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Bay Area startup ZipZapPlay launched the latest entry in the quickly growing build-and-share-your-own-game space in alpha this week, a service by the name of Playcrafter.

ZipZapPlay CEO Curt Bererton and Chief Creative Officer Mathilde Pignol stopped by the GigaOM office recently to give us a hands-on demo, and what impressed Om and I most was the site’s whimsical beauty. That’s no surprise, as Pignol is an alum of frog design. It offers up a large set of interlocking objects with which to create your games (platforms, widgets, and so on), all of which are designed to work together, then attributes game properties to them. (Think Lego Mindstorms, but for web games.)

I particularly liked the intuitive feel of the building experience, and the robustness of its internal physics — an element that should appeal to all the hundreds of thousands of gamers who embraced Line Rider. Since showing it to us, they’ve added the ability to embed Playcrafter games on blogs and social networks. Even more appealing, they’re sharing revenue with game creators, giving them a cut of revenue earned from ads that are run while games load.

Image credit: www.playcrafter.com.

With so much venture funding going into web-based, ad-driven casual games (both the companies that create them and those that monetize them), you’d think the gaming industry as a whole was moving in that direction. I certainly did, at least until today. But Yahoo Games just told me that starting this week, they’re going to host free, downloadable casual games embedded with video ads. (Think games that play more like TV shows, with commercials in between breaks.) Fifty of them are available now; by end of the year, according to division head Kyle Laughlin, they plan to have 400 of these ad-wrapped games online.

This is no small play, and has the potential to reshape the game industry. Just look at the numbers:

Yahoo’s game sub-domain averages 18 million unique monthly visitors from the U.S. alone, according to Laughlin, and 49 million worldwide. This audience is already downloading tens of millions of games from their download page, but they’ve largely been poorly monetized, 60-minute trials that require you to pay to play further (something few do).

With this new distribution system, Yahoo and its partners can target ads according to game player demographics: action games for young dudes, puzzle titles for older players, and so on. Each game is an average of 100 megs, which means downloading will take just few a minutes using decent broadband, but you end up with a more robust, engaging game experience than a (much) smaller, Flash-based web game. (Laughlin claims play time for their casual web games is around 15-20 minutes, but 160+ minutes for their downloadables.)

The advertising itself will be delivered by NeoEdge, which we wrote about last November, and Double Fusion, which we wrote about in 2006. Originally intended to deliver ads for hardcore gamers, Double Fusion has been shifting its focus over the last year, concentrating instead on casual games, which have more players and broader demographics than the 18-34 guy cohort that makes up most of the hardcore base. As CEO Jonathan Epstein put it to me in a joint conference call with Yahoo and NeoEdge, “The nature of the game market is changed.” With this move, I’d say it’s about to change even more.

Imaged credit: games.yahoo.com

??The promise of web video was that cheap cameras, easy editing software and free online distribution would open up new vistas of creativity. Instead we???re just seeing the same things, mostly parodies, over and over. Some are just recycling the same ideas. It???s just becoming faster and easier, which is spawning more of it, as people chase video views on YouTube. Continue Reading.

Ah Vermont, that lovely New England state known for its maple syrup, Ben & Jerry’s ice cream…and now, limited liability corporations that only exist online.

On June 6th, Gov. Jim Douglas signed an inauspicious-sounding bill entitled “H.0888, Miscellaneous Tax Documents” that could revolutionize the way startup companies are formed and run. As New York Law School professor David Johnson explained to me, up until now, U.S. law required LLCs to have physical headquarters, in-person board meetings and other regulations that have little relevance in the digital age.

No longer. Under the new law, for example, a board meeting may be conducted “in person or through the use of [an] electronic or telecommunications medium.” A “‘virtual company’ will be, as a legal matter, a Vermont limited liability company,” said Johnson. And other states are required to recognize the corporation as a legitimate LLC. So while in the past many companies registered in Delaware to take advantage of that state’s business-friendly policies, with this law, Internet-driven startups may find Vermont even more ideal.

