There is a $100 million discrepancy between what Facebook earned in payments revenue and what it paid out to developers, according to revenue figures in its IPO filing last week.

In the filing it says, “In 2011, our Platform developers received more than $1.4 billion from transactions enabled by our Payments infrastructure.”

But based on the company’s $557 million in payments revenue last year and its 30 percent share of transactions on the platform, Facebook should have paid out $1.3 billion at most. There is at least a $100 million discrepancy here. A company spokesperson declined to comment.

There are a number of possibilities:

Facebook may have comped free Credits for some developers: When Facebook began rolling out its virtual currency Credits, it would give them away for free to entice users to sign-up. Developers would have to eat the extra costs if  players bearing these free Credits showed up to play their games. They complained — loudly. But it’s possible Facebook comped some of this free Credits usage for certain developers.

(Sidenote: This only happened to gaming companies that used Credits as their in-game currency. Some developers like EA and Zynga didn’t change their in-game currency but still used Facebook to manage their payments.)

There may have been initial problems with fraud in the early months of Credits, which the company may have also comped for developers: One other developer told us that there were early issues with fraud and completion in Facebook Credits purchases (as you would expect with a nascent payments platform). So perhaps Facebook covered developers for these problems too.

Certain developers may have gotten a more favorable revenue share: It would be surprising if Facebook discounted its revenue share for favored partners. Facebook has always been adamant about taking a flat 30 percent cut across the board for all developers. Even Facebook’s special multi-year agreement with Zynga explicitly mentions the 30 percent payments share (although there are parts right around that number that are redacted in the contract, which was attached to Facebook’s IPO filing).

From the filing. (Anything marked [*] is a redaction):

“The amount of the service fee described in the Facebook Credits Terms that we charge to you at any given time to redeem Facebook Credits shall be [*] 30% per each Facebook Credit redeemed [*].”

Facebook started doing promotions on Credits with 80 percent discounts last November: One likely explanation might be promotions on Credits that ran from November to January. They gave certain players 80 percent discounts on the virtual currency, but still paid developers as if the virtual currency was priced normally, according to our conversations with gaming companies in the ecosystem.

There are a couple of ways to think about this. On the one hand, when we see individual developers engage in aggressive virtual currency sales, it can be a red flag. It’s a sign that they are sacrificing long-term revenue for short-term gains. They might be trying to boost financial performance to look better in an acquisition or funding round.

But Facebook isn’t a company that culturally operates for the short-term like that. By discounting Credits, the company is potentially getting more users to hand over their credit card data — which will make it more frictionless for them to pay for things down the road with Credits.

Right now, Facebook likely has payments data on just a small fraction of its users. If you consider that 50 percent of Facebook’s 845 million monthly active users play games, and then 2 to 6 percent of them monetize by paying for virtual currency, then a back-of-the-envelope calculation would suggest that they have payments data on around 30 million users. By comparison, Apple has more than 250 million iTunes accounts. Facebook needs more credit card data on more users if it wants to power payments for more interesting areas down the road.

So if the sales were successful in getting more users to hand over their credit card details, that’s a good thing in the long run. But if they just encouraged users who already pay with Credits to gorge on the virtual currency, then it could mean softness in payments revenue going into the first or second quarter of this year.

Zynga’s new senior vice president of mobile Travis Boatman has seen the mobile gaming industry go through one seismic shift after another. He saw JAMDAT through its landmark $680 million acquisition to Electronic Arts back in 2005, then built up EA’s mobile business and oversaw its studios worldwide. Raised in Silicon Valley where he grew up on games like Bard’s Tale, he switched to gaming from earlier career ambitions in sports medicine.

Right now under Zynga, there are three main lines of mobile games. The “With Friends” brand grew out of Newtoy’s smash hit Words With Friends and then expanded to include Scramble With Friends and Hanging With Friends. “These are usually asynchronous and directly social,” Boatman said. Then there is a cohort of games that are more or less extensions of Zynga’s core Facebook franchises like Cityville Hometown.

Lastly, there’s the “Dream” line-up, which is new given the recent debuts of Dream Zoo and Dream PetHouse. Boatman says the “Dream” brand is more aspirational. “We like to say they’re about ‘vest’ and ‘express.’ They’re about growing and customizing, which is in line with our core tenants. All of these games have a similar look and feel.”

Like Pincus, Boatman brushed off recent criticism that Zynga’s titles are too similar to ones existing in the market. NimbleBit recently blasted Zynga for an unreleased title called Dream Heights because it was too similar to its app Tiny Tower, which won Apple’s game of the year. Dream Zoo and Dream PetHouse also seem reminiscent of Pocket Gems’ Tap Zoo and Tap Pet Hotel.

“These games are free and our players have the choice to play what they want to play,” he said. “If games were too similar to consumers and there was no clear value add, why would a consumer play it?”

Read the rest on our sister site, Inside Mobile Apps.

