Today we announced a $4m investment in Serious Business. Their social game, Friends For Sale, has become a top ten app on Facebook since it launched in November. I am very excited about working with Siqi and Alex and the rest of the team.

While there are a lot of games on the social network platforms now, many have game mechanics that have been ported from another medium. I think Siqi and Alex have developed the first game dynamic that is native to social networks. As I’ve mentioned before, social games differ from merely multiplayer games in that social context has an impact on the game play and enjoyment. I believe that the Serious Business team has a deep understanding of how to create these social games, and we’ll see more such games coming from them in the future.

Venturebeat has a good description of the first game:

Here’s how it works. You join Friends For Sale and receive a starter war chest of several thousand dollars of the company’s virtual currency, as well as a valuation of how much you’re worth. Then you see a list of all your Facebook friends who have added the application, along with their selling price, and you can start buying them up. Price is determined like in any market, by bidders — so if you’re competing against others to buy a particular friend, you’ll have to keep raising your bid in order to maintain ownership.

When you sell a friend, you get to keep half the profit. The other half goes to the person getting bought. You can also make money by doing things like inviting more friends to the application. You earn $2,000 for every four hours that you’re logged in, and $1,000 for every friend you invite. And when somebody buys you, your value increases.

What’s the point of owning a friend, besides making virtual money on their eventual sale? Well, you can buy them gifts, or you can use them to “poke” other friends.

So really, this game is a mask for deeper social intentions. Let’s say you’re a high school student and you want to show a classmate that you have a romantic interest them — buy them and give them a gift on Friends For Sale. Or lets say you want to attract the interest of a prominent entrepreneur and angel investor like early Googler Georges Harik. Buy him, if you can afford it: He’s my most expensive Facebook friend, worth more than half a million dollars in the app’s virtual currency (pictured, above; thankfully, he’s already an investor in VentureBeat).

Other coverage is in Techcrunch, and Inside Facebook.

Apologies for having gone dark on the blog for the last two weeks - I was out on vacation. However, I’m back in the saddle now, in time for the Web 2.0 expo this week. I’ll be around the conference at Moscone West much of the week, and in particular am speaking on “Games 2.0” on Friday at 11am.

I’ll give some of my thoughts on how the games industry is undergoing the same forces of change that led to web 2.0, and discuss this with an illustrious panel of entrepreneurs working in this area: Siqi Chen of Serious Business (Friends for Sale), Mark Pincus of Zynga Games, Shervin Pishevar of Social Games Network and Johan Christensen of Power Challenge.

It should be a great session, both for people in the games industry, and for those in the web industry. There is much to learn from game mechanics that are more broadly applicable to social media sites. I hope to see you there!

There are a couple of nice wrap-up articles on the Easter themed special events in MMOGs and Virtual worlds that took place over the weekend.

Massively surveys MMOG events in World of Warcraft, Lineage 2, Final Fantasty XI, Lord of the Rings Online and Second Life, noting:

Seasonal events are often the most popular in-game events in many of today’s MMOs. But each game’s designers have to find a way to slip these real world celebrations into the lore and mechanics of their persistent worlds.

Izzy Neis covers Easter events in kids online worlds, including Club Penguin, Buildabearville, Moshi Monsters and Nicktropolis. She says:

Perhaps I’m just picky, but I honestly think you cannot have a healthy, uber-strong sense of citizenship in your youth-based virtual worlds WITHOUT acknowledging real world excitement. I am consistently impressed by the thriving movement of the community in Club Penguin– they’re very good about giving their users the tools to play, instead of dictating to the users the play. Kids are actually forming their own civilization under the eyes of the moderators & site runners

My friends at Gaia tell me that they see a massive bump in usage during their theme events. As an example, last years invasion of vampires into Gaia on Halloween brought the site down several times during the event.

I think this idea of creating special events around real world events is incredibly powerful. It introduces the shared social context that the players and users of the MMOG/Virtual world which helps shape and condition responses to events. Facebook gifting spikes around the holidays for exactly the same reason; users import conventions and context from the real world.

I’m interested to hear anecdotes and specific data that readers can share about the success of tying in world events to real world events.

