Social gaming is the driving force behind the billion-dollar virtual currency market. Popular social games on Facebook such as Farmville and Mafia Wars have turned startups like Zynga into IPO candidates, and have led to an ecosystem of companies that have come up with alternative ways for consumers to pay for digital goods online.

But for social game developers, building social games that have staying popular looks like it may be a challenge. As reported by Inside Social Games, the past two months have been particularly difficult for some of Facebook’s most popular games. In April, over half of the top 25 games, as tracked by Inside Social
Games, lost users. And the drops intensified this past month.

So what gives? Are social games losing their luster? Not quite. As Inside Social Games’ Christopher Mack notes, there’s still plenty of growth. But the most popular apps seem to have hit a snag.

Mack points to a couple of possible reasons for this:

  • Facebook removed notification functionality in March. While notifications were a valuable tool for social game developers looking to promote their games, these notifications were disliked by many users, who considered them spam.
  • Age. As Mack points out, “Game lifespan varies depending on genre, quality, the number of updates, and
    other factors — and some of these titles, like Restaurant City and Farm Town,
    are more than a year old.

Personally, I think the latter is an important point. Social gaming has fundamentally changed the gaming business. Not only has it created a significant market for casual gaming, it has altered the way games are developed, distributed, discovered, played and monetized.

And the trends social gaming has created are only going to get stronger:

  • Warner Bros. Interactive Entertainment is going to be transitioning its Lord of the Rings Online game from a subscription model to a free model, with monetization no doubt coming by way of virtual goods and virtual currency. Other major game makers are also opting to release new online games using the free-to-pay model instead of the subscription model.
  • Games popularized in Asia are making their way to the U.S. and Europe.

The implications of these trends are significant. One of the most important: the competition is only going to get more fierce. Consumers will have greater choice, putting pressure on game developers to be more creative and innovative, and to invest in building distribution advantages wherever possible. This will inevitably make it more costly to compete. At the same time, the plethora of free-to-play gaming options will likely make it increasingly difficult to build loyalty in some segments of the market.

What does this all mean? It’s hard to say, but it seems that for all of social gaming’s virtues, the largest developers will have to get used to spending more developing games that become depreciating assets after a relatively short period of time. This, of course, might eventually put pressure on margins. The good news, however, is that it looks like there will be plenty of money to go around.