Robot Unicorn Attack: Evolution is the third incarnation of Adult Swim’s simple but addictive platform game to hit Facebook. Rather than being a straight port or reskin of the original Flash game with some rudimentary leaderboard support, however, Robot Unicorn Attack: Evolution adds a significant amount of new mechanics to the game, allowing for a greater focus on monetization, viral promotion and user retention.

The basic premise of Robot Unicorn Attack is very simple, which gives the game its enduring appeal among casual and core gamers alike. Taking on the role of the titular robot unicorn, players are thrust into a randomly-generated 2D scrolling play area and tasked with jumping over gaps or using a “dash attack” move to smash through obstacles. The longer the player survives, the more points they get but the faster the scrolling becomes. Additional points can also be scored by jumping through floating butterflies or breaking star-shaped objects.

“When we originally brought Robot Unicorn Attack to Facebook, we focused on leaderboards as its social hook — playing against your friends, trying to beat their scores,” explains Chris Johnston, senior games producer at Adult Swim. “As our first Facebook game, it was an experiment and we kept it simple; we always wanted to bring more to that experience. We’d have these brainstorms of ways to expand the gameplay and its social elements, but we knew we’d have to do it in a way that made sense and kept people coming back. We partnered with Mediatonic for that effort, and they took some of those initial thoughts and ran with them in Robot Unicorn Attack: Evolution.”

These new ideas for Evolution include a combo system. Smashing through four stars in succession without missing any causes an “Evolution,” whereby the background art changes and the unicorn transforms into a different animal — first a panda, then a wolf and onward into other forms depending on player skill. Missing a star causes the player to drop back down an evolution “level,” however, while maintaining a combo in the higher forms gives bonuses to score.

Evolution also adds leveling, powerups and currency to the game. Completing a level earns experience points and “Fairy Dust.” Once the player hits level 3, they unlock a powerup slot, with new powerups and additional slots becoming available with each subsequent level up. These features can also be unlocked early by spending Facebook Credits. Activating a powerup costs a certain amount of Fairy Dust each time it is used, but generally offers some sort of enhancement to the player that makes gameplay slightly easier — one slows the game down slightly, another allows the player to survive one collision with a star if they are not using the dash attack. None of these powerups significantly unbalance the game, however — it is still a very challenging experience.

Fairy Dust is earned after each level, with more earned if more friends are playing. Larger bonuses are also provided upon leveling up, and the player may purchase more using Facebook Credits if they don’t wish to grind for more.

The game also offers daily challenges, with big bonuses on offer to those who complete the challenge five days in a row. This is a feature designed for those who believe themselves to be skilled at the game, however, since trying again after an initial failure costs 1,000 Fairy Dust each time. The base game, meanwhile, can be played as much as the player wants for free, with Fairy Dust optionally being expended on powerups.

The game strikes a good balance between the simplicity, addictive nature and broad appeal of the original Flash game while adding a variety of features that will help to both promote and monetize the game. Its optional Wall posts are also all somewhat sarcastic and humorous in tone, which might appeal more to those players usually disinclined to share their game activity with friends.

“We’re promoting Robot Unicorn Attack Evolution in a number of ways: by cross-promoting with the original Robot Unicorn Attack on Facebook and on AdultSwim.com as well as on TV via advertising during the Adult Swim programming block,” says Johnston. “We’ve got some great plans for the game’s future expansion and ways to give players more ownership over their unicorns and use the Fairy Dust they’ve acquired while playing. I can’t go into specifics right now, but it will be awesome.”

2012 also looks set to be the year of Adult Swim taking bolder steps into the social games market.

“[We're] working with talented developers on new social game concepts with quirky, absurdist Adult Swim twists,” says Johnston. “Developers who find that idea enticing can contact us via game.submission@adultswim.com and get more info on pitching to us.”

Robot Unicorn Attack: Evolution is, rather aptly, a well-considered evolution of the original game’s concept, well-designed for the Facebook platform and social play. The good reputation and recognizable name that its predecessors carry will likely allow the game to build up a healthy and dedicated following, in turn leading to success and profitability.

Look for the game on our traffic tracking service, AppData to track its MAU and DAU progress as the game matures. In the meantime, you can try out the game here.

Play

A much-loved Flash game gets a well thought out social overhaul.

Zynga announced a Hasbro partnership today that grants the merchandise giant the rights to develop toys and games based on Zynga’s games.

Merchandising is one of the key ways social and mobile game developers monetize their brands outside of games. Angry Birds is the most popular example with a wide range of plush toys and t-shirts available at most major retailers. Zynga has experimented with merchandise before via FarmVille plush toys sold at Best Buy stores. At our third annual Inside Social Apps conference, Disney Interactive’s John Spinale hinted that the company may explore similar merchandising around Swampy the Alligator from its popular mobile game, Where’s My Water?

The deal with Hasbro also includes the right to develop co-branded toys or games that combine Zynga and Hasbro IP. This means a branded Monopoly game is likely in the works as that’s the board game Hasbro most often marries to brand partners. The first products from the Zynga-Hasbro deal are expected to hit shelves in fall of 2012.

