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Investment in social gaming drops by $1 billion in 2012

An important rule to follow in the video game business: What seems suddenly like the most profitable new market in the world one day, can become a wasteland the next. At the beginning of the ‘00s, the industry was convinced that mobile gaming would be the next boom market, but it was another decade before mobile became the force it is today. Over the past five years, the expectation has been that social games played on mobile devices and browsers through networks like Facebook would be the next fabled boom. Even just a year ago, that seemed true: Zynga was valued at more than $10 billion just before the FarmVille maker went public. Today it’s valued below $2 billion and shares are trading below $2.50. It’s not just Zynga, either. The social game development bubble has  burst.

According to a new Digi-Capital report (via GamesIndustry International), investment in social game companies fell a staggering 94-percent between peaks in 2011 and the end of 2012, a total decline of $1 billion. Just $853 million was poured into social game development in 2012, and most of that was not into would-be FarmVille contenders, but real money gambling game makers and “Middleware.” Middleware actually account for 35-percent of all social game industry investment.

Middleware doesn’t refer to actual games, but rather the software used for “gamification” of other services. For example, the software that powers something like GameStop’s PowerUp Rewards program, basic as that customer loyalty service is with its growing points, could be considered middleware.

There was still plenty of activity in the social game industry, though. While there was little money poured into new operations, 2012 was a period of significant consolidation, with tons of companies merging or getting bought up by large companies. Mergers and acquisition transactions, according to Digi-Capital, totaled $4 billion in 2012 with companies like China’s Tencent and others leading the charge.

What does this mean in terms of how games will actually be made over the next few years? For one, young designers looking to fund a new studio by developing social game prototypes should look elsewhere for the time being. The market has cooled. In terms of big publishers like Electronic Arts who have poured huge amounts of money into social game studio acquisitions over the past few years, don’t expect a huge number of new games from them. Development will likely shift towards integrating social elements into existing PC, console and mobile games. Hope you enjoyed that Mass Effect 3 multiplayer and social network integrated iOS game, because much more of that is on the way.