Google’s (GOOG) chief executive Eric Schmidt said during a trip to Baghdad this week that Iraq’s stabilization could lead to business opportunities in the country.

Mr. Schmidt was part of a delegation, led by Peter Pace, the former chairman of the Joint Chiefs of Staff, to encourage business development in Iraq.

“After this tremendous investment in Iraq, we see business recovery finally happening,” he said in a video interview provided by the U.S. Army. “The creation of a new Iraqi state ultimately means business opportunities for global firms.”

“Google’s interested in making sure that Iraq ends up being an open and transparent democracy–after all, information makes a big difference in everybody’s lives,” Mr. Schmidt added.

The delegation met with both military and civilian leaders in Baghdad, he said. “It’s clear that the government is reaching out now to business, to try to get us to begin our part in the reconstruction of Iraq.”

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The rise of video streaming is dramatically affecting the Internet, according to a two-year study of Internet traffic trends that Arbor Networks recently presented to the North American Network Operators Group. Two years ago, Internet traffic was distributed evenly among a dozen Tier-1 network providers, but today the majority of traffic flows through direct peering agreements among large content providers, content delivery networks and ISPs.

Consequently, Tier-1 networks have shifted their business models from simple packet delivery to richer cloud computing and content hosting services, and new players Google (GOOG) and Comcast (CMCSA) have joined the top 10 list of Internet traffic producers–and the more traffic they put on the Internet, the more control it gives them over your online experience.

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For Kiaya Steele, the men in suits and dark glasses who appeared suddenly through the raindrops of a New Hampshire morning were the first sign that something very unusual was going on.

One of the men stood under an umbrella next to the car Steele and her friend Kellin had been riding in moments earlier and delivered a message. As Kelli’s sister Jenna was brought out of a second car that had pulled up mysteriously behind them, Steele was told that if she couldn’t quickly prove that she was “the real Kiaya,” the bomb planted inside Jenna would explode.

And this was just the tip of the iceberg of a day spent driving all around the countryside, complete with vans, staple guns, cameramen in trees, threats, red phone booths, and a series of hidden clues.

But this wasn’t a situation for the FBI. Rather, it was a very small-scale–and low-tech–version of what is known as an alternate-reality game, an entertainment genre that has grown in popularity in recent years, especially because its traditional use of mixed-media–the Web, cell phones, social media, and others–can allow large numbers of people to play together collaboratively.

Over the years, the games have become a favorite marketing tool of large companies like Microsoft, which has commissioned huge ARGs, as they’re known, for the launches of things like the video game Halo 2 and Windows Vista. Indeed, the first widely known ARG was called The Beast, and was used as a promotion for the release of the Steven Spielberg film “AI: Artificial Intelligence.”

Those versions of ARGs have seven-figure budgets and allow thousands of people to participate. Yet while they get most of the ink written about ARGs, there has long been a steady stream of games built for very small audiences or, as in the case of Steele and the friend with a “bomb” insider her, an audience of one. It turned out that the intrigue was all part of a day-long mystery concocted by Steele’s boyfriend, and involving several of their friends, as part of an elaborate marriage proposal.

“It’s such a cool format, and the people who can make it through a whole one of these get an experience that no other media can provide.”

–Jim Babb, founder of the AGR Awkward Hug

“We use a lot of fictional analogies in our lives–gangsters in an alley (and) later in the quest there was a Soviet scientist, all themes that had played out in our courtship,” Steele recalled. “We would write stories of sorts to one another before we dated. We’d take an image and run with it until it was too tired to move anymore. The whole thing was kind of a collaboration of our lives together.”

Given that the game Steele’s new fiance planned for his proposal had such a small audience, it was, to be sure, at the extreme end of the size and complexity spectrum for ARGs. But at any given moment, there are several ARGs being played that have slightly larger, yet still very small, numbers of participants. And it is these games, usually carried out at minimal expense and with no deep-pocketed sponsor, that may well be the true lifeblood of the increasingly popular world of ARGs.

And while there are practical limits to the kinds of interactions that are possible between the people running the larger games–the so-called puppetmasters–and the players, these smaller adventures offer everyone involved a much greater chance at direct communication.

“There are quite a few people making [small] ARGs, either without profit in mind or marketing [who are] saying, ‘Look at me, I can do this,’” said Michael Andersen, who runs ARGNet, the leading source for news and information about the genre. “The motivations for a lot of these things vary. [One] advantage of doing these grassroots games is working for yourself. [And], it becomes a lot easier to have those one-on-one interactions [and the] feeling that not only can you communicate, but you can change what’s going on” for fans.

Robot love

Earlier this year, a New York duo calling themselves Awkward Hug built and pulled off a small-scale ARG called Must Love Robots, which was centered around the idea of helping make love connections between people and robots.

