A battle has been unfolding in recent years as immersive 3D games have declined while casual, social and mobile games have arisen. The industry silos that make the immersive console and PC games blamed their slump on the general economy or console cycles. In fairness, their games are amazing and incredible. The trailers for these games make them look like blockbuster movie releases; how could they possibly go into decline? But this part of the industry has been somewhat in denial about a fundamental market shift away from their offerings. And they should not be surprised, as this change is foreshadowed both by disruptive product theory and by media industry history.

Disruption is always accompanied by a major new feature that the traditional industry or customers did not care about. In our case we are talking about social interaction. Because we are all seeking social value, consumer media interest has shifted to interactive social media, and away from traditionally passive media that only provided personal amusement. But the other factors that often seem to go along with disruption are rising consumer preferences for simplicity and convenience. This often parallels a decline in the fidelity expected by the public. We’ve seen this in the shift from phones and letters to email, and from email to texting. Texting alone is now a global market in excess of $100 billion and a decade ago nobody would have believed it could happen.

It seems that when a market becomes massive, simplicity and convenience are the driving factors and fidelity goes out the window. In the case of texting, SMS was invented purely as a tool for network technicians to test network presence. It was considered to be too clunky to appeal to consumers. But a mobile phone is portable and the convenience of being able to send a short text message from anywhere at anytime was of enough value to tolerate the clunkiness.

Similarly, there was a golden age for films prior to 1950 when to see anything on a screen you had to go to a movie theater. The best you could do at home was to have a radio, which became the most convenient way to get the news or live events. But for immersive entertainment, for a great show, you had to go to the movie theater. And everyone did. And then television came along. The film and radio industries didn’t really get TV, which, like SMS, had a humble beginning. TV was originally intended for civil defense communications. It was many years before the film industry took TV seriously as either a threat or an opportunity, and the dominant radio companies also underestimated TV. The esteemed leader of CBS, Bill Paley, thought so little of TV that he wouldn’t help his own radio stars make TV shows. Lucille Ball was one of his biggest radio stars but had to separately fund her own production company, Desilu, which of course then proved him wrong.

To watch a move you had to buy a ticket without really knowing what you were going to see. But TV was free, initially using an advertising business model that was later enhanced with monthly subscriptions and what we now call micro-transactions. TV became ubiquitous and the movie industry freaked out, rushing numerous gimmicks to market in the 1950s as they saw their growth vanish. In real dollars adjusted for inflation, the movie theater business has been flat since then, while TV grew into an enormous new business.

We are seeing exactly the same thing today with the shift from immersive hardcore games to casual social games. The latter are free with virtual goods micro-transactions. And they are on convenient and simple platforms like Facebook and mobile phones. When you see a trailer for a great movie or video game, it is mind-blowing excitement. And there will always be a market for it. And in the case of film, as with video games, the production budgets are always rising and the amazing immersiveness is only going to get better. But the mainstream shifted to TV and now they are shifting to casual social media like Facebook. For blockbuster films and console games, it is a hits business with high costs and high risks. By comparison, it is not so risky to produce a TV episode, a website or a Facebook game. Fewer companies will survive in the challenging blockbuster category but as with TV we will see a great deal of innovation from small new companies in new digital media that has social value.

Facebook policies have changed dramatically in the last year but Facebook.com now appears to be entering a period of stability and likely growth for social games. If you imagine Facebook as a home property, the app API was a brilliant backyard innovation that produced some unexpectedly lovely wildflowers in 2008. In 2009 Facebook seems to have closed the drapes and focused on interior decorating. By the time they looked out the back window again in late 2009, they were somewhat horrified to see that the yard was overgrown with weeds.

My father is really into gardening but I never really understood the distinction between a weed and a flower. They both have blossoms but apparently beauty is in the eye of the beholder and if you have a garden, blossoms are an extreme love-and-hate thing. In addition to these preferences, gardeners want things to be organized and don’t want any particular plant going beyond its boundaries. And so it was with Facebook as they dusted off their tools and waded into the yard to clean it up with various policy changes.

Apps and games that offer legitimate social engagement and play value are flowers. An app that merely exists to spread virally and offers very little true value to Facebook members is a weed. An app that overuses certain channels or features to the point of making itself unwelcome, is also a weed. The numbers on Facebakers.com and Appdata.com reflect the gardening process of 2010. If you can pardon the metaphoric shift, one could also say that some apps are like strains of bacteria and each policy change was like a does of antibiotics. Some apps were already dying as 2010 began but other, more virulent strains didn’t collapse until the end of app Notifications on March 1. Still other apps were tough enough that they were merely flattened out after March 1, but many of these collapsed after the middle of April when Requests were diminished. What remained and got stronger during this period were the more beautiful flowers that were a better fit for Facebook’s intentions for the platform.