We’re at the San Francisco Design center, blogging Inside Network’s third annual Inside Social Apps conference. Founder of Inside Network Justin Smith sat down with Google+ Engineering Director David Glazer for a fireside chat called “The Google+ Platform Roadmap in 2012.”

The following is a paraphrased transcript of the discussion.

Justin Smith: Google+ APIs are currently invite only. What should developers expect from those?

David Glazer: Very early on we decided there were three stages. One, create great user experience. Two, use relationships and identity to activate other Google products. Three, then do that for anyone else who wants to take advantage of that. We’re doing those overlapping. We have Google products taking more advantage of people’s real identity. As we understand and feel good about the capabilities, we’ll start to add APIs.

Justin: How are communications going to work? What are the dynamics of how applications are going to work?

David: So, if I have a website, I’m publisher and I want to have rich experience for visitors to use the plus one button for sharing and to start rich conversations about their site. There’s a whole area around that kind of sharing. That’s one of the areas that has been getting traction for us. The status of our APIs is that they’re still invite-only. We have a few dozen games up there seeing different successes. Then there’s the Hangouts API, which is not for use publicly yet but there’s lots of capabilities. There’s really exciting things we’re seeing there that are intentionally below the radar.

Justin: When will those APIs be available for testing?

David: The unsatisfying answer is when it’s ready. We want to avoid hurting users and developers. What that means is that we made a conscoius choice to roll it out deliverately. It’s the opposite of the land grab model of launching a platform. The things we want to avoid there is hurting users and hurting developers. We didn’t want to get developers on board and then change the rules on them when we have a new policy or a new mechanism.

Justin: What are things you’re still working on now?

David: Before we launched the first few games, we saw equal amounts of anticipation from the community – “gee, I hope they allow games” and “I hope they never allow games.” We listened to both sides because they’re both legitimate feedback. So we tried something new, by making what people do in games easily accessible to people who care, but not in the way of the people who don’t care. We set up a separate place where you could see people interacting in games and put that aside. What we’ve been tuning over time is finding the balance so that people who are interested in being more engaged in games, how do those conversations work without creating spam.

Justin: Google+ has segmentation of games related content. That balance is a challenge for any social service. Another interesting design decision is how social graph is architected on Google+, which is asymetric, follower, circle-based. How does that affect distribution? How should developers think about how the stream will work differently than on Facebook?

David: So far it doesn’t have to affect your [developers’] thinking. We’re trying to put control in the hands of users. Any time you’re [users are] sharing something on Google+ you choose your audience.

Justin: So will games always be segmented on Google+?

David: “Always” is a big word. So “maybe” is the answer to the literal question. The answer to the principle of the question is that it will always respect both types of people — those who want games and those who don’t. We will always respect both. Our first cut works pretty well and we’re fine tuning that.

Justin: The big picture affecting developers is the distribution of Google+ within Google’s other properties. People are interested in the way google is thinking about that first-party cross-promotion. How should we be thinking about how Google will be distributing Google+ throughout the network?

Carl: I don’t think of it in terms of cross-promotion or the importance of product to the company. It’s the importance of users to users. The bvious insight is that people care about other people so that should be baked into what you do while you’re online. The reasons Google+ is named that is we didn’t think of it as “Oh we want to add another product.” We wanted to up the game to help our users. It’s a mechanism for users to connect and share what’s interesting.

Justin: So we can expect more Google+ integrations in Google products?

Carl: Yes, where it’s good for users. There are a lot more places where we can make users happier by showing them content that’s relevant to them.

Justin: Another area Google has been investing a lot in recent years is Android. Some have said that Android will be a major way that Google+ will gain traction. What would you say to that?

David: Mobile is obviously growing faster than the rest of the web. Therefore I think Google+ will see a lot of traction on mobile devices. Right now there are a couple of devices that are seeing adoption, but we want to have a first-class experience on all of them.

Justin: Will there be any APIs specifically for mobile or tablet?

David: Yes. Though I wouldn’t specifically call them Google+ APIs. It’s more about location and identity. Anyone who builds an app on a mobile device has a set thing around location, and around communication because you’re holding a communication object. I want those APIs if I’m building on that device. And I want APIs that know [about user relationships]. There’s nothing special about the sharing API just because it’s mobile. We think about any new feature in the product and think about the mobile web, desktop, native application. We’re aiming for capabilities across all of them.

Justin: How will user acquisition work for apps on Google+?

David: All the games on the Google+ canvas are also available from Chrome Web Store. You You can discover a game from Google+ or the web store.

Justin: So it’s just organic? Will there be an opportunity for developers to spend to promote their apps?

David: Google is perfectly happy to help people use ad money to reach their audience. We’re looking at new formats for apps and everything else. That’s one channel. There are lots of channels and we like all of them.

Josh Constine [question from the audience]: Will there be applications on brand pages?

