The Social

The tractors, fuzzy pets, and mobster ambushes might be virtual, but the past few weeks have shown that the battle for social-gaming market share is very, very real.

Monday saw the long-rumored announcement of gamemaker Playfish's big-ticket sale to Electronic Arts, a big win for a product niche some had dismissed early on as faddish and silly. But it comes at a time when there's ongoing press blitz over how much social-gaming companies rely on lucrative but potentially misleading means of advertising in the form of lead-generating offers.

Both of these developments have changed the course of an industry moving at hyperspeed--but was anybody really sure where it was going in the first place? Playfish, arguably, was the safest buy in the space. Headquartered in the U.K., its revenues were solid--one analyst estimates it'll pull in $100 million this year--and it was less reliant on controversial third-party offer companies than many of its competitors.

Social-game manufacturer Playfish announced its acquisition by Electronic Arts on Monday.

(Credit: Playfish)

"I'd say hats off to EA," said Jeremy Liew of Lightspeed Venture Partners, which has invested in social-gaming firms like Serious Business and RockYou. "It's a much lower-fidelity product (meaning cheaper to produce) that appeals to a much simpler consumer (than the traditional gamer), but they recognized the risk that it poses to their business and they were willing to take a decisive action."

Playfish had a great exit, as they say in the venture capital world. Things might not go quite as smoothly for other social-gaming companies.

Here's some background. The social gaming craze grew out of an array of new time-wasters that involved neither a significant commitment nor a complicated set of rules. Companies like Zynga, Playdom, and SGN attracted millions of investor dollars, and word has it that former MySpace CEO Chris DeWolfe wants to roll up a bunch of smaller companies into another powerhouse. And now that EA has a big social-gaming company in its arsenal, other older video game manufacturers might push fast-forward on investments or acquisitions in the space.

Playfish, manufacturer of games like Pet Society and Restaurant City, was at the time of its buy either the second or third biggest company in the space--behind Zynga, but neck-and-neck with Playdom. Like most of its competitors, it makes money through a combination of advertising and the sale of virtual goods, which players can either purchase with real-world cash or can earn by completing offers and surveys from third-party companies like Offerpal Media or Super Rewards.

The industry common wisdom is that Playfish's revenue is less reliant on those offer companies than some other social-network gamemakers. That's a good thing, considering the bad press the likes of Offerpal have been pulling in recently. In a highly-publicized confrontation with Offerpal CEO Anu Shukla (who resigned from her post in a matter of days), TechCrunch blogger Michael Arrington launched a full-on assault against the business of social-game offers. They're no more than scams, he alleged, since many offers actually have hidden costs attached for consumers: entering your cell phone number to receive the results of a quiz you took, for example, may actually tack a charge onto your phone bill.

"The industry hasn't done, in general, as good a job as it could have of maintaining the offers' integrity to users," Jason Oberfest, a former MySpace executive who recently joined the executive team of iPhone and social-network gaming company Ngmoco. "(Playfish was) way more conservative in how they've used offers, and I'm sure, frankly, that their revenue per user has probably suffered a little as a result, but it's clearly played out well for them."

Even without the offers controversy, social gaming is a volatile industry: few if any of the companies in the space are older than five years. It's a hit-driven business, with companies needing to work around the clock to keep audiences playing and push out new games lest the current sensations grow stale. There's already a history of lawsuits and legal threats, often over rival gamemakers' extremely similar products. When bloggers started their keyboard assault on the likes of Offerpal, it was only adding to the sector's reputation for fast money, cutthroat competition, and occasionally shady business practices.

Playfish may have exited just in time. Some of the small to medium-size social-gaming companies are undoubtedly hunting for buyers, and Zynga has gotten so big that rumors suggest it may be looking to file for an IPO. With all the controversy over offers and whether social-gaming companies' revenues were inflated by misleading ads, there's a chance that their profits--and hence, their valuations to prospective investors or buyers--may take a significant hit.

