05/11/2010 05:12 am ET Updated May 25, 2011

Free is the New Cash Cow

"Free to Play." "Freemium." Those words are echoing the halls here at the 2010 Game Developers Conference in San Francisco. One of the fastest growing sections of the gaming economy is casual gaming, with an audience that's predominately female and typically older than the "traditional" gaming crowd. Facebook and mobile (especially iPhone) games like Farmville, TouchPets, Words with Friends Free, and Mobsters are all free to play and making a killing.

So where's the money coming from? The secret is to get as many players as possible (hence the free offering) and then take advantage of how much each player is willing to pay. Games offer virtual goods or currency that consumers can buy in-game. Lex Bayer, of Playspan, says that they've seen some individual Facebook users drop thousands of dollars a month within games. Players spend money on upgrades to their farm, accessories for their character, or to advance levels.

iPhone apps use a similar strategy. In the popular game iMob, you can purchase more expensive copies of the game in order to buy respect points which allow you to advance further in the game. To get 1425 respect points players drop $49.99 on the App Store. Who said you can't buy respect?

There are however, some cautionary tales as players are often willing to drop dough for virtual goods, but hate to be forced into it. Ngmoco's TouchPets initially required players to pay for "dog food." If dogs were not given enough food they would fall asleep, but to many kids and parents they appeared to have died... talk about traumatizing. Luckily, ngmoco turned things around by auto-generating more dog food. Now players spend money on doggie accessories, but don't have to worry about their dog dying. After all, as one player aptly pointed out, "You can't buy a sweater for a dead dog."

For the players that don't want to drop cold hard cash, there's always offers and advertising. At Mobclix, we've seen many games rake in the cash with advertising. Increasingly popular are offers that allow players to do some sort of action, like filling out a survey, and in exchange get virtual currency. Certainly, offers have had their fair share of scandals (i.e. the Zynga and Offerpal scandal), but with better quality control they are going to be a part of free-to-play gaming.

Free is the name of the game, but it's still the same game -- making money. Social and mobile gaming are finding the secret to turning the casual gaming audience into a cash cow. They get as much money as each individual is willing to pay, and those who won't pay are, in effect, subsidized by the small percentage dropping tons of cash. In the future, will you be willing to pay as much for a virtual sweater as a real one?