It is now relatively safe to say that the “weedy” phase for games on Facebook is over. Overall industry numbers have stabilized and the biggest policy changes have been absorbed. The garden has been cleaned up and reorganized. More attractive flowers have been planted and are growing and Facebook is now a full-time gardener with water, fertilizer and other tools to make the garden bigger and more beautiful. The message to the industry is clear: make flowers, not weeds, and together we can make something wonderful.

Google has shown some recent conviction about the business of games.  Relative to the Android platform, however, they have some work to do.  The good news is that Android is ramping up and a lot of devices are selling.  Android has the potential to be a platform comparable to Apple by 2012.  But as a game platform right now, Android strikes out.  It is a well-known fact that the supply of good quality games on Android lags far behind what Facebook and Apple have to offer.  Here’s why:

Strike one:  many current devices do not have one-touch payment because they are not integrated with mobile carrier billing systems.  This is likely to be addressed comprehensively by 2011.

Strike two:  Conventional games don’t sell on Android because Google has a senseless and lazy policy to ignore what is posted into their app store. Google also allow consumers to try any paid app and then easily return it up to 24 hours later for a full refund.  Seriously, when so many other things on the app store are already free and everything else is free for 24 hours, why would anyone pay for a game?

Google defends this policy because they don’t want to police the store.  I could understand this if Google were a new startup with a small staff incurring startup losses.  But we are talking about Google!  If Apple and others can pay attention to what is in their app store, surely Google can also do so.  Google has ignored this problem and may remain in denial until 2011, when the widening deficit in their app quality compared with Facebook and Apple should finally motivate them to fix the problem.

Strike three:  Google does not currently allow competing ad networks on Android so there are no offer completion networks, which have been a staple of the growth and evolution of engagement and payment with social games.  As social games have been the only type of game that can monetize without direct payments, this policy nukes Android for the remainder of the game industry.  However,  Google’s recently announced acquisition of Jambool should soon provide at least one in-house offer network alternative.

As long as they keep selling devices, Android could be a great game business within two years, but it would blossom much faster if Google becomes more proactive about these issues.

Why tax yourselves, here is some free analysis of the Top 25 publishers of Facebook social games that have virtual item economies. My data comes from Appdata.com and Facebakers.com and shows the trend over the last four months from late March to late July, 2010.

The table below shows Digital Chocolate’s ascendance from 22^nd to the “Fab 5” in only four months. Also remarkable is that with Crowdstar and Playdom rumored to be for sale, Digital Chocolate could soon be the largest independent publisher of these social games after a company named Zynga.

This study specifically ignores high-traffic Facebook publishers of simple quiz, arcade and puzzle games that do not monetize well with virtual goods. Some of these guys may be large enough to make respectable revenue from advertising; but this requires extreme volume and is a challenging bet with the tide going out on Facebook.

In late March we were already seeing big declines from the end of notifications on March 1. Games that relied too heavily on notification spam for their growth were already descending rapidly but the Top 25 virtual goods publishers still racked up 478 million MAU (monthly uniques). Some of these companies dropped out of the Top 25 or were acquired by late July, so the current Top 25 represents some consolidation and is arguably more like 28 companies. Despite this help, Mark Zuckerberg’s mid-April “re-alignment” sent another cadre of games into a tailspin and the Top 25 of late July totaled a reduced 412 million MAU, a four-month drop of 66 million MAU. That’s a 14% drop which would annualize to a steep decline of 36%. However, the worst would appear to be over as Facebook now appears to be doing things to stabilize the game business.

Despite acquisitions and new games, Zynga fell 13% and Playdom would have also declined if not for its acquisitions. The only company now in the Top 8 that had organic growth in this period is Digital Chocolate. Where a company is dominated by one virtual goods game I have listed that game on the right. One would get the impression that the fads of farming, fish and animals are coming to an end; and too many of these companies appear to be one-trick ponies. Companies that grew organically are in bold. I also listed 3 additional companies #26 – #28 that were in the March Top 25 that no longer make the cut. Several companies have fallen a great deal, as they apparently lack the understanding or the resources to cope with Facebook’s changes.

