As you level up, you gain the ability to do things like double down your bet, or modify your betting sizes, and the game slowly turns into a regular version of Texas Hold ‘Em poker, as far as I can tell. At level 3, you gain the ability to join groups, where your net winnings earns you opportunities for tournaments and more. We’ll have a more detailed review of the gameplay and growth patterns as the game iterates over the next few weeks.

One surprising element of this game is that it forces you to subscribe to their email feed to even play the game. Leave it to Zynga to always push the boundaries on what’s allowable within these games, as every user who plays the game must now receive email notifications about new improvements in the game.

The primary problem: Social games by their very nature will attract increasingingly more players, and your servers have to be able to cope. A few reasons for growth:

• Users will brag about their accomplishments, say on their Facebook Wall.
• Their friends might follow suit and play, then do the same thing.
• Friends of a friend (FoaFs) are the next layer in the viral loop.

If your game does go viral, thanks to social networks, your servers have to scale, else you’ll obviously have a lot of upset users. Zynga’s own games have 65M DAU (Daily Active Users) and 225M MAU (Monthly Active Users). FarmVille grew to 25M DAUs over only five months. To cope with that kind of usage, companies need to have the server infrastructure as well as software than can grow to scale.

So, how do you scale for games that become popular? Zubek looked at two areas: (1) Game architectures and (2) Scaling solutions. Let’s look at some of the options for each, in a nutshell.

Game Architectures

Game architectures are the combination of server and client used. While there are supposedly two types of each, in combination there are only three game architectures, according to Zubek:

1. Web server stack over HTML client.
2. Web server stack over Flash client
3. Web + MMO server stack over Flash client.

Each type has its benefits and disadvantages, though these are beyond the scope of this post.

Scaling Solutions

The database and any caching sit over top of the game architecture. Databases can be “the first to fall over,” as Zubek put it. To scale, data needs to be sharded, aka partitioned. There are two ways to do this:

1. Vertically – partition by table. This is easy to do but doesn’t scale well for increasing DAUs.
2. Horizontally – partition by row.

There are also caching solutions that can be combined with database sharding.

Overall, there are two ways to scale solutions:

1. Scale up. Scaling up requires moving to a larger box. Each time you scale up, you move to a bigger box, which at some point might become a problem.
2. Scale out. Scaling out requires adding more boxes, which is typically easier to do than scaling up.

Zubek indicated that Zynga prefers scaling out over scaling up. He also said that the company is looking at “NoSQL” data tools such as Cassandra, though nothing is in production.

This is only a light look at a technical-dense subject. If you’re interested in learning more about developer issues such as those covered here, let us know in the comments. It’s also possible that Dr. Zubek’s presentation slides will be posted at GDC 2010’s vault site.

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The reasons being that big companies, like Activision (who stated in the past that they’re still unsure about social games’ long term potential) and Ubisoft (who have dabbled in social games withits unsuccessful game, TickTock) understand that if Farmville took 5 weeks to create, then the cost is extremely low on the front end.  

So when they start thinking about generating another $50 million console game title, they are almost forcedto realize that that money could be put to use to make maybe 30 or 40 Farmvilles.  Of course, the cost of games like Farmville are heavier once the game is launched, with high server load and the required iteration and design changes, but since only the successful games incur that cost, they could dump the losers as failed experiments.

In an interview with VCs, we saw some critical analysis of console game makers:

“The industry is in huge disarray,” agrees Pacific Crest’s Wilson, who believes console game developers are “in denial.

Console game makers also need to look at how social games monitor their users.  EA recently discussed that they were inspired by social games to look more closely at their user data for Madden football.   Design was also an issue for console makers, and when this was clear when Amitt discussed effective design, development and iterative processes: “Normally in traditional game design, the designer creates specs, which are then passed over a ‘wall’ to developers who are then required to implement those specs. Why not give developers just as much ownership of the feature as the designer?”  

These are notes that the entire industry takes to heart, and any developer will tell you that one of the frustrations of working on big console games is the complete lack of feedback that developers typically have to the designers.  With smaller games like this, you get more efficiencies on design decisions, with more smart minds attacking the smaller design/development problems.

“ ATTENTION: Zynga has announced that as of March 31, 2010 FarmVille will no longer be available in it’s Beta version. The game will be available for a subscription fee of $5.99 per month and will include additional levels above 70. …… “.

