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Report: Zynga's $5.51B Valuation Higher Than Retail-Centric EA
Report: Zynga's $5.51B Valuation Higher Than Retail-Centric EA
October 26, 2010 | By Kris Graft

October 26, 2010 | By Kris Graft
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The private market value for venture-backed Farmville and Mafia Wars developer Zynga has surpassed the public market value of Electronic Arts, signifying a continuing consumer shift from packaged video games to online social games, a new report said Tuesday.

Bloomberg BusinessWeek cited SharesPost, an exchange for shares of privately-held companies like Zynga, which states that the San Francisco-headquartered company has an estimated value of $5.51 billion, greater than Nasdaq-traded EA's $5.16 billion value.

This valuation is based on the SharesPost's indications on the price of shares in Zynga trading on the closed, private market, largely from Zynga employees, since the company is not yet public.

Zynga generates the majority of its revenue from the sale of virtual items in games like Farmville, Mafia Wars and FrontierVille, which players access through social networks like Facebook. An analysis at Business Insider in April this year estimated that Zynga's revenues would jump 70 percent year-on-year to $525 million in 2010.

There has been continuing speculation this year that Zynga is positioning itself for a public IPO. This latest value estimate at the company's private market cap is higher than other estimates that placed the company's value anywhere from between $1 billion and $5 billion.

While some may be skeptical of the supposed value of Zynga, ThinkEquity analyst Atul Bagga told BusinessWeek, "The valuation is not that crazy, given what’s going on in the market. ... It’s not that terribly expensive seeing the growth prospects." He projects that the virtual goods market will reach $3.6 billion in three years.

EA has realized the potential of the social game market, however, with the 2009 acquisition of social game maker Playfish for up to $400 million, including $100 million in performance-based earnouts.


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Comments


Martin Crownover
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5.51 billion dollars, just for a company that sells virtual goods? Sounds pretty unsustainable to me.

Nicholas Lovell
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Erm, in what way are the games you play not virtual.



Is there any physical value in Modern Warfare 2? In Avatar? In Bad Romance?



I don't think so.



The entire media industry is predicated on buying stuff that is virtual, isn't it?

Martin Crownover
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Games you play? No, no, you don't understand. Virtual goods and games are not the same.

Nicholas Lovell
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My points is that, in practice, Activsion sells virtual goods. EMI sells virtual goods. Paramount sells virtual goods.



All media is virtual, isn't it?

Martin Crownover
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We can quibble over the definition of 'virtual' if you want. But comparing a song, movie, book, or game, which are media that can be enjoyed anywhere and in a number of different ways, for a number of hours, to a virtual item of clothing (for example), which can usually only be used in one instance of one video game, is absurd.



Obviously, when I say "virtual goods", I am referring to the latter, and not the former. Generally the term "media" is used for games, movies, books, music, etc. and the distinction is a sound one.

Nicholas Lovell
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That's a fair point, although I believe that we are moving away from paying for media across the board. Zynga-style models will be more commonplace - allowing most people to access your content free, but offering those who want to spend more the chance to do so.

Ran Gat
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Selling Virtual goods in a Virtual world (virtual in a virtual).......... Its another layer.



Its amazing seeing those numbers.

Jane Castle
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Right EAActivisionTHQ will give away their games for free and hope to recoup their costs by allowing people to choose whether they want to spend more......



If you think this is the future you are naive......

Ran Gat
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I am not saying console games publishers will change their current business model and game-play to support selling virtual goods. But for casual games that appeal to casual gamers it is certainly the future...

Nicholas Lovell
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Actually, that is what I think is the future. With wrinkles, sure, but basically, I think that's the future of all media

Samuel Batista
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I hope for the sake of mankind that it is...

Jason Manley
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Smoke and mirrors. Their games mostly rip offs of other companies titles. The viral days are over. The easy street is at an end.



If they turn those huge ip's into other non facebook properties..ala the transmedia conversation they might do alright but they do not have the experience to do that.



Good luck with sustaining that valuation with ripped ip's, a market that no longer has constant profile spam, and a company culture that disdains creativity.

David Glenn
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So, not too different from EA then really. Both are big enough now to simply acquire original IP by scooping up entire companies that make successful products. EA has struggled forever with keeping the talent after assimilation, Zynga will no doubt face the same challenges as the gold rush starts to dwindle.