Company Late March MAU – Late July MAU

1. Zynga                238                     208

2. EA                   51                      50

3. Playdom              35                      39

4. Crowdstar            48                      34

5. Digital Chocolate    1.8                     7.2

6. RockYou              19                      6.9     Zoo World

7. Country Life         8.7                     6.2     Country Life

8. Slashkey             10                      5.5     Farm Town

9. Ninja Saga           4.4                     5.5     Ninja Saga

10. Booyah              ---                     4.8     Nightclub City

11. 50 cubes            ---                     4.1     Mall World

12. Zipzapplay          ---                     4.0     Baking Life

13. Watercooler         1.9                     4.0     Kingdoms of Camelot

14. Metrogames          1.3                     3.8     Fashion World

15. Broken Bulb         5.0                     3.5

16. Meteor              8.0                     3.3

17. TwoFishes           3.7                     3.2    My Fish Bowl

19. Rekoo               5.0                     3.0

20. Castle Age          3.0                     2.1     Castle Age

21. SeriousBusiness*    3.6                     2.0     FriendsForSale

22. iwi                 ---                     1.9     SuperFun Town!

23. Tall Tree           4.0                     1.8     Fish World

24. Blue Fang           0.1                     1.7     Zoo Kingdom

25. zSlide              7.6                     1.5    Treasure Madness

26. Slide               7.6                     1.3

27. Five Minutes        3.3                     1.1    Happy Farm

28. Koram               2.0                     0.5    Koram Game

29. Challenge*          2.0                     0.4

*Acquired by Zynga and also included in Zynga’s July numbers.

Caution: There are some challenges for those of you that want to use AppData and Facebakers to dig deeper. For some odd reason, Facebook missed several days of reporting in mid-July and only recently began reporting again. AppData at the moment seems to also have a new, broken version that works on Mozilla but not Internet Explorer. Free stats on AppData only looks back 30 days, and Facebakers, while it can go back 6 months, is missing several new games and does not stay on top of mergers.

Digital Chocolate’s Millionaire City is flourishing with nearly four million active monthly users and having hit the number one spot on InsideSocialGames list of the fastest growing games on Facebook. But being on top doesn’t mean we’re slowing down! Here is a list of recent upgrades to help you develop your city and make more money faster.

• - Millionaire City’s newest “Decoration” is the Fountain II and only available to players at Level 28 or higher. The multi-tiered water attraction fits in a 2×2 plot and not only beautifies your city, but also adds value by increasing property rates by 10 percent within a 7 by 7 area for $120,000.

• - There’s a new architect in town and he’s drawing up plans for Super Skyscrapers, Millionaire City’s newest playground for business moguls with six figure salaries. Super Skyscrapers fill 5×4 plots and can only be built by players level 55 and higher with a price tag of $55,000,000 to build. Those cloud piercing beauties truly are reserved for the big boys and girls.

• - Players too busy to keep checking in on their renters can hire the Rent Collector to cash in on rent for them. Accessed via the Suitcase icon in the bottom left corner labeled “New!”, the Rent Collector can be employed to collect rent within a 12 by 12 area of residences for a predetermined amount of time.

• For six minutes of rent collecting services, players must pay $5,000 while two days will cost two gold bars, 15 days will cost 15 gold bars and 30 days will cost 25 gold bars (the best value of the service). Another option is to pay using Facebook’s new online currency, Facebook Credits which allow players to use real cash to obtain premium items at a moment’s notice.

• Using the Rent Collector may cost a cool penny, but the service makes sure you don’t miss picking up the checks and creates a reliable, automated way to cash in quick and easy. It takes cash to make cash, right?

• - Whoever said business with friends isn’t a good idea never played Millionaire City. The new Super Upgrades feature allows players to form business alliances with your Facebook friends by visiting their city and clicking the “Business Partners” icon on the left. Once your friend accepts the invitation, the income and experience points received after upgrading your friends’ developments will be greater for both you and your friend.

It is not surprising that Disney would buy Playdom or Tapulous.  What is surprising is that very few of the big media companies are doing very much about the breathtaking disruption in media in general.  Others should be following Disney’s lead, and fast.  Here’s why.

Media used to be analog, passive, boxed and sold for the purpose of amusement through channels that had limited shelf space (including television).  There was very little technology involved and each medium had a ubiquitous standard like NTSC.  Media companies did not need to excel at engineering or technology development, or even creativity, which they could easily outsource.  Hence, media business models used to be about using finance and distribution muscle to create chokeholds in the value chain.  I even founded and built Electronic Arts on these principles.  Disney, more recently, was still thinking this way in the first phase of their Pixar relationship.   What Pixar presages is now going to be a pandemic for all media industries.

New media is digital, interactive, virtual and sold through the unlimited shelf space of the Internet.  The consumer is no longer limited in their choices to what the distribution powers chose for them.  Now, the best business models are about using technology and engineering to create original properties and brands, also known as “IP” (Intellectual Property).  We saw this first with the Internet where the big winners have been new technology companies inventing new brands like Facebook.

