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Article from SFGate.

“Just a few weeks after “Mafia Wars 2” went live on Facebook, Din Shlomi got tired of playing the game.

A self-described hard-core gamer from northern Israel, he spent years playing the original “Mafia Wars,” building a virtual criminal empire and fighting online gang wars. But Shlomi says the sequel – launched to great fanfare – has too many bugs (some missions couldn’t be completed) and he ran out of challenges at a certain point.

“Like every Zynga game, it can be very addicting,” Shlomi says, “but once you hit level 50 there was nothing to do. It was literally like hitting a ceiling.”

Two years after Zynga’s “FarmVille” enticed millions of Facebook users to plant fields of digital crops, social gaming has mushroomed into a multibillion-dollar industry. The San Francisco startup is weeks away from an initial public offering in which it hopes to raise $1 billion.

While expectations for the social game market remain robust – it will generate $14.2 billion in revenue in 2015, up from $6.1 billion this year, estimates Lazard Capital Markets – the business is experiencing its first growing pains. Hundreds of developers now compete for the clicks of online gamers who are spending shorter periods of time immersed in each game.

To stand out, Zynga and others spend several million dollars developing titles and millions more marketing them, which increasingly puts a squeeze on profit margins. And hits are harder to come by.

“The economics just aren’t what they used to be,” says Josh Williams, president and chief science officer at Kontagent, a consultant on social games.

“The cost of customer acquisition is going up, and that means there is going to be pressure on margins,” says Atul Bagga, an analyst with Lazard.

Slipping profits

Although Zynga continues to enjoy high-speed growth – revenue was up 80 percent in the third quarter, to $306.8 million – profit fell 54 percent, to $12.5 million, from the same period a year earlier.

“Mafia Wars 2” had all the makings of a blockbuster. Its development team, which grew to 80 people, worked for nearly a year on the game, heralded in an October media launch at the company’s new Townsend Street headquarters. (The lobby contains a 1970s Winnebago and a tunnel lit with color-pulsing LED tubes.) The game peaked at more than 2.5 million daily active users in October. Since early November, the virtual organized crime adventure has shed more than 900,000 players, according to research firm AppData.

Sales of “Mafia Wars 2” have not met the company’s own expectations, according to people inside the company who were not authorized to speak on the record. Executives are second-guessing one another about what went wrong. Zynga declined to make Chief Executive Officer Mark Pincus or other senior executives available for comment, citing the company’s quiet period before the IPO.

“I think they are learning that the sequel doesn’t work,” says Michael Pachter, a research analyst at Wedbush Securities.

The number of daily active users in a game is a critical metric of its profitability, according to Pachter, because daily users are more likely to spend on virtual items such as machine guns and shields. “The more frequently they come back, the more likely they are to pay.”

Less than 10 percent of “Mafia Wars 2” players are playing every day, far below Zynga’s 20 percent average for most games, Pachter says. The drop-off may stem from players becoming bored with the same old thing.

“All the old ‘Mafia Wars’ guys who finished everything you could do came over here and said, ‘This is the same game with different missions.’ They are already tired of it, so they are dropping off,” Pachter says. “I think it’s a good case study for what can go wrong.”

Keeping the numbers up means more marketing, and the expenditures don’t always pay immediate dividends. A prime example is Redwood City game developer Electronic Arts, which has pushed to become Zynga’s closest rival. EA found its first major social gaming success with “Sims Social,” a Facebook version of the company’s popular real-world simulator.

Pushing for daily users

Since the title’s release in August, it has attracted 33 million users, with 19 percent of players returning each day. “Sims Social” has become the second most popular game on Facebook after “CityVille.” Yet EA has spent so much money aggressively marketing the game to millions of Facebook users that it is not yet profitable, according to a person close to the company.

Typically, software makers get about 40 percent to 70 percent of their players through ads, and spend between 25 cents to $1.50 for each of those users, according to Kontagent’s Williams. For a game like “Sims Social,” which has reached more than 10 million daily users, EA may have spent at least $10 million on marketing, he says.