Last week Andrew Chen wrote an excellent post about the growth and potential decay of viral apps. Rather than just focusing on the elements of viral growth, Andrew also took into account the declining likelihood of an accepted invitation as you saturate a population, and the impact of churn. He provided a useful model to social media founders who are trying to estimate their growth, and what can go wrong when a viral app “jumps the shark”:

He notes:

* Early on, the growth of the curve is carried by the invitations
* However, over time the invitations start to slow down as you hit network saturation
* The retention coefficient affects your system by creating a “lagging indicator” on your acquisition - if you have good retention, even as your invites slow down, you won’t feel it as much
* If your retention sucks, then look out: The new invites can’t sustain the growth, and you end up with a rather dire “shark fin.”

I think this is a very useful model, but that it doesn’t quite predict what we typically see in real life. Rather than dropping to zero, failed viral apps typically hover at a steady level much lower than their peak. Since Andrew made the model available under “copyleft”, I made a small edit to his model. Rather than treating churn as a constant percentage of users in each time period, I treated it on a cohort level, with a higher churn rate in the early periods and lower churn as time goes on. This is similar to the churn profiles seen for subscriptions businesses such as AOL’s ISP business. (I was at AOL from 2002-2005 as SVP of Corporate Development, and then as GM of Netscape.) This model better matches active user graphs that we typically see for failed viral apps.

If you’re interested, the model is available for download here. Viral growth assumptions are in the yellow cells on the “viral acquisition” tab and churn assumptions and output are on the “user retention” tab.

Yesterday I moderated a panel on social games at Graphing Social Patterns. The panelists were Mark Pincus (CEO of Zynga), Shervin Pishevar (CEO of Social Game Network), Michael Lazerow (CEO of Buddy Media) and John Hwang (CEO ofTrip Monger, whose primary app is Speed Racing). It was a wide ranging discussion.

First we discussed what differentiates a social game from other sorts of games, and in particular multiplayer games. The general consensus is that a game is social if the social context of the relationship between a player creates or enhances the gameplay. For example, if emotions like guilt, pride, reciprocity, gratitude or vengeance get evoked in the gameplay because of the combination of gameplay and player relationship, a game is social. These emotions of course greatly increase the level of engagement in a game. Scrabulous’ turn based game play (which can induce guilt for keeping a friend waiting for your move) and Warbook’s revenge attacks were both presented as examples.

We then discussed some of the specific game mechanics that have worked well for social games to keep high levels of engagement. These included asynchronous play and many of Amy Jo Kim’s game mechanics. Mark talked about the importance of dedicating resources to constantly tweaking and improving a game to keep engagement levels up since the environment changed so frequently. John Hwang talked about the need to focus on the “hits” in a hit driven business, rather than trying to make every game a hit.

The conversation turned to monetization. We noted that despite the early stage of the four companies, all of them were profitable. John Hwang said that an individual developer with a good game can make a great living off the ad networks. Mike Lazerow thought that “advergames” or sponsored custom games were going to become the standard ad unit for games. His company (Buddy Media) is trying to avoid the hit driven nature of the games business by building game skeletons that he can reskin for new sponsors. They have had great success, garnering a base of 24 blue chip brand advertisers so far, with each campaign averaging over $100k. Shervin said that SGN had been successful with both direct sales and with rich media ad networks, especially VideoEgg. Mark was most excited about the digital goods opportunities for Zynga. He noted that they had just launched their first game with digital goods baked into the game design, Ghost Racer, and with a base of just 30k daily active users, they were already seeing a run rate of over $20k/month in digital goods revenue. Shervin noted that while Warbook doesn’t have an explicit virtual goods model, Warbook gold had been showing up on Ebay and one player had made over $1,000 selling Warbook gold.

We next talked about how social games can grow. Viral growth has obviously been the key driver of growth up to this point for all the panelists. Shervin noted that they had seen a strong positive correlation between App Rating and rate of viral growth - high quality games spread faster. Mark talked about the importance of supporting a game with advertising, especially at launch. He said that many of the Zynga games had bought their early distribution so that they had a bigger base from which they could grow virally. However, as Facebook has clamped down on some of the viral channels, the panelists talked about other growth channels. SGN, Zynga and Buddy Media have all made acquisitions to help with their growth. SGN and Zynga both talked about the importance of having cross promotional and viral channels beyond the control of Facebook. They are interested in creating networks whereby apps can cross promote each other directly in canvas pages, and hence are not subject to changes that Facebook may make in the future. Both companies mentioned their respective game promotion networks as possible solutions to this problem.

