Social Network Hi5 Gets Its Game On

Hi5 is getting in touch with its inner gamer. After a multiyear struggle to keep users from defecting to rivals, the social network is reinventing itself as a social gaming and entertainment site.

Founded in 2003, hi5 will keep letting users interact with friends and family. It will also place greater emphasis on such games as pool, bingo, and Demolition City, which involves blowing up buildings around the world. Many of the pastimes include purchasing so-called virtual goods, in-game products that help a player accomplish tasks and graduate to higher levels.

By changing tack, hi5 is trying to tap the large, growing market for virtual goods, expected by ThinkEquity analysts to be worth more than $5 billion globally in 2010. The move also underscores the growing popularity of Facebook and microblogging site Twitter at the expense of rivals such as hi5 and MySpace, which itself is expanding music, gaming, and entertainment features. In January, hi5 had 47 million unique visitors worldwide, a 22% decline from a year earlier, according to ComScore (SCOR). Over the same period, Facebook's traffic doubled to 471 million, while Twitter grew more than tenfold to 73.5 million. Games are "an interesting model" for hi5, says Atul Bagga, an analyst at ThinkEquity. "I don't think hi5 or other networks can compete with Facebook, so they're trying to position themselves as an entertainment-focused social network," Bagga says.

Courting Game Developers

To halt the slide, San Francisco-based hi5 last year brought in a new management team, including gaming veteran Alex St. John, who worked in the game developer program at Microsoft (MSFT) in the 1990s, to serve as president and chief technology officer. One of St. John's chief challenges is enticing third-party software developers to create games for hi5 when some would rather program for Facebook, which gave Zynga's FarmVille a platform for generating millions of dollars from sales of digital crops and tractors.

An early convert was Matt Wilson. After leaving his day job at Sony (SNE) last year, Wilson created a startup, Detonator Games, with the intention of building games that could be played on Facebook. Detonator's first program, BlastCards, was ready for release on Facebook in the second half of last year.

Enter St. John, who worked with Wilson at Microsoft. St. John wanted his former co-worker to write games for hi5 and made his pitch during an informal December meeting between the two in Seattle. The proposition: leave Facebook to develop exclusively for hi5, and in return, BlastCards and other apps would receive more exposure on the social network and Detonator would get VIP treatment from staff. Compared with the prospects for doing business with Facebook, the choice was easy, says Wilson: "With Facebook, who knows if I can even get my phone call answered?"

Facebook spokeswoman Malorie Lucich says the social network has incorporated "the tools developers need to be successful," including the ability to update users on the progress of their games when they sign in. She says the company also hosts events to educate and encourage app makers, and provides funding to promising developers through the fbFund program—which divvies up a total of $10 million from the venture capital firms Accel Partners and Founders Fund.

Sharing Ad Revenue

To succeed, hi5 will need to convince more developers that the next great success story in social gaming can be created on a site other than Facebook. "Social media sites didn't try to make the equivalent of an Apple App Store—to do a good job of marketing and promoting the good [apps]," says St. John, who helped create Microsoft's DirectX programming language for game developers in 1995 and led efforts to evangelize and attract game makers to Windows. "There's a lot of work to be done."

The bearded, cigar-loving gaming fanatic made an appeal to programmers on Mar. 10, at the Game Developers Conference in San Francisco. For a limited number of high-quality game makers, hi5 will post free banner ads and other promotions throughout its site and share any ad revenue generated by graphical ads placed alongside games. Such benefits will be bestowed upon three companies—Detonator, Immortal Games, and Exponential Entertainment—beginning in March, as well as about one new developer each month this year, St. John says.

The hand-holding approach to building a stable of developers stands in contrast to the relative free-for-all on Facebook. Since anyone was allowed to develop software applications for the social network in 2007, thousands of programmers have helped stock Facebook's site with all manner of free apps—from bite-size games for showing friends your likes and dislikes, such as LivingSocial's Pick Your 5, to expansive simulators like FarmVille.

"Facebook Independence"

But even as companies like Zynga soar, developers say it's getting tougher to find profits on Facebook and are starting to look for new outlets for their apps on the Web. "We all need to get some Facebook independence," says Lisa Marino, chief revenue officer for RockYou. She says about 85% of the Web widget maker's revenues come from virtual goods and in-app advertising on Facebook—the remainder comes from hi5, News Corp.'s (NWS) MySpace, AOL (AOL)-owned Bebo, and Orkut, the social site run by Google (GOOG). Some of Facebook's recent policy changes for developers—like forbidding them from promoting apps within the social network's notification system—have caused RockYou to consider upping its presence on sites like hi5. "Facebook is going to tighten up a little bit and the others are going to open up a little bit," Marino predicts.

Another reason that app makers are shying away from Facebook is the difficulty of vying with Zynga. "Zynga is aggressively trying to find anybody who makes any headway on Facebook and buy them up or get them into Zynga's publishing group before they get any traction on their own," St. John says. San Francisco-based Zynga has added hundreds of employees in the past year, and many of them came on after their games were acquired by Zynga. "It's going to be hard to compete with Zynga," says Detonator's Wilson. "Either you have to partner with Zynga or you have to match the level that Zynga is at." Zynga spokeswoman Shernaz Daver declined to comment.

Will the efforts work? Given St. John's track record, the chances are strong that hi5 will build more loyalty among users, says Michael Pachter, analyst at Wedbush Morgan. "What Alex is trying to do is make hi5 stickier," he says. "Apps are the glue."

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