It’s official! Twofish has been acquired by Live Gamer. You can read the official press release here.

As a Live Gamer company, our technology and team will become part of the industry’s first total commerce solution, providing end-to-end software and services for any business implementing a microtransactions business model.
To most of the world, virtual economies are the cutting edge of technology, but for us, it’s time to push the envelope again – to continue to innovate and provide next-generation user experiences. We are just incredibly excited about what comes next.

For today, however, I couldn’t be prouder of our team. Congrats to everyone involved with making Twofish a success!

-Lisa

Surging online sales of digital goods — everything from digital pets to “currency” for online game-playing to virtual roses for a love interest — is driving growth and reshaping business plans among Internet companies small and large, particularly around video gaming, offering new revenue streams as web advertising rates have fallen. The trend is fueling growth and innovation among game publishers, dating sites, advertising agencies, payment processing companies and purveyors of industry analytics.

For now, the mac daddy of North American virtual goods is Zynga, the Potrero Hill online social gaming company founded in 2007, which gets two-thirds of its projected $100 million-plus annual revenue selling virtual goods ranging from digital farm buildings to poker chips.

In 2009, an estimated $400 million to $600 million will be spent on virtual goods in the United States, and $5.5 billion globally, according to Brian Balfour, founder of Viximo. His Cambridge-based firm provides virtual goods services to social networking, online dating and casual gaming sites. U.S. virtual goods spending was likely less than half that in 2008, and between $25 million and $50 million in 2007, Balfour said.

The growth rate is expected to increase. The No. 1 social network, Palo Alto-based Facebook, is now testing its own virtual currency, something that another social network, Hi5, has successfully deployed and multiple other social networks are rumored to be considering. In March, Apple also officially announced that microtransactions would be possible in iPhone applications, setting the stage for a massive explosion of virtual goods sales on the world’s most popular smartphone platform.

At Zynga, one-third of its revenue stream comes from direct-to-consumer sales of virtual goods, another third comes from advertiser-sponsored offers in which users can get virtual currency to buy virtual goods, and another third comes from traditional advertising. Zynga has been expanding hugely, rising from 263 full-time employees just in June to its current 340 people, and 110 positions remain open for hiring.

Virtual goods and virtual currencies were pioneered in Asia, particularly in China and South Korea, where free games with premium content proved popular. One Chinese company, Tencent, does nearly $1 billion a year in virtual goods sales by itself.

In San Francisco, Second Life maker Linden Lab in 2003 launched a pioneering virtual economy with its Linden Dollars, which are exchangeable for U.S. dollars, but other than leasing virtual land the company lets others do the trading and does not sell virtual goods. Also in San Francisco, dating site HotorNot started selling digital roses for $2 to $10 in 2004.

Zynga CEO Mark Pincus believes North American virtual goods activity could exceed $15 billion by 2014, and he says, “San Francisco has become the Motor City for virtual goods and social games.”

Numerous industry experts said U.S. virtual economic activity escalated dramatically in the last year as the economy suffered, ad rates dropped dramatically and publishers went looking for alternative sources of revenue.

“This space is red-hot right now,” said Jameson Hsu, cofounder at Mochi Media, a San Francisco-based network with 25 employees that sells advertising in games on over 30,000 web sites that are played by over 100 million people each month.

On July 21, Mochi Media implemented its own virtual currency called Mochi Coins, which players can use for things like advancing in game play, clothing avatars or buying tools like virtual swords to help them play better. Less than a month earlier, game distributor Heyzap, also in San Francisco, launched a similar system.

Revenue from virtual currency transactions is earning at a rate 10 to 20 times what advertising is providing, Hsu said. “Initial results show that the coin stuff is going to ramp up pretty quickly,” he said. “It’s just a matter of scaling it up right now.”

Last December, San Francisco-based social network Hi5 launched its own virtual currency and virtual goods store. The company, which has 60 million monthly visitors mostly outside the U.S., subsequently partnered with PlaySpan, Boku, Super Rewards and other companies on micropayments as well as Mochi Media, Playdom, RockYou, Real Networks and others for game distribution. Virtual currency transactions already account for 15 percent of Hi5’s revenue, which is projected to be more than $25 million this year, said company spokesman Michael Trigg.

