Over the past 12 months, the gaming giant’s stock has been cut in half, falling to $13.12 a share, down from a high of $26.13. At those levels, its market cap has shrunk to $4.2 billion, making the company potentially tasty acquisition bait for larger fish.

That valuation puts it slightly below its key digital competitor, Zynga, which continues to dominate the Facebook platform in spite of several failed attempts by EA to topple it.

EA has also lost a number of high-level executives to Zynga. And its big releases of Battlefield 3 and Star Wars: The Old Republic have struggled against rival Activision’s comparable titles, Call of Duty and Diablo 3.

Still, in an interview with Riccitiello this week ahead of gaming’s biggest annual gathering — E3, kicking off tomorrow in Los Angeles — he was sounding like it’s all high scores for EA.

“We are in a spectacular position. The stock is oversold, but they [investors] are waiting for a catalyst,” he said. “They don’t know what it is yet; maybe it’s the next mobile hit or social hit? But it will probably be E3. We will make their eyeballs peel.”

What that unusual image means exactly is unclear, but one assumes he hopes to impress at least some of the 45,000 attendees converging on Los Angeles Convention Center like zombies staggering toward fresh brains.

Once there, they will be overstimulated by ear-splitting music booming from a space — dotted with massive booths — about the size of eight football fields.

But for EA and the other companies showing off their wares, it’s an ever dicier situation. That’s because the show continues to celebrate blockbuster console hits over clear consumer trends focused on an increasing number of devices and platforms, as one-time purchases of $60 games are giving way to free-to-play models that make a few pennies per user every month.

In fact, about 90 percent of EA’s business used to come from the console arena, and now it’s closer to 60 percent. In the fiscal year 2012, EA generated $1.2 billion in digital revenues, representing a 47 percent increase year over year.

But in the build-up to E3, Riccitiello contended that, like so many other cycles in the past, the industry will get out of this lull too, and he’s pinning his hopes on new console hardware coming out from Sony, Nintendo and Microsoft this holiday season.

“I’m not saying Moses will part the water for us, but it will damn near be close when the consoles come out,” he said. “For the past few years, we’ve had a challenging console environment, but we are about to enter an era of double tailwinds.”

We’ll see about that, but here are highlights from my interview with Riccitiello:

On the next generation of consoles:

Each generation has built a software business that is 50 percent bigger than the one before, and that was entirely made up of a packaged goods business.

I don’t think console and packaged goods are synonymous, like how music and CDs aren’t synonymous. The delivery system has changed from a disc to a more digital model. It’s shifted to a service, like iTunes and Spotify.

Consoles are super-powered PCs that are connected to the biggest screen in the house. There’s no doubt in the mind that the TV set is going to remain as the principle display device for entertainment going forward.

On EA pulling off the transition from packaged goods to digital:

At some point they [investors] are going to have to wake up. When you are on the podium at the end of the Olympics, you obviously know how to swim. But they are still saying that we need water wings. I get it, I understand the cynicism that prevails.

On the worth of EA’s $400 million acquisition of Playfish, the social games developer, in late 2009:

If you read our fillings, you would see that they earned a significant portion of their earnout, so they must have done something right. If you go to E3, you will see a major introduction that will usher in a long train of products, which was only made possible by Playfish investment.

We are three years out from [realizing the full value of the deal], but the vision we have — and the direction we are going — has been made possible by a platform and culture and technology shift. And a gigantic part of that had to do with an infusion of Playfish’s DNA.

On shifting to an always-on model versus shipping software:

We used to peak on usage a week after we shipped. But all of our games have an ongoing business now, and Playfish was the model for all of that.

On the Sims Social on Facebook not knocking Zynga off the top of the charts as had been expected:

Maybe I wish the Sims Social had sustained longer, but relative to the impact it [Playfish] has made on our company, I can’t say enough about it.

On executive departures — such as Barry Cottle, the EVP of EA’s interactive division, and its COO John Schappert — to Zynga:

It says that people pay are willing to pay a lot of money for EA talent, but we had lower attrition than Google last year. … There were a notable number of high-profile executives who left for 300-600 percent more money. … Even at depressed stock prices, they got $12-$13 million to show up on day one. I take it as a compliment that someone is willing to spend $20 to $40 million dollars on my employees. Those are staggering sums.

On getting that talent back:

I just guided 30 percent income growth, which is better than any of my competition, and delivered a great fiscal 2012 with 40 percent growth on digital. I don’t think my team is missing a beat. Would I want them back? Not now, but I do understand it from a money perspective. I get it.

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Last year, Zynga hired Electronic Arts’ COO John Schappert, who now holds the same title at the social games company. It also picked up EA Play’s EVP Jeff Karp, who is now Chief Marketing and Revenue Officer.

Most recently, Cottle was overseeing EA Mobile, Playfish, Pogo, Hasbro and PopCap, and had been one of the key driving forces behind transforming the company from primarily a packaged goods company to a digital company.

At Zynga, Cottle will serve as EVP of business and corporate development in charge of new global partnerships, acquisitions and other development roles.

In a letter sent to employees today, Electronic Arts CEO John Riccitiello downplayed the departure of Cottle, and said it was going to fold EA Interactive into the entire organization now that “everyone and everything is digital.”

Four years ago, when it originally set up EA Interactive, it was to oversee mobile, social and Pogo, he explained. But today, those initiatives are part of every group within the company.

“It’s abundantly clear that the digital transformation is not confined to one group,” he wrote. “Therefore, we have decided to begin 2012 by folding EAi into the organizations noted below. This reflects our new reality: everyone and everything is digital.”

Executives now leading the charge include EA Labels President Frank Gibeau, COO Peter Moore, CTO Rajat Taneja and EVP of digital Kristian Segerstrale.

Riccitiello provided further evidence of EA’s digital transformation by announcing that the company had achieved more than $1 billion in digital revenues in 2011.

The loss of another high-profile executive to Zynga represents a signficant blow to the company, which has been clear about its attempt to challenge Zynga’s dominance in social gaming. Last year, it paid $750 million to acquire PopCap to become the second-largest social game maker on Facebook.

Cottle, who was at EA for the past five years, previously worked at Palm, where he held the position of COO, and at the Walt Disney Company, where he was he was an SVP and chief marketing officer.

“It’s rare that you find someone who possesses a deep operational background and also has the vision to see where your business and your industry are headed,” said Zynga’s CEO Mark Pincus in a release. “His skill set, combined with his deep understanding of the games, technology and entertainment spaces will help us accelerate our mission of connecting the world through games.”

KlickNation, which has been developing free role-playing games on Facebook for the past two years, will join EA’s BioWare label to create a new social division called BioWare Social.

The unit will be based in Sacramento, but will work closely with some of EA’s existing employees in San Francisco. BioWare Social will be led by KlickNation’s CEO Mark Otero.

BioWare is best known for creating such role-playing hits as Mass Effect and Dragon Age, and is currently preparing to launch the highly anticipated Star Wars: The Old Republic.

Prior to this acquisition, Electronic Arts had made two other significant purchases to bolster its social gaming business, acquiring PopCap for $750 million earlier this year; and Playfish for $400 million, back in 2009.

In comparison to the other acquisitions, the purchase of KlickNation is relatively small. The company’s biggest game on Facebook, Age of Champions, only registers 140,000 monthly active users, and Electronic Arts didn’t even bother disclosing the terms of the deal.