David: We’ve talked about that, we’re hearing requests. It’s a reasonable request but not one we’ve prioritized yet.

Justin: What about other apps that not games? Is there an opportunity for them on Google+?

David: We’re interested in ones that get users engaged. Games tend to be first to get people engaged when people are in a social environment. Our platform technically doesn’t distinguish between types of applications. In terms of where the traction goes, we’ll follow what people find. I think the Hangouts API is going to allow people to build a whole new category of applications. You can have synchronous gameplay action. Something that hasn’t been done yet, but I want someone to build a deck of cards. If you and I are sitting here and we had a deck of cards and 10 minutes to kill, that’s it, you don’t need anything else. [As a developer] assume you have a couple people hanging out around an object. People are pretty good at entertaining themselves.

Justin: Video is something that hasn’t been adopted on Facebook. What’s the trend that’s going to drive adoption of using Hangouts?

David: The trend is now you can. Then you couldn’t; now you can. It was a hassle for developers and users. I think we have Hangouts that have crossed that line. You now have the ability to say, “Hey what can I build with cheap, easy video?” The point is to build something for people to do together.

Digital Chocolate have decided to take on the life simulation genre with their new Facebook title New In Town, which launched on Feb. 6. Casting players in the role of a recent college graduate out to make it big in the city, the game tasks players with the management of several precious resources essential to survival even in the real world — time, money and happiness.

After customizing their avatar’s appearance, gender and name, the player is introduced to a number of fellow graduates who will later become the source of the game’s quests. Through some initial tasks, the player is shown how to get a job, how to perform the job to earn money, how to get food and how to buy new clothes. Following these introductory missions, future quests are presented as “challenges” against the other characters to see who can complete them first, with greater rewards on offer for quick completion. These quests must be juggled around the player’s other needs, however, lending an unusually deep degree of time management to the game.

Everything the player does costs a certain number of time units to complete — including moving around the city, though the amount spent on movement can be reduced by purchasing various means of transport. When the player is out of time units, the day is over and they must go to bed. If the player’s happiness level is too low or they are hungry, the following day has a penalty to the time units available, representing the avatar’s tiredness, or lethargy due to depression. Conversely, going to bed before depleting all the time units provides a bonus for the following day. Happiness can be restored by eating food (which only has to be done once per day in order to stave off the hunger penalty), shopping, socializing with friends or attending fun activities such as going to the movies. Happiness drops while working or studying, though both are necessary evils — working provides the player with money, while studying increases skill levels, certain levels of which are necessary to secure higher-paying jobs.

The “time” mechanic has an additional consideration: the number of “working days” available to the player. Working days are a finite resource that is restored over time, similar to an energy bar in other games. On working days, players are able to complete tasks that earn money and improve skills, but when they have run out, the player is only able to do things that cost money and/or restore happiness. This “downtime” is referred to as “leisure days” and allows the player to keep enjoying the game even as they wait for their allowance of working days to refill — though spending all their hard-earned money without any means to recover it is counter-productive.

The life simulation genre may have been dominated by The Sims Social for some time, and indeed a simple description of New In Town (“find job, improve skills, cultivate relationships”) may sound remarkably similar to EA Playfish’s title. Rather than resorting to copycat game mechanics or simply pushing out a clone of the established game, however, Digital Chocolate have chosen to take a fresh, original approach and present the game in a manner which works well. The player is offered freedom to explore and develop their character as they see fit while at the same time working their way through a more structured set of challenges offered by the game’s characters. In this sense, the player is given a lot more ownership over their avatar’s development than in some other social games, and this will encourage players to take a more protracted interest in the game. In other words, it becomes “their” story rather than a predefined one laid out by the developer. This sense of ownership will be a key factor in user retention in the coming months.

A solid suite of social features, a wide range of premium vanity items and the ability to use premium currency to eliminate “grinding” to a certain degree mean that the game has the potential to be both popular and profitable in the long run. Its original gameplay and high degree of technical polish may attract a wider demographic of players than many similar titles, and Digital Chocolate has plenty of plans in place for the future of the game, including ways for players to directly interact with one another’s avatars rather than simply visiting their apartments.

Due to New In Town’s recent release, we do not yet have any data on its monthly or daily active users. You’ll shortly be able to track its progress in the charts with AppData, our traffic tracking service for social games and developers.

Play

An original, innovative take on the life simulation genre with the potential to be a great success.

We’re at the San Francisco Design center, blogging Inside Network’s third annual Inside Social Apps conference.

The second afternoon panel is “Monetizing Social Games on Facebook: Credits, Today and Tomorrow.” Joining moderator AJ Glasser on stage is Trial Pay co-founder and CPO Terry Angelos, Kixeye CEO Will Harbin, RockYou CEO Lisa Marino and Happy Elements Chief Product Officer Rony Wang.

The following is a paraphrased transcript of the discussion.

AJ: Facebook Credits, how’s it working out?

