Zynga Elite Hacker

Like its overgrown canine namesake, social gaming company Zynga has become the largest developer on Facebook’s platform over the past year. And, it cannot get away from whispers about its plans for an initial public offering. A key reason: Within the last six months, it has piled on a series of hit games, from virtual poker game Texas Hold ‘Em to mob-themed role-playing game Mafia Wars to virtual world YoVille — and most recently, FarmVille, which just hit 50 million monthly active users this past week.

It is proving the possibility of social gaming companies being long-term hit factories, not unlike more traditional, publicly-traded gaming companies like EA. And it is, from what we and others here, bringing in the money to prove that it is a real business.


So what’s going on with the IPO plan? This spring, a reliable industry source insisted that Zynga was in the process of closing a round of funding for possibly around $30 million. Another industry source now adds that it had at that point hired Allen & Co., the boutique investment bank, to raise a round of funding with a valuation between $550 million and $600 million. But when we asked about the funding, then, the company adamantly denied that it had raised any new round.

Here’s what happened. At some point, Zynga decided to stop looking to raise money, we believe, so it can plan an eventual IPO. By June, Business Insider heard that the company would IPO within the next “18 months.” A second new source has recently told us that conversations in this direction have become more serious.

When would Zynga IPO?

Outside estimates of Zynga’s revenue have been climbing over the past year, from $50 million, to more than $100 million, to what we most recently hear is around $200 million. Given Zynga’s across-the-board growth in top games, this number could very well be higher. On Facebook, the company has 125 million monthly active users on at least 31 games, according to our AppData service, although clearly a large minority of these users play more than one of the apps, and so are being counted more than once. It also has top games on MySpace and other social networks, including an exclusive deal with Tagged.
The company has not excelled at originality in the games themselves, so much as its ability to execute. Nearly every one of its hit titles is derived from other companies’ versions of the same genre — poker, mafia role-playing games, virtual farming, etc. But it has figured out how to build, cross-promote, advertise and measure these games in ways that have made it twice as large as the second-largest Facebook app developer, Playfish.

Zynga makes money from selling virtual currencies so gamers can buy virtual goods, like virtual poker chips in Texas Hold ‘Em. Unlike Playfish and some other gaming rivals, it has also been making what must be a large portion of its money off of advertising offers. It has also, from what we hear, been bringing in more and more of these services in-house: building its own fraud system, for example, to help manage its virtual currencies.

There are questions about where some of Zynga’s money might come from in the long term, given that the company — as with most social gaming companies — is only as old as the launch of Facebook’s developer platform in May of 2007. Will offers prove less lucrative? Will other developers make more popular games?

The public markets

The virtual goods economy has only been panning out for Facebook developers since 2008, but it has been proven in countries like China and Korea. Games and social networks in those countries have long made far more money off of this revenue model. Perhaps most prominent is Chinese social network Tencent, and its $1 billion in annual revenue, predominantly from things like virtual clothes for avatars, coins in games, etc.

Two recent IPOs, from China’s massive multiplayer online game-makers Changyou and Shanda, also suggest that there is at least some overall interest for those gaming companies with this revenue model who go public. Certainly, Shanda’s IPO last Friday did not go as well as planned, even though its revenue and profits are looking healthy. In the first half of this year, net revenue grew 43% to $322 million, while net income increased 75% to $98 million, versus the previous year. The company raised $1.04 billion, the largest US-listed IPO of the year. This is in contrast to Changyou’s April IPO — that company raised much less money, and its stock has since more than doubled in value. Shanda, so far, appears to be overpriced versus what the market was hoping for. Shanda’s problem may be food for Zynga’s thought, as it considers when to go public.
So, do investors want to own the largest developer on Facebook and MySpace? They may be able to find out soon. Some industry sources we’ve talked to have suggested that Zynga could make a bold move to file before Thanksgiving, trying to immediately build on the overall attention it and the industry is getting. A more conservative strategy would mean waiting for the first quarter, or maybe second quarter of next year.

For now, though, the company is downplaying any public offering plans.”We are excited about the growth of the social gaming industry and our momentum,” Vish Makhijani, Zynga’s chief operating officer, tells us. “We are not focused on an IPO but on creating great games and building a company that has lasting value to consumers.”

Zynga’s decisions



Meanwhile, Facebook itself is already cash-flow positive, through its brand and self-serve advertising services — mostly not through virtual goods — and is likely to bring in more than $550 million in revenue this year. Zynga, notably, has been buying up millions of dollars in some of these ads to promote its games to Facebook users. One of our sources suggested Zynga could be on track to pay Facebook up to $50 million, but we have not been able to confirm this.
Facebook’s strategy is to try to grow its revenue streams as much as possible, rather than first subjecting itself to the constant scrutiny and the short-term demands of the public market. Zynga, especially given the growth of games like FarmVille over the last few months, appears to be doing the same — that game only launched in June and is now at 51.5 million monthly actives, with nearly 19 million accessing the app every day. Perhaps Zynga will go public when its growth slows? The risk, of course, is that if it waits too long, investors may have become more cynical about gaming companies, and value it far lower than it would be now on the market, even if the money has well-proven revenue by that point. The Chinese gaming stocks could be an interesting indicator of public sentiment, until Zynga has an IPO.

If Zynga wants to buy other gaming companies or continue quickly building its own infrastructure, an IPO would be one way to raise cash. But it apparently doesn’t need to, instead it is financing its own growth and paying for its expenses like massive advertising campaigns and its 500 employees.

Once the user and revenue growth slows, going public would make more sense. The money from an offering would let it continue gaining market share in a way that other rivals are less likely to be able to do.

The other effect of a Zynga IPO would be that other market leaders, especially Playdom and Playfish, are validated. But because they are smaller, they may not look as promising for their own public prospects. Big media and game companies have been losing money in the last couple of years. These new social gaming companies, especially the biggest and most profitable ones, will look like tempting acquisitions.

But all this speculation is early. Remember, social games as we know them today have been around less than two years, and their revenue models even less time than that. We would be surprised to see a Zynga IPO within the next six months.

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