Thursday, November 17, 2011

Zynga – IPO, Strategy and Facebook.

When Mark Zuckerburg announced Facebook platform in May 2007, it spurned a lot of companies and developers and millions of dollars worth of business. Every such business on that announcement was based on half a billion Facebook users and the advertisements and revenue based on products marketing henceforth.

Meanwhile, Mark Pincus and his team founded Zygna in January 2007. They received $29 million in venture capital from several companies in July 2008. After acquiring YoVille - the largest social networking game at that time - they had 60 million daily active users.

After a rapid growth in revenue, after Zynga launched in Facebook to capitalize on its user base, by 2010 Zynga had 13 studios spread all over the world, 1100 employees and owned 4 of the most popular 5 games on Facebook.

Following was the growth chart of Zynga from 2008 till 2010.

Zynga generated revenue primarily in two ways:
    From the sale of virtual goods, which were used as currency within Zynga's online games and were items that helped the player in the gameplay
   From advertising, both in and around its games

Keeping in view the huge business model, Facebook and Zynga signed a five-year contract, giving Zynga exclusively use of Facebook credits and giving Facebook 30% revenue cut. Thus when, Zynga filed for IPO under SEC at $1billion. Investors were clearly worried about its dependence on Facebook.

Zynga did grow particularly fast in terms of revenue but the number of users in Q1 2010 were the same as the number of users in Q1 2011. Since more than 90% of Zynga’s earnings come from users converting real cash into proprietary currency, a stagnant user growth could imply a stagnant revenue model.

Plus the absolute control of Mark Pincus over the company is a worry for some investors. Over that, Electronic Arts is also concurrently booming as a competitor for Zynga after buying its rival Playfish for $275million. And since social gaming is more about gaining a huge initial base of users through massive advertising, which Zynga could dominate till now, EA could spell a lot of problems for it. And to reduce its dependence of Facebook, Zynga launched its most popular game CityVille to Facebook’s competitor Google+.

So… with a net worth of $15 billion, flat user growth, dominant CEO and major dependency on Facebook - are investors going to be invest prolifically in the public offering or not?

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