Through a series of Web sites, social media, YouTube videos and more, Awkward Hug founders Jim Babb and Tanner Ringerud turned a $3,000 budget into a 3-month-long game with at least 300 participants.

Babb said that the project, which was entirely self-funded, came out of an original desire to create a Web series about a robot. But when the two realized that they could “make it so much more” by adding the various multimedia elements, they set out to build a bona fide ARG, one that would allow them to communicate directly with almost anyone who wanted to talk with them, even to the point of playing online games of Scrabble. And, of course, there were real-world meetings between prospective “dates” and the game’s signature robot (see video below).

Given the huge gap in size between a large-scale ARG and something like Must Love Robots, it might be surprising that many of the ultimate goals are the same. It certainly was to Babb.

“What surprised me the most,” Babb said, was that “players want more and they want to do things with you. It becomes a collaboration. The audience becomes characters.”

And while it’s not always possible for everyone to participate in person–Must Love Robots attracted players from around the world–one of the great things about the ARG genre is how many people who play do participate directly in one way or another. In Babb and Ringerud’s game, for example, 20 people created costumes related to the story line and sent in pictures of themselves wearing the outfits, all of which were intended to be folded into the larger story line.
Kids creators
A different kind of small-scale ARG was Find Chesia, a project put on by the Finksburg, Md., library on behalf of its local schoolchildren and their summer reading program.

The story, said organizer Heather Owings, was centered on the story of Chesia, a 14-year-old girl whose parents have gone missing on an archaeological dig and who sets out to find them. The game was designed by five small teams of 11- to 15-year-olds.

Like with many small-scale ARGs, Find Chesia encountered a series of structural problems, most notably, Owings said, the fact that the kids turned out to be resistant–mainly due to regular conditioning about the dangers of online anonymity–to the idea of posting information in character to the game’s Web site. In addition, there was the unforeseen problem that almost none of the kids were old enough to drive to the game’s real-world locations.

Still, the game was successful enough for Owings to want to run the game again next summer, incorporating some of the lessons they learned this year. And despite the problems, Owings said that she came away with an appreciation for what the ARG genre can offer its organizers and participants.

“I like that ARGs use tools that were set up to do something else, and they’re used to create something new,” Owings said. “It’s the taking of something and changing it and using it for something it wasn’t intended [for] in a new and creative way.”

Plus, she said, Finding Chesia turned out to be a perfect way to get the kids in on the enjoyment of building their own game, even though they lacked many of the skills generally considered necessary for such a task.

“It’s a way for teens to create their own game,” Owings said, “and we really enjoyed that aspect of it…They don’t need to be computer programmer [and] here is a way for them to take ownership for creating a game on a fairly small level. [As well, it] helps them to realize how much the Internet does facilitate networking within the community, as well as outside the community.”

These days, said ARGNet’s Andersen, there are at least as many small, grassroots ARGs being produced as the larger, corporate-backed games. And those numbers could grow as an increasing number of people become versed in the tools for building them. According to Andersen, teachers at the University of Texas at Dallas and the University of Mary Washington are both teaching classes about ARGs.

But the real upside in the genre’s growth will come naturally, as more people in more local communities get exposed to ARGs and discover the joy of playing something truly interactive and truly collaborative.

And while it’s true that most small ARGs quickly peter out as players and organizers discover that they don’t have the time or energy to follow through, there are those who feel that the ultimate payoff of participating is there for anyone with the stamina or commitment to grab it.

“For an independent ARG, the most successful thing you can do is complete it and have your core audience go all the way through,” said Awkward Hug’s Babb. “It’s such a cool format, and the people who can make it through a whole one of these get an experience that no other media can provide.”

Copyright ©1995-2009 CBS Interactive Inc. All rights reserved. Used by permission.

Videogames are serious business in China. The country’s online game market will reach 41 billion yuan ($6 billion) by 2010, accounting for half the global market, according to newly released data from Cnzz.com, a Beijing-based data analysis firm.

The Cnzz.com report says that almost two-thirds of China’s 338 million Web users are now online gamers. The online-game industry, which currently accounts for more than half of the total Internet economy, will see strong annual growth at a rate of 20 percent in future years, the report says.

The mainstream remains the awkwardly named sector of Massively Multiplayer Online Role Playing Games (MMORPGs). In October, six out of the 10 most popular online games in China are MMORPG games, according to the report. World of Warcraft by Activision Blizzard (ATVI) still tops the list with the most registered players and peak simultaneous online users. But the current government regulatory fighting over its Chinese license, held by Netease, may yet have a negative impact on the game, according to the report.

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The term “3-D” has been largely synonymous with Hollywood blockbusters, buttered popcorn and ill-fitting cardboard glasses since the 1950s, when three-dimensionality was introduced to draw TV owners into theaters.

