Are social games the next billion-dollar Internet jackpot? Google (GOOG) seems to think so.
As online social gaming becomes a lucrative Web business, it's not surprising that Google is cozying up to game makers, particularly Zynga, creator of wildly popular online social games like FarmVille and Mafia Wars, as The Wall Street Journal reported late Tuesday.
Faced with the meteoric ascent of Facebook, which recently overtook the search giant as the Web's most popular site, Google is urgently working to craft a rival to combat the social networking juggernaut. And it's betting that social gaming will be a cornerstone of its strategy.
Other media moguls have taken notice as well. On Tuesday, Walt Disney (DIS) snapped up game developer Playdom -- the No. 3 game developer behind Zynga and Electronic Arts (ERTS) -- for $563.2 million. Giant video-game retailer GameStop bought Flash game developer Kongregate the same day -- putting an exclamation point on a flurry of recent investment in social gaming.
Build Communities -- or Wage War
On the Internet, fake chickens -- like those sold in Zynga's FarmVille game -- can mean real-world billions. Online games generate billions of dollars of revenue in China and other Asian countries. The U.S. market lags, but it's expected to hit $2 billion by 2012.
Online social games fuse traditional, if simplified, aspects of console-based games like those marketed by Sony (SNE) and Nintendo with social features like instant messaging, which have grown with so-called massively multiplayer online role-playing games. Social games emphasize virtual community-building -- or violent virtual warfare -- and allow users to connect with -- or "kill" -- existing online friends, as well as new ones.
Zynga, which is valued at $4.5 billion, makes money by selling objects in a make-believe world to players, who can earn virtual currency. As The New York Times recently observed: "A pink tractor, a FarmVille favorite, costs about $3.50, and fuel to power it is 60 cents. A Breton horse can be had for $4.40, and four chickens for $5.60." This all adds up, with potentially hundreds of millions of players, even if only a small fraction of them engage in virtual business.
Earlier this month, TechCrunch reported that Google had invested at least $100 million in Zynga. The three-year-old company's explosive growth -- Zynga projects 2011 revenue to reach $1 billion -- has also fueled the growth of Facebook, where 60 million people play its games.
Lately, Zynga has had something of a falling-out with Facebook, which perhaps fears its rapid success. So it's the perfect time for Google to make friends with the fast-growing company, as well as others in the social game industry.
Stringing Several Social Pieces Together
Google clearly wants a piece of this action, but the company's foray into social gaming represents just one of the building blocks it's assembling to challenge Facebook. After Google's Buzz debacle, it's hard to imagine that the company still entertains mounting a full frontal assault on Facebook, which recently passed 500 million users.
Instead, Google seems to have settled on a strategy to assemble the pieces of a social offering -- Google Music is another big one on the horizon -- hoping it can string them together later. Google already has powerful email, IM, and Web-based sharing products. If it can build up its entertainment offerings, it may be able to piece together a challenge to Facebook.
Online games are a big component of Google's strategy. Citing sources, TechCrunch flatly predicted that Zynga "will be the cornerstone of a new Google Games to launch later this year." The latest evidence is in a Journal report saying Google is in talks with Zynga -- we knew that -- Playdom, EA and others to incorporate their games into Google's still-secret game service, itself a part of Google's broader mission to compete with Facebook.
Google's new social strategy, reportedly known as Google Me, comes months after Buzz ran into a brick wall of opposition over privacy issues. That lesson taught Google it couldn't launch a Facebook rival directly. Instead, Google appears to be pursuing an incremental approach, in which its builds its offering and then connects the pieces together. Social games will clearly be a key part of that effort.
Finding Stock Ideas
Learn to do your research and find investments.View Course »