A rave review in The New York Times of the motion capabilities of the Microsoft Kinect system for the Xbox 360 game console got me thinking about the ups and downs of the video game industry, and how social and mobile gaming fit into the overall picture.

Despite the Times’ enthusiasm about the Kinect box, most of the news from the traditional gaming industry has been bleak. According to NPD Group, in the first three quarters of this year US video game software, hardware and accessories revenues were down 8% compared with the same period in 2009 – and last year revenues were down 8% from 2008.

Nintendo posted its first half-year loss in seven years. And Viacom announced it’s selling the once-hot Harmonix unit, developer of Rock Band and creator of Guitar Hero. Harmonix had been pulling down Viacom’s earnings for several quarters, including a $260 million write-off in the most recent quarter.

Against this backdrop, social and mobile gaming look especially promising.

eMarketer’s short-term forecast of ad spending on social gaming is pretty aggressive. In the US, we’re expecting ad spending to hit $192 million in 2011, up 33% over 2010. And the non-US growth curve is significantly steeper at 160%—though the dollar amounts are lower.

Keep in mind that estimates of advertising on social games don’t include so-called “offers.” These are lead-generation pitches from marketers such as Netflix and Blockbuster, or surveys that reward participants with virtual cash for social games. According to ThinkEquity, these offers accounted for 47% of US social gaming revenues in 2009. Direct revenues from virtual goods made up some 44% and the remainder came from pure advertising.

On the mobile front, eMarketer expects US revenues to reach $1.5 billion in 2014, from $850 in 2010. Most of the revenue will come from paid downloads, but advertising’s share of the total will grow to 12.3% in 2014, from 6.5% in 2010. Dollar-wise, ad-supported gaming will bring in $186 million in the US in 2014.

It’s no wonder game developers, entertainment conglomerates and Internet giants are diving into social and mobile gaming. Electronic Arts acquired Playfish for $300 million, plus another $100 million if Playfish meets pre-established performance criteria. EA also bought Chillingo, the maker of the popular game app Angry Birds. Disney purchased Playdom for $563 million plus a $199 million earnout. And Google acquired social game maker Slide for $179 million and mobile gaming specialist Social Deck for an undisclosed sum.

Consider also that the granddaddy of social gaming companies, Zynga, was just valued at $5.51 billion, topping EA’s valuation of $5.16 billion. This makes Zynga the second largest video game company, behind Activision Blizzard, which is estimated to be worth $13.9 billion.

Zynga has some 210 million active users, including 62 million on FarmVille alone. Its 2010 revenues are projected at $525 million, and it’s raised $350 million in private capital so far. Most of its action happens on Facebook.

What’s in it for marketers? Quite a bit. There are many ways in which companies can tap into revenue streams associated with social games:

Branded virtual goods. These are rampant in the virtual gaming ecosystem, but to give one example, 7 Eleven partnered with Zynga to create a YoVille Big Gulp, a Mafia Wars Slurpee and FarmVille vanilla ice cream. 7 Eleven gets a cut of the revenue that consumers spend on these virtual goods

In-game billboards. Many companies are inserting their brands into the gaming space. For instance, Honda advertised its CR-Z in Cie Games’ Car Town.

Sponsorship banners. In one of the more clever examples of this kind of brand advertising, National Geographic overlaid its logo on the pitch of the soccer-themed game Bola.

Branded games. Companies are also creating their own games, following the advergaming model in the traditional video game world. One example: a Hello Kitty game.

I’m not ruling out a resurgence in console gaming. After all, this industry has had an impressive track record of reinventing itself. It did it in 2006, when the Wii led a new generation of hardware consoles. And it did it again a couple of years later, when music-themed games were all the rage.

But if I were a betting man, I’d put my money on social and mobile gaming. That’s where all the gaming action seems to be these days.

Remember that quote from former NBC Universal CEO Jeff Zucker about analog dollars and digital pennies? It was early 2008 and he was commenting in The New York Times about the top monetization priority for the TV industry as it transitioned to online video.

“Our challenge with all these ventures is to effectively monetize them so that we do not end up trading analog dollars for digital pennies,” said Zucker, referring to various online video initiatives, including Hulu, of which NBC Universal is a partner.

A couple of years later, two things are different: First, Zucker was ousted from NBC following Comcast’s plans to acquire the network and second, Zucker has changed his tune somewhat.

“I’ve since revised that quote, and I think we’re now up to digital dimes,” Zucker told an audience at the Wharton School on September 29, 2010—just five days after his dismissal.

But regardless of whether he’s talking dimes or pennies, Zucker hasn’t changed his overall assessment of the online video economic model. “Hulu and Netflix are pretty much destroying our business model and if we don’t figure this out, there’s not going to be any content to watch anymore. The equation still won’t work,” he said, gravely.

