A rave review in The New York Times of the motion capabilities of the Microsoft Kinect system for the Xbox 360 game console got me thinking about the ups and downs of the video game industry, and how social and mobile gaming fit into the overall picture.

Despite the Times’ enthusiasm about the Kinect box, most of the news from the traditional gaming industry has been bleak. According to NPD Group, in the first three quarters of this year US video game software, hardware and accessories revenues were down 8% compared with the same period in 2009 – and last year revenues were down 8% from 2008.

Nintendo posted its first half-year loss in seven years. And Viacom announced it’s selling the once-hot Harmonix unit, developer of Rock Band and creator of Guitar Hero. Harmonix had been pulling down Viacom’s earnings for several quarters, including a $260 million write-off in the most recent quarter.

Against this backdrop, social and mobile gaming look especially promising.

eMarketer’s short-term forecast of ad spending on social gaming is pretty aggressive. In the US, we’re expecting ad spending to hit $192 million in 2011, up 33% over 2010. And the non-US growth curve is significantly steeper at 160%—though the dollar amounts are lower.

Keep in mind that estimates of advertising on social games don’t include so-called “offers.” These are lead-generation pitches from marketers such as Netflix and Blockbuster, or surveys that reward participants with virtual cash for social games. According to ThinkEquity, these offers accounted for 47% of US social gaming revenues in 2009. Direct revenues from virtual goods made up some 44% and the remainder came from pure advertising.

On the mobile front, eMarketer expects US revenues to reach $1.5 billion in 2014, from $850 in 2010. Most of the revenue will come from paid downloads, but advertising’s share of the total will grow to 12.3% in 2014, from 6.5% in 2010. Dollar-wise, ad-supported gaming will bring in $186 million in the US in 2014.

It’s no wonder game developers, entertainment conglomerates and Internet giants are diving into social and mobile gaming. Electronic Arts acquired Playfish for $300 million, plus another $100 million if Playfish meets pre-established performance criteria. EA also bought Chillingo, the maker of the popular game app Angry Birds. Disney purchased Playdom for $563 million plus a $199 million earnout. And Google acquired social game maker Slide for $179 million and mobile gaming specialist Social Deck for an undisclosed sum.

Consider also that the granddaddy of social gaming companies, Zynga, was just valued at $5.51 billion, topping EA’s valuation of $5.16 billion. This makes Zynga the second largest video game company, behind Activision Blizzard, which is estimated to be worth $13.9 billion.

Zynga has some 210 million active users, including 62 million on FarmVille alone. Its 2010 revenues are projected at $525 million, and it’s raised $350 million in private capital so far. Most of its action happens on Facebook.

What’s in it for marketers? Quite a bit. There are many ways in which companies can tap into revenue streams associated with social games:

Branded virtual goods. These are rampant in the virtual gaming ecosystem, but to give one example, 7 Eleven partnered with Zynga to create a YoVille Big Gulp, a Mafia Wars Slurpee and FarmVille vanilla ice cream. 7 Eleven gets a cut of the revenue that consumers spend on these virtual goods

In-game billboards. Many companies are inserting their brands into the gaming space. For instance, Honda advertised its CR-Z in Cie Games’ Car Town.

Sponsorship banners. In one of the more clever examples of this kind of brand advertising, National Geographic overlaid its logo on the pitch of the soccer-themed game Bola.

Branded games. Companies are also creating their own games, following the advergaming model in the traditional video game world. One example: a Hello Kitty game.

I’m not ruling out a resurgence in console gaming. After all, this industry has had an impressive track record of reinventing itself. It did it in 2006, when the Wii led a new generation of hardware consoles. And it did it again a couple of years later, when music-themed games were all the rage.

But if I were a betting man, I’d put my money on social and mobile gaming. That’s where all the gaming action seems to be these days.

I understand why entertainment giant Disney bought social game developer Playdom. I also understand that sometimes it’s better to buy than build, and this is probably one of those times for Disney. Disney president and CEO Robert Iger stated it clearly when he told BusinessWeek: “You don’t get the kind of growth we want by building from the inside.”

What I’m wondering is whether Playdom was worth the $563 million price tag that Disney plunked down — which will swell to $762 million if Playdom meets predetermined performance benchmarks.

Now, you might say that a few hundred million is a drop in the bucket for Disney. After all, this is a company that had $36 billion in revenues and almost $6 billion in profits in FY 2009. And Disney paid $8.1 billion for Pixar in 2006 and $4.2 billion for Marvel last year, so nosebleed acquisitions are nothing new for Mickey’s team.

Perhaps more to the point, Disney just unloaded Miramax for $660 million, so you could say it “swapped” an aging art-house film unit for an up-and-coming social game developer. Disney made a handsome profit on Miramax, which it bought for $80 million in 1993.

But the fact that Disney can afford this hefty price for Playdom doesn’t mean it makes good fiscal sense. Electronic Arts snapped up Playfish for a comparatively reasonable $275 last year — and Playfish is bigger than Playdom.

Disney is gambling on Playdom’s ability to outmatch its competition, which includes Playfish and the grandaddy of social game makers, Zynga. But Disney is also betting that social gaming won’t die off as a passing fad, and that Facebook and other social venues will continue to support these games. (If it weren’t for Facebook’s massive scale, Zynga would not be anywhere near where it is today). These are some pretty aggressive gambles.

The price tag of this deal reminds me of other notorious acquisitions of the past decade, some of which crippled their buyers: Time Warner/AOL, AOL/Bebo, News Corp./MySpace.

The latter deal didn’t seem so overblown while MySpace was riding the crest of a popularity wave during its acquisition in 2005. Of course, that was before Facebook blew it out of the water, both in user growth and advertising sales. Facebook is expected to top at least $600 million (though recent estimates put the number closer to a billion) in advertising revenue this year, while ad revenue to MySpace is expected to decline 21% to $385 million, according to eMarketer estimates. At this point, MySpace seems like an albatross for News Corp., which on multiple occasions has had to fend off rumors of a fire sale for the flagging unit.

This underscores the risks of paying top-dollar for flavor-of-the-moment properties. It’s all fine and good if those properties can retain their cool and appreciate over time. But very few do. Remember Bebo? It pioneered many of the same concepts that made Facebook successful today, and look where it ended up.

Or take Disney’s own purchase of Club Penguin for $350 million in 2007. The kids-oriented virtual world failed to meet performance benchmarks that would have sweetened the deal, and traffic to the site has been declining. Barring a stunning turnaround, it’s not looking like Club Penguin will go down in history as one of Disney’s corporate coups. Given the steep price Disney is paying, we may be saying the same thing about Playdom—another company who makes its money selling virtual goods—a few years from now.

Image courtesy of Facebook.