Will: From my stand Facebook Credits are a simple reality. Our original hypothesis was that we would see an increase in conversions when the transition to Facebook Credits happened, and that’s been the case.

Lisa: When the change happened, monetization grew, because now you control your economy in a much more focused way. From our perspective, it’s absolutely fair for Facebook to take their share, and you design around the execution, really understanding how you convert non paying users to paying users.

Terry: There are two elements to the credits platform. Facebook as a payments service, and Credits as a virtual currency. We’ve seen some developers being very happy, and some wanted to switch back to their own premium currencies, but we haven’t seen anyone upset about the 30 percent.

AJ: Will either Happy Elements or Kixeye change the way Facebook Credits are used, making them a gateway payment to your own currencies?

Rony: We see three to five times higher conversion rate after Facebook Credits. There is a lower average revenue per user, but 10 to 20 percent higher revenue. Before Facebook Credits, we had to work with the prepaid card provider. If you use Facebook Credits as the in-game currency, but most of the conversions happen from Trial Pay. If we use Facebook Payments just as the gateway, we can get the user to pay more in a single transaction.

Will: It’s to-be-determined. It’s always best to see what drives conversion. Right now, we’ve seen that sticking with Facebook Credits as the exclusive provider makes sense, but it may change with upcoming games.

AJ: What about alternate forms of monetization?

Lisa: When we started out our apps grew very fast and we did a lot of experimentation. As we’ve been working with our games, we’ve always been a pioneer in monetization and that spawned the RockYou Ad Network. For example, Zoo World generates 40 percent of its revenue through ad units. When you have paying users to converting at a rate of about 1-2 percent you need to find alternate ways of monetization.

Terry: If you look at Zynga games, it is about 6 percent monetization through ads. We think that’s an interesting trend. There’s a lot of advertisers looking to try to reach an audience through advertising – CityVille, CastleVille and FarmVille all have bigger audiences than [NBC talent show] The Voice. When you’re reaching an audience the size of the voice every week, advertising makes sense. It’s much like a TV program. In order to continue to watching Seinfeld you have to watch an ad, in order to continue playing Words With Friends you have to watch an ad.

Lisa: I’ve been frustrated with the social gaming genre for many years, because people thought that it was beyond the scope of being a media company. With that many eyeballs, let’s call a spade a spade, you’re a media company.  If you think about media companies and social game companies you have three things that are very common: they have their own content, they source their content from other companies and they all have dual monetization — they have subscription and advertising. We need to start looking at ourselves, as developers, as media companies. User acquisition is starting to skyrocket. Alternative ways of monetization are the only ways we will be able to get through this.

AJ: Response?

Rony: Less than 2 percent of our revenue comes from advertising. In Asia, there are much fewer advertisers interested in participating.

Will: We are not a media company, we’re a game company. 98 percent of our revenue comes from direct transactions. There may be companies that do well with advertising but 99 times out of 100 our monetization is through game purchases. We’re giving something specific to consumers that they want to purchase. We are not a media company, we are a game company.

AJ: Let’s talk about engagement with advertising.

Terry: How do you convince a Proctor and Gamble to spend brand dollars on a completely new medium? They may think of games as a particular segment that’s only played by teenagers. One way to overcome that hurdle is to put in a really deep, engaging experience. Users can compare two ads and choose which one they like, or play a mini-game – more opportunity with the consumer’s time. If you’re not adding value and you’re not entertaining, you’re not going to engage, but if you can create an engaging experience, you’re going to connect. If you look at what RockYou is doing, what we’re doing, there’s an element of engagement that gets users to remember the brand. It might not be right for Will’s games, but if you look at a platform like Zynga, the users are casual gamers who don’t think of themselves as a hardcore gamers, they just want entertainment.

Rony: We haven’t seen a close relationship between engagement and retention. Lots of games on Tencent have a very low retention rate, but high ARPU. Hardcore games can have very low retention but very high ARPU. This kind of game can probably get more revenue over two months than other games can make in two years.

Will: To see monetization around 50 cents, a dollar or two dollars it really comes down to core game mechanics and no amount of blasting the consumer with media will get you there. Our core value to build a game that we love and we think our users will love. We don’t do optimization for monetization within games. Users in our game spend money to speed up time. There’s a lot of other elements that can help with monetization like real time synchronous gameplay. You see in real time what another player is doing to your base in Battle Pirates, and you can either wait to rebuild or you can go after them right away.  For us monetization isn’t another layer, it’s built into the game.

AJ: So you monetize revenge?

Will: We monetize revenge.

Lisa: I monetize cute animals. We break out the engagement by different user actions, because different users require different engagement. We’re incredibly deliberate about how we treat different users. We have whales that we’ve monetized through advertising. It’s about giving users the tools to collect either through buying items or grinding through ads.

AJ: How can TrialPay integrate with these types of developers — do you look to make those types of engagements with the game itself and what the brand offers?