Zucker offered a familiar litany of reasons for his pessimism—the fragmentation of the viewing audience, competition from cable channels, the difficulty in getting high CPMs for content on broadcast TV, and the industry’s fundamental lack of “a business model that will cover its costs.”

I can’t argue with Zucker that those are big challenges. But the real crux of the issue was something he revealed in response to a suggestion from the audience that NBC Universal reduce actors’ salaries or other personnel costs.

“There’s a lot of mansions in Hollywood built on preserving the old system,” said Zucker. “We make billions and billions … each year from the old models that are still in place, [such as] distributing USA and SyFy and CNBC through Comcast and Time Warner Cable. It’s expensive to produce the kind of content that we do and to collect the kind of news and information we do. If we forgo all of that because of these new technologies, we’ll be out of business right away.”

Zucker’s comments confirm what many of us have thought all along, but few (at least in the industry) have been willing to admit: That the monetization struggles of the burgeoning online video industry have less to do with a lack of economic viability than with a dogged determination by the old guard to protect its own interests—from their big mansions to their sweet content deals.

The “old system” Zucker is referring is not just the TV network he worked for, but the entire ecosystem of actors, writers, producers, content owners, broadcasters, cable channels, cable and satellite systems, and of course the two parties that ultimately fund the whole enterprise: consumers and advertisers.

At least in the short term, the shift to digital video will disrupt that ecosystem. The viewing audience will migrate toward online and mobile platforms, of which some will be fee-based and some ad-supported. For marketers, neither option is as attractive as the status quo. Paid content models effectively take advertising out of the equation, while ad-supported venues will take a long time to reach the kind of scale that broadcast and cable channels offer.

As I noted in a recent column in AdAge: “It will be years before TV and home movie viewing shift en masse from cable and broadcast to purely internet-based offerings. Until TV networks and movie studios start seeing dollar signs, they’re not likely to make a critical mass of content available to digital video providers.”

Image via

Yesterday’s Apple event was music to the ears of statistics fans. In his usual fashion, Steve Jobs reeled off a long list of millions and billions related to the consumption of Apple products and services. For example, in the time it will take to read this sentence, more than 200 apps will have been downloaded from Apple’s App Store.

Of course, there was a slew of new product announcements as well. Traditionally, Apple’s September events have focused on the iPod (275 million sold to date), and yesterday was no exception. Apple introduced a complete refresh of its line of popular music players. In the “one more thing” department, Apple also unveiled a revamped Apple TV focused on streaming video, including the long-awaited addition of Netflix (nicely complementing the recent addition of the Netflix iPhone app).

But as exciting as these product updates are for music and video lovers, the key announcements revolved around the introduction of the Game Center social gaming platform, and Ping, a social network for iTunes users. These new platforms lay the groundwork for Apple to leverage the growing nexus of mobile, social, content and commerce.

In my just-released report, “Mobile Content: Games, Music and Video Take to the Cloud,” I cite a series of studies by Edison Research and Arbitron that suggest social networking is emerging as a bellwether for mobile content consumption, with frequent social network access leading to higher-than-average indices of gaming, listening to music and watching video on mobile devices.

In many ways, it makes perfect sense: music consumption has always been about sharing (favorite artists, songs, etc.). And while one may bemoan the demise of the mix tape, incorporating sharing mechanisms into the commerce platform and making them available on mobile is a logical move that strengthens the platform and makes it stickier. Social commerce is fast emerging as a key driver of sales, and content marketers benefit by enabling their audience to do some of their marketing for them. In the case of Ping, the platform could also emerge as an effective way for artists to market themselves as well.

Similarly, as gaming becomes a more social experience (e.g. more users playing interactive multiplayer games and using social features to share both games and results), social networks are likewise becoming more game-like, with users competing for status through check-ins.

Yes, social network fatigue is a danger (as is Ping’s current lack of Facebook and Twitter integration), and no, iTunes fans didn’t get the streaming version some had been hoping for, but the combination of mobile, social, content, commerce and cloud points the way to the future.

Yesterday, Netflix released its long-awaited app for the iPhone and iPod touch, rounding the company’s offerings for Apple’s iOS platform. Significantly, the app works using both a Wi-Fi and a 3G connection. In my limited testing, the quality of the video streaming does take a hit over 3G, but the convenience of anytime, anywhere access makes for a fair trade-off.

This move dovetails nicely with my upcoming report on mobile content, which predicts a threefold expansion of the US mobile video audience between 2009 and 2014. In the report, I point out that attracting subscribers hinges on the right content, questions of cost and the quality of the viewing experience. Historically, these latter two factors have impeded the growth of mobile video.

