Facebook, Fatfoogoo, Firecue, Frogster, Gaia Online, Gala-Net, Gambit, Google, GratisPay, Green Patch, gWallet, Hi5, IMVU, iovation, Jagex, Kontagent, Meez, Metaplace, Microsoft, MySpace, Nexon, Nintendo, Offerpal Media, Outspark, PaymentPin, PayPal, PeanutLabs, Playdom, Playfish, PlaySpan, Rekoo, Riot Games, RockYou!, Second Life, Serious Business, SGN, Six Degrees Games, Slashkey, Slide, SocialGold, Sometrics, Sony, Sony (Free Realms), SponsorPay, Sulake (Habbo Hotel), Super Rewards, SupersonicAds, SurfPin, TheBroth, ThreatMetrix, Three Rings (Puzzle Pirates), TokenAds, TrialPay, Turbine, Twofish, Viacom (MTV), Viacom (Neopets), Viximo, WeeWorld, Zong, Zynga

During E3 in June, Nintendo and Microsoft announced that the DSi and Xbox Live would be integrating Facebook Connect this year. Last Thursday, the integration went live in Japan. And it’s expected to go live in North America, where 1.7 million of the devices have been sold, at 5pm ET today.

With version 1.4 of the DSi firmware, users can login to Facebook via the new “F” icon in the DSi’s camera software. From there, users can upload photos to their Facebook profile. Photos uploaded from the DSi appear in a new “Nintendo DSi Pictures” album, much like photos uploaded from mobile devices appear in a “Mobile Uploads” album.

This marks the first time a gaming device has officially launched native Facebook Connect support – something we’re very likely to see more of in the months and years ahead. As games go more social, players will increasingly use Facebook across devices to share content from their favorite games and recruit friends to play together.

Here’s a video of Facebook on the DSi in action:

[images via Joystiq]

This morning I gave the opening presentation at the Social Gaming Summit, discussing an overview of the major platforms, players, and monetization stats in the social gaming industry. For those interested in checking out the slides, they are embedded below.

Topics covered: Facebook, Facebook Connect, iPhone, MySpace, Hi5, Twitter, Monetization, ARPUs on Facebook and MySpace, IP, copycats.

Microsoft and Nintendo’s announcements at E3 last week show that 2009 is the year that game consoles are going social.

Prior to the show, Microsoft had been talking about making its Xbox Live platform more social with the “New Xbox Experience.” But the addition of Mii-like avatars did little to create the community the company wanted. The company conducted various surveys to gain information that would help it make its avatars better.

Microsoft revealed more information about its progress during E3, with the Avatar Marketplace on Xbox Live. Using the Microsoft Points virtual currency, users will be able to download goods based on both first-party games, like Halo or Fable, as well as third-party titles such as Splinter Cell.

Virtual goods will vary, from branded clothing to usable props (toys, pets, etc). Microsoft also announced the addition of fashion lines of clothing for the avatars.

All of this, of course, was in addition to Microsoft’s announcement to bring Facebook Connect to Xbox Live as soon as this fall with Tiger Woods PGA Tour 2010.

One of Microsoft’s chief competitors, Nintendo, also made a rather significant announcement. Nintendo announced the integration of Facebook Connect with the Nintendo DSi, and stated a release date earlier than Xbox’s similar announcement a day earlier. This will mark the first Connect integration to go live on any gaming console.

The announcement was made by Nintendo’s EVP of Sales and Marketing, Cammie Dunway. Through Facebook Connect, Dunway says players will be able to upload and share photos using the DSi‘s built-in camera and interactive lenses.

“Nintendo continues to challenge how both new and longtime players perceive and play video games,” Dunway says. “We are continuing to add entirely new dimensions to the video game experience.”

The new features will be available this summer, and with them comes a new milestone in the evolution of social gaming.

[images via Gamespot]