If I missed elements of the discussion, readers please feel free to add them in comments. I wasn’t able to take notes since I was moderating, so this is relying on my imperfect memory! The video of the panel is also available here (scroll down a ways). UPDATE: Unfortunately the video seems to have been taken down.

I’m moderating a panel on social games on Tuesday March 4th at 11:30am at the Graphing Social Patterns conference. If you’re at the conference, come on over. We’ve got the CEOs of some of the companies that have produced some of the top games on Facebook, including Zynga, Social Game Network, Buddy Media and Trip Monger (Speed Racing). It should be great!

The NY Times realizes that teen girls are driving social media:

Research by the Berkman Center for Internet & Society at Harvard Law School, the result of focus groups and interviews with young people 13 to 22, suggests that girls’ online practices tend to be about their desire to express themselves, particularly their originality.

“With young women it’s much more about expressing yourself to others in the way that wearing certain clothes to school does,” said John Palfrey, the executive director of the Berkman Center. “It ties into identity expression in the real world.”

That desire is never so evident as when girls criticize online copycats who essentially steal their Web page backgrounds and graphics by hotlinking (linking to someone else’s image so it appears on one’s own Web page). Aside from depleting bandwidth, it is the digital equivalent of arriving at a party wearing the same dress as another girl, Professor Palfrey said.

People building social media and social games need to think about their teen girl strategy; as I have noted in the past, it is no accident that Typhoid Mary was a woman.

Social Networks are widely accepted to be the latest evolution of online communications, tracing a line back through instant messaging, webmail, chat rooms and bulletin boards. Now that we’ve had a little more time and perspective on how they are used, we’re starting to see a few differences between how social networks are used for online communication and previous forms of online communication. I can think of three primary differences:

Stages for Performance.

As danah boyd has noted before, the public nature of many social network communications leads to performance aspects to communication. Users are simultaneously communicating with not just the recipient, but anyone else who happens to stumble across the recipient’s profile. An example I gave in a previous post is a helpful illustration:

Suppose it’s your birthday, and I know it. If I send you an email wishing you “Happy Birthday” then you’re happy that I remembered. This communication is part of the social lubricant on which relationships are built.

But supposed that I post “Happy Birthday” to your Facebook Wall instead. Then not only do you know that I remembered, but ALL OF YOUR FRIENDS know that I remembered as well. They may find out from the feed, or by visiting your page, but they will know that I’m a good enough friend of yours that I know when is your birthday. That is the performance element of the communication.

Lighter Weight Communications

Historically, an important part of communicating with someone is having something to say. Emails are not sent blank, calls are not spent silently. But as the quantity of one’s relationships increases over Dunbar’s number, it becomes impossible to maintain the full overhead of communication with each person. Put simply, for some of your weaker ties, you just don’t have the time to think of something original to say to each one of them. But you still want to maintain some “heartbeat” to the relationship with an occasional ping.

People have found lots of solutions to this problem. One is the Holiday card, often with an annual update letter enclosed. Another is the non verbal communication often seen between coworkers in an office or competitors at a conference. Smiles, nods, back slaps, high fives as you pass each other in the corridor are enough to keep a relationship acknowledged without having to stop and talk each time. A third is the chain email. Whether forwarding inspirational passages, funny videos or jokes, chain emails let people keep in touch with their friends without having to spend a lot of time thinking about what to say.

These lightweight communications are native to social networks. Whether they be exchanging pokes on Facebook or pasting a glittering “thanks for the add” .jpg into a Myspace comment, “content free” communications abound. The meta message is clear though “I’m thinking of you”, and that is often enough of a ping to keep the connection open. Many of the Facebook and Bebo apps fulfill exactly this lightweight communication function, including Hug Me, Zombies and Scrabulous. Many of the social games on facebook wrap this lightweight communication around a casual game.