Still, venture capitalist Liew doesn't think that will make a huge difference. "Zynga said 30 percent of their revenue comes from offers, and I think that's pretty representative of the industry," he estimated. "Let's say 20 percent of the offers are scammy, so that's 6 percent of the revenue of these companies that's at risk. It doesn't change the answer as to whether this is a valuable company."

Maybe so, but there are other complications. Facebook, the biggest destination for social games, continues to make alterations to its developer platform. Most recently, the massive social network announced some changes that limit games' and other applications' appearance in members' news feeds, a move that may make it more difficult for start-ups to enter the space as well as drive already-big companies to purchase more advertising space in order to get the word out about their latest games and keep acquiring new customers.

Social-gaming companies are already some of the biggest advertisers on Facebook, with the biggest one, Zynga, spending as much as $50 million this year on Facebook ads alone, according to estimates from industry insiders. If revenues are potentially going to decline (and no one can quite agree on how much) as a result of a crackdown on offers, but advertising costs may go up as companies attempt to increase their reach on Facebook, that makes their balance sheets look less sunny.

For all the ugliness of the Offerpal mess, it could have been much less pleasant if the scrutiny was coming from lawmakers rather than industry bloggers--like the several state attorneys general who were particularly vocal about stamping out misleading offers in display ads, but haven't yet targeted social networks. And changes appear to be imminent. Zynga CEO Mark Pincus announced Sunday that the company has blocked all cost-per-action offers until the situation calms down and it's easier to weed out scams. Playdom, too, says it is continuing to make its business less reliant on offers.

"Offers are an important industry issue, and particularly important for our players," CEO John Pleasants, a former high-ranking EA exec who left for the fast-growing company this summer, said of Playdom in an e-mail to CNET News. "When I joined as CEO, Playdom began a company-wide effort to deliver a quality user experience on our offer walls...We've dropped more than 1,500 offers that don't meet our standards. In tandem with these efforts, we have actively grown the direct payment portion of our business; offers, otherwise known as CPA advertising, currently account for less than 20 percent of our revenue and continue to shrink."

Social-gaming companies don't want to look like criminal operations, nor do they want to look like they're turning a blind eye to questionable third-party activity. While Zynga and Playdom are big enough to sacrifice that revenue, some other companies that are likely hunting for buyers might not fare so well. As a result, future acquisitions in the space could easily be much smaller. Price tags could be lower if revenues deflate, and now that EA's made its buy, the list of potential buyers who could actually pay $300 million is now one company shorter. There's a legitimate question as to who would actually be buying; even optimistic insiders say that this could get in the way of another Playfish-like exit.

"I think the more important question is who can pay. Because if you want to buy Zynga, it's way more than Playfish. If you want to buy Playdom, I think it's going to be equivalent, if not a little bit more than Playfish," Liew said. "There are a lot of people who want to get into social gaming that don't have the ability to write a check of that size, and so they are going to be looking at the next tier of companies. That's where I think we're going to see some action."

In other words, we still don't know who the next real winner will be.

The industry P.R. frenzy over scams in ads and offers on social networks goes on: Facebook announced on Thursday evening in a post on its developer blog that since it updated its developer platform terms of service this summer, it has disabled two ad networks that it says were running deceptive advertisements.

This comes in the wake of allegations that some companies that power offer- and survey-related moneymaking operations for social-gaming applications on platforms like Facebook's have effectively been scamming users into paying for services without disclosing those costs. One of them, Offerpal Media, has been particularly visible in the crosshairs.

"This battle is not new and it's far from over," the post by Facebook's Nick Giano wrote. "We faced stimulus scam ads on our own system earlier this year and pushed them off the site with rigorous enforcement. We did the same months later when deceptive ads from third-party ad networks appeared in applications. We're doing that again now as we see them appear in the form of offers."

