APRIL 29, 2010 • Playdom is a developer and publisher of what is commonly referred to as social games, but more accurately described as games delivered via social networks. What sets Playdom apart from its main competitors, Zynga and Playfish, was its early focus on MySpace instead of Facebook.

Playdom was founded way back in early 2008 as a bootstrap by four recent college graduates. As a way to differentiate themselves, Playdom (originally called YouPlus) focused on MySpace. Since Zynga and Playfish had already managed to gain popularity and large subscriber bases very quickly on Facebook, Playdom’s decision to first establish itself in MySpace proved to be a smart strategy.

Playdom’s focus on MySpace proved immediately successful with Mobsters, Bumper Stickers and Own Your Own Friends quickly becoming among the top four games on the social network. However, it also resulted in some bad blood between Playdom and Zynga.

In September 2009, four former Zynga employees were accused of illegally taking 70 proprietary documents, including the Zynga Playbook (about how to create social games), two weeks before joining Playdom. Zynga filed a lawsuit against Playdom for misappropriation of trade secrets, breach of contract, breach of the duty of loyalty, tortious interference with contracts, tortious interference with existing and prospective economic advantage and unfair competition. Zynga also sued Playdom for misleading ads for the game Mobsters, claiming Playdom is misleading players with ads that compare its Mobsters to Zynga’s Mafia Wars game.

By March 2009 Playdom had the number one game on MySpace with Mobsters, and eight of the top 25. By that time, the company claimed to have 5.2 million active daily users and 21.8 million active monthly users on MySpace:

After establishing itself as a leader of games on MySpace, Playdom decided to start to expand into Facebook games starting in March 2009. By October 2009, Playdom had gained a respectable user base on Facebook, and it was clear this was where the company was seeing much of its growth. At the time, 60% of usage was from MySpace, but it was clear the growth was occurring on Facebook.

In June 2009, Playdom, which at the time had about 65 employees, surprised much of the game industry when they announced that Electronic Arts Chief Operating Officer John Pleasants was jumping ship to lead Playdom. Pleasants had just been promoted to the EA COO position the year before and this was a clear sign of the rapid emergence of social network games.

Until November 2009, Playdom had been entirely self-funded. As Playdom looked to expand to Facebook, they raised their first outside venture funding in the form of $43 million Series A funding from New Enterprise Associates, Rick Thompson, Lightspeed Venture Partners and Norwest Venture Partners. This valued the company at about $260 million.

Playdom has used the investment to rapidly expand, primarily into Facebook games, but also iPhone applications. Although Pleasants says no Playdom title has yet to launch on the iPhone first. Immediately upon receiving the funding they acquired Facebook game developer Green Patch and iPhone developer Trippert Labs.

So far in 2010, Playdom has mainly focused on expanding its Facebook position. In March of 2010, Playdom acquired Facebook game studio Offbeat Creations. Offbeat Creations is best known for Super Farkle, a dice game similar to Yahtzee, which claims 1 million monthly active users. Also in March, Playdom acquired Argentine game developer Three Melons and invested $5 million in MetroGames, another Argentine game developer with 30 games on Facebook.

Playdom has had some significant success on Facebook in the first part of 2010. Tiki Resort and Tiki Farm quickly became two of Playdom’s top Facebook games. So far, in 2010, the biggest new product from Playdom has been Social City, a city building application along the lines of SimCity. Social City launched in early March and by the end of April was Playdom’s number one Facebook game with over 12 million monthly active users. By the end of April 2010, Playdom was the No. 6 Facebook application developer, having nearly tripled is monthly active users (MAU) from November 2009. As of April 2010, Playdom has 11 studios producing games, and plans to release 10 games  between the spring and fall of 2010. Along with Zynga and Playfish (acquired by Electronic Arts for up to $400 million on November 2009), Playdom is one of the fastest growing social network focused game companies. In a little over a year Playdom has grown from 37 employees to over 350.

Playdom chief executive John Pleasants notes three goalposts that drive the successful social network titles:

• Not pushing deep immersion
• Providing a live service
• Free-to-play

Of course, the biggest issue with social network games is monetization. Much like Zynga’s games, Playdom’s titles encourage users to buy virtual goods for avatars, and virtual chips for its poker game. According to Playdom, in mid-2009, 70% of its revenue comes from direct payments for users buying virtual goods, 10% from advertising and 20% from offers. However, Facebook has been making platform changes to move away from viral marketing offers. As of 2010, it is estimated that 90% of Playdom revenue comes from users buying virtual goods.

According to Pleasants, an estimated 2-3% of Playdom users buy a virtual good. For a successful game, the goal is that each paying user will spend about $50 per game over several months. Of course, this is a very optimistic best-case scenario for a product. In looking over Playdom’s usage numbers, DFC estimates that the company is on track to generate about $100 million in revenue in 2010. However, this is only a rough estimate and the actual number could vary significantly.

Playdom has said it is profitable and it is clear that if done properly, Playdom’s monetization model can be highly profitable, albeit on a smaller scale than seen with traditional video game distribution. Playdom’s games are developed for under $300,000, and with the viral marketing approach, marketing costs are low. Furthermore, most marketing spending is scaled with payments done on a cost per install basis, usually less than $1.

The main issue with a company focused on delivering games solely on social networks is how well the business can scale. It currently takes tens of millions of users to make significant revenue and distribution is limited by the size of the social network(s) the product is delivered on.

In addition, there is growing competition from more established players that have more high-end games and more high profile licenses. For example, Playdom now competes not with Playfish, but Electronic Arts, a company with many branded products including IP like SimCity which is similar in nature to Playdom’s Social City. Then of course there is the growing number of casual game companies starting to deliver their products on social networks.

Companies like PopCap and Real Network’s GameHouse could become major competitors as they look to distribute their products via social networks.

One interesting difference with Playdom is it still has a leadership position on MySpace, even if that service has declined in importance. With MySpace in the midst of a content make-over intended to attract more users, Playdom has a chance to bolster its user base on the network if MySpace is successful with its reboot.

MySpace aside, Playdom used its first round of funding to successfully bolster its position on Facebook. This means Playdom’s situation looks much stronger for the flood of competitors that are likely to start coming its way. Right now it may be difficult for the company to scale much faster, but Playdom is clearly in a position to take advantage of any growth in games delivered on social networks.