Johnson was instrumental to crafting the bill’s language; he, along with his NYLS students and a couple of professors at Vermont Law School, spent the last two years putting it together. He foresees virtual companies launched for countless reasons, such as the production of software or publications written by people across the country, even for corporations that exist only in Second Life.

As you may have guessed, this isn’t just an academic exercise for Johnson; he’s also developing software to manage virtual corporations through NYLS’ DoTank project. Since word of the Vermont bill’s passing got out, he said, “I’ve had two people beg me to be the first to get on the list” to start filing virtual incorporation papers. Indeed, it’s easy to see this becoming standard practice in coming years, with traditional office buildings being abandoned for dynamic companies that exist wherever its employees happen to crack open their computers.

Image credit: Vermont.gov

The thumbnail on the left depicts a service that, if it fully delivers as promised, has a decent chance to transform the web as profoundly as AdSense. Launching today, it’s the NeoEdge Game Channel, an ad-driven game widget from NeoEdge, the Mountain View startup we wrote about last November. Its Game Channel is a kind of videogame jukebox offering a selection of titles from several genres; when you click to play, NeoEdge’s advertising feed kicks in as the game loads.

Here’s the thing that excites me most: Pretty much any web owner (including bloggers) can install this plug-and-play widget on their site, and share advertising revenue with NeoEdge. (Hence the comparison to AdSense, only fun and interactive.) The social network PerfSpot is using the Channel, so you can go here to get a sense of what it’s like.

For site owners, NeoEdge Marketing VP Ty Levine told me, “This is a way of keeping people on your site.” It also gives them a new revenue stream; a site with 200,000 unique users, Levine estimated, could earn $1,000 to 5,000 a month, depending on the owner’s sponsorship deal and revenue share. With some 400 titles in the NeoEdge library, the channel can be customized with selections that fit a site’s demographics and branding.

As with AdSense, the Game Channel widget gives site owners far and wide an incentive to install it — and gives casual-game developers reason to keep creating content for it. Whether NeoEdge can capture and hold this market depends on its ability to deliver a diverse and compelling library of games — and to stay ahead of its competitors. With so many players rushing into the ad-driven casual game space, I wouldn’t be surprised to see similar services, purporting to offer better titles and/or revenue shares, launched by NeoEdge’s rivals. Let the casual game wars begin!

A few months ago we made note of the public beta of GameLayers’ Passively Multiplayer Online Game, the immensely clever MMO that turns web browsing into a game. Now with 20,000 registered beta users, it’s finally open for public play — go here to check it out.

It debuts with a cool kicker: GigaOM itself is one of the game’s destination sites! If PMOG players visit this blog enough times they win a “KillahOM” badge. “It’s like an Xbox Live achievement that you get based on your surfing habits,” GameLayers’ chief creative officer, Merci Hammon, explained to me. “A lot of players actually change their surfing habits to get all the badges.” It’s also a clever way to get top blogs involved in PMOG — by appealing to our vanity.

The best sign that someone’s qualified to run an Internet startup may not be an MBA degree, but level 70 guild leader status, according to the latest issue of Harvard Business Review.

“Leadership’s Online Labs” by Byron Reeves, Thomas W. Malone, and Tony O’Driscoll is based on the authors’ research into the leadership and management skills required by fantasy/sci-fi MMORPGs like World of Warcraft and Eve Online. In those multiplayer games, the hardest-to-achieve goals (such as killing the demi-god dragon, wiping out a competing space corporation, and so on) often require dozens or even hundreds of players working together in concert, so the skills required to lead a successful mission, the authors argue, are very much like those needed to run a profitable business.

The theory is hardly new; venture capitalist and hardcore WoW player Joi Ito has been talking about this for years. But the HBR team bolsters it with extensive interviews and observations to turn out an article that could help revolutionize business management in the digital age.

So what are some of the main managerial lessons they learned from the worlds of orcs, elves and battle cruisers? Below are the three that stand out most to me — call them the habits of highly effective half-elf managers:

Embrace Failure As a Rung on the Success Ladder

“In one incident that we recorded from EverQuest,” Reeves, Malone and O’Driscoll report, “seven guild members prepared for a brand-new quest that required them to get their team across a large lake protected by a gruesome and hostile creature.” They did this despite knowing they were likely to drown, which they very nearly did. But when the team failed to make it across, it was simply viewed as a learning experience, and after re-orientating themselves, they went right back to try it again. (The classic corporate response would be to simply cut the failed program’s funding, as opposed to re-launching with a new strategy.)