Additionally, Facebook--which has said for quite some time that many of the activities highlighted in the "app scam" controversy are already banned by its terms of service--included in the post that more than 100 developer applications have been either "suspended or brought into compliance" over advertising issues, and that more than half of them were used by at least 1 million Facebook members per month. It's not clear whether these were all related to scams, or to other advertising-related infringements like the Burger King marketing campaign that encouraged users to "unfriend" their contacts in exchange for a free cheeseburger.

Facebook representatives declined to name which ad networks or applications it has banned. But the company did ban two companies in June, Social Hour and Social Reach, citing ad network policy violations. It's possible that the two ad networks mentioned in Facebook's blog post were banned months ago, given the "since July" language.

Earlier this week, MySpace--another big destination for social-network apps--announced that it had updated its terms of service to ban app scams. Prior to that, several prominent application manufacturers announced that they had banned potentially deceptive offers, despite the fact that they are responsible for a big chunk of virtual-goods revenues.

An update was made to this post at 7:51 a.m. PT on November 6 to note that Facebook banned two ad networks in June.

It looks like the brouhaha surrounding social-app moneymaker Offerpal Media is bigger than founder Anu Shukla's "sh*t, double sh*t, and bullsh*t" response to the accusation that its business is built on scamming consumers. It's got upcoming developments in two lawsuits, one in which it's the plaintiff and one in which Shukla is a defendant.

VentureBeat's Dean Takahashi reported Thursday that a lawsuit was filed in an Alameda County, Calif., superior court against Shukla and co-founder Michael Liu on behalf of Kevin Halpern, who alleges that he helped found the company and was then shut out. In a court complaint, Halpert says that in exchange for offering his social-networking expertise to what would become Offerpal, Shukla promised him a 15 to 20 percent stake in the company that never came to fruition.

The defendant's motion to dismiss the breach-of-contract suit is scheduled for November 24, according to public court documents. On Wednesday, Offerpal had announced that Shukla would be leaving her post as CEO and would be replaced by digital-ad veteran George Garrick.

But that's not the only legal dispute that Offerpal is in. There's a judicial settlement conference scheduled for Friday in the trademark infringement lawsuit that Offerpal filed against Kickflip, a former customer that went on to create a competing business, called Gambit, according to a person familiar with the court details. The suit was originally filed in April, and the status of a potential settlement is currently unclear because most of the events thus far, as well as Friday's scheduled meeting, have been behind closed doors.

But the reason why Offerpal has been in the news so much as of late has been because of Shukla's public altercation with TechCrunch's Michael Arrington at last month's Virtual Goods Summit in San Francisco. In response to Arrington's allegations that Offerpal's profitable business, used by many social-gaming companies as a way for users to earn virtual goods in-game, actually misleads players into signing up for paid offers and subscriptions.

Following the Arrington-Shukla spat, a number of high-profile names in the gaming and social-networking world came out against developer-app scams and misleading ads. Offerpal maintains that it runs a legitimate business. But it's clear that this company's issues run quite a bit deeper than a single PR fiasco.

In the wake of a firestorm over just how much of social-gaming companies' profits can be attributed to potentially scammy offers and incentives, News Corp.'s MySpace has taken a stand (and, it could be said, taken advantage of the PR opportunity) by coming out vocally against them.

"We're adding a fifth principle (to our developer terms of use) that clarifies a specific use case that we feel is particularly damaging to the user experience: promotions that include hidden renewals without specific opt-in will not be permitted," a company blog post by CEO Owen Van Natta read. "Because it's our belief opt-out offers are misleading and do not have the best interests of the users in mind, we will be updating our Terms of Use this week to better clarify this for users and developers."

What exactly is he referring to? In many of the most popular (and profitable) games built for big social-networking platforms like Facebook and MySpace, players can progress faster in the game by either buying virtual goods with "real" money, or by completing offers and surveys from a partner company like the prominent Offerpal Media. Critics say that many of these offers aren't actually free, and unwittingly can sign users up for expensive subscriptions or programs.

After a public confrontation between TechCrunch's Michael Arrington and Offerpal CEO Anu Shukla at last week's Virtual Goods Summit event in San Francisco, game makers like Zynga and RockYou put out statements saying that they're cracking down on offers that are potentially misleading.

