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What game company can claim over 232 million active users, generating over 2 billion minutes of play per day, whilst creating over 38,000 new virtual goods per second, all being bought – with real money – at the clip of nearly $100 million per month in revenue? Electronic Arts? Wrong. Microsoft? Sony? Activision? Nope. TakeTwo, the makers of the killer Grand Theft Auto franchise? Absolutely not. It’s Zynga. And if you don’t play their games, you might never know. But if you do play, my condolences, friend – you most likely just blew another ten minutes and ten dollars inside Farmville.
Zynga, named after the founder’s bulldog and launched in 2007, is an animal in more ways than just its canine heritage. Zynga’s Founder, Mark Pincus, is no stranger to digital start-ups, having successfully grown and led two software companies to lucrative exits – one early IPO and one sold to Cisco. This time around, however, Pincus has a different beast on his leash. Zynga carries a unique quadruple whammy in its current profile as a leading millennial digital force: it’s making tangible (and large) sums of money from intangible things. Its growth, I daresay, its whole existence, has been wonderfully tied to the primary quantum force in the social web – Facebook. It is redefining what a “video game” is for this generation, and it has become the target of venture capital and stock market pundits as it prepared for a hotly anticipated initial public offering (now completed) in the United States. What’s been driving this company? How did they place the right bet? Did they simply get lucky? Will they last?
“Connecting the world through games” is Zynga’s mission statement. This corporate credo is remarkable for its simplicity, but also for one word: connecting. In this word lies their rapid and relatively unassailable success. At Zynga, this is no surprise as the company was built to drive social gaming from the outset. For the moment, put yourself in the CEO seat of any online-only business. How do I get people to eat up what we have? How do I acquire customers? It’s the same, age-old challenge. For Pincus, still Zynga’s CEO, his path to acquisition was to ride the coattails of someone else’s efforts. And did he ever.
Zynga launched its early games – Mafia Wars, Zynga Poker and the flagship, Farmville – almost solely within Facebook. Its customers were (and still predominantly remain) Facebook users who must be logged into Facebook to play. When Zynga staked out its ground, Facebook and the “apps” inside were wonderfully new, nascent to the point of being blindly accessed with not much thought as to how connected these games really were. This relationship wasn’t just a stroke of luck, as Zynga has been tightly bound, through its contractual partnership, to Facebook. This has required Zynga to give Facebook first right to any new game coming out of Zynga’s design and development studios. These games are first released through Facebook rather than other channels, including Zynga.com itself. Why spend money and time trying to distribute these titles yourself when you can piggyback on the growth curve of social networking’s beast? Still, you say, why should I care about another flash-in-the-pan video game craze?
First, there are the games. They are different and are changing the nature of how we play and what we now expect from “video games” as a whole. Farmville, easily Zynga’s best known franchise, is an online virtual world, within which you, the gamer, tend your crops, feed your livestock, and manage your growing farm. Tied to every little interaction are your Facebook Friends joining in the fun. Players can send constant streams of status updates: when buying the newest piece of farm equipment, when a new crop has been harvested, or when a player simply needs help in achieving that next level. Of course, the “game” is free to play, but the hook is in the extras foisted upon you to accelerate your progress and win the virtual bragging race between you and your Facebook friends. Need that special fertilizer to put your corn fields on steroids? It’ll cost ya. Want that nuclear-powered scythe to clean up your harvest? It’ll cost ya even more. It’s called “freemium”, a revenue model that’s been batted around in many an online business before, but had never truly taken hold. It’s time has finally come and Zynga is exploiting it to the hilt. This tightly bound ecosystem of utilising the social web to get players playing and then exploiting the “freemium” model inside that dynamic is at the core of Zynga’s success. Zynga’s other early runaway success, Mafia Wars, was also designed for this model, as have been Cityville, Frontierville, Castleville, etc. Get the picture?
