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