Could this lead to real industry changes? Yes. But keep in mind that Facebook, the biggest destination for these social games, already bans this stuff in theory. "Ads cannot be deceptive or fraudulent about any offer made," the company's advertising guidelines read, and adds "if an ad includes a price, discount, or 'free' offer...the destination URL for the ad must link to a page that clearly and accurately offers the exact deal the ad has displayed (and) the ad must clearly state what action or set of actions is required to qualify for the offer."

But judging by the amount of sketchiness that allegedly takes place on the platform, it seems like advertisers aren't necessarily following these guidelines. Whether MySpace's stance against them can lead to a legitimate crackdown has yet to be seen.

Not so long ago, the faces of gaming on social networks were those of zombies, vampires, and cuddly virtual pets. Now it's more along the lines of Michael Corleone or Tony Soprano.

You've probably seen it in your news feed: From Facebook to MySpace and now Twitter, Mafia-themed games have more or less taken over. Mobsters, a game created by development company Playdom, is the most popular application on MySpace's platform. Mafia Wars, owned by Zynga, is a huge hit on Facebook. The Social Gaming Network has an iPhone app called Mafia: Respect and Retaliation. And earlier this month, a Twitter-based game called 140 Mafia launched. The craze appears to have started with a Facebook app called Mob Wars, which was built by a smaller company called Psycho Monkey.

The premises of most of these games are the same. You can found or join a "mob" with friends from the social network that the game has been built on. You can carry out missions, including "killing" other players in rival mobs, in order to earn points. Your activities are broadcast, via news feeds or Twitter posts, to your friends on the network in question.

With the mobster gaming craze, social-network developers may have found the secret to bringing multiplayer role-playing games--long the lucrative domain of ultrageeks--fully into the mainstream. They can build elaborate role-playing scenarios with points, levels, teams, and weapons, but without the nerdy stigma that's become attached to fantasy-themed games in the vein of World of Warcraft. (A 2006 episode of the Comedy Central cartoon "South Park" summed this up well.)

"A lot of the core architecture is very similar to role-playing games in the past, in the way that levels and achievements and so forth are often themed around the certain topic but are pretty generic, actually," said Justin Smith, who runs the blogs Inside Facebook and Inside Social Games. "When you compare a dragon game to a mob-based game, they're actually pretty much the same thing with different content."

"People just really like the crime genre," said Mark Pincus, CEO of Zynga, which publishes Mafia Wars. The mobster game is currently the company's most popular app, with 15 million active users across social networks Facebook, MySpace, and Tagged. "GTA (Grand Theft Auto) and a lot of derivative games of GTA top the charts, and I think that it's more those games feel more culturally relevant to people than a lot of other games that go into other genres that are either historical or more fantasy. I think that people like fantasies that are closer to reality."

There's another side to it: Organized crime in the real world tends to be concerned with the illicit transfer of wealth in one form or another (drugs, laundered money, gambling, you name it). When you take the popular perception of the mobster lifestyle and transport it to a gaming environment, there are plenty of opportunities to bring money into the mix. Most of the Web's Mafia-themed role-playing games make money from display ads as well as the sale of virtual goods, and some make it possible to earn extra points and "level up" by completing offers and surveys. It's no secret that some social gaming companies are making a ton of money, but mobster games are a particularly lucrative enterprise.

"(It's about) climbing your way to the top, and the status, and the ego of being the biggest and the best and the toughest," said Jason Bailey, CEO and co-founder of Super Rewards, the company that has partnered with 140 Mafia to power its payment platform. In 140 Mafia, for example, players who want to speed up their "recovery" from a round of game play can petition to the "godfather" for a favor (and that'll cost them real money).

Plus, Bailey said, it gets personal: "It has that small violence factor as well, being able to feed on people and put them on the hit list. When somebody does that to you, when somebody kills your character...the rage that it conjures up in people is much much stronger and they're much more willing to retaliate than in a sports game or a racing-themed game."