Over the past 20 years, 3-D-capable devices like set-top boxes as well as 3-D programming have become available at home. A lack of standard broadcasting formats, relatively little content and the need for 3-D glasses, however, have kept it from a broad audience.

Tech companies are betting that will all change, and when it does, you’ll be able to lose the glasses.

According to new data from Thomson Reuters, 3-D-related patents have risen sharply in recent years, led by companies such as Samsung, Panasonic and Toshiba. “It will only be a matter of time before 3-D televisions start showing up in the home,” the report says.

Patent activity in the 3-D television space grew 69 percent over a five-year period, with more than 1,000 unique invention patents filed last year alone. This year is on par, with 486 filed in the first half of 2009.

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A new feature wherein All Things Digital looks at up-and-coming and innovative start-ups you should know about.

This week: We caught up with Sam Blackman, CEO of Elemental Technologies at the San Francisco NewTeeVee Live conference.

Elemental Technologies hopes to become a major player in the future of online and over-the-air video through its high-performance encoding technology.

Who: Sam Blackman

What: CEO and Chairman of Elemental Technologies.

Why: People want to watch live video on all their devices. Making a new version of a given video for every device is time- and processor-intensive. Elemental says it can replace up to five existing dedicated servers with one of its own, based on its proprietary software.

Where: @elementaltech (Twitter); company blog; Portland (analog place).

Who else: Sam says, “We’re the first-ever company to take advantage of GPUs for video processing,” but Nvidia (NVDA) is the key hardware player.

Five Stats You Won’t Find in His Facebook Profile

Worst Job: Barista. Late for the Trolley coffee. It had this really abusive owner. He’d yell at us if we gave a half-pump too much flavoring.

Gadget of the Moment: Lenovo X301. It’s all about the keyboard.

Early Geek Influence: Jack Dudman. He was a neighbor growing up and was Steve Jobs’s math teacher at Reed College.

Wishes There Was an App for That: A really smart public transit app. Like one that knows where I am and can tell me which of the options near me I can go to, to get to my destination fastest.

Sport You Can’t Live Without: Ultimate Frisbee

Bio in 140 Characters

Raised in Oregon. EE at Brown. Time at Intel, then Pixelworks. Left to start Elemental Technologies. Loves work, kids and Ultimate Frisbee.

The Five Questions

Elemental’s products seem pretty hardcore geeky. Break it down for me.

The man on the street today wants to view video on any device at any time. The content owners of that video need to be able to format the video differently for each type of device ["transcoding"]. We make that process much cheaper. At the beginning, we saw that there was going to be a huge increase in the amount of video produced out there, but that it was hard to distribute.

Right now it’s really hard [lots of equipment and time] to create, say, 240 versions of every video [so that they can be viewed quickly on an iPhone and in HD on a laptop, for instance]. Four to five regular CPU [central processing unit] servers can be replaced by one of our servers with a GPU [graphical processing unit] and our software. That means far less cost for businesses and many more video options for the consumer.

Device variations are just exploding. How do you see the changing landscape moving your business?

I don’t see the number of video formats decreasing at all. Every company that [produces] a device wants to control delivery to it. No one is going to dominate the cellphone market. It’s just too big. You can get three percent and have a nice business. As long as that is the way the game is played, our products will be very desirable.

Why are you going to be the first software company to acquire an auto body shop?

That’s my dream. The way our product works is, when we take an order, we just submit the hardware request to Dell (DELL). They plug in a GPU. We take the box and add our software.

The funny story is that we wanted a more custom look, so we found this auto body shop in Portland that takes the bezels [rack server face plates], sands them, cleans them, repaints them and sends them back. They look beautiful, like tons of engineering went into it. Dell will do that for you, but its 20 grand, and we’re a start-up. That’s my dream, a company that doesn’t have any employees who drive to work but owns an auto body shop.

Every geek has a memory where they saw something new and had to say to themselves, “Dang, I love living in the future.” What’s yours?

I know exactly what that was. Turtle graphics. My mother put me in a programming class in kindergarten, and there was this thing called LOGO [where you could use computer instructions to make an onscreen turtle draw something]. I had an hour class where I figured out how to draw a square. I went home that night and wrote down on paper a program that would draw the American flag.

My neighbor had an Apple (AAPL) IIc that I used to input that first program. I probably stayed up all night as a six-year-old doing that and that was it for me. What a genius idea. I mean, kids love seeing results, and there were no visual results [from programming] for a long time. LOGO was the first thing where you could spend about an hour and get visual results.

What tech war are you watching most closely?

There’s a battle looming between Intel (INTC) and Nvidia, as Intel releases their own GPU architecture. We’re trying to be really well-positioned to benefit from that arms race of the FLOPS [the processing performance unit].

The In Living Color Interview