Terry: We’re running lots of pet videos on Pet Society today, but you can’t always do that. You’re going to have a great response if you can monetize a game with advertising that matches the content. Finding ways to target to the right demographic is what we focus on, and that’s very similar to how TV ads work — just because I’m watching Modern Family, it’s hard to discern what I like. You have to get that right. What we’ve seen some developers do is large scale advertising — for example Lady Gaga’s FarmVille campaign.  That must have been very expense. I don’t know how often you’ll see campaigns like that. What we focus on is repeatable engagement.

Lisa: Totally agree. Our incentive add unit gets very different performance in our owned and operated properties than in our partner’s games because there is a different depth of integration into the overall gameplay. The commitment and integration of that particular unit, regardless of content, is what generates results — the performance is night and day.

Terry: We have to work very hard as a third party to get the same level of engagement as a third party. We have in-game icons that enable the user to watch a video — we customize them to fit within each game. If you A/B test the giant banner that takes over the whole screen will always win. How do you develop an ad platform that is opt-in, sustainable, and effective? We do this by surfacing ads only when it’s relevant, so that when a user sees an icon, it’s more likely to result in engagement, and once the ad is clicked, the icon disappears.

AJ: What types of monetization are your users going to tolerate? Are they more receptive to some types of monetization than others?

Will: Our users respond to functional items. They decorate with blood, not bananas or palm trees. The market dictates what kind of spending they’ll do and I don’t think we’ve found that limit yet. It really comes down to user acceptance and what they’ll tolerate.  We’ve seen games in China that have hit $4 average revenue per daily active user. It’s a new concept in the US — most of our audience is used to spending $50 to $60 and putting a game in the tray, but some of our users have found that this method works better for them. None of our items are exclusive to paying users. I’ve spent over $200,000 of free currency within a game, and I get my ass handed to me daily by other users (who haven’t paid as much).

Rony: For us, the bottom line is that the paying user should not ruin the non-paying user in games. In our games, we pay a lot of attention to the balance, so that the paying users don’t gain a huge advantage.

AJ: What’s the most you’ve spent on a game?

Lisa: In CityVille $200, our game $250 — if I decide to play, I’m a paying user. You’ll get me for at least $50.

Will: I’ve played League of Legends, but I don’t want to tell you how much I’ve paid.

Terry: 3-figures.

AJ: In one game?

Terry: I’m obviously one of the cheapskates.

Rony: I spent $500 in one day, in a browser based game in China. I pay for revenge.

Audience question: What are your thoughts on advertising competitors in your own games?

Lisa: I do it all day long. You don’t want to give up your paying users, but for the users who aren’t paying, you want to monetize them in some way. We want to be a good player in the ecosystem, but also to grow the number of eyeballs. Thinking through how to treat paying vs. non-paying is an issue for every developer to address prior to entering the ecosystem.

AJ: Can I expect to see you monetize differently across different platforms?

Lisa: We monetize on mobile as well as Facebook, but the behavior is very similar.

Will: I don’t think your behavior intelligence changes across platforms. The game informs the monetization, not the platform, the platform is a canvas.

Audience Question: I’ve been told the amount of money people pay for virtual goods is inversely proportional to their IQ. Is that true?

Lisa: Not at all true. Some of the best monetizing games on Facebook are gambling, skill-based games slots and bingo and they monetize at a very high rate. If you’re looking at a Sims game, the ARPU is likely to be much lower than for a skill-based game about a 4 to 8 cents. I think you can can easily get to 8 to 10 cents in ARPU but only if you’ve built the economy right.

Loot Drop COO and game designer Brenda Garno Brathwaite calls cloning “disgusting,” revealing her company’s first-hand experience with the practice.

“We had a meeting with a publisher and a game designer discussed an idea for a game,” Brathwaite said during the Trends in Social Gaming panel at Inside Social Apps conference. “The publisher came back next week and said they’d be making the game and they might need us to consult on it. That game had been cloned before a line of code had even been written.”

Brathwaite spoke frankly, calling out the social games industry for its “fast-follow” mentality. ”In the traditional space, a great game would come out and you would say ‘how can we make a game that good and improve on that?’ What we have now is ‘how can we change the narrative and make the same game?’ That’s like putting out the Peaches of Wrath rather than the Grapes of Wrath. In any other medium it would be considered a tremendous fail and I think it’s because the space is about monetization and not about creativity,” she said.

The issue of cloning in the social and mobile games space has come up numerous times in the news recently. Triple Town developer Spry Fox is suing 6waves Lolapps over the similarities between its game and 6waves’ Yeti Town, and San Diego-based NimbleBit criticized Zynga for its upcoming game Dream Heights, pointing out numerous similarities between the two titles. During EA’s third quarter earnings call the company was reluctant to reveal details about its upcoming slate of social games, citing the need to protect its intellectual property.

You can read our recap of the Trends in Social Gaming panel here.

We’re at the San Francisco Design center, blogging Inside Network’s third annual Inside Social Apps conference.

