Is giving away content for free a sustainable strategy for organizations fighting for profit in an increasingly competitive world market place? The electronic gaming world has seen its traditional business models torn up and rewritten over the past few years – leading to a major boom in investment but also some high-profile accidents. On Tuesday, October 16, the BABC held a panel event to discuss the future of social gaming at the Mission Bay Conference Center, generously sponsored by Aramark. Moderated by Sana Choudary of Yetizen Games Accelerator, Peter Moore, Chief Operating Officer of Electronic Arts was joined by Josh Williams of Kontagent and Jude Gomila of Heyzap, an online network for social gamers.

More than 200 million people across the world are estimated to use online social gaming platforms, which generated nearly $5 billion in revenue last year alone.

Between 2008 and 2010 revenues from the burgeoning industry grew more than 20-fold, and forecasts predicted its exponential expansion would continue. Last December Zynga – creator of free Facebook games such as Farmville, Draw Something, Words with Friends and Bubble Safari – was the darling of the industry, raising a billion dollars in its initial public offering.

One day in July however, the company’s stocks crashed by 40% after reporting a surprise loss. A few weeks ago, with revenues flat-lined on last year, the company announced it would be reducing staff numbers and closing studios in a bid to cut costs and refocus its business model.

For many commentators this summer’s events are a sign the bubble of social gaming is bursting in the face of the hard reality of monetization. Most players spend less than $5 a month in real money on their virtual hobbies. The key question for gaming companies is simple: is it possible to develop sustainable business models to convert the enthusiasm of their millions of users into a profit for investors?

For Jude Gomila, founder of Heyzap.com, it is important to remove the concept of social gaming as a whole from the Facebook platform.

“ Facebook games are a cash cow, but it’s a tapering growth model, because the number of new US users of Facebook itself are tapering off. Social gaming moves through different platforms – consoles, PCs, tablets – the idea of social gaming itself is not restricted to one specific platform.”

For Peter Moore, Officer of Electronic Arts, whilst some platform specific games may have very short lifespans, the concept of ‘social gaming’ is just the latest manifestation of the urge to play which has been behind the development of nearly all games throughout history.

“The very idea of gaming is about bringing people together,” he explained. “The channels and platforms they are played on evolve over time, but it is just the canvas – in this case Facebook – that is a bubble here. Many of the games on this platform – for example Playfish – are short lived. The algorithms are often simple, and frequently skimmed from other more complex games, like the Sims [the original life-simulator computer game, published by EA] and Sims Social [a version developed for Facebook], for example. These work on a system of negative feedback – you feel guilty you didn’t go to visit your farm or check your Sims, for example, and that’s what keeps you going back.”

The mechanic is much more sustainable for those gaming brands which already have a huge following – but whose popularity increases with their social connectivity. Prior to his current role, Moore was President of EA Sports, delivering some of the top-selling sports video games of the current console generation from franchises including FIFA, Madden NFL, NCAA Football and NHL (before that, he was responsible for leading both the Xbox® and Games for Windows® businesses at Microsoft Corp., and previously worked for SEGA).

He pointed out that FIFA, the popular soccer game, has more than 3 million players competing at any one time.

“Something like FIFA is an $800 million franchise,” Moore said. “The key to its success is being able to link gaming devices together in a persistent presence which allows me to go from device to device and keep my scores and rewards. If my 2-1 victory over you isn’t recorded, it means nothing. Our sociability as competitors is essential. I don’t want to play this offline, as I can’t beat my friends offline. The experience is fun because I am playing with my friends, not because of the canvas we’re playing on. I am willing to pay for this experience as it hooks me in. That is the future of social gaming.”

It is how the gaming industry cultivates these groups of players and their desire to compete amongst themselves which drives its strategy to avoid the struggles of other physical media producers in recent years.

After all, sales of physical games have dropped by 25% over the past year alone. The industry is being forced to change – and for Peter Moore, companies have to get used to giving away their products as free social games in order to profit.

“Gaming companies see their gamers as a fund,” he said. “In the 1990s you could count the number of gamers in the tens of millions – mainly boys in their bedrooms on rubbish TVs trying to shoot down fighter jets, and so on. The controllers were very complex, and they were eschewed by women. As the sale of physical media shrinks – and this is the same for music and movies – you need to expand that fund of players. In India, for example, most consumers can’t afford to pay $64 for a game. So you make it free, to build up the fund of gamers. But if as a player you want to progress further in a game – to get more points, to hold on to their scores, to reach the top of the leader board – then you have to pay. Just a little at a time. But this idea has exploded the fund.

“The core strategy is this: acquisition, engagement, monetization. To get people to play the games, you give them away. Free to play games are the lifesaver of the industry.”

The changing face of the physical media industry is very much influenced by shifts in the geography of consumer power across the world.

“Asia basically skipped physical games,” Moore explained. “In India, for example, from just one legal disc sold, 60,000 copies were made. Piracy worked out well for us. It built the brands for us with popular games like FIFA and Need for Speed. We’ve got no choice but to embrace free to play in order to survive there.

“Asia also has the infrastructure for very high speed internet. In South Korea people don’t go to the pub – they go and pay $5 to play World of Warcraft or Starcraft on very fast broadband with their friends. Their broadband is so superior to that in the US, for example, that it allowed them to skip the physical element completely.”

For Peter Moore, western countries have been experiencing a lag time in terms of physical game sales because of our love for huge televisions. “The TV is now a work of art – and it has allowed games consoles to make it out of the bedroom,” he explained. “Now these devices can also be used as a real family entertainment center – to play music, watch films, go on the internet, look at photos, and so on. Because of this, seven or eight years ago it finally became acceptable to have a games console in the living room for the woman of the home. This drove the development of the really expensive games like Halo and Call of Duty, which showcased the high tech high definition experience of the big new televisions. Even now though, that is beginning to change.”

“That model of spending $7 billion a year on developing new games is now going through a real revolution,” Moore continues. “In the past at Electronic Arts we focused on developing seven major games at once – now it’s 40. Free to play has completely changed the monolithic development model of taking 400 people two years to make a game. The business model is being completely reinvented.”

One way of doing so is to sell advertising space in the games themselves, which currently makes up around 14% of an average game’s revenue. Brands such as Dunkin Donuts, Wendy’s and Toyota have all been featured in The Sims Social, for instance, and in January Unilever kicked off a year-long advertising campaign for its products within the game.

As the social gaming space grows, its potential as a tool for raising brand awareness increases also. Josh Williams of Kontagent gave this example: “Recently a TV show wanted to create a social game out of its marketing budget to promote the show and put it out here. But people were getting so engaged with it, that the game became profitable on its own – people were buying it and the income came to supplement the TV show.”

For Williams, the bubble is not bursting, but metamorphosing; social games are becoming a marketing category in their own right. “We are seeing that more and more,” he said. “Every brand needs a game. For a TV show you have always had branding on accompanying products like clothes – now you need to think about social gaming as well.”

Whilst the fortunes of many companies tied to the volatile world of social media rise and fall, social gaming is a concept which dates back to the very first time men and women began to roll dice or play a game of chess with friends or family. It is in harnessing this sociable nature of gaming that the industry hopes to move forward – and in giving the products of their innovation away for free, they hope to bind their players to them, and collect payment down the line. It’s a bold strategy for a rapidly changing industry; time will tell if it’s truly a winning one.

Many thanks to our sponsors, ARAMARK and the Mission Bay Conference Center. We would also like to thank UKTI for their invaluable support in bringing this event together.