Google, EA's New Frontier: Social Gaming

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).

Future Social Gaming Jewels

While the San Francisco-based Zynga is likely too large to be absorbed with a valuation reportedly in the low billions -- the company's worth has reportedly passed that of market leader EA -- other small game developers are potential M&A candidates.

Rumored targets include 6Waves in Hong Kong, the publisher of the popular Mall World game, and Crowdstar in Burlingame, Calif., the No. 2 developer on Facebook with more than 57 million monthly active users, according to AppData.

Other possibilities include Pop Cap Games in Seattle, the creator of the popular Bejeweled game (above) with more than 12 million monthly active users, and Redwood City, Calif.-based widget maker RockYou, whose rival Slide was acquired by Google in August for $228 million.

" These deals are an early sign of things to come in a big market," said Marc Metis, president of Digital Chocolate, a San Mateo, Calif.-based social game developer.

The rise in popularity among social games is really a story about the mounting use of smartphones, said KPCB's Gordon. "The app economy is in the middle of a tectonic collision with the major continents of mobile operating systems, creating mountains of opportunity," he said.

Even chipmaker Intel, via its Intel Capital venture arm, is getting into the social gaming game. Last week it announced that it was investing $8 million with a partner into Aurora Feint, the Burlingame, Calif. maker of the OpenFeint platform that powers some 3,400 mobile games.

Aurora Feint told TheStreet that it intends to leverage Intel's chip expertise to determine what platforms -- from tablets to smartphones -- hold the future for gaming.

"We like to partner with platform leaders who understand how to build infrastructure, have a global view of the industry and understand which way certain platforms are going," said Aurora Feint chairman Peter Relan. "We think Intel will be an amazing partner for us."

--Written by Olivia Oran in New York.

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