Extraordinary Games Businesses 3: Zynga

Extraordinary Games Businesses 3: Zynga
Rick Gibson

By Rick Gibson

September 17th 2009 at 10:30AM

Rick Gibson turns his eye to the social network games specialist

For the third instalment of our Extraordinary Games Businesses series, let’s turn to a better-known company, the social network games phenomenon Zynga. Barely two years old, Zynga is the market leader on a games platform outpacing every other in growth of both revenues and audience.

Serial entrepreneur Mark Pincus founded Zynga in San Francisco in June 2007 to develop and distribute games for social network platforms. Pincus has been launching and selling web businesses since the early 1990s, and was the founder of Freeloader, Support.com and Tribe (one of the first social networks). His team’s successful start-up background is the first secret of Zynga’s success: experience and deep understanding of the social web’s potential.

Facebook’s decision to open its platform for third party developers in May 2007 triggered many social network game start-ups, including Zynga, SGN and Playfish. Since then, Zynga’s growth has been nothing less than phenomenal. Celebrating its second birthday during a month in which its staff headcount neared 400, Zynga’s game installations on Facebook alone hit 67 million and its daily audience across all networks crested 18 million unique players.

Zynga’s games are all persistent, server-based and multiplayer, and accessed through Facebook, MySpace, Bebo, Friendster, Hi5 and Tagged. Its 30-odd titles are breaking little ground in terms of gameplay, but usage and revenues are being driven by catering and listening very carefully to the web’s largest online communities. Its most popular games are Farmville (with 18m monthly users), Mafia Wars (15m monthly players), Texas Hold-em (with 15m monthly players and no cashing out), and Yoville (with 10m monthly users).

Most of Zynga’s popular games are designed like MMOs or virtual worlds, featuring permanently free play monetised by microtransaction-based premium features plus advertising. Players pay to access certain game sessions, progress faster through games or purchase virtual goods and services. Despite being cash-rich, Zynga has raised around $40m in venture capital to date. It claims to have been profitable from month three and to have not actually spent any of this external finance to date.

Speculation about its revenues has been feverish online, with numerous VC sources suggesting Zynga is on course to exceed $100m in 2009, recording substantial month-on-month growth. Given its user levels, which are independently verified from the source network, we believe this revenue projection to be entirely credible. Zynga, Playfish and SGN have helped the social network games market explode.

Gaming on social networks relies on virality and responsiveness. Viral propagation is built into social network games, with features which use the social network’s infrastructure to assist users to connect to, and communicate with, friends. Driven by recommendations, which mean little from a stranger but much more from a valued friend or colleague, social network games rely on real friends connecting and socialising, making them powerful vehicles for viral distribution.

Responsiveness is a much repeated topic in our column, and Zynga is at the cutting edge of profiling, understanding and responding to its audience. Like all good online games companies, Zynga runs its games as services rather than products. Pincus says one of the key lessons learnt from earlier ventures is that data mining is critical to the company’s success. Deep and granular user profiling allows Zynga to ‘fail fast’ and amend or ditch services and applications that are not instantly popular with its user base. 40 per cent of Zynga’s games have been dropped for failing to meet its aggressive success metrics.

Before this becomes too much of a hagiography, there are three downsides to Zynga’s success, all of them related to the increasingly crowded marketplace of Facebook, where around 85 per cent of Zynga’s audience congregates. First, Zynga does not rely on virality alone, and has admitted to spending millions of dollars per month on advertising. As much about maintaining market share as reaching new audiences, this is an ongoing and rising cost even for such a cash-rich company like Zynga.

The second cloud on the horizon is that the league table of top-ranked Facebook applications is very turbulent indeed. This is because it’s driven by a community whose interests can change suddenly and unpredictably, like the weather. Zynga is sensible to watch its stats like a hawk.

Finally, although Facebook’s new in-house currency is a real opportunity, at some point Facebook could reconsider its stance on taking little or no revenue share from partners on its giant platform. Facebook’s terms and conditions are constantly changing, and if Facebook decides to follow Microsoft or Apple, by taking a material percentage of revenues, this will have a huge impact on its app developers’ bottom lines.

Few, if any, games companies have gone from a standing start to ten-digit revenues in under two and a half years, which makes Zynga a candidate for the fastest growing games company ever. Zynga is definitely a company to watch.

Rick Gibson is a director at Games Investor Consulting, providing research, strategy consulting and corporate finance services to the games, media and finance industries.

www.gamesinvestor.com