E3: Video Games' Social Challenge

Pay $60 for a packaged game or get a variation of that content free online. That choice is putting pressure on game developers. Correlation or causation? Traditional game sales dropped 7 percent year-to-date through April, while free Facebook games and cheap iPhone and iPad applications have exploded.

Zynga's free Facebook games draw 235 million players monthly. Those players pay nothing upfront, but they spend hundreds of millions of dollars on so-called "virtual goods" to enhance their games. Zynga's annual revenue has been estimated as high as $700 million.

Traditional game companies are looking for a piece of the action. Electronic Arts bought social game maker Playfish for $300 million in November. Partnering EA Sports with Playfish, popular console game FIFA Soccer launched for free on Facebook last week. It's already attracted nearly 1.3 million players. Revenue, which would come from so-called "micropayments" to improve your team or swap players is still tiny, according to EA Sports president Peter Moore. But he tells us he expects Facebook game revenues to have a real impact on the company's bottom line within two years.

It's not just Facebook, consumers are also spending more time on iPhones and iPads , so game-makers are gunning for a piece of Apple's app store revenue. Activision Blizzard is launching six titles for the iPhone this month alone, including Guitar Hero and Call of Duty. CEO Bobby Kotick told me he doesn't expect to see significant revenue from this — not compared to its $5 billion business — but it can't afford to sit out the social gaming revolution.

Even on the console platform, the social component is key. XBox 360 , PS3 and Nintendo allow gamers to play against friends from thousands of miles away. XBox and PS3 make it particularly easy to update your status and game scores on Facebook and Twitter.

Game-makers rely on the social component of their games to keep consumers buying and playing. Tony Key, Ubisoft's SVP of sales and marketing tells us that the ability to play games with friends gives the games longevity, saying "they bring more people into the discussion and create bigger brands."

The social component may also drive game-makers growth. Wedbush analyst Michael Pachter predicts Activision and Electronic Arts will start charging subscriptions for gamers to play each other on hit titles "Modern Warfare 2."

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