Andre Gagne
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Except the rumour/belief is that Zynga doesn't pay for the IP unlike EA...

Cynthia Linton
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Having seen inside both companies I would say that in many ways (good and bad) Zynga is very similar to EA.



And as far as the "Zynga steals IP" argument, I would say that anyone who wrote a MUD variant right through to WoW without paying the authors of MUD 1 or D&D are probably guilty of the same thing. What we see with the social games iterating on existing IP isn't new, it just happens so much more quickly, which makes it so much more obvious.

Christer Kaitila
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It seems that the entire games industry hates Zynga. Everyone wants them to fail. Keep dreaming folks: imho virtual goods will blow retail away whether we like it or not.

Martin Crownover
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It probably will for a while. But eventually enough people will get burned by it (like buying goods for a game or service that goes out of business) and the bubble will burst.

Nicholas Lovell
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I'm not sure that matters. The average lifetime of a social game user on a game is 6-9 months. If they survive for a year, most people who might get burned may well have moved on.

Cynthia Linton
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I wonder about that statistic. Does it mean that it's 6-9 months on a specific game or 6-9 months on all social games. I know many of my friends who are not traditional gamers do move about from one social game to another, but they don't quit gaming entirely.

Andre Gagne
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Right, because virtual goods have only been popular in east asia for how many years? 10? 15?

Still going strong from what I understand...

Tim Carter
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What they hate is being compelled by investors to put their ideas for making better games onto the trash bin for the sake of doing service-industry-like, wide-and-shallow games like Zynga.

Ian Uniacke
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Tim: I would just ask how is this any different to the dozens of "big boys with big guns" games on the market?

Mathieu MarquisBolduc
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Zynga seems to have build their business off facebook's negligence. Will they be able to continue to grow now that they are tightening the spamming rules? The report doesnt mention that.



The report is heavily based on the size of Zynga's user base. What is their retention rate? The report doesnt mention.



Sometimes I think analyst reports should be peer-reviewed...

Simon Carless
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Mathieu, see my below post to Tont - obviously can't verify it, but SharesPost claims their numbers are based on what Zynga shares are currently privately trading for in real money terms. So it's what people are currently paying for Zynga shares absent of public markets.

Tont Voles
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Oh Mr Lovell! You are a card.



This valuation is based on little more than estimates. To my knowledge, not a single shred of solid financial data has ever been released by Zynga, so quite how this evaluation has any weight whatsoever is beyond me.



I think the only solid financial fact Zynga's ever released is how much it donated to the Haiti fund.



Please note:



"So where does the $5 billion valuation come from?



The valuation is based on a 15.3X multiple on our projection of Zynga’s 2015 EBITDA of $659 million. I’m the first to admit valuation is part art and part science."



So it's wild speculation about what Zynga *might* be worth in 2015.



This is all about that rumoured angling for IPO. No surprises, mind. If Zynga's managed to pull the wool over the eyes of its MAU base, it's only fitting it should do the same for its potential investors.

Simon Carless
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Tont (?), actually your quote about valuation there is from an earlier analyst who was considering how much Zynga _might_ be worth. That's a lot more speculative. On this valuation, as we explain:



"This valuation is based on the SharesPost's indications on the price of shares in Zynga trading on the closed, private market, largely from Zynga employees, since the company is not yet public."



Of course, you can argue that people are privately trading at levels that might not be sustained when Zynga goes public, but SharesPost are claiming that people are trading shares at that valuation - ie, somebody would be buying 1% of the company for $50 million.

Nicholas Lovell
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@Tont,



That's not wild speculation about what Zynga might be worth in 2015; its what Zynga might be worth today based on wild speculation about its EBITDA in 2015.



The financial community doesn't really care about historic numbers: it cares about the future. It is pretty unusual to base a valuation on an EBITDA forecat that is five years away (both the time-value of money and the difficulties of estimating EBITDA so far away militate against that). But primary valuation techniques focus on EBITDA in 2010 and 2011, not on 2009.



So the technique is a little weird (2015 versus 2010), but it is not speculating about future value, only speculating about future earnings.



More importantly, Simon is right; it's based on grey-market trading of small minority stakes.

As Nicolas says below, that can drive the price up (because a small trade can imply a large valuation), but it can also drive the price down (because it is riskier to trade in illiquid stocks with no market).

This is no different to the suggestion that Facebook was worth $15 billion when Microsoft bought a very small stake.

