As it turns out, game developers are finding it is easier to make money on the iPhone if they give their applications away for free and sell virtual goods inside the game, instead of expecting users to plop down 99 cents on a game they’ve never played.

According to Flurry, which tracks the performance of more than 90,000 apps that use its analytics service, more than half of the top performing games on Apple’s iOS are making money by using a free-to-play model, up from only 39 percent in January.

In a blog post, Flurry’s general manager of games, Jeferson Valadares, who worked previously at EA’s Playfish and Digital Chocolate, writes that when the game is free, two things can happen: “First, more people will likely try your game … and second, you will likely take more total money since different players can now spend different amounts depending on their engagement and preferences.”

In other words, if a user really likes your game, he or she may end up spending more than 99 cents.

Flurry said that can represent a lot more money, even though more than 90 percent of players never spend a dime.

Valadares writes that the number of people willing to spend money in a free game ranges from 0.5 to 6 percent.

The freemium model has been well demonstrated on Facebook, where game companies like Zynga are making millions of dollars from users willing to pay for small items inside of games, such as crops for the farm or energy boosts to continue playing.

Zynga has disclosed that a majority of its revenues come from a very small percentage of users.

While many independent game studios have embraced freemium models, it’s been more difficult for other companies. Nintendo is perhaps the most vocal company speaking out against the trend.

Despite the heads-up, a few slackers were still busily updating their games this week in time for today’s deadline.

Facebook Credits is a currency used to buy virtual goods inside many games on Facebook. Users can pay with a credit card, PayPal or by using their mobile phone.

Going forward, that means a player must purchase virtual goods with Credits, instead of paying for them directly using a credit card or other payment service, like PayPal. Once Credits have been purchased they can be used in any application on Facebook.

Many developers started implementing Credits more than a year ago, and by the time the announcement was made in January, many were already on board. At that time, Facebook said 350 applications, from 150 developers, were already using the payment system, representing more than 70 percent of virtual-goods transactions.

But this week, I talked to two companies — RockYou and RealNetwork’s GameHouse — that were scrambling to get their final implementations done in time. Other big players, such as Zynga, Playfish, CrowdStar, Digital Chocolate, Lolapps and PopCap, jumped on board early and have been up and running for a while.

Facebook said the primary purpose behind Credits was to make payment more straightforward for the consumer.

But it would be an oversight not to mention that the company is also generating big bucks from implementing the program, since Facebook takes a 30 percent cut of all sales. (See Liz Gannes’ interview with Dan Rose for the latest on the program.)

In fact, Facebook Credits is a lot like Apple’s iTunes, which keeps 30 percent of the revenues and shares 70 percent with application developers.

When first introduced, the program met a lot of criticism from game developers, but over time they’ve been pleasantly surprised at how easy Facebook Credits is to implement and how well it monetizes.

Take GameHouse, for example.

The Seattle-based game developer has some 15 games on the social network, and was working up until yesterday to get all of its games on board. Ian Fliflet, RealNetwork’s senior director of corporate strategy, said some of them weren’t worth the time to convert. So some games won’t be monetized going forward, but will be kept up to generate traffic.

He said in the case of the games that have already been updated, the conversion has definitely been worth it.

“We’ve seen an increase in the number of people paying, so it’s been net positive for us. There’s an advantage to players already having Facebook Credits in their account — the biggest hurdle is to get them to get their credit card out of their wallet,” he said.

In the case of UNO, since implementing credits, the number of people now paying to play the game has increased 10 times, which more than makes up for the 30 percent they are paying to Facebook.

RockYou, a Redwood City, Calif.-based developer of social games, switched over most of its games earlier this year, but waited until yesterday to transition Zoo World over to Credits, for several reasons.

Lisa Marino, RockYou’s CEO, said the company did not have enough developer time to get it done earlier, and it is reluctant to switch because the two-year-old game was monetizing well using PayPal. She said the game accounts for about a third of the company’s digital goods revenue.

In general, she’s found that if you have to completely retrofit a game to accept Credits, revenues will decrease. But when you have the opportunity to build a game from scratch with Credits built in, it does better than any other payment platforms.

