FarmVille maker Zynga's risky business: Will it scare away investors?

FarmVille maker Zynga's risky business: Will it scare away investors?

Summary: On Friday, while everyone was rushing out of town for the holiday weekend, news broke that FarmVille maker Zynga filed an S-1 with the SEC, indicating the company’s plans to go public.Analysts say that Zynga plans to raise 1 billion for its IPO, but investors will have to be willing to take some slightly unusual risks if they want to put their money behind this social gaming giant.

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On Friday, while everyone was rushing out of town for the holiday weekend, news broke that FarmVille maker Zynga filed an S-1 with the SEC, indicating the company’s plans to go public.

Analysts say that Zynga plans to raise $1 billion for its IPO, but investors will have to be willing to take some slightly unusual risks if they want to put their money behind this social gaming giant.

One of the major risks highlights Zynga’s over-reliance on Facebook for its continued success. Where other gaming companies, like Electronic Arts, have games that are spread across multiple platforms, Zynga readily acknowledges that “If we are unable to maintain a good relationship with Facebook, our business will suffer.”

Some potential setbacks include if Facebook decides to create its own competitive product or if the social network suddenly requires game makers to pay more than the current 30% per transaction. Then there’s the distinct possibility that Facebook might fall out of favor with the general public (thanks to something like, say, Google+), requiring Zynga to jump to another social network or somehow create its own to make sure its game continue to grow in popularity.

Another unique risk for Zynga is that, in addition to over-reliance on one platform, it relies on a small number of players for almost all its profits. Unlike Blizzard’s World of Warcraft, which is powered by 12-some-odd million players paying a monthly subscription fee of $15, Zynga games are freemium (free + premium), which means they’re free to play and then users can opt to open their wallets and pay real-life cash for virtual goods. Considering that roughly 1% to 5% of social game players spend cash on their games, and (and less than 1% percent of these players are ‘whales,’ who readily spend thousands), Zynga has to either keep finding more people who are willing to spend money on these freemium games, or somehow convince players who are spending money to spend a little more.

For now, at least, Zynga seems to be in the clear. Even though there is speculation that Facebook has reached its peak in North America, its user base continues to climb, reaching an all-time high of 750 million users in June 2011. Google+ has a ways to go if it plans to compete with the social networking juggernaut.

Zynga and Facebook also continue to have a symbiotic relationship -- Zynga pays for advertising on Facebook (not to mention that 30% that all developers pay to host their games on the network), and its games continue to be a big reason devotees come back regularly and stay engaged.

As for the small number of people who drive Zynga’s profits -- that statistic likely won’t decline much either. Especially if FarmVille creator keeps cranking out new hit games like it has in the past month (Empires & Allies, Hanging with Friends and CityVille Hometown). Then, at least, there’s a chance players who pay won’t experience social gaming fatigue. There’s also the fact that the freemium game model has been bringing in billions of dollars in Korea and other Asian countries since the mid ‘00s, so it’s up to Zynga to keep stirring the pot, adding the magic sauce that keep hungry devotees coming back for more.

Now it’s up to investors to show us that Zynga’s risky business will pay off in what’s likely to be one of the more interesting IPOs in the next few months.

Image credit: Warner Bros.

Topics: Mobility, Social Enterprise

Libe Goad

About Libe Goad

Texas native Libe Goad resides in New York City and has spent the past decade covering technology and video games for publications including Blender, PC Magazine, Bust, Seventeen and Sync.

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7 comments
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  • RE: FarmVille maker Zynga's risky business: Will it scare away investors?

    "Especially if FarmVille creator keeps cranking out new hit games like it has in the past month"

    Not sure I'd call them "hit" games. Unless you mean you actually want to punch them through your monitor. Personally, I left Facebook gaming a long time ago, thanks to practices like requiring money and friends just to advance.

    "There?s also the fact that the freemium game model has been bringing in billions of dollars in Korea and other Asian countries since the mid ?00s"

    They didn't do it by using the same heavy-handed techniques as Facebook games, however, and frankly Blizzard still has more customers than any of them.

    World of Warcraft overshadows all of those Asian games. If you want to copy somebody, copy Blizzard. Just because they're making some money doesn't mean they have the most customers, nor does it mean they're making the most money.

    Copy the best of the best if you want to copy somebody. Don't copy those who are second rate but still a bit profitable.
    CobraA1
    • RE: FarmVille maker Zynga's risky business: Will it scare away investors?