Rotate Individual Managers to Individual Goals

The authors were also surprised that guild leaders often became followers, letting temporary leaders come forward to direct specific sub-goals:

Put another way, leadership in games is a task, not an identity—a state that a player enters and exits rather than a personal trait that emerges and thereafter defines the individual.

It’s easy to see how that principle would apply to real-world business; of course, it would require a managerial culture in which personal pride is attached not to a job title, but to getting the job done. This could be why MMO guild leaders rarely seem to be managers in real life. Indeed, Joi Ito once told me that while his We Know World of Warcraft guild includes top Silicon Valley execs, when it comes to WoW, they’re not always good leaders. One of its best commanders, he said, was an EMT worker.

To Get Better Management, Change the Game

The authors went in expecting to learn managerial wisdom from MMO’s top guild leaders, interviewing them as though they were virtual Jack Welches. But the players suggested a different approach: “If you want better leadership,” they said, “why not change the game instead of trying to change the leaders?”

Quite literally. Online games are highly structured, and successful gameplay is determined by the amount of virtual treasure players have in their possession and the amount of game information of which they’re aware (player stats, enemy capabilities, etc.). The authors suggest a number of ways business data can be given a game-like structure, which would then shape how the company runs. For example, what if your CEO assigned value, in virtual currency, to your company’s internal email?

Attaching a large amount of the scarce currency to a particular message would draw attention to it or even serve as a feedback mechanism: You send me an e-mail you value at 100 units, and I respond with one valued at 200, giving you a credit of 100 units to validate the usefulness of the information you sent. One experiment showed that the currency, as a marker of information importance, in fact influenced how quickly colleagues opened and read different messages in their inboxes.

With online gaming so mainstream (World of Warcraft now has 10 million subscribers), many people in the tech business world have already learned these lessons. The Harvard authors note an IBM survey of its managers who were also gamers, and the results are striking:

Three-quarters of the respondents said that environmental factors within multiplayer games could be applied to enhance leadership effectiveness in a global enterprise. Nearly half said that game playing had already improved their real-world leadership capabilities, particularly for managing teams whose members didn’t fall under their formal authority.

At the same time, the business leaders also worried that implementing what they learned in games would require drastic changes to the companies’ existing corporate culture. Which is why I think we’ll see these invaluable ideas put into practice not by established firms, but by startups eager to level up into world-conquering profitability.

Image credit: harvardbusinessonline.hbsp.harvard.edu. Hat tip: Virtual Worlds Review.

The casual games market is booming, generating over $2.25 billion in yearly revenue despite virtually no brick-and-mortar representation or advertising and marketing costs. But is this market rewarding for investors? For VCs interested in this space, here’s rundown of how it works.

A casual game is defined as a stand-alone entertainment software title that is digitally distributed by one or many “portals,” or independently owned Internet retail sites. Casual games typically operate under a try-before-you-buy business model –- the downloads allow players to play for a set period of time (usually 60 minutes) before shutting down. If the player wishes to continue playing, they must pay the retail price, which they can do electronically from inside the program, instantly unlocking the game for unlimited play. The average rate of purchase to play is lower than 1 percent, and games that convert higher than 2 percent are considered “hits.” The largest market for these games is women ages 30-60, a significant departure from the standard computer games market.

Development costs

The development cost of a casual game typically hovers somewhere around $100,000. That money goes into paying developers, including artists, programmers, game designers, project managers and audio engineers, as well as the developer’s overhead. This investment usually pays for between eight and 12 months of work. Of course, there are ways to reduce costs. In recent years, many developers have outsourced art and coding to companies overseas, in places like Eastern Europe, India or China. But such a move needs to be carefully managed, as many outsourced games are shipped with little quality control, often sporting poor or confusing English.