Saturating the market with ads is crucial to attracting a wide audience, says Kontagent’s Williams. The strategy, however, squeezes margins and makes it harder to profit from the game over the long term.

“I would estimate that only about 30 percent of social games whose developers are spending money on advertising are hitting a positive return on investment,” says Hussein Fazal, CEO of AdParlor, a consultant on Facebook advertising campaigns.”

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Article from SFGate.

“If Facebook were a country, it would be the third largest in the world, so it figures that the social networking giant is trying to develop its own currency – Facebook Credits. Already, those credits can buy virtual goods from more than 200 applications on the Facebook platform, like special crop seeds or enhanced tractors in the otherwise free-to-play social game FarmVille. But credits have moved into the physical world as well. Last week, Safeway Stores joined Target, Best Buy and Walmart in selling Facebook Credit gift cards, just in time for them to become a stocking stuffer for the onrushing holiday shopping season. “We want Facebook Credits to be the virtual currency on Facebook,” said product marketing manager Deborah Liu for the Palo Alto firm. Analysts say Facebook Credits also have the potential to become a universal online currency that crosses both applications and country borders, not to mention a multibillion-dollar revenue source for Facebook, which takes a 30 percent cut of each transaction. Credits, for example, could be the future currency used by publishers of digital content like news and video, said analyst Atul Bagga of the investment research firm Think Equity LLC. For now, “Facebook is only taking baby steps,” Bagga said. “But you can see that Facebook Credits can go far.”

Positioned to win

Indeed, online payment systems are a key component of the main theme for the Web 2.0 Summit that begins today at the Palace Hotel in San Francisco. The convention will focus on “a battle to gain the upper hand in crucial ‘points of control’ across the Internet Economy,” entrepreneur and tech journalist John Battelle wrote earlier this year in a blog post setting up the theme for this year’s conference. And with more than 500 million active members, Facebook is already positioned to become a winner in that battle. “As Facebook Credits increases in usage, Facebook will begin to look and feel like its own economy,” said Augie Ray, a senior analyst at Forrester Research Inc. The privately held Facebook isn’t disclosing how many of its members now use Facebook Credits, which grew out of a Gift Shop feature that closed Aug. 1. Earlier this month, Wedbush Securities projected Facebook will generate more than $1 billion in sales from virtual goods this year, and approach $2 billion next year. Currently, there are more than 200 games and applications from 75 developers that accept Facebook Credits for those virtual goods, including 22 of the 25 most popular social games. On Nov. 2, Facebook signed a five-year deal with Redwood City video game giant Electronic Arts to use Facebook Credits as its exclusive payment method for its social games, such as Pet Society, Restaurant City and FIFA Superstars. That followed a similar deal earlier this year with San Francisco’s Zynga Game Network Inc., maker of popular social games like FarmVille. But there are non-game apps, such as Family Tree and Hallmark Social Calendar, that also accept Facebook Credits for virtual gifts such as digital birthday cards. And charitable organizations like Stand Up to Cancer and the anti-malaria Nothing But Nets have accepted Facebook Credits donations. The payment system could become especially important since Facebook is also pushing its Connect program to directly bridge the social network’s members with millions of other websites.

Making it easy

The system works in a way that’s similar to real-world transactions such as using a BART transit card. Facebook members use a regular credit card, PayPal account or mobile phone account to buy a certain value of Facebook Credits, starting with 15 credits for $1.50. Facebook Credits accepts payments using 15 currencies, including dollars, euros and yen. Like BART cards, which deduct fares based on the distance of travel on the system, a Facebook Credits account is charged for the value of a virtual item that in real currency might cost only a few cents each. It’s the basic concept used by Apple Inc. to sell 99-cent songs on iTunes at a time when downloading songs for free was all the rage, said Alex Rampell, chief executive officer of Trial Pay Inc. “How did Apple get everybody to pay? They just made it very easy,” said Rampell, whose Mountain View company offers an advertising system that entices social game players to try a real product like pizza or cosmetics in exchange for Facebook Credits. Indeed, Facebook’s Liu said the company sees a “sweet spot” for making a frictionless micro-payment system. The company is slowly expanding its list of developers who can “just plug into Facebook Credits” and not have to worry about creating their own payment system, she said. Social gaming is just the first industry to be affected, “but we think a number of verticals will break through,” Liu said.

