Playfish sees social games as industry driver

* CEO says social games can grow video games market

* Paradigm shift seen away from consoles and software

* Playfish sees huge market for virtual goods

By Matt Cowan

LONDON, Nov 4 (Reuters) - The video games sector has yet to gain from a downturn where consumers stay home to play, but social games creator Playfish says the industry is just beginning a new growth spurt.

The company that invented Pet Society, Restaurant City and Who Has The Biggest Brain? -- games played by tens of millions on sites such as Facebook and MySpace -- believes the $50 billion industry has many more converts to win.

Two-year-old start-up Playfish makes games for people to play on ordinary computers with their family and friends, unlike traditional video games that need dedicated consoles.

The London-headquartered company is backed by Accel Partners and Index Ventures, and is already profitable -- thanks to the virtual goods such as clothes, furnishings and weapons it sells for real money within its games.

"What social gaming allows us to do is to grow the aggregate size of the industry... by getting those people who are not so interested in slaying the monsters on their 42 inch plasma screen but are really interested in playing with their friends and family involved," said Chief Executive Kristian Segerstrale.

The video games industry is facing crunch time this December holiday season, with publishers and console makers pinning their hopes on a slew of big games releases to make up for sales that have fallen 13 percent this year so far in the United States.

Price cuts in recent months for Sony's (6758.T) PlayStation 3, Microsoft's (MSFT.O) Xbox and the Nintendo (7974.OS) Wii failed to have a dramatic effect on sales of games.

Nintendo, whose Wii console brought video gaming to millions of new, casual gamers, lost its leading position in the gaming market last quarter and slashed its full-year earnings forecast last week after a 52 percent drop in quarterly profit. [ID:nT328320]

Segerstrale believes, however, that engaging non-traditional gamers to play within their existing social networks represents the next paradigm shift in the industry.

"The video-gaming market is in the middle of this fundamental tectonic-plate shift, away from being a physical product-driven industry to being a digital service-driven industry," he told Reuters Television in an interview (here)

Segerstrale expects video games giants such as Electronic Arts (ERTS.O) or Activision Blizzard (ATVI.O) as well as start-ups to benefit. EA has been rumoured to be about to buy Playfish, but Segerstrale has said the company is not for sale.

Playfish said it is owned by its founders, management, staff and outside investors including Index and Accel.

Pet Society, in which players custom-design virtual pets who then interact with their creators as well as other pets in the game, has more than 20 million active Facebook users per month.

With this many users, even micropayments of just a few cents for a virtual item soon add up. Playfish sold 4 million bouquets of flowers in Pet Society during Valentine's week this year.

Media executives sceptical of Playfish's ability to make serious money out of virtual goods asked Segerstrale at an industry conference last week how far he expected to be able to take it.

"We have barely scratched the surface of what's possible in getting people to pay for things that don't exist," he replied. (Writing by Georgina Prodhan; Editing by Hans Peters)