Nicolas Godement-Berline
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This analyst is comparing apples with oranges : a public company vs a non public one.

There is a dozen ways to evaluate Zynga's value. It's notorious that when only a few shares of a non public, hyped up company are traded, their value will spike up dramatically.

Tom Baird
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Now I'm not very knowledgable in economics, but if it's a private, close market what prevents Zynga from inflating it's own worth to whatever it desires. Giving 1% of the company to a group of employees and stating it's instead of $50 million worth of bonuses. Or higher up employees buying their own stock for higher than normal prices to increase their stock should they go public.



The smaller the group of people trading something the more individuals get to dictate what it's worth. And if there are payoffs to increasing that worth, then why not?



Someone please correct me on why they can't just choose their value if it's privately set.

Nicholas Lovell
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They could. More likely to my mind, is that investors who want a piece of Zynga in advance of possible IPO are prepared to pay this amount of money for a small stake. But it's hard to say.

Carlo Delallana
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My family still has old trophies and golf clubs my grandfather used to own. I believe we still have my father's suitcase full of casette tapes he used to listen to. What kind of stuff will I pass on to my grandchildren if everything I own is virtual?



Food for thought.

Patrick Coan
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An existentialist would argue that it's all virtual, regardless of the medium: RL or SL. Given humanity's currently shifting paradigm, digital goods are becoming more relevant- thus Zynga's numbers. You can scrutinize the legitimacy of the numbers all day, the fact is that Zynga is successfully utilizing a newer formula.



The responsibility of a game designer has always been placing logical value on virtualized entities: God says Earth is home, Man turned checker board into a battle-field, and companies like Zynga and other Digital Content Creators tell consumers that their RGB pixels are relevant.



As a game designer, isn't our job about crafting the consumer's experience of logical relationships between virtual entities? Apparently, the masses are defined by casual gamers, and apparently casual gamers like to purchase things like "Cute Brown Sheep". I know I didn't begin my journey as a game designer to create games with this model, frankly, social gaming isn't what I had in mind at all.



I guess if you're in it for the cash, the social gaming way seems good. State Farm Insurance thinks it's a good way to go, they offered to keep my crops safe until the 27th.



At the same time, the social gaming framework may be the start of some really cool means of gaming that have yet to be considered.

Ken Kinnison
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I just have a hard time buying the numbers, even once I factor in any bias. As someone said, its kinda apples to oranges considering its a closed market.

John Gordon
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That is impressive. I didn't know that Zygna was even in the ballpark of EA even if the figures are inflated. Still I have to wonder why they would consider IPO. Normally you do that to raise capital, so that you can grow quickly. Zygna has already grown quickly. If they really do go for an IPO I would suspect the owners are just trying to sell off the business to stockholders and then get out as quickly as possible. I.e. IPO is just an indication that they think their days are numbered.

Shaun Greene
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I don't understand how if the virtual goods market is PROJECTED to reach $3.6B Zynga, which operates entirely within that market, is valued at $5.51B...

Cal Henderson
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$3.6B per year. Companies are valued at more than their yearly revenues. Google's yearly revenue was $23B (2009) while it's market cap is currently $197B.

Javier San Juan
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My advice: SELL NOW!!! That valuation is clearly unsustainable.

Tomiko Gun
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HAHA! Social games are the new web bubble. I can't wait for it to burst. If Zynga were smart, they would sell the damn company tomorrow.

Richard Lyle
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UPDATE: Bubble has burst!

A W
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Doesn't Sony do the very same thing with Home? They require you to purchase a PS3 and they give you Home for free, and when you get into Home, you find out that you have to pay real dollars for much of everything you aquire in the VR world. If Home was a facebook social interaction that didn't require a PS3 to work but still had the same "virtual market" solutions of Zynga to stimulate Sony bottom line, it would be guaranteed the hardcore crowds would be talking about how Sony is a pioneer in creating a virtual space for gamers to enjoy.



I don't play Zynga social games, but I don't hate them either. Last time I heard, gaming companies selling physical software are now saying that the best solution to making a profit is to sell games that are half done are have less content at 60.00 usd and then later charge that consumer upwards of 14.99 usd to purchase add-ons. Where is the call for that being a silly idea? Activision, EA, and others do it all the time on the consoles and computers gaming front, but its OK because they make games we like to play...


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