Video games see social networks as growth engine – MarketWatch

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By Dan Gallagher, MarketWatch

SAN FRANCISCO (MarketWatch) — For those wondering when the video-game industry will enter its next console cycle, some argue that the new cycle has already started, with social networks as the next big opportunity.

Such was apparent this week at the Game Developers’ Conference in San Francisco, an annual gathering of video-game designers and publishers. while the event saw some big developments among traditional gaming — most notably, Sony’s new motion-control system — a big theme running through the event was the rapid growth of social networking and the related opportunity for game makers.

The opportunity is big indeed. The largest social-network site — Facebook — alone has more than 400 million monthly users. MySpace, its closest rival, has 100 million monthly users. Those numbers are far above the number of people who own traditional video-game consoles.

“We have a new mainstream mass audience,” Gareth Davis, platform manager at Facebook, said during a panel discussion at GDC. “We think this is a lot of opportunity for game developers to tap into.”

Games are becoming hot property for social networks. The soaring popularity of games such as “Mafia Wars” and “FarmVille” over Facebook has attracted the interest of both game makers and investors looking to pump money into the next Big thing.

Such was apparent at GDC this week. Among the crowd of programmers and designers were venture capitalists, financial analysts and private equity funds, sniffing for opportunities in the market.

These investors are not looking to sink money into the next PlayStation or Xbox game; rather, they are looking for the next Zynga — the San Francisco-based company that makes “Mafia Wars,” “FarmVille” and other social-network games. still privately held, Zynga landed $180 million in funding late last year from Digital Sky Technologies, or DST, the Russian outfit that also bought a large stake in Facebook.

Media reports said the investment gave Zynga a market valuation between $1.5 billion and $3 billion. The company reported 100 million unique monthly users in November, and reportedly has about $250 million in annual revenue.

“Amazingly, there are over 200 million people playing games on Facebook each month, out of 400 million total Facebook users, suggesting a 50% penetration rate,” said Todd Greenwald of Signal Hill Capital, who also noted that more than 500,000 gaming apps have been developed to date.

Competing for gamers — and developers

For game makers, the growing interest among social networks provides a new opportunity beyond the industry’s typical channels — which are largely consoles such as the PlayStation 3, Xbox 360, Wii and associated handheld devices.

These social networks are competing against each other to lure developers — and each offers its own unique set of advantages and disadvantages.

Sony moves toward Wii-like motion

Sony unveiled the details of its new motion-control video game system called PlayStation Move, which is expected to hit the market later this year. MarketWatch’s Dan Gallagher and Walt Mossberg explain why we’re likely to see this technology play a role beyond video games in the near-future.

Facebook offers the largest base of users, by far. Offsetting that is recent developments whereby the social-networking giant will be taking a portion of the revenue generated by games in the form of virtual goods sales. The company has also changed some of its policies that had previously allowed game makers to market their games more aggressively, after several users compared the efforts to spam.

“When you have 400 million people, it’s important to protect the user experience,” Facebook’s Davis said.

MySpace — which runs a distant second to Facebook in terms of market share — is taking a slightly different approach.

Video games see social networks as growth engine – MarketWatch

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