But even the Internet was a case where there was a dominant platform standard which again allowed media companies to avoid having to become advanced engineering and technology companies.  Now, however, consumer platform use is permanently fragmented as consumers roam across various devices, screen sizes and networks.  Hence in addition to creating new IP, the other issue will be how to use technology leverage to efficiently cover all devices, screens, platforms and languages around the globe.

Outsourcing is not an option in this case because original IP requires such an advanced level of expertise.  You cannot just go to a third-world supplier and tell them to copy what Pixar is doing but to make up their own original brands.  And you also cannot rely on an industry of outside artists because they’ll all use their own software tools and code libraries and you won’t be able to efficiently cover the fragmentation.  There is only one solution and that is to become vertically integrated at enough scale and with enough expertise.

Big companies understandably struggle to innovate and would rather wait and “buy in” instead of having to build from scratch.  This is unlikely to change so it pits all the big media companies in competition with each other to acquire the clear industry leaders.  At this point, being a leader in digital media basically means being a game company that is competent, at minimum, on both the Internet and the iPhone.  I say a game company because we are talking about interactive media and this is not well understood outside the game industry.  I say the Internet because that is where digital media is happening now, such as Facebook.  And I say the iPhone because it is the first stepping-stone for the mobile web in the West.  And in case you haven’t figured this out yet, the web on mobile is going to be a much bigger consumer market than the web on the PC.  And it already is in places like Japan where the mobile web has had time to mature.

So if you are a big media company like Disney, you logically need to cover both Internet games and the iPhone.  This is obviously what they are thinking in making the two acquisitions as Playdom is strong on the web and Tapulous is strong on the iPhone.  Disney faces severe integration problems with their scattered digital media dominions but I give Disney credit for addressing the issue early.  The combined purchase price of Playdom and Tapulous is only about 10% of what they had to spend on Pixar.  Disney may face some challenges from being an earlier entrant among the big companies but they’ll get down the learning curve faster and be in a better position.  Their competitor that enters later will be the one that pays ten times more this time around.  And given the scarcity of acquisitions that can really solve this problem, some of the late entrants won’t find that there is anything good left to buy.

It gives me great pleasure to announce that Millionaire City is growing rapidly on Facebook and in a short time, it has made it on the Emerging Games list with close to 4 million monthly active users!

In Millionaire City, constructing Wonders not only beautifies your burgeoning metropolis, it raises property value. Who wouldn’t want brunch with a view of the Eiffel Tower or be able to take a stroll to the giant Pyramid complete with obelisks and a Koi pond just around the block?

A well-placed Wonder will easily boost tenant payments from your properties by hefty percentages effectively helping to increase your income and accelerating your progress towards millionaire status.

The Wonders category is found under the “Shop” tab where the Golden Statue is the only Wonder available from the beginning, though with higher experience levels, other Wonders become available with greater pay offs.

While Wonders take longer to construct than most other developments, they can prove profitable in the long run. Unlike Decorations (such as Cypress Trees and Fountains), Wonders yield higher percentage increases that cover a larger area.

If you want to play with the big leagues in order to draw the big crowds and the big money, an investment in Wonders is where it’s at. Recruit your friends to help you build the Wonders faster; each friend reduces the time by 10%. You can also pay for Instant Build but it’s more fun to get your friends involved and not to mention, it’s cheaper!

We were delighted to see Millionaire City rank Number One last week on InsideSocialGames’ list of the fastest growing games on Facebook. We’ve also just added French, German, Spanish, Italian and Portuguese versions that have now gone live. C’est marvelous! Beworden sie ein immobilien erfolg! Sea un millonario!

Also on the charts recently was NanoStar Castles. Having recently architected and load tested the server back end for larger scale volumes, we are now able to promote and grow the game. In the last few days I have been enjoying playing with the flood of newcomers.

If you’ve not given NanoStar Castles a try, now is a good time. Play the tutorial first and then a single player game just to get your bearings. And then try live play as it is definitely more fun against real opponents. For those that want more information about the game we are reprinting below a few of my older blogs that provide some gameplay tips about the NanoStar characters.

Introduction – Part 1: KNOCK KNOCK

Introduction – Part 2: WATCH OUT FOR ROBIN HOOD

Introduction – Part 3: PREFER CATHOLIC SCHOOL GIRLS

Play Now: http://apps.facebook.com/nanostarcastles

Magic Mirror, on the wall, who is the fairest one of all? In the world of social gaming, it might be getting easier to tell.