Potential markets

Airline tickets or other big-ticket purchases may not be practical for Facebook Credits. But news site publishers, for example, could use Facebook Credits to get readers to buy access to an important story or a special video, Bagga said. “And music is a very social phenomenon,” he said. “There are so many industries that can have disruptions due to the social networking phenomenon.” Facebook, however, is based on the proposition that members make the network work by sharing their personal information, so it has also sparked numerous controversies over privacy. Facebook Credits might bring even more scrutiny. “As Facebook becomes a bigger part of the user’s shopping and purchasing activities as well as an even greater part of their communications activities, there’s going to be a greater focus on the part of government as to what Facebook is doing,” Ray said. Read more here

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Article from SF Gate.

“Zynga Game Network Inc.’s estimated worth surpassed Electronic Arts Inc.‘s stock-market value, a sign of the ascendance of social-networking entertainment at the expense of traditional video games.

Zynga, the maker of such games as FarmVille and FrontierVille, is valued at $5.51 billion, according to SharesPost Inc., an exchange for shares of privately held companies. Electronic Arts, the second-largest game publisher by sales, is worth $5.22 billion on the Nasdaq Stock Market.

Started by Mark Pincus almost four years ago, Zynga has become one of the fastest-growing technology companies by using Facebook Inc.’s social network to distribute games. It makes money by selling virtual goods, such as vehicles and weapons that help players advance in games. The company has grabbed about a third of that market, which is worth $1.6 billion this year, according to Inside Network in Palo Alto.

“The valuation is not that crazy, given what’s going on in the market,” said Atul Bagga, an analyst at ThinkEquity LLC in San Francisco, who estimates the virtual-goods market may reach $3.6 billion in three years. “It’s not that terribly expensive seeing the growth prospects.”

Electronic Arts, meanwhile, faces declining retail sales of gaming hardware and software. Before Tuesday, its shares had dropped 7.4 percent since March 1. Zynga’s estimated value has more than doubled in that period.

Electronic Arts was the world’s biggest video-game publisher until 2008, when Activision merged with Vivendi SA‘s gaming business to form Activision Blizzard Inc.

Dani Dudeck, a spokeswoman for San Francisco’s Zynga, said the company doesn’t comment on its valuation. SharesPost bases its number on data from trades of private shares, research estimates and venture-financing valuations. Jeff Brown, a spokesman for Redwood City’s Electronic Arts, didn’t immediately respond to a request for comment.

Zynga is the largest maker of games on Facebook, with more than 210 million monthly active users, according to AppData.com, part of Inside Network, a research firm.

Zynga’s value on SharesPost was $2.61 billion in March. That’s when SharesPost introduced a new index for venture-backed companies, including Facebook, Twitter Inc. and LinkedIn Corp.”

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Article from TechCrunch.

“We all know that social gaming giant Zynga is one of the fastest growing tech companies of all time and has turned games like FarmVille into a mainstream phenomenon. And via international expansion and deals with Facebook and Google, Zynga has continued its path to domination of the social gaming market. We have an idea of the company’s revenue and other gaming statistics, but there is some data involving the backend of the platform that has not been revealed. Today, Zynga’s CTO Cadir Lee is speaking at Oracle’s OpenWorld conference about the gaming giant’s infrastructure, business and challenges.

Lee offers the following statistics:

  • 10 percent of the world’s internet population (approximately 215 million monthly users) has played a Zynga game.
  • The company adds as many as 1,000 servers every week to accommodate growing traffic.
  • Zynga’s properties move a whopping 1 petabyte of data daily, and the company operates its own data centers; using a hybrid private/public cloud infrastructure.
  • Zynga’s technology supports 3 billion neighbor connections on games like Frontierville and Farmville.