As with any online sensation, though, the question remains: Is this just a fad? From film noir to "The Godfather" to "The Sopranos," mobster themes have a solid shelf life to them, but mobster games on social networks could easily fade from favor if something more exciting comes along. But the real lasting power, social gaming insiders said, is in the fact that Web development makes it possible to keep a game in a constant stage of evolution. Once these games hit critical mass--which Mafia games arguably have--it's easier to keep people around.

Short attention spans
They're also low-maintenance, said Dave Kahn, head product manager for Zynga's Mafia Wars.

"I would say the difference between what makes Mafia Wars more popular over time than your traditional console game or your traditional hardcore game is that you can have the same experience with five minutes of play and you can interact with your friends," Kahn said. "I would say a game like GTA or a game of that crime genre would be much more popular if you could interact with your friends on a daily basis, and it doesn't require much time investment for you and your friends to have that satisfactory interaction."

"You're able to come in and come out in short spurts. You can play for 30 seconds, you can play for five minutes," Jason Bailey said. "It's not like a first-person shooter or a real-time strategy game where, if the phone rings, you're going to get shot. It's really easy to come in and out of these games."

On the flip side, though, casual players who haven't put a massive time investment into a game are quite likely to be more fickle about whether they stick around or not. Time will tell when it comes to just how "sticky" mobster games turn out to be for players who aren't completely hardcore.

But beyond attention span issues, perhaps the biggest challenge to the creators of mobster games is that there are simply too many of them already, and the companies that make them have fallen into courtroom infighting that bears an ironic resemblance to actual mob warfare. There's an outstanding lawsuit between Zynga and Playdom, for example, over the latter's allegedly illegal use of the Mafia Wars name in advertising its own Mobsters game. And Mob Wars creator Psycho Monkey sued Zynga over copyright infringement in February.

"There's a variety of litigation that's still pending, and I think it just generally reflects the current culture of game development on social networks right now," Inside Social Games' Justin Smith said. "There's a lot of rapid iteration based on adapting other games and twisting them in a very slight way, and there haven't been many good examples of cases in which the IP has been successfully protected in the courts. So I think it will really be interesting in seeing how some of these cases play out over the next few months."

As we learned in the Scrabulous-Wordscraper-Lexulous affair last year, in which the manufacturer of board game Scrabble used litigation to force a Facebook-based imitator to change its name, intellectual property laws for games are complicated, and extremely similar games may legally coexist as long as they don't share a few key features. But it's not clear whether the mob wars over Mob Wars and its ilk will be without carnage.

"There's literally 20 or 30 mob-themed games on the Facebook and MySpace platforms, and that's conservative," Jason Bailey said. "If people find something that works, they copy it and copy it and copy it, ad nauseam."

The playing field for mobster games, as well as any other games on social networks that make money through virtual goods and transactions, could also change dramatically when social networks start introducing payment systems of their own. Facebook will start to do this soon, and it's also been circulated as a possible business model for Twitter. It's unclear what the rules will be in either case.

But Super Rewards' Jason Bailey--whose company will be a competitor to Facebook's in-house virtual currency platform, it should be said--thinks the dominance of mobster games won't change much if Facebook brings new rules to the applications on its platform. It may be too late for the massive social network to be the real kingpin when it comes to monetizing the likes of the mobster game craze.

"Facebook's issue, I believe, is it's hard to tack something like this on later...companies go out and spend millions of dollars building games for your platform," he said. Were Facebook to start requiring a cut of the revenues, "there would be literally a riot of people with torches at (CEO Mark) Zuckerberg's house tonight complaining about it."

Well, that's a whole different kind of mob.

The Social Gaming Network, a company best known for its Facebook Platform apps, has launched a new iPhone app that uses the handset as...a gaming controller.

