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TheStreet Open House

Google, EA's New Frontier: Social Gaming

Stocks in this article: ERTSDISAAPLGOOGINTC

NEW YORK ( TheStreet) -- As recent announcements from tech giants like Google (GOOG), Electronic Arts (ERTS) and even chipmaker Intel (INTC) underline, social gaming companies are hot, and not just for consumers.

Representing a market that some analysts have tagged to hit $2 billion by 2012, the social games sector -- startups creating browser-based computer and smartphone games that are integrated within social networks -- will continue to see big investment and M&A activity throughout the year and well into next, following a rash of recent deals.

Notable was EA's $20 million buyout last week of mobile app publisher Chillingo. Control of Chillingo allows EA access to revenue from sales of Angry Birds, the intensely addictive and popular smartphone game recently ranked the most popular paid Apple (AAPL) iPhone app.

"Games are on an inexorable march," said Bing Gordon, a partner at venture capital firm Kleiner Perkins Caufield & Byers and a former EA exec who helps manage the iFund, a $200 million pool for investment in mobile app games and technology. "It's going to be hard to be in education, branding and communications and not have a game strategy."

Social games, while still in their infancy as a market, represent a potential revenue influx for firms. Most social gaming companies generate cash from the sale of virtual goods, digital items that gamers buy with real dollars such as a cow on developer Zynga's FarmVille game. While the price of most virtual goods range from $1 to $3, these figures can add up -- the virtual goods market is expected to reach $1.6 billion in the U.S. this year, according to Inside Network.

Revenue perks aside, there are other reasons social games are attractive to big tech -- such as a more efficient shift in time to market. While traditional video game publishers like THQ (THQI) and Take Two Interactive (TTWO) have struggled to control ballooning production costs upwards of $30 million per game, social games can be created in several months with total development expenses totaling less than $1 million.

Social games are also distributed virally -- word of mouth or via the Internet -- without a need for expensive marketing campaigns.

Such low barriers to entry help social gaming companies develop a cost efficient, less risky business model, said David Cole, an analyst at video game research firm DFC Intelligence. If a title isn't a hit, these companies can simply pull the plug, a process that is much more difficult for large publishers.

While most social gaming companies have yet to post huge profits, large acquirers are nevertheless taking the plunge.

Last week's Chillingo acquisition follows DeNA's $400 million purchase of mobile gaming company ngmoco this month. Other recent gaming deals include Electronic Arts' acquisition of Playfish for $300 million and Disney's (DIS) purchase of Playdom for $763 million (Disney also recently acquired iPhone developer Tapulous).

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