John Cahill, CEO of San Francisco-based Meez, which runs a virtual world for teenagers, said that virtual goods have become 30 percent of his company’s $5 million to $10 million in revenue since last year. The company sells digital items such as branded clothing, room decorations and virtual pets, he said.

“The virtual goods part is the fastest growing part of our business, and literally it didn’t exist 12 months ago,” he said.

Third-party processing of payments is also proving to be a good business, with multiple companies, including Palo Alto-based Zong, thriving in the space.

On July 22, AdKnowledge, the $250 million a year social advertising network, of which MySpace co-founder Brett Brewer is president, bought SuperRewards, a platform that lets users get virtual currency for taking offers or surveys. SuperRewards’ biggest competitor is 2-year-old Offerpal Media of Fremont, which had $30 million in revenue last year.

Boku is a 50-person mobile payments company in San Francisco that raised $13 million and launched in June after acquiring two other companies, Mobillcash and Paymo. Cofounder Ron Hirson said virtual currency transactions are the majority of Boku’s business and “growing amazingly.”

Twofish was founded in 2006 to provide infrastructure for managing virtual economies. The company offers products and services to process payments, manage virtual banking and inventory systems, and a data collection system to analyze economic and retail trends. The Palo Alto firm has 25 people and raised $9.5 million in venture capital.

Twofish President Lisa Rutherford predicted huge change in the near future, both in who will be the top players in virtual goods and currencies, and the types of markets where virtual currencies will proliferate.

She and other experts predicted that in the future mechanisms will emerge for transferring value from one virtual economy to another, and that virtual currencies will be used in other media sectors, such as music and video, and even for purchases of hard goods.

“I think it’s going to be much more than games,” she said. “It’s going to change the way we do commerce.”

Just input inventory into a CSV file, upload it with the easy API, and all of the storefront components are ready to use in real-time. For further customization, the out-of-the-box code can be reskinned with any look and feel. Features include:

Customizable Storefronts
• Skinnable and embeddable client-side html and Flash code
• End-user notification panels, such as My Items, My Purchases, Gifts Given, Gifts Received
• Full item and gift stores with integrated currency support (show financial balances and “get more credits”)

Ease
• Built-to-spec for fast-moving Facebook and MySpace application developers
• Set up a store in real-time
• CSV upload of inventory, user and price data

Flexible, Advanced Reporting and Analytics
• Complete sales, currency, catalog and user data
• E-Commerce reports pre-integrated with Google Analytics
• Full access to the comprehensive Elements Analytics framework

And Elements Analytics are provided for free with all Elements and EasyElements integrations.

Sign up here for more info on how to get started: http://www.twofish.com/developers/

His quote was the first thing that came to mind when I read Tadhg Kelly’s insightful comment to Bill’s post on All Facebook. I loved a couple of things about Tadhg’s comment.:

First, what he is worried about is focusing on metrics to the exception of coming up with creative, fun, and truly engaging gameplay features. He blames the rampant “copycatting” in the social games industry at least partially on the emergence of clickstream analysis as a viable business strategy.

I don’t disagree – The focus on empty metrics has certainly helped to maintain a “bubble” of social games that are simply stagnating. “What are your page views?” has quickly replaced “Do people love it?”

The nuance here is that I said *empty* metrics. Metrics have to matter, and they have to measure meaningful things. The metrics Siqi and David talked about were measures of virality and page views, which are much more about monetization in an ad-driven model. That’s where those metrics came from, that’s where they were refined, and that’s what they measure.

The real question is “How do we measure fun?”

Well, let’s think about a restaurant. How can you tell if patrons enjoy your establishment? You’re not going to find that out from foot traffic or the raw number of visitors…but you *can* look at the amount of money they spend over time, how often they come back, the number of times they refer a friend, what they order… those are metrics that DO have value. And in the same way a restaurant keeps its most popular dishes on the menu, app developers can use data about their customers’ buying patterns to create more engaging experiences that give them what they want and value.

Tadhg also cites an example of Zynga killing a project because it wasn’t performing against metrics. What Tadhg is highlighting isn’t a problem with metrics in general, but with using metrics as simply a measurement tool. The true value of data is to fine-tune and improve games. THAT’s the next-generation of data analysis that Bill is so excited about.