Called "iFun," the app is a takeoff on the Social Gaming Network's existing sports apps: iGolf, iBowl, iBaseball, and the like. But instead of playing on your iPhone, you use your iPhone or iPod Touch much like the "Wiimote" device for Nintendo's Wii console. (Both gadgets use accelerometer technologies.) It connects via Wi-Fi or cellular network to your PC. You can then play against friends--remotely, and in real time.

Currently, iFun is restricted to a golf game but will soon expand--as well as to other devices with accelerometers in them, like the Android-powered G1. It also uses Facebook Connect for authentication.

Social Gaming Network CEO Shervin Pishevar told CNET News that the company is currently "lining up advertisers" and is interested in turning iFun into a platform for external developers to create their own games. The Social Gaming Network raised a $15 million investment round last spring, followed by more funding from Amazon founder Jeff Bezos' venture firm.

And--wait for it--here's the recession angle. Playing the free iFun game on an iPod Touch is "significantly cheaper than buying a Wii for Christmas," Pishevar said.

It's the M&A deal of the century: FluffFriends got bought!

The virtual-pet application built on Facebook's platform, which once permitted me to display a penguin named Bill Gates on my profile and invite friends to give him a nice hug, has officially been acquired by the Social Gaming Network. A price was not disclosed.

I named him Bill Gates.

(Credit: FluffFriends)

FluffFriends makes money through a virtual currency that translates to real cash, with which members purchase items to spruce up their pets. A release from the Social Gaming Network said that since January, the game makes an average of 192 percent more revenue per paid player, and members spend an average of 143 percent more per transaction.

Of note: FluffFriends was actually created by a Google engineer, Mike Sego.

Last month, the Social Gaming Network announced funding from Amazon.com founder Jeff Bezos' investment firm. It was already backed by $15 million in a round led by Greylock Partners.

Even though the iPhone has been dominating developer headlines recently, it looks as if there's still some air in the social-network gaming space.

The Social Gaming Network, a start-up that develops games for social platforms such as Facebook and OpenSocial, has received an undisclosed amount of funding from Amazon.com founder Jeff Bezos' personal investment firm, Bezos Expeditions.

This comes just months after the company closed a $15 million Series A round from Greylock Partners, the Founders Fund, and others.

Founded by the creators of Web 1.0 page creator Freewebs (which now calls itself Webs.com), the Social Gaming Network has assembled a portfolio of popular Facebook applications, such as Jetman, Super Snake, and Free Gifts, some of which it acquired from independent developers. It counts more than 54 million game installs.

SGN is one of the more prominent players in the casual-game space. It competes with Zynga, which was created by Tribe.net founder Mark Pincus.

The aim of the new funding, according to CEO Shervin Pishevar, is "to continue capturing new demographics in gaming by distributing the highest-quality games available on the social Web."

Bezos Expeditions also joined the most recent round of Twitter funding.

The Social Gaming Network, parent company of social-networking applications that do exactly what the name implies they would, has reason to celebrate.

The company has netted $15 million in first-round funding from Greylock Partners, the Founders Fund, Columbia Partners, and Novak Biddle Venture Partners.

Yes, that's $15 million for the people responsible for the Warbook, Jetman, and Super Snake applications clunking up your friends' Facebook profiles.

It makes sense. Gaming applications have proven to be some of the most popular apps on social-networking developer platforms like Facebook and MySpace.com, and veteran entrepreneurs have taken note. The Social Gaming Network was started by the founders of Webs.com--known in the Internet's earlier days as Freewebs--and Zynga, another well-funded gaming start-up created by Tribe.net founder Mark Pincus. Both companies have turned to independent developers too, encouraging them to work on games on their platforms-within-platforms.

The new funding will be used to "allocate even greater resources to research and development of its gaming platform, and produce more tools for social game developers who want to create a richer gaming experience on the social networks and the social Web," according to a statement. But it was also hinted that the cash will help the company add "more depth to its platform and diversity to its portfolio of games."

Considering the Social Gaming Network has made acquisitions in the past--snapping up Facebook applications such as Free Gifts--there will probably be more on the way.

Wonder if they'll make a play for Scrabulous.