The news got picked up by various outlets, and was a popular TechBlip on Daily Radar. The rumor mill spread but Zynga crushed it today, claiming there were absolutely no plans to do this. This was likely an important fire to put out, as if their audience were to feel payment were coming, it would threaten their motivation to build up the empires that Farmville is so famous for.

The news was dismissed by the majority of the readers on the site itself, as a poll at the site reported
these results:

• True, I saw this coming! 14% (343 votes)
• False, The Farm Gods wouldn’t do this. 72% (1,726 votes)
• Maybe, I already spend on Mystery Boxes. 14% (325 votes)

Discussing the valuation, the managing director of equity research for Wedbush Securities.Michael Pachter stated that “nobody but Zynga knows enough about the company’s revenue, margins and growth trajectory to have an informed opinion about what the company is worth.” He wasn’t completely dismissive of the report, saying that a high valuation “is reasonable to believe”. He went on to say:

“A $3.3 billion valuation would suggest sustainable cash flow of $200 million or more. Clearly, Zynga isn’t there yet, as their revenues are probably only a tad above that level, and they incur costs to generate those revenues. Yet, it’s possible to come up with that value if the company can show a path to $200 million in annual cash flow or higher.”

Overall, the news just further validates the potential financial value of the massive audiences that social games companies have amassed. The companies revolve around monetizing their user base to increase the average revenue per user (ARPU), and with new developments like Facebook Credits appearing to facilitate an easier process for gamers, we could potentially see even higher valuations for these companies as their massive traffic and great monetization systems generate unprecedented ARPUs. Furthermore, with purchases like EA’s purchase of Playfish for up to $400 million, the industry is no longer theoretically valued: the money is real.

From the press release, Zynga states:

Online gaming in India is rapidly expanding. Forty one percent of active Internet users played online games in 2008, up 89 percent from the previous year, according to the Internet & Mobile Association of India. With more than 81 million Internet users, India is projected to become the third largest online market behind China and the U.S. by 2013. Zynga hopes exposure of its social games such as FarmVille, Mafia Wars, Café World, and FishVille, will grow among Indian players with the presence of a local office.

An image of the new office is shown below.

Zynga, which has more than 200 million users and racked in revenues of around 200 million in 2009, has disclosed that only 1% of its user base currently buys virtual goods. Imagine the impact on Zynga’s revenues if that percentage could be moved up to 10% or more. This is exactly what Kwedit wants to accomplish. Kwedit believes that Facebook Gamers want to purchase virtual goods, but they simply cant do it at the moment.

According to Danny Shader, Kwedit’s chief executive officer, who previously sold Good Technology Inc. to Motorola Inc. and Accept.com to Amazon.com Inc:

There is a group of players out there who would pay if they could pay. We can drive a ton of revenue to the Zyngas of the world.

Kwedit plans to provide revolving credit to teens, so they could access virtual goods worth a certain amount before they are forced to pay. If they don’t pay up at their nearest 7-Eleven, they wont be able to buy again. Since Kwedit would be partnering with the likes of Zynga’s, no money would be lost since every thing is virtual. Such is the age in which we live – Goods are virtual, yet profits are real.

A quick note about the action of becoming a fan: While some games provide a “become a fan” button from within the game itself, users are still forced to head to the game’s “application page” and click the “become a fan” button on that page to actually become a fan.  This is the reason that number of fans is a meaningful number: users can’t easily be tricked into becoming a fan, so if they have signed up as a fan they have done it intentionally.  This is as opposed to things like wall-posts, where games simply ask the user to “publish your activity to your wall” after every action, causing more social behaviour than the user necessarily wants or even knows about.

The highest Fans to MAU ratio among the three developers is Playfish, with 0.24, or approximately one fan for every 4 MAUs.  This is carried mostly by the fact that Pet Society and Restaurant City have scores of 0.26 and 0.27 fans per MAU, and show that while those games haven’t grown to the size of Farmville, they have loyal fanbases.  This can also be attributed to the longevity of the games: Fans that joined Pet Society back when it first started in 2008 would probably not remove themselves as a fan, even after they stopped playing the game.

Crowdstar was in second place, again led by the strength of its top two games, Happy Acquarium and Happy Island.  These games are relatively newer, and this shows that their games are not just attracting gamers quickly, but fans as well.