      CobraA1 --<br><br>It's not specific to Zygna or social media games, but this article says it all: <a href="http://www.cracked.com/article_18461_5-creepy-ways-video-games-are-trying-to-get-you-addicted.html" target="_blank" rel="nofollow">http://www.cracked.com/article_18461_5-creepy-ways-video-games-are-trying-to-get-you-addicted.html</a><br><br>I despise the pay-as-you-go model, and I dislike the idea of continually chasing the next carrot game makers decide to dangle, just to keep me hooked. I like games that I pay for <i>once</i>, and which have a beginning, middle, and end. (I.e., a real STORY, not just an endless hamster wheel.)<br><br>Competitive multiplayer usually devolves into being on the receiving end of hacks, cheats, and 12-year-olds' potty mouths.<br><br>Nor can I stand the way social games <i>require</i> an ever-growing friends list in order to advance. Yes, I know they're <i>social</i> games, but they could provide multiple ways to achieve the next expansion/etc. Oh, but wait -- that wouldn't work, because it would undermine the game makers' goal of getting you to induct friends (and their wallets) into the cult. No thanks.<br><br>I know: my tastes run counter to what everyone seems to want in games these days. Oh well ... I guess someone else will have to harvest fake crops for fake money before they fake rot. Otherwise we might all fake starve.
      Churlish
  • Risky business is investing in a company with no long term future

    This company has very little chance of surviving beyond the fad period. They have no real long term strategy beyond making dumb games for Facebook.

    Facebook already reached the peak of popularity and is already in a down spiral. Any business built exclusively around Facebook is a failure by design.
    wackoae
  • Zynga the newest video/computer gaming company

    NOw, If the naysayers would go on and play whatever they prefer and let the millions of others who enjoy Zyngas simple games have a word..... YES, having to add friends to level up is annoying IF your account is for personal and gaming use. Many have found a way around that by having a gaming ONLY account. And to get farmcash in farmville, for instance, you can go through the list of offers and buy something you would already buy anyway to get FC. Green Giant, Edy's/Dreyer's, and Tostinos have all done promotions for Zyngas games. Theres always another way to get the job done, true gamers (and hackers) know that. I do, however, like the idea of Zynga creating its own social network specifically for their gamers. Rewardsville is a nice start. Excuse me, but my crops are ready, I have some baby sheep to feed, some pigs to breed, and several chicken coops, duck ponds, dairy farms, nurseries, orchards, feed barns, and a nice winery to tend to. MajicShark aka DecemberDaughter
    MajicShark
    • RE: FarmVille maker Zynga's risky business: Will it scare away investors?

      MajicShark --

      All I can say is have fun; social games aren't my bag, but if you enjoy them, then have at it.

      I'm just not wild about the friend requirements. I know: they're [i]social[/i] games, and friends/cooperation should certainly play a role, but I don't like how most of these games REQUIRE ever-increasing friend rosters to make significant advancements (expansions, new buildings, etc.).

      Recruiting others to join the game simply to get perks has all sorts of unsavory associations, such as "pyramid marketing," "CD club" (remember those?), and "cult."

      Some sneaky games allow you use real cash to buy computer-controlled "friends" to satisfy these requirements. Which brings me to my other major gripe with social games: the optional but pervasive pressure to pay (and pay, and pay) to play.

      Regarding subscription-based (WoW, Everquest, etc.) and cash-for-upgrades (Farmville, et al.) pricing mechanisms, I can't deny that they're brilliant ... some gamers will pour hundreds or even thousands of dollars into a game that would have only fetched $20-$60 under the old, single-sale structure.

      I just don't want to devote that much money to a single game, and I get irritated by the constant wheedling for real cash that confronts me at every turn in games like Farmville. It's like trying to watch something great on PBS, only to be interrupted every ten minutes with pledge-drive begging.

      I know: free-to-play games need to be funded SOMEHOW, but I much prefer ad-supported flash game sites to Zynga-style "pay-pay-pay" games. The latter constantly dangle incentives which would take hours and hours of free-play grinding to earn, but which can be bought instantly ... if only you whip out your credit card for more FarmBucks (or whatever the hell they're called).

      That's just too much of transparent money-grab for my liking. It's like they've coded my teenage son into the game: "Can I have $30?" "Do you have $20 for gas?" "Can I have $50?" "There's a dance this Friday, and I need some money..." "I need $150 for sneakers." etc., etc.

      However, that's where the similarities end. I can easily tell my son to get a job, but for Zynga, wheedling cash out of players IS their job.

      Finally, regarding the "special offers" that earn you FarmBucks/whatever, way too many of them look like they'd be spam-avalanches at best and scams at worst. Again, though, if you've had good experiences with them, I'll never say you shouldn't take advantage of them.

      To each his or her own ... have fun!
      Churlish
    • RE: FarmVille maker Zynga's risky business: Will it scare away investors?

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  • RE: FarmVille maker Zynga's risky business: Will it scare away investors?

    I guess so! get news here http://www.farmvillescoop.com
    phingseo