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7 Things To Know Before Investing In Zynga
7 Things To Know Before Investing In Zynga
December 15, 2011 | By Tom Curtis

December 15, 2011 | By Tom Curtis
More: Social/Online, Business/Marketing

We've hit the calm before the storm -- Zynga is about to file its highly-anticipated IPO, and Wall Street and the game industry are waiting with bated breath to see how it all pans out.

Just this afternoon, the company announced that it will begin selling its stock at $10 for a total IPO of $1 billion, making this the largest IPO for an online company since Google went public in 2004.

Now that the company's IPO is upon us, however, Zynga needs to ensure its long-term growth. It might be the leading social game company today, but who knows what could happen down the road? In its most recent SEC filing, Zynga laid out a few of the biggest risks it will face once it becomes a public company.

The following is a look at the top risks Zynga faces today, with a breakdown of how these factors could influence the company's future:

1. Zynga Might Be Too Reliant On Facebook

Without Facebook, Zynga wouldn't be the powerhouse developer it is today. It's where Zynga first took off, and it's still where the company makes the vast majority of its revenue. In its most recent SEC filing, Zynga noted that it needs to maintain a strong relationship with Facebook if it hopes to sustain its now-gargantuan business.

So long as the relationship between the two companies stays amicable, it'll be smooth sailing for Zynga, but if Facebook chooses to alter its policies for game distribution or turns its favor to another competing developer, Zynga would have some real trouble on its hands.

In order to prevent this from happening, Zynga has been at work creating a platform of its own, where it would no longer be ties to Facebook's leash. In October, the company revealed Zynga Direct, a separate platform that, while connected to Facebook, allows players to access Zynga games without going through the popular social network.

Last year, Zynga signed a deal with Facebook, agreeing to use Facebook Credits as the primary means of payment for its games on the platform. As long as Zynga is publishing games on Facebook, it is bound to use its proprietary currency until May 2015.

2. Zynga Relies On A New Business Model In A Rapidly-Changing Industry

When compared to the games industry at large, social games are still in their infancy, and the space has seen tremendous growth over the past few years. Zynga has had great success thus far, but who knows how the social space will evolve following the company's IPO?

As the space changes over the next few years, Zynga will need to ensure that its virtual goods maintain their value for consumers, especially if audiences begin to expect more for their virtual dollar.

In addition, the company will need to stay on top of the ways in which audiences want to consume their entertainment, keeping abreast of new platforms, devices, business models, and more.

3. A Few Customers And A Few Games Bring In Most Of The Revenue

As successful as Zynga's free-to-play model has been this far, the company pulls most of its revenue from a tiny sliver of its player base. In all, roughly 3 percent, or 7.7 million of Zynga's 227 million monthly active users are actually paying money on its games, reports Forbes.

This gives Zynga huge incentive to find ways to retain that valuable, yet minuscule segment of its audience. The trick, however, will be to find ways to retain and incentivize users to play, without scaring off the players committed to playing for free. Last week, Zynga CEO Mark Pincus said that he plans to double the company's number of paying customers.

In addition, Zynga has made a distinct effort to boost its catalog of games over the past year, yet the company still generates most of its income from just a few of its titles. Analysts have noted that the company has had a "difficult time driving user growth," with well-established games like CityVille and Empires & Allies seeing declines in user numbers.

4. Is Mark Pincus Zynga's Lynchpin?

Zynga founder and CEO, Mark Pincus, is one of the major factors behind the company's success. He has helped establish Zynga's vision, business strategy, studio culture, and key products, and has played a key role in the company's astronomical growth.

Google chairman Eric Schmidt recently called Pincus "a fearsome, strong negotiator," adding that he is "a we’re-going-to-make-this-happen-or-else type of person," reports Bloomberg. It is Pincus' drive and knack for business that built Zynga into its current form, and losing him would be a notable blow to the company.

5. Managing Growth Is A Precarious Business

Outside of the social realm, the mobile space is the next clear target for Zynga's growth. Words With Friends is, of course, extremely popular on mobile devices, but Zynga can't exactly port over its Facebook games like CityVille and Empires & Allies and call it a day. Rather, the company has instead released some mobile-only games like Dream Zoo and FarmVille Express in hopes of carving out it sow space in the mobile market.

A key challenge for Zynga will be to expand its mobile business and find hit games that work outside of the browser-based Facebook platform. In fact, the company needs to stay even more aware of the increasing number of online-enabled platforms, since players can access the internet through smartphones, tablets, PCs, and even unconventional platforms like Smart TVs.

Zynga has already made steps to stay abreast of these new platform developments, but its long term approach to spreading its business across multiple platforms will really impact its potential for growth.

6. The Company Needs To Maintain Its Talent

If there's one thing a company needs to succeed, it's a talented workforce. While Zynga has no lack of talent at its disposal, the company needs to make sure it can retain its top employees.

One key worry is that Zynga's senior employees, who posses a fair share of the company's stock, will cash out once the company makes its IPO, stripping Zynga of some of its key developers. These concerns are backed up by some recent and stinging reports indicating that some employees are dissatisfied with the way things are going at the company.

