Who’s Making FarmVille and Mafia Wars So Profitable?

The video game industry has known for a while that social networks represented a threat to the bottom line of traditional publishers – but the depth of that threat was unknown. A new survey of U.S. and U.K. players, though, underscores just how fast this new gaming category has grown – and gives new insight into who’s playing.

Source: Facebook

There are approximately 100 million people in America and the U.K. regularly playing social network games such as FarmVille and Mafia Wars, according to a study by Information Solutions Group and PopCap Games. That’s nowhere close to the number of people playing on the Nintendo Wii or Microsoft Xbox 360 – but for an industry that’s less than three years old, it’s impressive.

Ironically, while many have worried about the impact of social gaming on publishers like Activision Blizzard and Electronic Arts, the demographics indicate that Nintendo may be most at risk to have players lured away.

According to ISG, the average age of social gamers in the U.S. is 48 – smack in the middle of the age range the Wii has actively courted. Women make up the majority of players, holding a 55 percent majority in the U.S. and 58 percent share in the U.K. However, for players 21 and younger – who make up a notable percentage of the core gamer demographic – only 6 percent play games on their social networks.

Of the people surveyed, 95 percent play multiple times per week – and nearly two-thirds play at least once per day. (U.S. players are more active than those in the U.K.) And over a quarter of them have spent real world money to buy in-game items.

Analysts expect the social games sector to generate more than $1 billion in revenues this year. And while their impact on console makers hasn’t been traumatic yet, the next few years could be telling. The Wii, Sony’s PS3 and Xbox 360 are currently about half way through their life cycle. Historically, at this point, it’s casual gamers who begin buying systems – and buying the bulk of the games sold.

This time around, though, there are a number of alternative ways for that audience to play games, many of them charging little or nothing. That could dissuade them from buying premium games which could cut deeply into publisher profits – and some companies are already taking action to prevent that.

In late 2009, Electronic Arts paid $300 million to acquire social games developer PlayFish. In a particularly telling move, that purchase was announced the same day EA unveiled plans to lay off 17 percent of its workforce – some 1,500 employees.

Zynga, the maker of FarmVille, has reportedly been approached by numerous publishers about a buyout, but has declined each offer. Many analysts believe the company is quietly preparing for an Initial Public Offering – with a valuation of $1 billion to $1.25 billion.

Facebook, in the past year, has grown from the eleventh to the fourth most trafficked Internet site, according to ComScore. It now accounts for 7 percent of all time spent online in the U.S.

Making games for the site isn’t an expensive thing to do – but players on social networks have shown little interest in large retail game franchises. (Take Two Interactive Software will try to break that trend later this year with a Facebook version of the highly successful “Sid Meier’s Civilization” franchise.)

Major publishers haven’t had a lot of organic success breaking into the market, so acquisitions are an easier way to achieve a foothold.

Because the audiences are so similar, though, some games that have found success with on online game sites such as Pogo.com and Yahoo! Games are trying to turn the tables. PlayFirst just released the fifth installment of its “Diner Dash” series, integrating Facebook Connect into the game. (Players can gift in-game elements to Facebook friends, which gives them an advantage if they purchase the game.)

“Diner Dash” has a Facebook fan page boasting roughly 18,000 fans. Leveraging that audience might allow PlayFirst to hang on to its paying audience, while still letting them brag about their achievements on their social network of choice.