But right now the industry is in a talent war, with the leading social games company, Zynga, gobbling up many of the smaller social games studios across the country.

Electronic Arts is currently the second-largest game developer on Facebook after Zynga, with its most popular game, The Sims Social, attracting 30 million monthly active users.

Still, the Sims game has failed to top two of Zynga’s most popular games, CityVille and FarmVille.

Electronic Arts has made it abundantly clear that it intends to challenge Zynga’s dominance in social gaming. If successful, EA may have a chance to win back some of the attention Zynga has been stealing away from it.

It just may not happen fast enough. Zynga is heading out on its road show next week to convince investors to pony up for its initial public offering.

As part of its pitch, Zynga is seeking a $10 billion valuation in its IPO, according to Reuters; that would be higher than Electronic Arts’ current public valuation of $7.8 billion.

It is asking for a higher valuation despite Electronic Arts recording 10 times greater revenue, compared to Zynga, in the three-month period ended Sept. 30. Electronic Arts reported revenue of of $3.8 billion; Zynga reported revenue of $300 million.

In an interview in Silicon Valley, Brad Serwin, the COO of Playdom’s social games unit, said the company has finally started to come out of hiding after being acquired for $563.2 million, plus a $200 million earn-out, more than a year ago.

One reason it took so long, according to Serwin: The general pains of integrating a small company into a larger organization.

Since the acquisition, Playdom has moved to new offices in Palo Alto, Calif., which it shares with Disney Mobile (which was formed through the acquisition of another Silicon Valley start-up, Tapulous).

Both have been learning to work with a parent company that is headquartered 350 miles away.

“A year after the acquisition, we are successfully transitioning into an operating division within Disney,” Serwin said. “We are 100 percent back to work.”

It took long enough, especially given the radical change the industry has undergone since Facebook launched its third-party application platform in May 2007. [More on how the industry has changed  in an interview today with Rick Thompson, a founder of Playdom.]

Since then, games have become the most popular applications on the platform, and have evolved from simple and inexpensive time killers to graphically rich applications.

Facebook has changed the rules, too.

This has impacted everyone in the space, not just three-year-old Playdom. Two of the biggest challenges emerged when the social network shut down its viral channels: When it became difficult to acquire new users by posting messages on users’ pages, and when Facebook implemented Credits, a virtual currency that requires developers to cut Facebook 30 percent of all revenues.

Playdom execs believe the company has finally reorganized, and are planning on making a big splash in what many worried was a dead pool.

Of the dozen titles slated for the next year, two games will come as soon as this month, and up to three games — coming in January, March and August — will leverage Disney brands.

Playdom’s next game is called Secret Agent X. For now, it is only available in beta in some international markets, but it is coming to the U.S. in the fall. In the game, a player leads a dual life as an average citizen who at night becomes a secret agent, exploring new locations and completing missions with the help of high-tech gadgets.

In the trailer for the game, seen below, a suburban housewife manages to save the world, all the while keeping her cover by making sure dinner is on the table on time.

As the seventh-largest app maker, according to AppData, Playdom falls below Zynga, Electronic Arts and even such new entrants as Germany’s Wooga.

That said, Playdom’s recent launch of Gardens of Time was considered a breakthrough hit that used game mechanics rarely seen on Facebook. The social game falls into the category of “hidden objects,” where players try to find a list of items in a room, similar to “Where’s Waldo?”

The concept behind hidden objects is not new to gaming, but it is new to Facebook, and was recently identified as a niche worth pursuing. Today, Playdom’s game is garnering nearly three million daily active users, which registers slightly below Zynga’s new Adventure World.

Playdom hopes it will prosper by bringing new concepts to social gaming and also by leveraging Disney’s big brands to catch players’ attention.

As a recent test, Playdom renamed its game GnomeTown as Disney’s GnomeTown. Serwin said the game performed much better with the new name.

Playdom’s close competitor Playfish is also relying on the intellectual property of its parent company, Electronic Arts. It has seen its Sims Social title climb the charts to become the second-most-popular game.

On the other hand, Zynga, which is the largest social games maker, has made up all of its own properties, ranging from FarmVille to its newest property, Adventure World. More recently, it has used name-brand promotions within its games to garner attention, such as Lady Gaga in FarmVille, and more recently, Enrique Iglesias in CityVille.

“Competitors have chunks of IP, but we have a lot to choose from,” said Serwin, adding that it’s not as if Playdom alone needs intellectual property: “Everyone needs IP.”

Serwin said the Playdom division’s plan is to work closely with Disney; it has hired a liaison who works in Burbank every day to make sure Playdom’s plans are on course with what Disney has in mind.

Still, Serwin can’t deny that the lull in game making has dragged down the results of Disney’s Interactive Group. Disney reported $21 million in accounting adjustment in the third quarter and $34 million in the second quarter tied to Playdom alone, and the losses are expected to continue.

In the second-quarter earnings call, President and CEO Bob Iger tried to explain its multimillion dollar charges to analysts:

“We thought it would be wise to improve the quality of the games that we’re going to release. So, we took a five-month hiatus, which had not been planned, from releasing games, to build a higher-quality game, and then also to re-stack our technical capabilities to deal with volume or to deal with scale, which we are hoping to achieve.”

Iger declined to say when the group would hit break-even, but that it was expected to get into the black by 2013.

Iger gave Gardens of Time as an example of a game that is monetizing well. “We feel good about the direction of Playdom, particularly with this new hit game in the marketplace,” he said, adding that new games in the pipeline will be based on Disney, ESPN and Marvel brands.

It has taken more than a year, but Serwin believes Playdom is ready.

“We’ve made a connection with people at Disney to get it done,” he said. “Whether it should have happened faster or slower, I don’t know, but it’s happening and it’s great.”

As of yesterday, EA became the second-largest social games company on Facebook, trailing behind Zynga, which is seeking $1 billion in an IPO.

EA’s rankings have been propped up by the recent launch of the Sims Social, which over the past week became the fastest-growing game on Facebook, and by its roughly billion-dollar acquisition of PopCap, which has Facebook titles such as Bejeweled Blitz and Zuma Blitz.

Electronic Arts jumped in the rankings yesterday after AppData, which tracks the performance of games on Facebook, started counting the performance of EA and PopCap together.

The company’s acquisition of PopCap closed last month.

Zynga’s lack of brand names might ultimately hurt the company in the long term, but so far it has been able to make its own hit titles, such as FarmVille, CityVille, Mafia Wars and Empires & Allies.

Its IPO appears to be on track, unlike another Wall Street darling, Groupon, which faces increasing scrutiny and potential delays. But ultimately, investors may want to know how the San Francisco company plans to respond to increasing competition from companies with access to big brand names.

Other brand names that have gained recent traction include the Smurfs & Co, which is the second-fastest growing Facebook game after the Sims; and Kabam, which is planning an upcoming game based on “The Godfather.”

EA initially got its footing in social through the purchase of Playfish, and over the past year it has used those resources to focus more on titles, such as the Sims and other recognizable names, like Monopoly, FIFA and Madden NFL.

As of yesterday, EA had 71.5 million monthly active users, a distinct second to Zynga, which has 275.5 million monthly active users, according to AppData. The next-largest social games company is Germany’s Wooga, which has 38.5 million monthly active users.

