‘Social market bubble’ concerns raised

The extraordinary flow of money into social networks, and by extension social gaming, has led to a number of investors and analysts suggest the industry is in a bubble.

Some investors believe the hysteria surrounding social networks and gaming mimics the dot-com bust, which a decade ago shattered the illusion of invincibility among online enterprises.

“I am seeing many more unnatural acts from investors happening,” said venture capitalist Fred Wilson, having observed the market over the last year.

“I have never seen phases like this end nicely,” he was quoted by the New York Times as stating.

One clear difference between the current rush in social gaming and the dot-com bubble is that the likes of Zynga, Facebook and Twitter are privately traded, meaning – in theory – there is less unification between these firms and, if one’s valuation takes a dive, the rest won’t automatically follow.

Yet social game firms are beginning to embed themselves in the fabric of the games industry. Disney, EA and Dena are each public firms with significant revenue investments made in social games firms.

Activision CEO Bobby Kotick, speaking last week at the Reuters Global Media Summit, appeared to be cautious of the social gaming climate.

“It’s a different question assessing it as a business opportunity,” he said. “Right now we don’t see an opportunity for us to participate in that market.”

Investment in social game firms has rocketed in the last year. Just a few months after EA paid upwards of $300 million for Playfish, the Farmville owner Zynga was valued at over $5 billion, while Disney footed $763 million for social studio Playdom.

PopCap creative director Jason Kapalka recently told Develop he feared the social gaming space is becoming a bubble, with investments and valuations out of sync with the sector’s actual size and worth.

“The social gaming sector is very hot right now,” he said, “but certainly we’re worried that at some stage a lot of these things get to become a bubble, where companies start chasing things without necessarily thinking it through too closely – it seems to happen every few years, whether it’s mobile or iPhone or MMOs.”

Kapalka later claimed he “wasn’t predicting a dot-com-style collapse”.

Alex Gould, leadership scholar of the Stanford Institute for Economic Policy Research, suggests that Kapalka was on to something.

“I always get a little nervous about bubbles when five different angel investors ask me to join their brand new angel funds in one week”, he said.

Dave McClure, a founding partner of 500 Startups, meanwhile suggested investors should be cautious, but said there’s no clear signs of a bust.

“I’m not saying Quora, Foursquare, Square aren’t eventually worth a lot of money, but the price to pay to get into those games is kind of amazing — $50 to $80 million?” he told the New York Times.

“These companies are in big markets with proven founders, so maybe not absolutely crazy but certainly eyebrow-raising,” he added.