The primary profit center for casual games is online retail. Games in the genre retail for $19.99, minus retailer discounts and incentives. Since conversion rates for a casual game usually linger below 1 percent, the only profitable games are hits – mid-level successes rarely recoup their development costs. Causal games are not a high-margin business. Because the market involves so many middlemen, the final slice of the pie that makes it to developers is usually quite small.

Investing

Investment in casual game development can come in two forms: as a publisher or as a development partner. Each carries its own risks and rewards. Typically most VC investment in the casual games industry goes to the publisher, and most of the major publishers (including PlayFirst, Big Fish and iWin) were founded with VC money. Publishers then contract with individual developers to create games, paying them an up-front amount as well as a percentage of sales. Once the game is completed, publishers then distribute the game to portals and handle receivables from those portals. Most of the major publishers also maintain portals of their own, retailing both titles they publish as well as other games.

VC money does not, of course, guarantee a hit game. PlayFirst is the best example of using venture capital to successful ends, commissioning Gamelab (where I currently work) to develop their first set of titles, including the very successful Diner Dash. But another Playfirst-commission title we developed, Subway Scramble, didn’t do nearly as well.

Recently, a few studios have worked with VCs on the development side and then self-published the resultant games. This method eliminates the publisher’s revenue share, meaning more of the total income goes to the developer. Studios that have followed this method are typically more established in the marketplace, with at least one successful title under their belts. However, the lion’s share of the game’s sale price still goes to the portals and distributors, and recoupment can be slow.

Revenue streams

Developers and publishers depend on the revenue from hit games to subsidize their output, and there is still no dependable method to predict which games will be hits. With an average of one new game getting released every weekday, the market is already becoming saturated. Because development time is relatively short, a successful game will see its mechanics and theme copied and cloned within six months to a year of being released. So while the development cost of a casual game is low compared to a standard PC or console title, the chance of a single title turning a profit is also reduced.

Secondary revenue streams from casual games include advertiser-supported, “free-to-play” versions, which are generating a higher revenue-per-download rate than purchased games, as well as boxed
physical retail copies (usually handled through another third-party distributor) and ports of the game to other devices, including mobile phones and portable gaming consoles. Because casual games are
typically small in file size, with simple input mechanics, they make this transition more easily than complex PC games.

Investing in the casual games market is much like investing in any content market – dependent on a large number of unpredictable forces. There are proven marketing and content models that are exploitable, but the saturation of the market with products slavishly following those models steadily reduces their effectiveness. For a VC, the best bet is to work with an established developer with a strong, marketable idea and keep costs low. Anything else is way too risky for a market this crowded and volatile.

Written by K. Thor Jensen, who’s worked in the games industry for nearly 10 years and is currently an associate producer for Gamelab.

Image credits: playfirst.com, bigfishgames.com, and iwin.com.

Updated: We all know there’s no love lost between Hulu, the Hollywood-backed online video service, and Google-owned YouTube. The two companies have taken snipes at each other. For instance, at the NAB trade show, Hulu was trash-talking YouTube. Jason Kilar, the CEO of Hulu, said that you can’t make money by posting unauthorized and copyrighted videos — with a YouTube page behind him.

Hating your rival is part of the game, which is why it’s hard to ignore the irony of a Hulu Channel on YouTube. YES! What you just read is right. The LA Times discovered the channel and posted about it on their blog. Seems a little disingenuous! The reason for the Hulu-on-YouTube channel is pretty basic — YouTube has what Hulu hopes for: traffic and an audience. Hulu has content from its backers. It makes perfect sense for the two of them to start working together. Kilar should remember that you can’t make money by posting to a site that doesn’t have a lot of traffic.

NewTeeVee talked to Hulu and got a confirmation from them that indeed they are the ones who set up the channel for promotional purposes.

YouTube head of premium content partnerships Jordan Hoffner says: “It’s fantastic that Hulu is providing content to our global community and using our platform to grow and drive traffic to their business. Media companies large and small can set up channels or even partner with us to interact with the world’s largest and most active community. “

Pop music keeps getting more virtual! Today there’s news that ’80s metal stars Mötley Crüe are releasing a new single via Xbox 360/PS3 download to Rock Band, the epic bestselling multiplayer rhythm game. And it’s just the latest development in what’s fast becoming a larger trend.