Now, there is a debate. Are these really games? The old-guard video gamers contend that Zynga is just a marketing company with hints of gaming – that they use the data captured during this thin social gameplay to shape the experience rather than allowing traditional game designers to rule the roost. In fact, there is a growing and heated discussion over this new angle of digital marketing called “gamification.” By adding game-like layers and interactions that feel like gameplay, can brands gain new customer engagement? The immediate results point to a strong yes – “gamification” can truly drive the needle for marketing. This is evident in other wildly successful social-based campaigns that drive engagement through social network functionality by adding a sprinkle of gameplay. Ironically, both Zynga’s detractors and Zynga itself have a point, as each perspective rings true. Ken Rudin, Zynga’s Vice President of its data-analysis team, said in a recent interview, “We’re an analytics company masquerading as a games company.” Halo on the Xbox? This is not that.
Of course, there is the money. Zynga’s revised S-1, a required disclosure prior to a US market IPO, stated over $235 million of turn-over for the three-month period ending March 2011. The reality is that their take is actually higher, with Zynga claiming its “bookings” to be nearing $300 million for the same period. This is a unique consequence of how they treat the sale of a “virtual good” – the single, primary contributor to this revenue line. Zynga will record nearly $800 million this year having nearly doubled its first-quarter revenue from the same period in 2010. Fast forward to this month and Zynga has now exited the ranks of well-funded private start-ups into a NASDAQ-listed public company. All new views to revenue and profitability are now under the scrutiny of many, many eyes.
Its current valuation, based on its second week of trading at around $9.50 per share, places it just shy of the other well-known and long-publicly traded video game companies like the stalwart Electronic Arts (EA) and Activision at nearly $8 billion. Market analyses are now pouring in, with many saying that the 8-times revenue multiplier that this valuation is derived from is unsustainable – and simply way too high. Certainly, its venture capital backers and other investment partners, who have poured in over $300 million dollars of investment, are very bullish about Zynga, now that it is a public company. However, in the months leading up to the IPO, the bears point to some troubling trends in Zynga’s financials. This past September, Zynga disclosed that its profit tunnelled downward to $1.4 million from $14 million the previous year. So the pressure is on not only to regain profitability, but also to continue its top-line revenue growth. This challenge takes a long-term view and many argue that Zynga just won’t have the staying power.
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In a recent, high-profile article on Zynga, the New York Times interviewed a well-known Silicon Valley venture capitalist, Roger McNamee. His stated perspective was that “Zynga should be an example of entrepreneurship at its best. Instead it’s going to be a Harvard Business School case study on founder overreach – this will be a cautionary tale.” Full disclosure though, McNamee was once wedded to the current CEO of video-game grandfather EA through an earlier venture fund.
Another ugly undercurrent also highlighted in this Times exposé were accusations that Zynga’s executives have been engaging in hard-ball tactics, forcing employees with sub-par performance achievements to sign back stock option grants, face demotion or worse. The most public example of this was the recent departure of Owen Van Natta as head of Business Operations at Zynga. No matter that he was also the former head of revenue at Facebook (with a suicidal romp at MySpace as CEO thereafter). With Mr. Van Natta as example, if you aren’t bringing immediate value to the company, there is the door. In that respect, Zynga carries a reputation as an overly aggressive and unfriendly company to its employees. Even with its tremendous payday now within grasp, Zynga’s poor working conditions, late hours and undue pressure on development deadlines have impacted morale. This last point is almost certainly on the minds of all Zynga employees – at least those with vested stock options. Who will cash in and check out now that the IPO is a reality?
But that’s just the industry talking. So what? If the games are fun, then let’s play! Perhaps that’s the best outcome to digest Zynga’s role as the poster-child for this wave of internet craziness – we simply play differently now. For many, the Playstation is collecting dust on the TV shelf. Thanks to the multi-tasking reality of our digitalia-socialmedius-interruptus, you’ll find me inside the worlds of Zynga. I have money to spend, but only seven minutes to actually play.