EA’s biggest title on Facebook is the Sims Social, which has almost 30 million monthly active users, or about 7.8 million players who return daily. At that size, the game compares to Zynga’s fourth-largest title, FarmVille, which has 35 million monthly users and eight million daily users. EA’s second-largest title is Bejeweled, a PopCap game, which gets nearly 10 million monthly users.

Of course, both companies are expecting social games to become a significant business down the road.

SuperData, a New York-based market intelligence firm, estimated in a report released last week that the North American social games market will grow 35 percent this year to reach $1.4 billion.

Facebook is a big part of that, but as the seventh largest developer on the platform, and with only 12 percent as many active monthly users as Zynga, it has a long way to go.

It believes the solution is leaning on its deep catalog of brands — something Zynga and many others can’t compete with. So far, it’s launched Monopoly Millionaires, FIFA Superstars and Scrabble.

The next one, officially launching today, is The Sims Social.

Sims Social is a brand with a lot of history. It’s been played by 140 million fans in 22 languages in 60 countries around the world. To date, it has been available on the PC, PlayStation, Xbox, Wii and mobile.

Electronic Arts originally unveiled the game at E3 in June. To put the social game in context, I wrote at the time:

One of the most anticipated launches of the year is EA’s Battlefield 3, which is expected to go head to head with the seemingly unstoppable Call of Duty franchise. But at the company’s eardrum-splitting press conference in downtown Los Angeles, it also showed off The Sims, which is reflective of a wider trend in the industry to embrace other platforms.

With the launch of Sims on Facebook, EA is promising that your social life will never be the same. Given the game has the potential to create some very awkward moments with your friends and partners, that’s hardly an overstatement.

Players will be presented with challenges, such as forming romantic relationships, flirting, joking and getting married. They can build dream homes, take showers together, or play pranks or achieve goals, such as having 10 girls in the hot tub at the same time.

At E3, I wrote: “Who needs Battlefield 3 when you can begin World War 3 among your friends?”

There’s no requirement to “marry” your real-life wife or husband, or boyfriend or girlfriend, which could cause all sorts of real-life sparks to fly. If you can imagine slapping your husband (or the other woman) after reading about his latest accomplishments in his news feed, don’t worry, you can do that in the game, too.

EA is hoping the high intensity situations will lead to explosive growth.

The game, which is available in five languages, was technically launched today, but has been around in beta for awhile. It won the 2011 Best Browser Game Award at Gamescom in Germany this week, and it topped this week’s list of fastest-growing games by daily active users, according to InsideSocialGames.com. It has roughly 1.45 million daily active users on Facebook, gaining 2,287 percent compared to last week.

Sims Social will be free to play and will monetize both through virtual goods and in-game advertising, such as items from Dr Pepper, Dunkin’ Donuts and Toyota that can provide extra boosts and benefits when players need them.

This is not the first time the company has brought the PC game and console title to the Internet, but last time it failed.

John Buchanan, VP of Marketing at EA Play, said it’s been more than five years since that experiment and that this time they put in the time and energy to build something that both Sims fans and newcomers can enjoy.

“It is an incredibly exciting time for us. You have the No. 1 PC franchise and the No. 1 social network. It’s really exciting. It’s a game that is going to revolutionize social gaming and the Sims,” he said.

To build this game, EA’s Play Label teamed up with Playfish, its social games division. This marks the first time for a massive collaboration between the two groups, said CJ Prober, VP of publishing at Playfish.

“We used everything that the Sims team knows about the game for the past 10 years, and what works and what the fans love, and Playfish brought everything it knows about social gaming. It was a truly collaborative effort.”

Prober said development doesn’t stop today. Up next will be a mobile component that will allow users to stay in touch with their Facebook experiences while on the go.

That’s a good idea. That way, you can get out of the hot tub quickly before you get into real hot water.

There are three major appointments: Frank Gibeau, currently president of EA Games, will become president of the EA Labels; Peter Moore, currently president of EA Sports, will become COO, overseeing EA’s global publishing organization and online initiatives, including the Origin digital platform; and Barry Cottle, EVP of EA Interactive, will now oversee EA Mobile, Playfish, Pogo, Hasbro and PopCap.

The management changes will be effective Monday.

Along with the promotions, there will be one structural change to the business. EA is expanding from three to four labels — EA Games, EA Sports, EA Play and BioWare — with Gibeau in charge of all of them.

Each label is focused on key game franchises and each is responsible for launching at least one game annually while also creating content for all platforms, including console, PC, mobile and social.

This is the first reorganization since EA CEO John Riccitiello established EA’s label structure when he rejoined the company in 2007; he left in 2004 to be a founding partner and managing director of Elevation Partners, a private equity firm.

In a letter to employees, Riccitiello said that EA has shifted to creating fewer, bigger and better titles with better cost management, while also expanding its digital businesses.

“Our quality has risen dramatically. We’ve built an $800m+ digital business while pushing down operating costs,” he said. “Not all of it was easy but looking back, it was exactly the right structure and priorities for the challenges we faced.”

Gibeau has worked at EA his entire career, joining straight out of college in 1991. Moore was appointed president of EA Sports in 2007, having joined from Microsoft, where he was responsible for leading its Xbox and Games for Windows businesses. Cottle joined EA in 2007 from Palm, where he was COO in charge of overseeing its wireless and Internet division.

Photos: EA’s booth at E3, top right; Gibeau pictured left; Moore pictured right.

The videogame maker, which does not break out revenues for Playfish, the social games division it acquired two years ago, said revenues are starting to ramp, but that the number of users playing its games are flat or down.

In a response to a question about Playfish revenue, EA’s CEO John Ricitiello said during the company’s conference call today, “I would say it’s a one-win and one-loss situation, which we are trying to turn into a two-win category in the next six months. We have not seen the growth in DAUs (daily active users) that we would have liked to see with the last couple releases.”

The company said monthly active users from its social games totaled 32 million, which is far lower than the 52 million it registered in the year-ago period.

Some of that churn has to do with a change in Facebook’s policies that turned off the ability to market games to user’s friends, but even still, EA has been aggressive at rolling out new games, leveraging some of its core intellectual property, such as Monopoly and MLB Superstars.

“DAUs are flat,” Ricitiello said. “But we roughly doubled our revenues. We are moving revenue up sharply. That’s a good thing. … We’ve learned the right lessons around monetization.”

EA Sports President Peter Moore also joined the call today to talk about its three sports titles on Facebook, consisting of Madden, FIFA and World Series Superstars games. He said the average revenue among paying users for those titles has hit $56 in accumulated spending, which is higher than revenue the company receives from players on consoles.

However, Moore acknowledged that the percentage of paying users is in the low single digits.

While this information is not exactly earth-shattering, it provides a small look into the company’s business as it tries to evolve from shipping games in cellophane to pushing out titles to multiple digital platforms, spanning PC, social and mobile.

Plus, the company’s investments in social will grow as it integrates the acquisition of PopCap games into its business. Ricitiello said he sees complementary aspects of the two company’s businesses. While PopCap games has been better at gaining users on Facebook, EA has been better at monetizing them.

“We think there will be strong synergies with their IP,” he said.

Going forward, it will also be important to compare EA’s performance to Zynga, which has registered for an initial public offering.

But there’s not a lot of overlap in the way the two are reporting results. While Zynga discloses its revenues, it does not report how individual titles are performing or the average revenue per paying user. It also admits that a very small percentage of its users pay for items inside its games, but doesn’t provide an exact figure.

Here are two slides from EA’s financial presentation today that break down its digital revenue by platform and by type.

On the first slide, social games revenues are part of PC revenues (in red), which shows it was the fastest-growing segment during the first quarter compared to the same period a year earlier.

On the second slide, social revenues are part of the Free-to-Play category (in purple), which shows that it was also the fastest growing segment in the first quarter, jumping 32 percent over the same period a year earlier.

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.

So, what might be next for the aspiring social network?

Probably a social game network, and based on what I am hearing from multiple sources, it sounds like Google is close to launching one that could rival Facebook.

A Google spokeswoman would not confirm that a social game network was in the works, but provided this statement: “It’s important to keep in mind this is an ongoing project and this is just the beginning. We plan to add a lot of features and functionality to Google+ over time. We’re just excited to get started.”

Over the past three years, Facebook has helped spawn a whole new category of games that allow you to play with your friends online.

Along the way, it has also helped build several million-dollar companies. Zynga, which is reportedly going to file for an IPO any second, is the largest. Others, such as Playfish and Playdom, have been acquired by Electronic Arts and Disney respectively.

The Google+ project is the company’s most cohesive social strategy yet, so it would be the most likely candidate for more services and features to be layered on top over time, including a social game network.

Google already sells games, like Angry Birds, through its Chrome Web Store, and recently has gotten more seriously into social gaming, for example, through its venture arm’s lead investment in Kabam. (There are also some hints in the Google+ source code that games are coming. Engadget discovered that the code says “have sent you Game invites and more from Google+ Games.”)

Google’s quest to enter the social games market likely kicked off more than a year ago.

Last summer, Google invested more than $100 million in Zynga, which TechCrunch reported was part of a larger strategic partnership.

Shortly after the investment, Eric Schmidt, Google’s CEO at the time, verified the company’s involvement in the game company. When asked about Google’s partnership with Zynga, Schmidt told the WSJ, “we haven’t announced it” but “you can expect a partnership with Zynga” in the future.

If Zynga files for a public offering, we may find out more of the details as soon as today.

Strategically, Google’s entrance into the space could be a big deal to developers looking for a platform to build on outside of Facebook, which has a lot of control over the social games market.

For example, starting Friday, it will be mandatory for all game companies to use Facebook Credits as the only in-game currency. And Facebook takes a 30 percent cut of all of that revenue.

Google could offer an outlet for developers that charged less to use. Plus, for all of the companies that are sick of competing (and losing) against Zynga all the time, Google’s entrance could give them the opportunity to start again with a fresh slate.

Google will still have to prove it can be a successful platform to make it worth a developer’s time.

Founded in 2008, it was one of the first gaming companies to feed off of Facebook’s social graph, which allowed companies to endlessly post messages on players’ walls to get the word out about their games.

Flash forward to 2011 and the frothy days are over.

Facebook has scaled back the amount of viral activity allowed, due to all the complaints, and now the Burlingame, Calif.-based company has decided to raise $23 million in capital to fuel its next stage of growth.

The round is a big deal for the fifth largest game company on Facebook because it represents its first ever. That’s quite the accomplishment given its position compared to others.

For instance, CrowdStar registers roughly 29 million users a month vs. Zynga, which enjoys the top position by a wide margin with 248 million users. Electronic Arts, which purchased Playfish for $275 million in 2009, has 32.7 million monthly users, according to AppData.

As a YouWeb incubated company, CrowdStar previously had raised no formal capital. Contrast that to Zynga, which has raised somewhere around $1 billion if you count a nearly $500 million injection that has not yet been officially announced.

The company’s first round was led by Intel Capital and Time Warner, along with participation from China’s The9 and NVInvestments. Vivi Nevo, the largest individual shareholder in Time Warner with lots of ties to Hollywood, also invested.

“We’ve built six to seven substantial properties that have done well and we got the audience when customer acquisition was fairly easy,” said Peter Relan, the company’s CEO and co-founder. “We were able to be profitable and fund the growth to 100 people organically.”

Relan declined to specify the company’s valuation or its revenues, which he said was in the “tens of millions.” No matter how much it is, it’s not enough to support his lofty ambitions for 2011.

By the end of the year, the company plans to double the number of employees it has to 200, hiring game developers, artists, producers and business analysts. It also wants to expand to mobile and other social networks around the world. Relan says the goal is to double the company’s revenues with only 50 percent coming from Facebook by year end.

“We are a Facebook social games company turning into a multi-platform global company,” he said. “It’s a very profitable business, but it can’t fund all that growth.”

CrowdStar said that it will launch four to five more games this year, two of which will be on mobile and the rest on Facebook. Additionally, it will launch two to three of its current game titles overseas this year in a few countries.

Relan said by pursuing both mobile and international growth, he’s confident that he’ll find audiences that are equivalent in size to Facebook. He’s targeting such social networks as Renren in China, The9, a game network in China, and OpenFeint’s social network on mobile phones.

Relan said he carefully picked the mix of investors.

Intel will be active in the tablet market, which may be a big market going forward for social gaming, and Time Warner will be able to contribute as social games increasingly integrate brands, such as GagaVille on FarmVille, and Playfish’s integration of celebrity chef Jamie Oliver in Restaurant City.

Last year, there were rumors that Microsoft was interested in purchasing CrowdStar.

Relan declined to comment on those rumors but said he’s thrilled to be an independent company. “We’ve been independent and historically we’ve never even had an investor to tell us what to do. We are a fiercely independent and motivated company that really enjoys the cultural freedom of creativity. We can do what we want, and that’s a rare luxury.”

By staying independent and by not raising money before, Relan also says he maintained lots of financial flexibility.

“With Zynga setting the trend, it’s a great thing to follow on. There will be people who think it is too inexpensive–I don’t know if it is–but it’s a great thing to be seen as inexpensive.”

As social games attract large user bases, it is increasingly common for advertisers to sponsor virtual goods to get in front of a very engaged audience.

The most high-profile example lately was this week’s launch of GagaVille, a Lady Gaga-inspired farm on FarmVille, Zynga’s popular social game.

In both cases, the sponsorships have been in older games, which are having a hard time attracting as many daily users as they once did. It’s unclear whether injecting high-profile brands into the games will help players reconnect or attract new players.

In the case of GagaVille, players have the chance to unlock songs from the pop star’s album coming out next week. After launching, FarmVille appeared on Facebook’s list of top performers for the week, reports InsideSocialGames. It gained 88,736 daily users to hit a total of 11.3 million.

As part of the Jamie Oliver promotion, players on Restaurant City will have to collect multiple ingredients in order to make recipes from the celebrity chef, such as Farfalle Carbonara, Asparagus Fettuccine, Basil Pesto Pasta and Meatball Pasta. Virtual goods will include the Jamie Oliver Pasta Maker.

Ultimately, players will be directed to a link to visit Jamie Oliver’s site, where they can learn how to make the recipes at home.

“Really the strategy is two-fold: to provide something fun and engaging with a brand people can feel good about. It’s also an opportunity for us to reach a whole new set of players, who are fans of him,” said Tom Sarris, Playfish’s director of global communications.

Restaurant City attracts nearly six million monthly users and 1.4 million daily users. It registered one notch higher than FarmVille on this week’s list of top gainers, coming in at number 12.

The promotion corresponds with the new TV show, “Jamie Oliver’s Food Revolution,” which airs in both the U.S. and the U.K., and addresses concerns about obesity, heart disease and diabetes.

In its first-quarter results released today, the company, which is known for its Call of Duty and World of Warcraft games, said its revenues from digital channels increased 30 percent year over year in the first quarter.

What’s more, on a non-GAAP basis, digital channels accounted for more than 50 percent of net revenues, or roughly $378 million.

However, what’s becoming clear is that the definition of digital is a moving target for all parties involved, a trend that will likely continue as companies experiment with new business models and ways to deliver games to consumers.

Activision’s big source of digital during the quarter came from the $15 content pack for Call of Duty: Black Ops, which provides new areas for players to explore that were not included in the the original game sold at retail. It’s available on Xbox today and is expected to launch on Sony’s PlayStation Network and the PC in the second quarter.

That’s much different from Electronic Arts, which said last week that its digital revenues for its fiscal year ended March 31 totaled $833 million, exceeding its forecast of $750 million.

When EA talks about digital, it refers to mobile games and social games on platforms, such as Facebook. For the most part, it’s not referring to downloadable content available on consoles (although it has that, too).

The differing points of view also come down to business models.

Mobile games and social games are often free and either monetized through advertising or through virtual goods that are purchased in the game. Online games are often paid for via subscriptions and console games frequently require a $60 upfront payment with the option of paying for more downloaded content later.

Thomas Tippl, Activision’s COO and CFO, said while digital revenues grew at 30 percent, it was also able to maintain margins of up to 50 percent since most of its digital content was leveraging the company’s large online communities and popular franchises.

Call of Duty and it’s $15 content pack is one example:

During the earnings call, Activision said that Call of Duty: Black Ops has now officially become the best-selling title of all time in dollars across the Xbox 360, PlayStation 3 and the PC in the U.S. and Europe. Additionally, the popularity of that title was able to drive massive sales of the digital add-on pack. While only released a few days ago, it has the potential to do better than most console games at retail.

“The Call of Duty content pack shattered records with 1.4 million downloads in the first 24 hours,” Tippl said. “We no longer think about launch events, but long-term on-going relationships with players. The response from fans underscores this approach.”

The company also discussed other digital initiatives, of which some could arguably be considered social, although they are not on Facebook.

In the works is a next-generation massively mutli-player online game; a micro-transaction game for China; a digital platform surrounding the Call of Duty franchise; a new property from Bungie; and Skylander’s Spyro’s Adventure, a new children’s game coming out that will tie the Internet together with real-life $10 toys.

But not ever in the company’s earnings release, or during the call, did Activision place much emphasis on mobile games or social games.

Actually, Facebook was mentioned once. Activision said that since Call of Duty: Black Ops First Strike launched on Feb. 1, players have spent an average of 58 minutes a day playing online, which is more than the 55 minutes an average Facebook user spends a day on the social network.

So, maybe it can build its own communities?

Still, one could argue that mobile and social are key components to the digital gaming experience.

In addition to Electronic Arts’ many investments in the space, including the purchase of Playfish, a social games publisher, Disney also acquired Playdom. Both plan to use the publishers to bring some of their more recognizable content from other platforms to Facebook. Social games are also becoming a massive business for privately held companies, like Zynga.

An analyst during Activision’s earnings call this afternoon asked about how the company viewed the various emerging platforms across the videogames industry.

In response, Activision’s CEO Robert Kotick said: “You hit on the most interesting of the fundamentals that are redefining interactive entertainment. More people are playing games than ever before.

“Facebook has done a good job of introducing interactive entertainment to people who have never engaged in gaming of that kind…We’ve always taken the approach of platform agnosticism. We deliver services across devices with a display and a microprocessor. We have to prioritize the resources based on the opportunity. As we look out three to five years, we see there being a lot more displays with microprocessors that will be capable of playing games. We are so excited about the prospects of the future. If it has a microprocessor and a display, our content can be there.”

It argued that instead of creating hits that are sold on store shelves for videogame consoles, the Redwood City, Calif.-based company wants to take popular franchises, like Madden or Need for Speed, and digitally distribute them across a number of platforms, such as mobile, social and PC, to create recurring revenue streams.

Riccitiello was unwavering in his commitment:

“The consumer has changed. 200 million console players have become 1.5 billion consumers gaming on multiple devices,” he said. “Today, we are a very different company….From here, it is about building a better, more predictable, and more profitable business, a business that is less dependent on individual hits and more deeply anchored in the ongoing monetization of game franchises.”

But the big question is whether EA can turn the ship when there are 8,000 employees on it who are used to doing business the old way.

Habits are hard to break, especially when it requires replacing a controller with a mouse or a touchscreen. In the meantime, some of its more nimble competitors are getting most of the credit as the industry shifts to digital.

For example, earlier this year, we watched as the private market valuation of Zynga–EA’s much smaller and younger competitor–exceeded EA’s public market valuation. Zynga was reportedly worth between $7 and $9 billion, while EA was valued at roughly $6 billion.

Today, EA’s market cap stands at about $7.25 billion.

Zynga, which makes such Facebook games as FarmVille and CityVille and has dabbled in mobile games, reportedly had revenues of $850 million in 2010. In comparison, EA’s digital revenues totaled $833 million for its fiscal year 2011. (Meanwhile, its overall revenues totaled much more, or $3.6 billion.)

Still, smaller competitors, such as Zynga, which strictly make money from digital revenues, are viewed as not having a lot of baggage and can go hard after something new without sacrificing the old.

Just last week, there was a sign that EA wasn’t winning that battle–even internally.

Electronic Arts disclosed that its COO John Schappert resigned. Rumors indicated that he was joining Zynga, although Zynga has not confirmed the appointment.

Despite that potential set-back, and EA’s public perception, it has been trying.

It has been on an acquisition spree for the past couple of years, picking up everything from Playfish, a social-games developer, to Chillingo, a mobile-games publisher. Earlier this week, it bought a small mobile-games studio called Firemint. (Of course, those investments also become a curse because they have to start paying off.)

Beyond acquisitions, it has also re-prioritized the work it was doing.

On the call, Riccitiello said that involved paring back the number of titles it was making from roughly 70 to around 20. While that was something of a defensive move, he said they are now shifting to offense, by picking the game franchises they do decide to build and porting them across several platforms to increase their profitability. “Over the coming years, we will transform EA from a packaged goods company to a fully integrated digital entertainment company.”

He calls it the “games-as-a-service” model, which is comparable to the software industry switching from a licensed packaged goods model to SAAS, or software as a service, several years ago.

Under this philosophy, he said, they will rely on intellectual property and strong brands, such as EA sports and Hasbro, and build out a platform of registered users that can be marketed to (in Q4, it had 112 million users, roughly twice as many from a year ago). It’s also making managers experts across mobile, social and console, rather than making silos for each category.

“It’s a big change,” Riccitiello said. “As an investor, you can see this as a way to better manage our IP, and drive up the ARPU for our core properties.”

At least one analyst was reluctant to believe the transformation could take place. How does Riccitiello plan to get everyone on board?

“If only you could spend a couple of weeks with us,” Riccitiello joked.

His more serious answer was that they’ve spent the past three years conducting a managerial change: “We’ve identified intellectual property owners inside of our company, and we’re sort of organizing around that.” Those individuals are charged with plans that involve console, PC, mobile, social and a variety of business models, including microtransactions and subscriptions.

The change will be relatively slow. This year the company is projecting digital revenues to total $1 billion, increasing roughly 20 percent over 2011.

And despite all of its efforts, the company will face other challenges, including some that are out of its control. For instance, the company’s EA Sports business is facing two potential league lockouts and this year there won’t be a FIFA World Cup title. Those three things represent roughly a $250 million revenue gap.

It’s also launching its biggest launch campaign for a game in EA’s history for Battlefield 3, and it’s unclear when the highly anticipated launch of Star Wars, an online multi-player game, will occur. Depending on when it is ready, EA’s earnings per share could fluctuate by 15 cents.

Overall, at least some people were sold on the picture Riccitiello painted.

The company’s stock increased a modest $1.76 a share yesterday, or roughly 8.8 percent, to close at $21.68. And Piper Jaffray analysts raised their price target on EA’s shares from $19.50 to $25.00.

The company was expecting to report digital revenues of $750 million for the year ended March 31, 2011. Instead, digital revenues totaled $833 million, up 46 percent over the year-ago period.

In a statement, EA’s CEO John Riccitello said: “We’re particularly proud of the scale and growth rate of our digital business.”

The company is now forecasting digital revenues of more than $1 billion in fiscal 2012.

Digital revenues mainly include mobile games, digital downloads and social games built by its Playfish subsidiary. It said that mobile revenues in the fourth quarter totaled $70 million, increasing from $55 million in the same period a year earlier.

It does not break out revenues from social games, like Monopoly and Major League Baseball, but the company’s CFO Eric Brown told us in an interview that its cross-platform approach is working with brands such as FIFA, which single-handily generated $100 million in digital revenues in 2011.

He also added that the company’s social gaming revenues more than doubled in 2011, compared to the year earlier.

Its monthly active users, who play social games, totaled 36 million, falling from the year ago period’s 51 million players. That has a lot to do with Facebook changing its policies about how much games could be promoted on the social network. The shift caused many companies’ metrics to fall.

For the year ended 2011, the company’s net loss was $276 million on revenues of $3.6 billion. In the fourth quarter, the company’s non-GAAP net revenue was $995 million, exceeding guidance of $850 million to $950 million. It reported a quarterly profit of $151 million or 45 cents a share.

The company’s stock is trading down in after hours, falling $1.13 a share, or roughly 5.7 percent, to $18.79 because of a weaker than expected outlook.

Non-GAAP revenue is expected to be down, ranging between $910 to $950 million, and non-GAAP earnings is expected to fall between a wide range of 44 and 53 cents a share.

“We are always on the lookout,” said EA Interactive’s EVP and GM Barry Cottle, following the announcement that EA has acquired Firemint, an independent game studio in Australia, and Mobile Post Production, which is focused on porting games to multiple platforms.

“I do think this is an overall trend for the industry. You’ll start seeing more of these acquisitions as opposed to the large-scale type because of the nature of openness of the marketplaces. It creates opportunities for third-party independents.”

That’s a big shift from the past when game developers did not have direct access to consumers. Now with the proliferation of social networks like Facebook and mobile app stores like iTunes and the Android Market, it’s easier to create a hit title on a small budget.

Take Firemint, for example:

Its hit game, Flight Control, was released on March 6, 2009, and within the first three and a half weeks, Firemint sold nearly 600,000 copies on the iPhone. As of January 2010, it had sold 3.9 million copies and Apple listed it as one of the all-time top paid iPhone apps. The game is currently 99 cents in the App Store and has since become available on the Android Market for $2.99.

All this from a small 60-employee shop in Melbourne, Australia.

EA did not say how much it paid for either company, but Cottle described both as small acquisitions. The acquisitions are not material to the company’s financial results. EA will report first-quarter results tomorrow. The small purchases are a big shift from the past. EA is well known for purchasing Playfish, a social game developer, for $400 million, and Jamdat Mobile for $680 million, way back before the first iPhone. More recently, it purchased Chillingo, a mobile games publisher.

While small, Cottle said, the acquisitions support all three of the company’s principles: Quality, speed and scale.

“The lack of barriers to entry and ability for independent developers to get into the marketplace has led to a whole host of new very talented developers,” he said. “These guys [Firemint] are two for two in hits and when looking at their future slate, we are excited and confident.”

Meanwhile, Mobile Post Production helps EA get games to market faster.

“Fragmentation is not getting better,” Cottle said. “It’s getting worse, and we’ve had a long-standing relationship with MPP. They are fairly small acquisitions, but they bolster our three tent poles.”

Other companies are also adopting the strategy of acquiring small mobile and social developers.

Zynga has been acquiring at least one social or mobile game developer every month, picking up a handful of employees each time. Its most recent acquisition, Wonderland Software, will be the basis for its new offices in the U.K. MindJolt recently bought two gaming companies, SGN and Hallpass Media, and casual game maker PopCap Games acquired ZipZapPlay to expand into social gaming.

According to sources familiar with the matter, Schappert is joining Zynga, the San Francisico start-up that is building a mini-empire based on games running on Facebook.

His departure was noted in a document filed with the Securities and Exchange Commission this morning. An EA spokesperson confirmed his resignation, but declined to comment on where he was headed.

It’s unclear what role Schappert will play at Zynga, although it is reportedly as COO. A Zynga spokesperson declined to comment.

Schappert’s hiring would be only the latest. Earlier this month, Kara Swisher’s BoomTown reported that Zynga hired Taylor Barada, Yahoo’s recently appointed head of M&A, for an unspecified role. On the same day, the start-up announced it hired former Cisco exec Debra Chrapaty as CIO.

Zynga, which has developed popular games like CityVille, FarmVille and Mafia Wars, is reportedly raising up to $250 million in new funding and could be beefing up its management team for a potential IPO.

In 2010, the three-year-old company reportedly earned $400 million on $850 million in revenues last year, making it a lot smaller than Electronic Arts. However, many have pointed out that the company’s valuation in its next financing could exceed EA’s current public market cap of $6.75 billion.

EA does not break out revenues of its Playfish subsidiary, which competes against Zynga, but it says it is on track to hit $750 million in digital revenues in 2011. Last year, its overall GAAP revenues totaled $3.7 billion.

Schappert’s departure is similar to the circumstances in which he joined EA 22 months ago. He replaced John Pleasants, who was leaving to become the CEO of Playdom, the social game developer that Disney eventually acquired. Schappert, who was working in Microsoft’s Xbox division at the time, had previously been the COO of EA’s worldwide studios.

We’ve obtained the letter that CEO John Riccitiello sent out to EA employees this morning regarding Schappert’s departure, which he did tersely:

All,

We’ve just started FY12 and the year promises to be one of the most exciting in EA’s history. Thank you for your hard work, commitment and success in FY11.  You will hear more on our FY11 results next week during our earnings call on May 4^th and at our global Town Hall meeting broadcast from EALA on May 5^th.

Today I would like to communicate some important organizational changes that I believe are beneficial for EA. Our focus is and must be on our IP, going digital and our great people. Effective immediately, Nancy Smith, Barry Cottle and David DeMartini will report directly to me. Nancy leads our global publishing organization and has been an industry icon and EA leader for over 25 years. Barry leads EA Interactive, and our Mobile, POGO and Social business and has proven to be one of the best digital leaders in our industry. Dave DeMartini is leading one of our most important strategic initiatives related to online infrastructure. I am proud to expand my team with these veteran EA leaders who are committed to and passionate about their teams, their roles and EA.

I’d also like to thank John Schappert for his contributions to EA.  John’s last day at EA was Monday of this week. We wish him well.

We have come a long way and EA could not have made it to where we are today without each of you. It is without question that the talented individuals and teams creating new ideas, products and services are what make EA a great company. The board, management team and I are very confident about where we are and where we’re going from here. I look forward to sharing more with all of you during our Town Hall meeting on May 5^th.

John

 

“We are back in baseball,” said Peter Moore, president of EA Sports. “It’s been six years since we’ve had the licenses.”

For a while now, MLB has had a third-party exclusivity with EA’s competitor, Take-Two Interactive. While Take-Two still holds a grip on most games, MLB has turned to EA to make its Facebook game.

This may be an early indication that EA’s decision to fork out $275 million to acquire Playfish, one of the early entrants into the social-gaming space, was a step in the right direction.

Still, there are a whole lot of home runs EA must now hit.

World Series Superstars, which launched today in advance of Opening Day tomorrow, challenges players to build teams, manage clubs and compete in games against friends. The game follows three other branded sports titles: FIFA Superstars, Madden NFL Superstars and Sports PGA Golf Challenge. Like the other titles, World Series Superstars is free to play with the option of paying for virtual goods to advance the game further.

Beyond EA’s licensing deal with MLB, the roll-out of the game also hints at the increasing importance of branded games on Facebook.

To date, much of the industry has been focused on what is called original IP, which doesn’t rely on well-known names to spur adoption. Zynga, for instance, has been wildly successful with its own content, ranging from FarmVille to CityVille and Mafia Wars.

A lot of debate recently, however, has centered about whether brands will dominate as the industry matures.

It’s debatable as to whether Zynga or others have become brands themselves, much like Rovio’s Angry Birds on mobile, but EA’s approach has been to leverage the licenses it has and bring games to market on Facebook, such as Monopoly and other titles.

Before EA purchased the social game maker, Playfish had no branded titles.

“We are very focused on extending some of our key brands onto social platforms. We’ve invested a lot since the acquisition, and we are starting to see the fruits of the labors,” said C.J. Prober, Playfish’s VP of publishing and product management. “Playfish is still really new to EA and we have lots of access to great new brands. The mix of brands vs. original IP will be higher in the near term, but will even out over time.”

Prober argues brands are increasingly more important since Facebook started cracking down on how often a developer can post messages to a player’s wall to attract new users among their friend groups.

Facebook said there’s still a mix of both branded and original titles, but that it is starting to see a shift.

“We are seeing some acceleration on the growth of brands coming to the platform…We are moving from the younger, newer category of games to the branded players that have been established on other platforms,” said Katie Mitic, Facebook’s director of platform and mobile marketing.

In particular, she says branded sports games are among the most engaging and best monetizing games on the platform.

“As Facebook Platform matures, we’re seeing high quality games, such as FIFA Superstars and Madden NFL Superstars, emerge and reach a new audience of social game players who may not have typically played online games before,” she added.

For anyone, it’s a large audience to target.

Mitic said more than 200 million people play games on Facebook each month–translated into sports terms, that’s nearly twice the size of the entire audience of the last Super Bowl.

The France-based company said it is hiring in its San Francisco office, and that more than 15 percent of Ubisoft’s Bay Area workforce will be focused on its social gaming business this year.

Currently, there’s roughly 300 employees, but that number is expected to grow.

To be sure, that’s a lot smaller than other social game makers, like Zynga, which employs 1,500, or even other major game publishers, like Electronic Arts and Disney, which have acquired social game companies Playfish and Playdom respectively.

But Ubisoft’s incremental investments in social demonstrate a broader appetite in the videogame industry for emerging platforms.

It’s part of a strategy Ubisoft calls “companion gaming,” said Chris Early, vice president of Digital Publishing.

We caught up with Early last week in San Francisco to hear more about the company’s increasing digital efforts.

Early defines companion gaming as having a single brand that crosses multiple platforms, including console, social and mobile.

An analogy he uses is how a baseball fan attends professional games, but also likes to read about the games in newspapers or on the Internet–a fan wants to engage across all platforms.

So far, Ubisoft has created 10 Facebook titles and has several more titles planned for the year, he said.

One of the more successful games is CSI Crime City, which Ubisoft made in collaboration with CBS.

It currently has a modest 1.9 million monthly users on Facebook, according to appdata.com. From there, Ubisoft’s titles drastically taper off, with its next title, Castle & Co., generating only 620,000 monthly users.

However, Ubisoft is using the platform to experiment with cross promotion.

For instance, it worked with CBS to create direct ties between the Facebook game and the TV show. During sweeps week last month, the TV show writers added clues in the show that could be used to unlock in-game bonuses on Facebook.

Early says the strategy is about putting the core intellectual property at the center of the experience and then building games based on that, whether it’s on Facebook, console or mobile.

Ubisoft’s mobile game efforts so far have consisted of mostly partnering with Gameloft, which builds the games. While Ubisoft used to own stock in Gameloft, its ties to the company are now limited to family relations. Ubisoft’s CEO Yves Guillemot is the brother of Gameloft’s CEO Michel Guillemot.

While questions arise in the industry on how much focus on social and mobile there should be right now, Early is cautious because he doesn’t see digital overtaking physical games anytime soon.

“Digital will not kill physical,” he said. “There will always be support for a certain percent.”

One primary reason for that is because digital platforms have infinite shelf space, which make discovery extremely difficult for the consumer, he said.

On Facebook, consumers must sift through thousands of titles to decide what to play. Same goes for Microsoft’s Xbox Live or Sony’s PlayStation Network. “You have to look at the top 10 sellers, or rely on a friend,” he said. “There’s a significant hurdle to digital.” The same has been said about mobile, where getting visibility on Apple’s App Store or the Android Market has been difficult.

He said with physical sales, stores have limited shelf space and customers can more easily browse through titles in a store and get recommendations from employees.

For now, there’s not a lot of pressure on Ubisoft from Wall Street to make a ton of money in digital. It hasn’t purchased a social-gaming studio for millions of dollars and therefore doesn’t have an urgency to see a return.

At least not yet.

It is forecasting revenues of $1.4 billion this year, which is about 17 percent higher than in 2010. It also expects that 2011 will mark a return to profitability and positive cash flow.

In addition to investments in Facebook, Ubisoft plans to support the launch of the Nintendo 3DS portable with more than six titles. It also is investing heavily in Microsoft’s well-selling Kinect platform. So far, it has sold more than two million games for the platform, giving it an 18 percent market share in the U.S.

Iwata, who presented the show’s only keynote, said he fears today’s emphasis on mobile and social is going to hurt the industry.

Later in the afternoon, critics said his statements only prove his ignorance and point to the company’s own weaknesses.

“Long-term, Nintendo is doomed,” said Michael Pachter, equity research analyst of Wedbush Securities. “He’s under full frontal assault by Apple.”

In the keynote, Iwata explained the games industry is no longer focused on building the highest quality experiences, but rather is narrowing in on free or very low cost titles.

