Zynga Files for IPO: Facebook is the Only Option No More

Social gaming giant Zynga, the company behind titles such as Farmville, CityVille, and Mafia Wars, has just filed its S-1 form to go public, with the intention to raise $1 Billion. This has been expected for some time and sees the firm join LinkedIn, Groupon and Pandora in a wave of tech IPOs this year. According to the filing Zynga has 60 million daily active users in 138 countries. 38,000 virtual items are created every second and game players spend 2 billion minutes a day on Zynga games. The company had $597 million in revenue in 2010, and posted revenue of $235 million in the first quarter of 2011.

For Zynga, the IPO is an important step forward that bring the company to a higher level to consolidate its No.1 position in social gaming industry. Currently, Zynga is supported in two manners: via direct credit card payments and partner businesses, its daily active users on mobile platforms grew more than ten-fold from November 2010 to June 2011. The IPO makes it clear that mobile growth is one of Zynga’s priorities going forward, as the company currently develops browser-based games that work both stand-alone and as application widgets on social networking websites such as Facebook and MySpace.

Zynga is the top game publisher on the world’s No.1 social networking site, but the problem is, you can’t deny the contribution that Facebook made to the social gaming giant. Social networking and social gaming sounds like a perfect combination, There are no gaming companies close to Zynga in reach or in excellence of execution, and there are no social networks close to Facebook. The two companies are, at the moment, different sides of the same beast, and there is always a good relationship between the two companies as Facebook brings millions of its users to Zynga, as of March 31, 2011, 82% of revenue of Zynga is brought by Facebook.

However, the tight relationship is a double-edged sword, Zynga gets access to Facebook’s more than 500 million members, and Zynga keeps people returning to Facebook. As the top game publisher on the world’s No.1 social networking site, Zynga’s games are free, revenue comes mainly from selling virtual items such as tractors and weapons that people use in the games. Last year, the online game company came close to declaring war over a change in Facebook’s policy involving credits, the currency Zynga players use to buy virtual goods. Previously Zynga has made an agreement with Facebook that to use the virtual currency Facebook credit in its games and Facebook wanted to take a 30 percent cut of transactions.

It could be actually said that Zynga is currently in a very passive position, seemingly that it’s Facebook which makes Zynga becomes what it is today, any deterioration in its relationship with Facebook would directly harm its business, and Zynga will get hurt if Facebook discontinues or limits access to its platform by Zynga and other game developers; or the SNS giant modifies its terms of service or other policies, including fees charged to, or other restrictions on Zynga or other application developers, or Facebook changes how the personal information of its users is made available to application developers on the Facebook platform or shared by users; the most serious issue is, Zynga is riding that wave of Facebook and its user base, but the danger would be if Facebook says, Why can’t we capture more of that revenue ourselves?

The IPO offers Zynga an opportunity, a large opportunity to extend its brand and games to mobile platforms such as Apple iOS and GoogleAndroid. Indeed, Zynga needs to pick up the pace in the mobile area, where it is only just starting to find its feet, and everyone can see the success of mobile games like Angry Birds, Plants vs. Zombies and Fruit Ninjia, the companies behind those games either will be acquired or filing for an IPO, just for expanding their business to multiple platforms and completing the evolution from mobile gaming to social gaming, because they all realize that the devlopment for mobile gaming is one day to be combine with social attribute, becoming social gaming. Obviously, Zynga has an undisputed advantage in this field, first of all, the company has a larger scale than any rivals of its, and secondly, the company has been in the number one position in social gaming industry, all it needs to do is just to make a reverse evolution, and then expanding its brand to the other platforms by using its IPO loots.

To expanding to other plaforms such as smartphone and tablet is definitely a wise decision due to the above-mentioned concern, even so far Facebook’s 30 percent cut from virtual goods sold on its platform does not yet seem to have hurt Zynga. Besides, Facebook also needs Zynga, it would love to lessen its dependence on Zynga, but it’s not going to shoot it, Zynga is reason to come back to Facebook every day. Zynga shows a natural growth, people will go to Facebook, start their profile, reconnect with old friends, then the question becomes, ‘What’s next?

There is no doubt a large opportunity to extend its brand and games to mobile platforms such as Apple iOS and Google Android, Zynga needs to make its games accessible on a large number of mobile and other Internet-connected devices and invest in developing and acquiring mobile development talent, technologies and content. In the year of IPO, LinkedIn hasn’t produced significant profits so far, Pandora is unprofitable and Twitter hasn’t come close to generating significant revenue. Zynga has a lot to show for it, and out of all the Internet and social media IPOs we’ve seen so far, Zynga is one of the more solid ones.

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