The second panel of the day is “Trends in Social Gaming”. Joining moderator AJ Glasser on stage is Loot Drop’s COO and game designer Brenda Garno Brathwaite, Zynga Dallas’ creative director Bill Jackson, Gaia Interactive’s CEO Mike Sego and King.com’s co-founder and chief creative officer Sebastian Knutsson. The following is a paraphrased transcript of the discussion.

AJ: I wanted to talk about the evolution of social games. Are they going to mimic the path of traditional games?

Bill: I come from that sector — for me it’s not a separate path, it’s the same path and one continuum. Atari, Nintendo and PCs all brought in larger audiences. I think the mission in my mind is to make the audience larger and make room for play.

Mike: I think the evolution of social games has been in an interesting path. It’s been very different from the evolution of console games. Games that evolve with better graphics are missing the point, I think the point of social and mobile is to expand the audience and bring in new players. I think it there is room for a wider variety of games. Three developers working out of a garage can open up a new segment on social and mobile and invent a new genre of game.

Brenda: I do see a trend that the social space is actually following the development path of the traditional games industry. The traditional games industry got very “genre-fied” and the social game space is following that. We’re getting a culture of fast-follow where we take things and copy it and there’s a lack of innovation.

AJ:  King.com has been very good at innovating on older games like Snood and Puzzle Bobble and making it into a totally different game. Can you tell us about your development process?

Sebastian: Our focus as has been to stay with our core demographic and make games that are easy to play and get into. Even though people are asking for more advanced graphics, the strength is social. People want to play with their friends.

AJ: What do you see as the future use of friends in social games? Will it just be leader boards?

Sebastian: I think the focus will be on cooperative and collaborative gaming, allowing people to hook up with other players, not just their friends.

Brenda: I think playing with your friends is just a bribery function right now. In the game I’m working on I very deliberately didn’t want to do that. I wanted to make sure that having it there felt like a natural and intrinsic part of gameplay for both casual and hardcore players. That was probably one of the most important features in the design.

AJ: One of the trends that we’ve seen is combat – what impact do you think real-time competitive play will have on social games?

Bill: I think that’s a tool and the game needs to demand that tool to use it well. I think there’s an opportunity in the space for synchronous play. So far we haven’t had a giant hit but I don’t think there’s a reason there couldn’t be. I’m excited to expand on asynchronous play because I think that’s one space where social games have innovated.

Mike: I think Facebook and the web is very successful as an asynchronous platform. It’s a platform where I can update what I did three hours ago and get feedback on it. I think the success of Words With Friends is based off how well it fits with Facebook’s usage habits. That said there’s a lot of people playing games on Facebook and people are interested in playing synchronous combat games. Facebook does compete with other platforms, and when you play a game on Facebook you’re not playing on another a platform. For synchronous play to be a hit, there needs to be a game were you can bring in players that wouldn’t play a real-time combat game and bring them into that experience, even if they’re not the type to play a game for two hours on a console.

AJ: When we talk about branching out the different genres of social games, where do you see the opportunities to go into new territory and bring in new users?

Brenda: I see Facebook as one part of a whole. My game may be on Facebook, iOS and PC, but it needs to work together for the greatest monetization. If the game is fun you’ll get money. If you have to bribe or use tricks you’ll break the game. The most social game I’ve ever played is Minecraft. That game doesn’t have a marketing budget but it’s a wonderfully social game and I’m happy to give that guy money regularly.

Bill: As a game developer I think that fun is something you need to aspire to, but it’s not everything — for example some players have limited time and you need to give players a way to keep up with their friends if they’re limited on time. That means there are other items like accelerators that people will covet, but fun is the core.

Brenda: You can have fun or pay to have fun faster.

Mike: I think what monetizes is what people feel strongly about — creating an emotional experience. Size is also what monetizes. There’s a much wider variety of what monetizes on Facebook now. If you looked at the top three games last year it was CityVille, FarmVille and maybe poker and the other games were following along those lines and trying to make the same kinds of game. Today there’s a much broader variety of games that can all monetize in different ways and monetize thorough different audiences.

AJ: When you’re testing your games, how do you know when you’ve hit that sweet spot of “fun?”

Bill: I follow a combination of design and metrics. When we’re designing a game we start with design and then you start collaborating with players to improve the game. It’s a combination of feedback, the data that backs up that feedback and working from that feedback.

Sebastian: We find the real issue is hitting the sweet spot in the difficulty curve. If it’s too easy or too hard they won’t come back or they’ll get frustrated. Users tend to prefer shorter playtimes so we err on that side.

AJ: Bill — was there anythigng that you changed or fixed in the first 14 days of CastleVille being live?

Bill: There’s definitely issues with difficulty curves. In Castleville we had issues with balance and crafting and getting that right. In this discussion we talked about fun, but these are social games and so it’s not just a conversation, but that it will scale when it gets to be truly social and how players will interact together. How is it that you’re engaged as a single player and how are you engaged as a community? I think people will love a game world and the environment when they’re engaged in a larger community.