Context for communications

Facebook’s innovation in the feed is now being widely imitated by the other social networks, and with good reason. As I mentioned earlier, two of the challenges of having a large number of relationships are (i) keeping on top of them all and (ii) being able to communicate often enough to keep the relationships alive. The Feed dramatically simplifies this process, especially when combined with Facebook’s birthday notification and the full status updates list. All three features provide triggers for communications with friends, whether commenting on their pictures, posting witty comments to their wall about what they are doing or wishing them a happy birthday. Facebook and other social networks are helping prompt more communications between their users by helping to surface topics for communication.

Yahoo, Google, AOL and Microsoft are all rumored to be revamping their communications products; it will be interesting to see if how they start to incorporate some of these social network native features into their email and messaging products.

Last week I estimated that Facebook is doing up to $15m in revenue per year from its digital gifts business. I noted that there are three use cases for digital goods. I thought that it might be useful to go into each of those use cases in more detail.

Digital Gifts

Facebook, HotorNot. Live Journal and Dogster are all examples of companies that have rolled out virtual gifts that members can send each other.

Virtual gifts are most effective in the context of communications, especially high volume communications environments where it can be difficult to get attention. By paying real money for a virtual gift, the sender of a message signals that they are more eager than most others to be heard. As James Hong has noted:

The utility gained from this is one of SIGNALING. What is it you are trying to signal? In the case of HOTorNOT’s virtual flowers, one is trying to signal extraordinary levels of interest. A user on the site can say “yes i’m interested” to every other person on the site because it costs nothing (but time) to click “yes” on people’s profiles. However, it is presumed that money IS a limited resource. By spending money in order to purchase a flower, becaues the # of flowers I can afford is finite, it signals to the recipient that S/he is very very EXTRA special. So we chose to price the flowers high…

So basically, because they’re so expensive and less people are willing to send them is what makes someone who RECEIVES them DIFFERENTIATED. The flowers have REAL value to the receipient [sic], and therefore real value to the sender who is gonna get props for sending them…

We found, last time we ran the numbers, that sending flowers increased the likelihood of a “double match” on our system by 4x.. meaning as a signal, they are well received and really work.

Dana Boyd also points out that gifting opens up the opportunity for reciprocation:

Gifts are part of status play. As such, there are critical elements about gift giving that must be taken into consideration. For example, it’s critical to know who gifted who first. You need to know this because it showcases consideration. Look closely at comments on MySpace and you’ll see that timing matters; there’s no timing on Facebook so you can’t see who gifted who first and who reciprocated. Upon receipt of a gift, one is often required to reciprocate. To handle being second, people up the ante in reciprocating. The second person gives something that is worth more than the first. This requires having the ability to offer more; offering two of something isn’t really the right answer - you want to offer something of more value.

This communications context for gifting underscores our finding that holiday themed facebook gifts sold 5x better than average facebook gifts. Holiday gifts come with a built in message. Getting a Santa Hat as a virtual gift is much easier to understand than getting a beach ball as a virtual gift.

Self Expression

Social network users love to personalize their profile pages, whether they be MySpace users, Bebo Users, Orkut users, yes, even Facebook users! Many web sites and virtual worlds have found that users are willing to pay to personalize their web representations, as evidenced by Gaia, Habbo Hotel, Meez, CyWorld, Second Life, Tencent and many more. These are businesses that in some cases are making tens, even hundreds of millions of dollars in revenue by selling virtual goods to personalize virtual avatars, apartments/hompies and the like. As Fred Stutzman notes:

In the SL and Cyworld model, the motivations are built on very sound logic. People like to buy stuff for themselves that makes them look cool. Since online identity is primarily about the representation of self, people will pay to differentiate themselves.

This is not so different from the real world, as evidenced by the continued growth of the luxury goods industries (including apparel, jewelry, luxury cars, watches etc).

Increased Functionality

The third common use case for digital goods is for users to buy increased functionality or power. This is ften within the context of a game. As Susan Wu noted on Techcrunch:

Each day, thousands of transactions take place via markets such as eBay for virtual swords, currency, or clothing across a multitude of virtual world environments. For people who purchase virtual items such as swords or armor, buying these items increases the overall satisfaction she receives from spending time in this virtual world / online community / online game. For example, struggling along as a level 20 character might give her 20 units of personal satisfaction per hour, whereas progressing as a level 20 character with a very powerful sword could confer 50 units per hour. In this case, she would be willing to pay the equivalent of whatever amount generates an incremental 30 units of personal satisfaction for the sword.