New social games lacking a growing virtual goods economy and unable to easily exceed 100,000 daily players (DAU) on Facebook shouldn’t expect to generate much revenue and will likely struggle to recoup their development costs.

Despite the rising popularity of social games only 17 new games released in the first half of 2010 have reached these two benchmarks. And, of these 17 games, 15 came from venture-funded companies. Literally hundreds of other companies failed to make this list.

In addition, no single company published more than 2 of these top-tier games; an achievement shared by Zynga, Playdom, EA, Digital Chocolate and Crowdstar.

One might have expected more out of Zynga than just Treasure Isle and FrontierVille considering their staff size of 760, but Zynga is more focused on building up pre-existing live games like Farmville and expanding platform coverage beyond Facebook.com.  With their enormous cross-promotional funnel, a new hit for Zynga can be bigger than anyone else’s new hit.

Yet another victim of Facebook’s policy changes, Playdom’s Social City is now in decline; but it was the industry moon rocket of Q1 and is still at scale, joined on this list by the brand-new Verdonia.

Social City’s decline, however, hasn’t stopped Playdom from exploring new paths having acquired 2 additional publishers that also have games on the list:  Bola from Three Melons and Fashion World from MetroGames.

Meanwhile, EA and Playfish have stop-gapped a steep decline with the recent releases of My Empire and FIFA Superstars; Digital Chocolate’s new Millionaire City joins with MMA Pro Fighter to give DC a good one-two punch; and Crowdstar’s Hello City and Zoo Paradise both showed declines in June, but made the list from substantial growth earlier in the year.

Among the remaining 5 games are the notable Nightclub City from Booyah and Watercooler’s Kingdoms of Camelot.

In addition, if we apply similar criteria to older games we find that only another 7 virtual economy social games launched prior to 2010 have sustained at least 65% of their peak audience size (Zynga has 3 of the 7, led by Farmville and their poker game; and only one of these 7 games, Ninja Saga, is from a smaller independent developer).  Most of the hits of 2009 have declined precipitously and, despite the fact that most of them are from large, well-funded companies, they are getting scant marketing support because apparently it is unprofitable to do so.

What does all of this mean?  A speedy cleanup of the social game sector is underway, rapidly narrowing the industry to an oligopoly.  For starters, making a hit social game is obviously not as easy as it looks.  Older versions and policies of Facebook provided such a strong tailwind that nearly anything could sail to greatness.  But now it is a legitimate “hits business” like every other form of entertainment.

Facebook’s changes have also shortened product lifecycles and triggered a rapid consolidation phase.  The bar is now raised on competitive requirements like capitalization, scale and marketing.  In steepest decline are the pure developers that never pretended to meet these requirements.

Many small contenders are now being rolled up by larger developers like Playdom and Zynga while others just fade away.  A few will make new hits but for each of those more than 100 will fail.

Shallow games and apps that rely too heavily on spamming Facebook members, games that do not monetize well (since they won’t be able to justify additional investment in either new features or marketing campaigns)  and smaller companies that either cannot or will not attempt to raise capital have also been shown to be vulnerable.

Conversely, while in 2009 the big story was how small developers like Slashkey established new genres like farming, the big story in 2010 is that the strong will get stronger, as evidenced by the high correlation of venture involvement and established scale with the 17 successful new games of 2010 thus far.

With Zynga’s big lead, the consolidation scenario will look like Snow White and the Seven Dwarves.  I think we already have candidates for Grumpy, Happy and Sleepy.  At Digital Chocolate we have been Sneezy at times but aspire to be Doc and are certainly not Bashful.  Industry auditions are now being held for Dopey.

Rocky had Mickey, the Karate Kid had Mr. Miyagi and now your friends can have you. Every great fighter begins with a gym and a trainer and with the new MMA Gym function, you can help your friends train to become fully-fledged MMA fighters.

The latest addition to Digital Chocolate’s MMA Pro Fighter for Facebook adds a new dimension to the MMA simulation where users develop characters and learn various martial arts styles to enter the ring against opponents where they fight to gain experience points, cash and respect.

With the MMA Gym function, users can invite friends to join as they watch their gym grow adding apprentices to train alongside them. The perk: increased interactivity and massive cash rewards.

The best part about this new wrinkle to the game is that it couldn’t be easier.

Click on “Gym” tab  located between the tabs “Train” and “Challenges.” Here, players can invite their Facebook friends to join their gym as an apprentice.

Once the new apprentice reaches level 10, both the apprentice and the player will receive a $2000 reward. It’s that simple!

Invite your friends now to start earning money, but keep training or else the student may become the master.