Mike: I think that goes back to user feedback and that’s not just user feedback that comes to you but that users share with each other and the meta community that springs up. I think if people both love your game and hate your game it means you tapped into an emotional response.

Brenda: I don’t think we’ve tapped into feeling that users get from games like World of Warcraft where you will feel bad if you don’t log in and do something at 10 pm every night because you’ll be letting your guild down. Social games haven’t done that yet.

AJ: How do you feel about mobile? How do you approach bringing a game to mobile?

Sebastian: We’ve focused on keeping the game the same on each platform. Our games are simple and it fits us very well to create cross platform games.

Bill: I also think it depends on the type of game and what’s right for the platform. I do see mobile as a way to keep in touch with a comfort zone of what you’ve established. Our express apps have been very popular.

AJ: My last question is a difficult one that Brenda has agreed to take. What about what could harm the social game space? What about cloning?

Brenda: Cloning is a disgusting subject. The technology isn’t a challenge. You can license an engine and outsource the art and develop a game in two months. What matters now is the idea. Inside of Loot Drop we had a meeting with a publisher and a game designer discussed an idea for a game and the publisher came back next week and said they’d be making the game and they might need us to consult on it. That game had been cloned before a line of code had even been written. I’d never heard the term fast-follow until I came into the social games industry. We as game developers need to be phenomenally protective of our games — in the traditional space, a great game would come out and you would say “how can we make a game that good and improve on that?” What we have now is “how can we change the narrative and make the same game?” That’s like putting out the Peaches of Wrath rather than the Grapes of Wrath. In any other medium it would be considered a tremendous fail and I think its because the space is about monetization and not about creativity. I think that could hurt innovation because developers may not come into this space and may choose to stay in console development. I think its very unfortunate. As we see bigger companies come in, they’ll have money to fight the clone wars that smaller developers may not be able to do.

Facebook’s top developers say the company’s payments infrastructure and virtual currency Credits are converting fewer paying users than they had hoped a year ago.

Facebook made it mandatory for developers to use its payments platform in canvas games in July. That meant developers on the platform had to start handing over a 30 percent revenue share to the company, mirroring a similar split on Apple’s iOS. The hope was that a single, universal currency would make it more frictionless for users to start paying for virtual goods.

“We thought that conversions would go up and be around 15 or 20 percent,” said Kevin Chou, the chief executive of Kabam, a social gaming company that targets a more hardcore demographic, at the Inside Social Apps conference in San Francisco. “But it turned out to be around 5 to 10 percent, meaning that we’re taking a 20 percent net tax.”

For comparison, Facebook’s biggest developer, Zynga, revealed in its prospectus that it had 3.4 million unique payers during the third quarter of last year. That’s out of 152 monthly unique users in the same time period, suggesting a 2.2 percent conversion rate. Zynga attracts a much larger, more casual audience, so we’d expect to see a lower conversion rate compared to Kabam.

Anil Dharni, who co-founded Funzio, which has had hits on iOS and Facebook like Crime City, said the move to Credits ended up being roughly even for the company.

“Facebook credits is a wash for us,” he said. “It increased the conversion rate but we actually saw a gradual decrease in average revenue per paying user. It’s hard to know why.” Funzio has since moved its focus to iOS, where it has launched Crime City and Modern War, both titles that reached the top of the grossing charts.

Facebook’s payments revenue increased 20 percent quarter-over-quarter going into the end of last year to $188 million, suggesting that the platform may be improving at getting users to pay. However, the company also ran promotions during that time, giving some users an 80 percent discount on Credits. So it’s hard to tell whether those are genuine increases.

If Facebook can’t improve at converting more paying users, it risks losing developer talent to competing platforms like Apple’s iOS and Google’s Android. That in turn could mean growth in its payments business will slow or stagnate over the next year. Facebook diversified its business last year to make payments 17 percent of its revenues in the fourth quarter, up from 10 percent the year before. The rest is advertising.

Developers earned $1.4 billion in revenue from transactions on the platform last year, according to Facebook’s filing for an IPO. Apple’s iOS was able to pay developers about half of that or $700 million in a single quarter during the holiday season, according to their most recent earnings call.

“Mobile users are more engaged and they produce higher revenue than our tethered titles on PCs,” said John Spinale, the senior vice president of social games at Disney. He added, “We’re also seeing incredible revenue growth on Android. Android is a little bit unwieldy, but the revenue is meaningful enough that it’s worth the pain of doing.”

One developer, Wooga, which is the biggest social game developer in Europe and trails only Zynga in daily active users, defended Credits. The company’s chief executive Jens Begemann suggested that Facebook takes more flack because it instituted a 30 percent revenue share after several years of not charging developers for earning revenue off its platform. Apple had a split from the beginning.

“We have been on Facebook Credits since Day One. So for us, we don’t see really negative trends,” he said. “I’ve also not heard anyone complain about Apple for their 30 percent revenue share.”