Summary:

Not much differentiates one hot new social gaming startup from another. Sure they have different games — and maybe even slightly different…

Sebastien de Halleux; Playfish COO

Not much differentiates one hot new social gaming startup from another. Sure they have different games — and maybe even slightly different business models — but for the most part, they make their money through some combination of user-generated revenue (micro-transactions, virtual goods, subscriptions, etc.) and advertising. What’s really interesting is when other people in the industry — rival CEOs and business execs, not a PR team — continuously talk up one company as an example of how to get the money-making combination right.

And that’s been the case with U.K.-based Playfish. Founded in 2007, outside execs like former EA COO John Pleasants and MySpace’s SVP of business development Jason Oberfest have highlighted the company’s track record for creating games that are both popular and ad-friendly. As such, Playfish has roughly 50 million people playing its nine games across networks like Facebook every month, and it’s “substantially profitable,” according to COO and co-founder Sebastien de Halleux. So with the company scaling out to a second office in San Francisco, I chatted with de Halleux about what caused the “tipping point” for social games, and whether potential buyers have been sniffing around the company.

paidContent: You raised $17 million in funding this time last year. Since then, there’s been a tremendous amount of M&A and VC activity in the social gaming space — most recently — with Zynga buying MyMiniLife, LiveGamer’s various acquisitions, and the Loudcrowd funding. Why all the investment in this space, right now?

Sebastien de Halleux: Much of this is due to Facebook. When it launched the app platform, all the big gaming companies that had distribution on lock, lost control. A developer doesn’t need retail or distribution partnerships now; a studio doesn’t need to spend millions of dollars on marketing efforts. It could take five years and $100 million to create a hit like GTA:IV or The Sims, and then another $100 million to market it. But we’ve moved away from that, which is why people like John Pleasants are leaving their nice COO positions for small startups. You release a game on Facebook, watch the users adopt it and share it — without spending on marketing — nurture it so that it’s more fun to play, and you have a hit with longevity. I’d think investors would be very interested in that model.

Speaking of investors, you’re opening up a new office. Launching new games. Do you need to raise more cash? Have you had any buyout offers from the likes of EA or *Activision*?

We’re seeing interest, but we’re concentrated on building an independent business — not selling. And we’ve raised money which we haven’t had to use yet. We’re growing like crazy, while being substantially profitable.

What’s profitable? Double-digit millions per quarter? And where’s most of your profit coming from, end-users or advertisers?

Take a game with 10 million users, and figure $1 to $3 in revenue per user each month. Times that by a year; that’s about average for a low-end game for a company in this space. The goal would be to scale that out to hundreds of millions of users over multiple games. And we’re seeing a higher contribution from micro-transactions right now. Long-term, we see that evening out.

Does that mean this trend of micro-payments and social commerce is just a passing fad?

Not at all. I think we’ll see continued investment in different payment options — mobile phone payments, and prepaid game cards for example — because users are demonstrating that they’ll pay cash for these experiences. But you never have to pay up front; the games are supported with ads so that the people that don’t want to spend, can still enjoy. I think both legs are quite strong.

You’ve run some interesting campaigns for big brands like P&G in your games. How do you choose your ad partners?

We go after the creative that’s equivalent to an ad in a glossy magazine. If an agency spends $300,000 creating a TV spot, that’s the video we’d want one of our in-game characters to introduce after someone’s been playing for four minutes — not a crappy web banner. The same goes for performance ads. We don’t want our players to sell their souls to a credit card company because they wanted to upgrade in Restaurant City; you don’t work with the bad companies if you want to create a long-term relationship with your users. A relationship, that ultimately provides so much value that they want to send us money.

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