The fact that the Netflix app has jumped immediately to the top of the charts of the most popular free iPhone apps provides strong evidence of pent-up demand for a video service that combines a deep catalog of content, multiplatform viewing and quality streaming. Netflix recently deepened its catalog with a nearly $1 billion deal with Epix that will add access to films from Paramount Pictures, Lions Gate and MGM.

In the wake of the Netflix launch yesterday and the introduction of Hulu Plus in June, consumers have increasingly rich options that combine online and mobile video streaming, and that is what will propel the market over the next five years. Although ad-supported video will grow more quickly, subscriptions will still account for the bulk of mobile video revenues, more than doubling from $413.4 million in 2010 to $901.2 million in 2014.

Have the issues associated with viewing quality and cost been solved? Not entirely, but let’s consider how these issues might play out.

Mobile bandwidth is certainly more plentiful, more ubiquitous and more reliable, although it may be the case that the amount of data mobile consumers use will always expand to fill the ever-widening pipes. However, Wi-Fi access points and, increasingly, WiMax networks will help alleviate some of the strain being put on the existing infrastructure.

As for cost, the ability to watch across multiple screens helps amortize the expense of a service such as Netflix or Hulu Plus. Of course, there is the looming issue of tiered bandwidth pricing and its potential impact on mobile data consumption. But here again, Wi-Fi is likely to provide a remedy. Plus, there is little evidence to suggest that mobile will become a primary platform for video consumption anyway (according to Nielsen, for example, the amount of time spent viewing video on mobile devices has remained stable over the past year).

In the end, it all comes down to platform integration. Consumers will increasingly expect video content (along with games and music) to be available on demand or via subscription on TVs, mobile and PC. The content owners that will thrive in this digital ecosystem are the ones that understand the need to deliver seamlessly across every possible platform.

We’ve been saying for quite some time that the arrival of Internet-connected TVs will catalyze a long-awaited breakthrough for online video. The day people can sit on their couches and reach for a single remote that can seamlessly access TV programming and web content, we’ll start to see online video scale to true mass-market dimensions. But that day, most people expect, would come gradually — not anytime soon.

Or will it? As Upfront Week rages on for the major television networks and TV advertisers, recent developments seem to show that TV-Web integration could be much closer to reaching a mass audience than previously believed.

We noted Tuesday that Google, Intel and Sony are collaborating on a “smart TV” platform which they plan to unveil soon, possibly as early as today at Google’s annual developers’ conference. The platform will reportedly be open to developers, and Google is said to be calling on the Android community to create apps for it.

A report from GigaOM Pro expects the global market for TV apps to explode in the next five years, from $10 million in 2010 to $1.9 billion in 2015. The report also says that, by 2015, 60% of all new TVs will have built-in network connectivity, and 70% of the connected sets ship with an embedded app platform and app store.

These are the kinds of stats that get the attention of companies like Google, Intel and Sony—not to mention other consumer electronics and content leaders such as Apple and Hulu. Apple has been trying for years to crack the TV market, so far with limited success despite having a set-top box (AppleTV), a popular content application (iTunes) and a hot new tablet (iPad).

Hulu has built a sizable business as a content portal for first-run episodic TV. So far, this content has been available on an ad-supported basis on Hulu.com, but there are indications that the company will launch a $9.95/month subscription plan. This price point would be comparable to a lower-tier Netflix subscription, which gives customers unlimited DVD rentals (one at a time) and free access to the company’s growing archive of streaming movies.

If Hulu follows through on its plans to at least partially transition from free to paid content, it will not be alone. The New York Times is one of several media companies planning a similar shift, and Apple has been rumored to be shopping a $30-month TV subscription service to networks and content owners.

Meanwhile, online TV directory Clicker.com is making its own push toward becoming a content hub. The company just launched clicker.tv, a Web-based application that helps users find—and stream—video content from varied sources, including Netflix, Amazon and network TV web sites. Clicker’s interface super clean and user-friendly, its streaming quality is outstanding and its content selection is extensive: 650,000 TV episodes, 30,000 movies and 80,000 music videos, according to a story in MediaBeat.

Clicker’s app runs on HTML5, the latest version of the standard language for web pages, which Google is supporting. Not to get into a technical digression, but most Web video had previously run on the nearly ubiquitous—and proprietary—Adobe Flash platform. But no longer. Recent reports say about two-thirds of Web video is encoded with H.264 (translation: HTML5-friendly). Hulu recently made a deliberate decision to stick with Flash instead of HTML5. Apple, on the other hand, has refused to license Flash for the iPhone or iPad, a decision that has blocked a wealth of video content from those devices. By using HTML5, Clicker is assuring itself that its content will be viewable on virtually any platform, from iPads to Android devices to web browsers.

With so many established and emerging players making moves to bridge the gap between the TV and online video universe, the market will get very crowded very soon. That should make networks very happy, because it could mean that online video advertising is about to become much more lucrative.