The company itself has been steadily adding employees, through both acquisitions and new hires, and now counts more than 1,200 full time employees and includes 13 game studios.”

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Here is a SF gate story that talks about high-tech growth.

“The technology industry is playing the white knight of San Francisco’s struggling office market, as startups and growing companies ink deals and scour the market for space emptied out by the financial meltdown.

Many of the tenants are swelling homegrown businesses like Twitter, while others are relocating from Silicon Valley or outside the Bay Area. As of June 15, 83 technology companies were in the market, seeking 1.5 million square feet of space, up 51 percent since the financial crash in fall 2008, according to brokerage firm Jones Lang LaSalle, which regularly tracks the market.

To be sure, that demand alone won’t turn around a market facing more than 13 million square feet of total vacancy, according to a first-quarter research report from Cassidy Turley BT Commercial. But it’s a big step in the right direction for San Francisco’s office market and employment.

“The greatest areas of job growth in San Francisco and the drivers for economic activity across a whole host of related sectors will come from those innovative industries,” said Michael Cohen, director of the mayor’s office of economic development.

One of the largest potential deals in the market is Zynga, the maker of popular social-networking games like FarmVille and Mafia Wars. The company is looking for anywhere from 150,000 square feet to 300,000 square feet of space, according to various industry sources, who asked to remain anonymous because disclosure of such information could affect their business.

Zynga was on the verge of signing a lease for approximately 140,000 square feet last fall, but that deal fell apart.

“Zynga doesn’t have an update on our expansion plans right now,” a spokeswoman said in an e-mail response to a Chronicle inquiry.

Expansion

Twitter, the popular microblogging service, expanded its San Francisco space by nearly six times in the past year. It had been looking for still more space, as much as an additional 100,000 square feet, but that effort seems to have gone quiet, sources say.

An especially encouraging trend for San Francisco business boosters, who have long lamented the exodus of companies to surrounding regions, is the relocation of a handful of Silicon Valley firms to the city in recent months.

Industry blog TechCrunch and video-streaming site MetaCafe moved up from Palo Alto, while Webcasting service Ustream and tech-consulting firm Encover Inc. arrived from Mountain View. Mobile application company Booyah Inc., also of Palo Alto, recently signed a lease to shift its headquarters to San Francisco.

In addition, gaming companies like Playdom Inc. and Playfish opened satellite offices in San Francisco, and Yammer Inc. moved to the city from Los Angeles. Meanwhile, there are a handful of out-of-state, and even out-of-country, companies touring space in the market right now, sources say.

Real estate and technology observers believe San Francisco is becoming a more attractive place to start a company or move to for a variety of reasons, including: South of Market rents that are about half of Palo Alto’s right now, the desire to cluster near success stories like Zynga and Twitter and the broader shift to the Web 2.0 world.

As Internet companies become as focused on social media and entertainment as they are on underlying technology, they want to locate near a different set of partners, customers and talent pools, several executives said.

It’s all about layering

“Tech is still the core of what we do, but you’ve got to add layers on top of this,” said David Rice, chief operating officer of MetaCafe Inc.

The company’s new address, at 128 King St., with exposed brick and a view of AT&T Park that puts their previous business-park space to shame, made it easier to tap into marketing, media and advertising expertise in the city, he said.

Other companies’ leaders say they opted for San Francisco because that’s where today’s engineering talent wants to be as well.

When David Sacks, chief executive of Yammer, asked his developers whether they should relocate the microblogging service for businesses to Palo Alto or San Francisco, the latter won hands down. This represents a distinct shift from a decade earlier when he was chief operating officer of PayPal in Palo Alto.

“There’s a lot more engineering talent living in San Francisco now,” he said. “The balance of power may have shifted.”

Web 2.0 firms also don’t need the massive research and development facilities required by the computer manufacturers and chipmakers that gave rise to Silicon Valley.

“Companies like Twitter can have incredible reach with a relatively small workforce,” said Kelly Pretzer, director of new media for the mayor’s office of economic development. “San Francisco has been able to complement that development in the industry nicely.”

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