Zynga filed an S-1 on July 1st, preparing itself for an IPO later this year.
What do we know about the company, loathe to many for clogging up our Facebook feeds and admired by others for its success in social gaming?
Before Zynga, social gaming was pockmarked with many failed attempts like Games.com, as well as Yahoo (YHOO) and Microsoft’s (MSFT) attempt at online gaming.
Successes like EVO and World of Warcraft use "blow ‘em up" and war themes to attract the hardcore gamer. Until a few years ago, no one captured the social gaming experience like Zynga. Three years ago, who would have thought that a video game company built around sharing and teamwork would be more successful than its violent video game counterparts?
The internal premise of Zynga's games is fairly simple to understand. Each is built upon the same ‘engine’ with adjustments made to fit the individual game. For example, what is a crop or animal in FarmVille may be a fish in FishVille or something else in CityVille. Just the individual gift is changed and the underlying play mechanism is left unchanged. The best way to describe how the engine works is to compare it to a car. The frame and engine is the same but the exterior color, design, interior dash, and seats may all look different. Each game runs on the same frame and engine even though the exterior and interior looks different.
There is a distinct social and sharing aspect to the games. Using FarmVille as an example, users are asked to share goods and items with their friends and even go so far as to assist them in harvesting crops and orchards. The enjoyment of the game comes from working with others to achieve goals and quests.
Zynga’s biggest advantage is not being tethered to a control unit attached to a TV set, like the Xbox (MSFT), Wii (NTDOY.PK), or PlayStation (SNE). You can take your games anywhere and everywhere, harvesting your virtual crops on a laptop, smartphone, or tablet.
The games themselves are much different than console games. Even in games like Mafia Wars, a player needs the help of friends to complete tasks.
Zynga’s games have a social consciousness to them, whether players are tending to their farms, fishtanks, building cities, or taming the wild frontier.
Recently, Zynga has taken aim at some classic games. The recent push with Empires & Allies is a distinct move towards games such as Risk, with CityVille making a push to compete with The Sims.
The crown jewel in Zynga’s portfolio of games may be the game which is the most unknown, Zynga Poker. Online poker players remember the fallout from April 15 when the government cracked down on online poker sites on a Friday afternoon at 5PM. Zynga’s poker game has more than 36 million monthly active users. You play for free using virtual money so it was not affected by the recent ruling. I am not one to play online poker, but if the ERISA act was repealed and online poker legalized in the US, those 36 million active users would have significant value to Zynga in terms of ramping up a legal online poker site.
Zynga’s games are not just limited to the United States or Facebook. Last year, Zynga partnered with Softbank in Japan and launched FarmVille and Texas Poker in China, Hong Kong, and Taiwan.
Taking a look at all the postings onto my Facebook feed, I have grown to wonder if Zynga’s ultimate success depends on Facebook or whether Facebook needd Zynga in order to command its valuation? When we look at our Facebook feeds and all of the postings from Zynga games, how much of the volume is related to Zynga and how much is actually relevant to Facebook? By doing a rough eyeball test using Better Facebook, it appears to me that a clear majority of the posts in my feed are related to Zynga’s games.
Facebook takes a portion of all money paid to Zynga through its Facebook credits, but what if Zynga was to leave Facebook? Certainly Zynga’s revenues and profits would take a hit, but most players would follow Zynga as their user base appears to be quite sticky. I would postulate that Facebook needs Zynga more than Zynga needs Facebook because of the amount of posts and hits to our feeds that Zynga generates on a daily basis.
The potential pitfalls with regard to investing in Zynga are few but worth monitoring:
The object of Zynga’s games is to provide a refreshing and relaxing time with your friends. One recent complaint from friends on Facebook is that the games are becoming more ‘work’ and less ‘fun.’ This trend seemed to start about the time the IPO rumblings started, as more quests and tasks were added on FarmVille.
A distinct complaint from some Facebook friends is that international players continue to have difficulty playing, as load times continue to frustrate players. This indicates a weak network infrastructure but without knowing the internal schematics, it is hard to attribute this to Facebook or Zynga.
There was a recent network breach which involved the ‘sheep breeding’ function where code was uploaded that allowed different patterns other than the approved patterns. The breach became so pervasive between farmers that Zynga had to close the hole and let the farmers keep their illegal sheep.
A new issue has popped up with respect to the placement of Zynga’s servers. From posts on the forums, those players whose virtual farms are located on the Washington DC servers are being forced to pay a 6% tax when purchasing FarmVille cash.
In the next post, we will be digging through the S-1 to understand the revenue model and growth drivers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
