The social games market has exploded onto the startup scene in the last three years.  We all know about the remarkable growth of companies in this space, yet we tend to forget that Zynga was founded in July 2007.

But the social games business has clearly entered a new phase of institutionalization. I don’t mean just consolidation via EA acquisition of Playfish, Disney acquisition of Playdom, huge strategic investments from Google & SOFTBANK in Zynga, and plus countless smaller consolidations.  I mean there are secular shifts going on in the industry which mean the land grab of the recent past is beginning to wane, and the near future of social games may start to mirror other gaming waves (PC, console, handheld, etc). 

1) Production Values Going Up – Every social game developer I speak to agrees that production values are increasing.  Consumers should benefit from richer, more engaging games but obviously development costs are going up as game companies large and small engage in an “arms race” with their competitors. This may also have the potential to shift gamer attention from other platforms or other forms of entertainment.

2) Low/No Cost Customer Acquisition Is Largely Gone – This has been true for some time (6-12mo), as social networks like Facebook changed the way in-game activity could be published to status feeds.  These changes dramatically impacted zero-cost viral growth, but even paid acquisition through FB ads has transitioned from what was once a very cheap arbitrage to materially higher CPAs.  It’s still possible to attract hundreds of thousands of players relatively inexpensively, which can produce an attractive small scale revenue stream (low 7-figure annualized) for games that monetize reasonably well.  But to create a breakout hit w/ 1M+ DAUs now requires a real marketing budget.

3) IP Starts to Matter – Disney didn’t buy Playdom for a huge user base or massive current revenue stream.  Playdom had essentially built up a holding company of several social game studios, both through organic growth and acquisition.  Disney bought the second largest social games labor force in the US, through which they will pump their massive portfolio of IP (Mickey, Buzz Lightyear, and the rest) to create branded games.  EA is doing the same with their licenses from sports leagues, Playdom had perviously lined up a deal with World Series of Poker (http://blog.games.com/2010/07/28/playdoms-poker-palace-gets-world-series-of-poker-branding/), and the trend will continue.  There’s still lots of opportunity for “original” games not developed on existing movies, sports stars, and books and plenty of developers will continue to clone each others’ games in popular genres.  But just like PC, console, and other game platforms, web & mobile social games will transition from being largely original to greater use of existing IP.

4) Zynga is Still Huge – Followers of the social games space know that Zynga has repeatedly broken records for the rapid growth of games like Farmville and others.  But the most staggering stat is that measured by daily active users (DAUs), the #1 social game company (Zynga) is larger than the #2-#30 companies combined.  That’s Google-like market share dominance.  Marc Pincus and the rest of the Zynga team clearly know how to run a studio that can continue to crank out hits.  They have the human and financial capital to deal with trends #1-3 above, but the nature of the competition is clearly different now and the company is working very hard to diversify it’s dependency on Facebook.

5) “Hardcore” Social Games Emerge – Most prior waves of the video game business have been driven initially by “hardcore” players rather than a “casual” mass market.  Casual is best thought of both as a demographic and a gameplaying context… but the browser-based social games world has been flipped, whereby “casual” led the evolution.  I think you’ll start to see more web and mobile social games which are targeted to “hardcore” players albeit often still in a “casual” gameplay setting.  But the latter will start to blur, with more social games targeted towards gamers who currently spend far more time on other platforms.

6) Picks & Shovels Businesses – The online offer companies (Offerpal, TrialPay, et al) pivoted neatly to serve the social games space, but I predict we’ll see more picks and shovels type businesses emerging in this sector (either within bigger companies or startups).  Cross-promotion platforms, payment systems, maybe even game engines specifically designed for the social games business will come down the pike.

The gold rush isn’t over, and there’s still huge opportunities for lots of new social game franchises to be built by both small and big developers.  But we’re pretty clearly moving into the middle innings here and everybody in the social games ecosystem is furiously trying to adapt.