As for cutting a check to Facebook, Marino calls the 30 percent “pretty standard.”

“If you are looking for eyeballs, then you have to be willing to pay the toll,” she said. “I don’t lose any sleep over it. It’s my operating environment and I optimize for it.”

Marino can also share her opinion as a gamer who spends $300 to $400 a month of her personal money on social games. ”I don’t have an issue with Credits … as long as I can do things quickly and conveniently, then I’m good.”

Photo Credit: BeingSelfEmployed.org.

The San Mateo, Calif.-based company, led by Electronic Arts founder Trip Hawkins, has now raised close to $56 million in total.

The latest round was led by Intel Capital and includes participation from previous investors Sutter Hill Ventures and Bridgescale Partners.

While Digital Chocolate is no Zynga–which is close to completing a funding round of $500 million, valuing the company at $10 billion, according to BoomTown’s Kara Swisher–it has still managed to build a pretty sweet business as a cross-platform game developer, spanning both mobile and social.

Today, Digital Chocolate is the 12th-largest game developer on Facebook, with 17.6 million monthly active users playing such titles as Tower Bloxx, MMA Pro Fighter, NanoStar Castles, NanoTowns and NanoStar Siege, according to AppData.

The company also reports that it has achieved more than 100 million mobile downloads, and that it supports multiple platforms, such as iPhone, Android, BlackBerry and an upcoming slew of tablets.

Digital Chocolate says the capital will be used to improve its cross-platform capabilities and its geographic reach.

However, exactly how it will be accomplished, no one quite knows.

WildTangent believes it has found the winning formula, and, surprisingly, it goes against what others, like social gaming leader Zynga, are already doing in the space.

Over the past 12 years, the Redmond, Wash.-based company has toyed with all sorts of business models.

But the picture started coming into focus a couple of years ago, when WildTangent made the decision to stop developing games itself in favor of helping other PC game makers distribute and monetize their games. Six months ago, it expanded from working on only PC games to social games, too.

In an interview, Mike Peronto, WildTangent’s president and CEO, and Dave
Madden, EVP of sales, marketing and business development, said social gaming has quickly become the company’s fastest growing segment, with revenues tripling year-over-year.

WildTangent is best known for its consumer-facing game platform, which comes preloaded on 85 percent of PCs sold today. The platform, which is also accessible online, attracts 20 million monthly active users and is monetized through a combination of players paying for coins at 25 cents a piece, subscriptions and ads.

Madden said the problem it is now focused on solving is how to monetize social games when only two to three percent of players are willing to pay for virtual goods.

That means advertising is inevitable, but it’s still too early to tell how it will play out.

Last month, Zynga told us it was focused on product placements within games, where virtual goods are sponsored by brands, like blimps in FarmVille and branded cars in Mafia Wars.

But Madden argues that approach doesn’t scale. “We know it doesn’t scale because we’ve tried to build a business doing it,” he said.

“Product placement is appropriate in some media, and games are no different, but it’s not supported well by agencies, and we are trying to chip away at the broadcast budgets. There has to be metrics for them to compare it to other mediums….It’s difficult to measure a sign or blimp.”

Today, WildTangent works with some of the largest brands, including PG&E, Unilever, automobile makers and insurance companies. It also works with some of the biggest social games companies, like Playdom, Digital Chocolate, Crowdstar and others.

While WildTangent does sometimes work with brands on product placements–like a Scoop Away litter box in the Happy Pets game on Facebook–generally, it requires players to watch a short video, or offers the option of playing a very simple game.

So far, Madden and Peronto have been happy with the results. Of all of its social advertising campaigns, WildTangent has been averaging a 10 percent click-through rate.

WildTangent, which has 130 employees, hit profitability two years ago and has been in the black ever since.

Next up is integrating social games into its platform so it can have access to their vast distribution network, and then it will bring what it has learned from advertising on social networks to mobile phones.

Here’s a video of Madden and Peronto talking to eMoney about the opportunities for advertising in social games: