Social games are online games that are played on social networks like Facebook or MySpace, or on smartphones like the iPhone.
One of the most popular is Zynga's Farmville. It is a Facebook application that allows users to grow digital crops and sell them for virtual money - which is used to buy virtual items that help you improve your farm such as tractors and tools. As silly as this game sounds, there are roughly 61 million players around the world.
The game is social because all the players are logged into Facebook and users can choose to work together or compete with one another. During my very brief Farmville experience, I neglected to water my crops. But in an interesting example of the social nature of the game, a friend of mine noticed this and watered them for me.
The companies make money two ways. The first is selling virtual goods to game players. Using a credit card or Paypal, users improve their game performance by buying items that speed up play or make it easier to reach a higher level in the game.
The other - and much larger - revenue stream comes from lead generation for companies advertising on the games. The game companies offer virtual cash in exchange for game players taking offers from advertisers. Sign up for a credit card or Netflix, buy ringtones or an energy drink and you get rewarded with virtual cash. The company gets rewarded with real cash.
These companies already have substantial revenues and are growing very rapidly. Not surprisingly, they are also rumored to be quite profitable (all three are private) - which is not surprising since they are selling virtual goods and trading fake money for real money.