7 Things To Know Before Investing In Zynga
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.