Why Social Apps are Hot

It’s pretty crazy to see the recent growth of social gaming companies like Zynga, Playfish and Playdom. The sector has already seen substantial venture capital financing and we have witnessed some exits in the space with EA acquiring Playfish. Though the big 3 have emerged dominant in the market, I still believe we will continue to see venture capital funding going after the space. So, why is this space so attractive?

• With Facebook, Hi5, Orkut and Myspace achieving mass market adoption, the web’s social layer is getting to an advanced layer of maturity.

• Now that social networking users have gotten the hang of the basics (and the masses are now involved), many are looking for more advanced ways of interacting with one another – gaming seamlessly integrated into the social networking experience represents a great option.

• The viral nature of social networks allow social apps to spread like wildfire relative to what we have seen on traditional web properties, making it the perfect distribution channel.

• The cost of development for social gaming apps are substantially lower relative to console games, thus fueling more entrants into the space.

• Social gaming companies are able to effectively monetize their users beyond advertising through offering virtual goods and allowing people to pay to “level up.” People are willing to shell out money in these two areas because it improves their “status” in the social ecosphere – something extremely important to individuals on social networks.

• Virtual goods and leveling represent extremely high gross margins, further fueling the attractiveness to investors.

• Next generation social applications beyond gaming have the ability to see tremendous growth in this space if they are able to seamlessly tie into the user experience – a prime candidate could be e-commerce applications.

Net/net, we have seen some exciting things occur over the past 12 months. However, I think the best and most exciting things are yet to come as more players enter into this attractive space with higher levels of innovation and creativity while the incumbents continue to push the envelope.

-KKF