Of course, the company has already seen its fair share of shuffling throughout the year. Even in just the past few months, Zynga has lost key staff members such as former VP Lou Castle, executive producer Daniel Stahl, and chief business officer Owen Van Natta. Following its IPO, Zynga will have to encourage its top staff to stay, and prevent an ongoing exodus.

7. Competition Is Getting Stronger

As the social market has matured, a number of new companies have settled in as substantial players. EA, the Disney-owned Playdom, and even privately owned companies like Crowdstar and Wooga have a substantial presence on Facebook and other networks, and Zynga needs to make sure it can maintain its leadership as the competitions gets increasingly tougher and even more players enter the space.

Earlier this year, EA made a strong footprint in the social market with The Sims Social, which is currently the fifth most popular app on Facebook with 28 million monthly active users, according to AppData. In September, the game briefly overtook Zynga's popular FarmVille in terms of daily active users, indicating that it's possible for new titles to overtake even Zynga's most established products.

As these major competitors continue to grow and carve out their own niches on social platforms, Zynga will have to determine how to maintain its leadership, whether it be through evolving its current strategy, targeting new audiences, or something completely different.

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Harry Fields
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8) You'll find yourself lighter in the wallet.

Alan Rimkeit
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I am sorry to say it like this, but to me this whole "social gaming" scene reminds me just too much of the Dot Com era in Northern California. Investors throwing money around. Analysts making wild unsubstantiated claims of company stock values.

More venture capitalist investors tossing money onto companies. Lots of companies going up in value then up in flames. Lots of people losing their jobs. Maybe I am wrong. I hope I am, but if I was going to invest any substantial amount of money in any of these bigger social gaming companies I would wait to see how this all turns out for a little while.

I hope this all turns out well for the industry and the people who have the jobs working at these companies. But still, it all makes me just a little leery to see such high values arbitrarily assigned to companies like Zynga.

Arthur Tam
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Oh, you're perfectly right, for the most part. If you build a business on temporary advantages, it's going to crumble as soon as you try to get serious with it. Zynga just has a bigger ego than most. Heck, Rovio is getting a pretty big head over their one game, and don't seem to know how to capitalize beyond that.

This is a very preachy standpoint I'm about to take: did anybody who worked at Zynga truly not know what the company was doing?

E McNeill
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Keep in mind, though, that Zynga actually has profits. Most of the dot com busts never even had revenue.

Steven Stadnicki
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While that's a fair assessment, I think it's worth remembering that the 'dot com bubble' that produced and its kin also produced Amazon and eBay. Social gaming has a bubble aspect to it, but in the same way that access to the world's largest library/shopping mall (and yes, I know that's not the core of the net by any means, but it's the more business-relevant side) has fundamentally transformed the way people live, 'you can play with your friends wherever and whenever they may be' has a game-changing aspect that goes well past the hype. That's not to say that Zynga is the Amazon of this space; I think they have some fundamental flaws yet. But there's more than just hype here.

Ken Love
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They forgot the part about the games typically being "clickfests" and that the majority of them have the word "ville" in them.

Doug Fresh
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A bit scary that 95% of their revenue relies on Facebook as their platform. There's something to be said about developing/publishing titles on multiple platforms... if any one platform fails/dies/becomes obsolete (etc., etc.) in the eyes of consumers, having the talent to develop/publish elsewhere is a nice security blanket Zynga won't have.

They've already begun to learn lessons about higher Marketing costs, higher development costs, and what it feels like to have titles underperform. Welcome to the industry, Zynga. I'm at least halfway intelligent, and trying to find a GOOD comprehensive list of available "games" on Facebook is something I've yet to figure out. Having a title lost in that shuffle seems highly highly possible.

While I personally don't enjoy their "games", Zynga can very well be a successful gaming company for years to come. But to step into the industry, and claim your value is greater than Electronic Arts and Take-Two combined, is simply batshit crazy. I just don't get it.

Ashkan Saeedi Mazdeh
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For now i think investing a little and in short term will be good. I mean in near future zynga will only see growth but as a long term goal it can not be the safest option availlable and i think EA and others would be much more successful!

unlike the article i think htere is not much real tallent there in Zynga. copy cat designs and competing in a market with no competitor at first is not tallent.

A guy named Ramin Shokrizad has a good article called "Zynga analysis revisted" which has a good look on it.

Kim Pallister
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*might* be too reliant on Facebook?! The lions share of their revenue is on one platform, in which they are required to hand over an arbitrary share of revenue subject to the terms of the platform holder, in a segment where the platform holder is a near-monopoly.

I also wrote a while back that I am curious about the terms of their agreement. Seems strangely absent from their filing. More here:

Craig Timpany
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This could be the first time I've seen the word "minuscule" used in conjunction with "7 million paying customers". Hell, even imagining the market for a self-help book to help people kick playing unfun games... First person to get on Oprah gets a lambo.

Yama Habib
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That fine sir, is a brilliant idea. I'll call it "Go Play Skyrim"