“The majority of people here are creating games for social and mobile. I fear our business is dividing, and that threatens the employment for those of us who make games for a living,” he said.

Iwata also addressed Apple’s impact on the industry, but without every naming the iPhone and iPad-maker.

The lack of acknowledgment felt particularly strange given that his comments were being made at the exact same time that Steve Jobs was across the street, unveiling the iPad 2, which has all the hardware capabilities in place to become a serious gaming device.

The closest Iwata got to talking about Apple, and probably Facebook too, was when he said that “these platforms have no motivation to maintain the high value of video game software. For them content is something created by someone else.”

For emphasis, he added: “The value of games does not matter to them…The fact is, what we produce is value, and we should protect it.”

[A video of Iwata's entire speech can be viewed on Nintendo's web site.]

Iwata gave the impression that he was oblivious to the burgeoning mobile and social sectors around him, which despite being in their infancy, are generating significant revenues and attracting large audiences. Together, they both have the ability to define the future of gaming.

“He may be right, but then the 200 to 300 million people who play games on Facebook are wrong,” said Jeff Brown, the VP of corporate communication for Electronic Arts  ”Social gaming as a whole aggregates into a business that is undeniably big money.

“When it’s that big you are forced to pay attention,” he added.

Among the large publishers, EA’s ahead of the game when it comes to preparing for the day when consumers switch from paying $60 for an Xbox title to paying a few bucks or nothing at all for an iPhone or Facebook game. Yesterday, it furthered its commitment by expanding its third-party publishing platform into social and mobile through its acquisitions of Chillingo and Playfish.

So far, it’s paying off.

EA’s digital business was up 39 percent in 2010 and its on track to hit three-quarters of a billion in revenues this year.

Zynga, the undeniable leader on Facebook, also took offense to the statements.

Zynga’s Chief Game Designer Brian Reynolds, who came from the traditional games business and was lead designer on the big hit Civilization II, was especially baffled by the comments about being able to make a living in social.

Last year, Zynga hired more than 800 people and today has more than 1,500 full-time employees in 13 offices, spanning six countries.

“I expected better from Nintendo. They are missing the point of what we are doing,” he said. “We are making games that everyone can play and socialize on while playing.”

What’s more, Zynga is doing a great job monetizing, he said.

Sources tell BoomTown’s Kara Swisher that it’s close to completing a funding round of $500 million, valuing the company at $10 billion –making it worth more than EA’s $6 billion market cap. In 2010, its revenues were rumored to total $850 million.

“We do it in a microtransaction way, and it’s free to play, but they’re wrong that they don’t make a lot of money,” Reynolds said.

The gaming industry has always been fraught by disruption.

In the past, the storyline has been about the consoles wars with Microsoft, Nintendo and Sony all going head-to-head to be the gaming leader. Now, it’s about the platform wars with consoles vs. mobile and social.

How quickly do things change.

It was only a year ago at GDC that Zynga seemed to piss off everyone when accepting an award on behalf of Farmville for best new social/online game.

In a similar manner as Nintendo today, Bill Mooney, the general manager for Farmville at the time, used his acceptance speech to make the argument for why everyone should leave console gaming for social games. He even solicited resumes at the podium.

Mooney’s overtness was translated as lack of respect for the traditional games business, which is what seemed to bother people the most.

What’s different with today’s platform wars vs. yesterday’s console wars is that this time, it’s not about one beating another. It’s about expanding the market opportunity for gaming. Ultimately, if you give people a choice of platforms to play on, more people will play.

Reynolds said while Zynga has made huge gains since last year, it still hasn’t been fully recognized for its work.

“What we’ve done has permeated everywhere, but we don’t have the recognition from the old guard. The young guys — they get it, but the forces of the industry are living in the past. The longer it takes them to realize that, the more it will cost them to buy your way back in.”

As for whether Nintendo is wrong or right, and whether it will have to pay heavily down the road to get back in, we’ll have to wait and see.

The rest of Iwata’s hour-long keynote was spent promoting its upcoming 3DS launch at the end of the month.

Today, Nintendo’s North American President Reggie Fils-Aime announced a partnership with Netflix to offer streaming video.

It also formed a partnership with AT&T to give internet access to the handheld gaming devices wherever it operates WiFi hotspots.

Webush’s Pachter said despite the pressure from Apple, he believes the 3DS is novel and has the ability to sell tens of millions of units, but it will face competition from the iPod and iPhone, which have similar games and much lower prices.

EA’s Brown also wouldn’t count them out. “The instant you stop thinking they are relevant, they turn the industry upside down.”

While the announcement received only a few minutes during the presentation, they represent a significant investment in the company’s digital efforts.

With addition of mobile and social to its 26-year old publishing business, this likely establishes EA as the largest publishing company in the industry that can say it can help bring third-party content across three sectors — the traditional games business, mobile and social.

Still, the rest of the event was focused on the company’s bread and butter. The gaming press salivated over some of the hardcore gaming titles for Xbox and Sony PlayStation that have yet-to-be-released. The contrast was obvious when C.J. Prober, Playfish’s VP of publishing and product management, took the stage and joked that EA was going to integrate Pet Society into Crysis 2, in which players are attacked by a frightening alien species.

With the announcement today, EA will support third-party developers in getting to mobile platforms, such as iPhone and Android, and social platforms, such as Facebook.

In an interview, Playfish’s Prober said the platform will lend its expertise to social-game makers, who need help negotiating the ins and outs on Facebook. “In November 2009, Playfish became a part of EA and since then we’ve opened up the platform to EA with such games as FIFA and Madden, and now we are extending it out to third parties.”

Every deal will be structured differently, but most likely it will entail some sort of revenue split.

In return, EA will provide guidance on the latest techniques for distribution on Facebook, including access to marketing to its 40 million-or-so users. The platform expertise will include billing and analytics technology, and EA may consider investing resources into the game.

But why not go it alone? As GDC demonstrates, there’s hundreds of thousands of game developers who think they can still make a hit on Facebook.

Prober points out that the most successful social games have hardly changed over the past year — Zynga’ remains No. 1 and 2 with the hits FarmVille and CityVille.

It’s yet another big-dollar buyout for the game industry, which has been in an M&A frenzy for about a year, and one of the biggest investments by a Chinese company in an American digital property.

The transaction was first reported by Bloomberg, and Riot confirmed the deal to VentureBeat, though neither outlet has the financial details. Here’s how they break down, according to people familiar with the transaction:

• Tencent, which had already invested in the game maker, will pay “just south” of $400 million to buy out other investors, primarily Benchmark Capital and FirstMark Capital, which along with angels had put approximately $18 million into the company.
• The company’s management team will receive some portion of that buyout themselves, but will also retain an equity stake; some will receive “stay packages.”
• The total investment values the company at $472 million.

The chief appeal of Tencent is Riot’s League of Legends game, which is free to play but encourages players to pay for extra goodies via micro-transactions. (Thanks to readers who educated me about what you can and can’t buy with real-world money in the game.)

In that sense it’s like Zynga’s FarmVille and other popular social games. But it’s a much more sophisticated game, with arcade-style action: Think of World of Warcraft, on steroids and amphetamines.

The deal follows a string of Web-based game deals in the last year. Among the more notable ones: Walt Disney purchased Playdom, Electronic Arts purchased Playfish and DeNA purchased Ngmoco.