At the end of the day, great games need to be novel and interesting, and a large part of that comes from human imagination. But there’s also a place for data – to help you understand your users better, to help you tweak your game to make them love it even more, and ultimately, to replace that hammer with a swiss army knife.

The AO Global 250 Awards event will start at 5:05 pm PDT on July 28, the opening night of the AlwaysOn & STVP Summit at Stanford, to be held at the Frances C. Arrillaga Alumni Center at Stanford University in Palo Alto, CA on July 28-30.

Which is why I looked forward to last week’s session on metrics at the Social Gaming Summit. The SGS is at the forefront of social game design, and the speakers, David King and Siqi Chen, are outspoken proponents of using metrics to guide every decision, and of making metrics a “core cultural value.” I was looking forward to learning about the latest and most up-to-date thinking from people who are on the forefront of metrics-driven design.

And make no mistake: Siqi and David gave a great talk.

But, somehow, it felt a little bit like a great talk about last year’s metrics. In a conference where every other talk or panel discussion prominently mentioned virtual currencies and virtual items and virtual gifting, it felt a bit odd that the metrics talk was focused on user acquisition, virality, and page views.

What makes it even odder is that virtual currencies and virtual items are natural candidates for quantitative analysis. At the end of the day, people are spending currency to buy things. As a culture, we’ve had 100 years of MBA’s thinking hard about sales reports: about what to measure, how to report on it, how to do drilldowns and user segmentation, and tactics for increasing sales once user behavior is known.

What I really wanted to see, and what I hope to see at the upcoming Virtual Goods Summit, starts with David King’s last slides. In those slides, he called out “Monetization by Gender” as a key piece of data, and split out age as a key bucketing device. This is a great start.

But to my way of thinking, it’s not even half the question. Once you know that a user group is spending money, the key question is what did those people spend money on? Are there items or types of items that sold well to particular demographics? Can you break down your sales by demographics, spot purchasing trends, and upsell effectively? Using a ‘transactional graph‘ doesn’t just lead to more effective monetization, it leads to a better user experience — or, at least, to a more engaged and invested user.

And for those users who have money but aren’t spending it, can you figure out why? Something as simple as “Once they’ve been using the application for 45 days, women over 30 spend 60% less money than during the first 15 days” is a powerful fact that can guide game design and item catalog revisions.

At Twofish, our recently released analytics framework focuses on exactly these sorts of questions. We think crossing user engagement and demographic data with sales data and information about user spending takes metrics to the next level for social application developers.

Jason Oberfest listed the important things a platform provides. In his “second tier down”, he included payments. The panelists concurred that payments were important, but Facebook agreed with Myspace, not very important.

Arrington was surprised and asked the developers in the audience if they agreed. In a crowd of about 250, 3 people raised their hands for “payments were very important.” Arrington was still surprised and asked the panel again.

Facebook’s rep, Gareth Davis, agreed: the ecosystem, with so many successful 3rd party payment gateways, is already healthy. So it’s not obvious that Facebook Credits are important.

Hi5 demurred a little, pointing out that the real value of Hi5 coins is that it enables developers to monetize Thailand without thinking about the appropriate money or currency; you just accept Hi5 coins. Andrew Sheppard also stated that hi5 ‘wants to help developers build sustainable businesses’ and allowing direct payments is one way they see that happening.

Xioanei already has a payment gateway, billing services and partners with developers, so while China may be behind in e-commerce, their platforms are ahead in allowing direct payment to developers. Especially to the developers in whose business they have a direct interest.

Here at Twofish, we think that global branded currencies supported by the platforms will be an important part of the future of virtual currencies and v-wallets, but that they’re not the whole picture, or even the most important part of it. We were a little surprised that the major platforms agreed with us, though!

In general, ‘mobile payments’ has been a pretty fragmented space, with very little meaningful differentiation. Usually, those types of market dynamics lead to consumer-friendly price wars and razor-thin margins, but in mobile, “how low can you go?” has been capped by the exorbitant carrier costs. It’s particularly painful for micropayments, where a quick 10 cent charge gets marked up to 20 cents, and you’ve lost half your buyers before you’re even started. As a result, this convenient payment method hasn’t gained as much ground as it should, versus other, cheaper alternatives.

We’re hoping that the consolidation of startups and entrance by larger media companies will start to shift the landscape… the bigger these providers become, the more leverage they’ll have to negotiate lower fees with the carriers.