Zynga, in third place, is an understandable result just by the sheer enormity of their catalogue.  They have an incredible number of MAU, and games like Farmville hit on new markets that may not be comfortable with the process of clicking over to the application page to become a fan.  That said, Farmville still has an excellent ratio of 0.24, with a total number of fans of nearly 19 million users.  That is as many fans as there are MAU for Playfish’s top game, Pet Society.

Other elements to note here are that by looking at the above chart, we can see that Zynga’s top 5 games sum up to 180 million MAU, which is four to five times Crowdstar’s 50 million and Playfish 40 million MAU.   The ratio is between 6 or 7 times for DAU, with Zynga at around 60 million and Crowdstar and Playfish at 11 million and 9 million, respectively.  Also, while not particularly significant due to the transient nature of DAU, the Fans to DAU ratio corroborated proportionally quite well with the  Fans to MAU ratio for Playfish games, which indicates that those games’ DAU are reflective of their MAU, and not suffering swings in popularity.  Games like Restaurant Life (Beta) by Crowdstar, on the other hand, had proportionally lower Fans to DAU ratios than Fans to MAU ratios, indicating the game’s popularity today may be quite lower than its steady monthly growth and fan accumulation.

The investment activity in the virtual goods sector in 2009 has more than tripled from that of 2008. In 2008, virtual goods related startups saw a cash inflow of around $408 million. The number of companies trying to carve out a piece of the virtual goods market has also doubled to 87 in 2009 compared with 34 in 2008.

"Virtual goods was the hot tech story of 2009, driving investment that crossed over into game development, virtual currency, payment services, and social networks," said Christopher Sherman, CEO of Engage Digital Media. "In the fourth quarter alone 30 companies raised an astounding $944 million, more than double the amount raised in all four quarters of 2008. Also noteworthy was the number of acquisitions in the space – 18 of the course of the year – with half of those taking place in the 4th quarter."

Out of $1.38 billion invested during 2009, $398.3 million were acquisition related – with the acquisition of Playfish being the biggest contributor to these numbers. Playfish was acquired by EA for $300 million in Q4, 2009. Digital Sky Technologies was the pick of investors in virtual goods related startups with an investment of around $380 million in Facebook and Zynga. DST invested $200 million in Facebook in Q2, 2009 and one-upped this investment by investing $180 million in Zynga in Q4, 2009. Zynga is the most popular game developer on Facebook and is also one of the biggest advertisers on Facebook.

With acquisitions and investments in Facebook and Sina (a China-based social network) excluded, total investments in the virtual goods space reached $598 million. The performance of the virtual goods segment in 2009 is extraordinary given the fact that the year was one of economic hardship in most industries.

Google’s talks to acquire Yelp for a rumored $500 million, fell apart in Dec 2009, when Google walked away from the deal citing concerns that Yelp was not transparent enough during the due diligence. Sources familiar to the deal disclose that Yelp received a secondary offer from another company and decided to decline both the offers.

After testing the IPO waters and discussing the acquisition possibilities Yelp has decided to take the investment path pioneered by Facebook. In Q2, 2009 Facebook accepted an investment of $200 million from Digital Sky Technologies in return for preferred shares in Facebook. Facebook employees sold an additional $100 million worth of common stocks to DST in July – allowing them to cash in on their stocks at $14.77 a share without having to wait for the IPO. The investment model was followed by Zynga, which accepted a $180 million investment from DST in Q4 2009. Similar to Facebook, a portion of Zynga’s investment was used to buy shares from the employees and early investors, whereas the remaining would go towards fueling future growth.

Following in the footsteps of Google, who used an irregular IPO model (dutch auction), Facebook is also crafting their own pre-IPO investment model. While Fred Wilson says that this new model of investing is being coined “DST deals“, due to DST being the investor using this new strategy with both Facebook and Zynga, it may be more of a sign of the current economic environment.

Due to the current financial crisis, the IPO market has  all but dried up. This has resulted in a significant plunge in the acquisition prices of startups which averaged $144.2 million in 2009, down from an average of $214 million in the fourth quarter of 2007 alone.

Private financing provides a best of both worlds. It enables investors and employees to sell their stock without the scrutiny and distractions of the IPO and simultaneously allows startups to fuel their growth and avoid getting acquired cheaply.

However, one side effect of private financing is that it increases the valuations to such stratospheric levels that an IPO becomes the only viable exit option. Having said this, companies like Facebook, Zynga and Yelp would rather try their luck with the IPO rather than getting acquired for pennies on the dollar.