It's Game Time for Google

by: Kevin Kennedy
It used to be that everyone wanted to be like Google (Nasdaq: GOOG). Now everybody wants to be like Facebook – including Google.
The online search supernova, stung by Facebook passing it by as the world’s premier online destination, has been grasping at straws in trying to maintain its relevance, with previous forays into the social media space like Google Buzz producing underwhelming results. Now it appears to be emerging with yet another social networking game plan – literally – to stop the bleeding and better target Internet users and the advertising dollars they attract.
Google is apparently talking to some of the leading developers of social games, which have rapidly grown in popularity and helped fuel Facebook’s surge to more than 500 million members, as part of its plan to create a social game service dubbed “Google Me,” according to Amir Efrati of The Wall Street Journal. The Journal story follows a report by Michael Arrington of TechCrunch in early July that said Google had invested $100 million to $200 million in leading gamemaker Zynga and expects its games to be the cornerstone of a major challenge to Facebook.
San Francisco-based Zynga, founded in July 2007, has attracted more than $500 million in investments and is valued at $4.5 billion, according to Miguel Helft of the New York Times. The privately-held company has grown to 1,000 employees and expects to generate $1 billion in revenue in 2011, according to Sam Gustin of Daily Finance.
Google’s not alone in its interest in the U.S. social games market, which is expected to triple to $2 billion by 2012. Electronics Arts (Nasdaq: ERTS) bought Playfish, another game developer, for $400 million late last year. Walt Disney (NYSE: DIS) on Tuesday snatched up Playdom, its second acquisition in less than a month, for more than $563 million in a deal that could exceed $750 million if certain incentives are met. The Journal said Google is talking with Electronic Arts, Playdom and others in developing the “Google Me” initiative.
In early July, Disney bought Tapulous, which makes games for cell phones and other mobile devices. Disney had previously bought Club Penguin for about $300 million, according to CNET columnist Caroline McCarthy.
Game retailer Gamestop (NYSE: GME), meanwhile, made its own play Tuesday for Kongregate, an online distributor of games. Terms were not disclosed.
Google and Facebook aren’t the only companies working with Zynga. Yahoo! (Nasdaq: YHOO) made a splash in May when it announced a deal to host Zynga games on its site. The games are also available on MySpace and on Apple’s iPhone.
As McCarthy points out, that just scratches the surface of companies that could end up investing in the space. Viacom (NYSE: VIA.B), News Corp. (Nasdaq: NWSA), IAC/Interactive Nasdaq: IACI) and several Asian companies with extensive gaming portfolios could join the fray. It’s also worth noting, says McCarthy, that both Steve Jobs, CEO of Apple (Nasdaq: AAPL), and Facebook Chief Operating Officer Sheryl Sandberg are on Disney’s board. Jobs is actually Disney’s largest shareholder.
It’s not just advertising dollars at stake here, either. Social gamers actually pay for virtual items that help them win games. FarmVille, Zynga’s most popular game, has almost 60 million monthly users on Facebook. It generates revenues by selling tractors, chickens, horses, fuel and other “items” to players, with Facebook taking a cut of 30% of those revenues.
Zynga said its games are played by more than 230 million users each month. It has about four times as many users as the Electronics Arts/Playfish combo. Playdom is ranked third.
Most of that activity is on Facebook, and the two companies announced a new five-year deal in May. But the Zynga-Facebook relationship has seen its share of tensions, and Zynga is clearly open to spreading its wings.
Google could use the help. While it’s been a model of consistent earnings growth since coming public in 2004, its stock has floundered in recent years. It closed Wednesday at 484.35, down 22% for the year and 35% off its all-time high of 747.24 set in November 2007.

Disclosure: No positions.