Last month, the game got its own iTunes-like download service, an inevitable move as it and its predecessor, Guitar Hero, instantly attracted millions of download sales. It’s a smart move on the Crüe’s part, and for the embattled record labels, a move that’s probably the best (last?) chance to recover their revenue in the post-Gnutella era: They license their back catalog and new hits to game music publishers; publishers turn their songs into fun interactive experiences; gamers who might otherwise download pirated MP3s or ignore them altogether happily pay to play them on their console.

The amazing thing is how much of this enthusiasm is driven by the gaming experience, as opposed to the actual bands. After all, many of their songs only show up on Guitar Hero/Rock Band as covers and almost as often, the bands were famous well before most gamers were even born. In coming years, I fully expect to see Guitar Hero-like MMOs, where fans jam as avatars with their favorite rock stars (who log in from the comfort of their studio, as opposed to touring in person.) Why stop there? Next up: Popstars who only exist as avatars.

Image credit: www.motley.com.

I’m still in Manhattan recuperating from last week’s Virtual Worlds 2008 conference; here are some news and trends that I’ve observed:

Barbie Rising: Subscription option announced for girls’ virtual world with 2.3 million unique users.

Since launching last spring, Mattel’s Barbie Girls has amassed a jaw-dropping 11.2 million signups; of those, a company publicist told me last week, they’re attracting well over 2 million monthly active users. Up to now an entirely free world, in May they’ll launch a subscription-based “VIP” membership, conferring on their users (86 percent of whom are girls over the age of 8) the right to wear a virtual tiara, among other premium content. I’d bet on huge upgrade rates with this model — and for other companies in the growing virtual worlds-for-kids space to follow suit.

IBM gives the metaverse a corporate firewall.

My pronounced bias for Second Life notwithstanding, this is legitimately big news: Working with Linden Lab, IBM showed off its “enterprise-safe” virtual world portal — that is, Second Life regions that exist on IBM’s servers behind their corporate firewall, but are still connected to the larger (and far more anarchic) world of Second Life. More crucial, IBM will offer this setup to other companies. (As an IBM staffer told me cheerfully, “What the hell do you think we’re doing this for, anyway?”) Numerous companies have resisted development in virtual worlds precisely due to the lack of a firewall, so now that the options exists, big announcements in enterprise-class metaverse development could soon follow. Check back here for more details over the coming months.

Leading metaverse developer throws cold water on virtual worlds applications.

Despite the foregoing, I should report the strong note of skepticism offered in the keynote address of Sibley Verbeck, CEO and founder of The Electric Sheep Co., which has built high-profile virtual world projects for CBS, MTV and many other top clients. I missed the talk, but he summed it up for me afterward.

“[M]ost applications for Virtual Worlds are not ready for prime time,” said Verbeck. “Only a few are, and so if you’re expecting to build a business anytime soon in this industry, you’d better do a full analysis on whether your use of virtual worlds is one of those rare ones that is ready here and now with only a feasible application of resources. One big part of that analysis is one of the underlying technology, and I see that as a limiting factor for most of the applications one might consider as otherwise ‘just around the corner’ for virtual worlds.”

Open world vs. walled garden? Competing development models vie for preeminence.

Overall, the strongest tension at VW 2008 was between companies that want virtual worlds accessible via the Internet but otherwise closed off from the wider Net vs. developers from the “Web 3D” school. In the former category, for the most part, are worlds for kids and/or “branded” worlds that exist solely to market the IP and products of a company and its partners. As Linden Lab’s former CTO Cory Ondrejka notes on his blog, “[W]hat really struck me walking around the show was how constrained the virtual world dream has become…with some marketing material promising a ’safer’ or more ‘corporate’ environment.” Like Prodigy or AOL in the early 90s, most of the money is still moving in that direction, but at the conference, there was also a strong showing of open-source worlds, too. More on that in my next post from New York.

Image credit: www.barbiegirls.com. Disclosure: My Second Life blog was an unpaid “media partner” with Virtual Worlds 2008.