I’m an avid player of multiplayer online games. A couple of years ago, I spent 10 real dollars to buy 1 million gold in a game [yes, it was legal and part of a world where real money trade is not prohibited.] My friends mocked me and told me I was throwing money away, so I tried to explain it to them: 1 million gold would give me 20 hours of entertainment. If I were to go to the movies, 10 real dollars would buy me 2 hours of entertainment. Assuming that 1 hour of movie watching entertainment gives me the same personal satisfaction as 2 hours of game playing enjoyment, I would have been willing to pay $50 in exchange for that 1 million of virtual currency. In fact, I felt like I had gotten a bargain paying only $10!

Buying gold, or RMT as it is known in the gaming world, exists for just about all MMOGs, whether sanctioned by the game or not, and has spawned businesses such as IGE and Sparter.

Maintaining Scarcity

One key to the success of digital goods business models is to maintain the scarcity of the digital goods. Since digital goods are digital, they cost nothing to copy. Free copies of digital goods would reduce demand for paying for the same item. In a closed system, it is easier to maintain scarcity. The company controls the supply of all digital goods completely.

In an open system, the situation gets more complex. If users (or app developers) can create content that can be injected into the system (whether it be a website, a profile page, a virtual world or whatever) then this can readily blur the lines for self expression and virtual gift type digital goods. If it is easy, or even possible, for users to mimic digital goods, and if this creates confusion or uncertainty about which goods are “premium”, then digital goods can become devalued. To some extent, this has happened in Facebook, where free gifts applications have proliferated. This has probably dampened the sales of Facebook’s digital goods.

Myspace has never seen a digital goods model take off because the completely open profiles make it impossible to differentiate a paid digital good from a free copy. Both end up being a .swf file or an image, with no ability to differentiate. This may be one of the reasons that CareBadges (a MySpace widget bought by donating to a cause) had difficulty achieving real scale in MySpace.

Even in a closed system, if there is uncertainty about whether a digital good is free or not, this can inhibit the sale of digital goods. Demarcation lines between free and premium need to be clear, consistent, and obvious to even a new user to sustain the value of premium digital goods.

Increased functionality is one area where this demarcation is easy to maintain because this is typically an area that is within complete control of the website or virtual world.

As systems grow, the number of digital goods in circulation can rapidly grow as well. This can slow the demand for further digital goods purchases as longer tenured users decide that they have “enough” self expression or increased functionality. Good system designers will create “sinks” for digital goods to maintain a continued demand for digital goods from even long tenure users. These can include wear and tear on digital goods (Cyworld furniture gets worn as it is sold, HotOrNot flowers die over time), or risks of virtual goods being destroyed when they are upgraded (ZT Online).

I’d be interested to hear from social media and social game designers building digital goods business models to see if they have comments on this taxonomy or examples of successes and failures of digital goods models.

There is increasing evidence to suggest that in the consumer internet, females serve much better than males in spreading the viral growth of social media, social networks and social games

The most recent Pew Internet report on Teens and Social Media notes that:

Girls continue to dominate most elements of content creation. Some 35% of all teen girls blog, compared with 20% of online boys, and 54% of wired girls post photos online compared with 40% of online boys.

This is certainly consistent with the demographics of the major social networks, widget platforms and social media sites. Quantast shows that more than half of the users of these sites to be female with the exception of Digg. (Quantcast does not show a gender breakdown of Slide.)

I recently spoke to the people who run a popular social network and they shared some of their stats with me:

1) In 2007, 56% of total signups were female.

2) Females are 33% more likely to invite friends than are males.

3) Females are 10% more likely to respond to an invite from a female vs. a male.

4) Males are 50% more likely to respond to an invite from a female vs. a male.

It is easy to see that in social networks, social media, and social gaming, where viral marketing is a going to be a key driver of user acquisition, it will be important to build a product that is attractive to women. This has certain implications for the themes and genres of these sites and games. Some of the current crop of Facebook games may be more “female friendly” (e.g. Fluff Friends) than others (e.g. Duels) and these may have better success in growing virally.