When Will Social Gaming Company Zynga Go Public?

zyngaLike its overgrown canine namesake, social gaming company Zynga has become the largest developer on Facebook’s platform over the past year. And, it cannot get away from whispers about its plans for an initial public offering. A key reason: Within the last six months, it has piled on a series of hit games, from virtual poker game Texas Hold ‘Em to mob-themed role-playing game Mafia Wars to virtual world YoVille — and most recently, FarmVille, which just hit 50 million monthly active users this past week.

It is proving the possibility of social gaming companies being long-term hit factories, not unlike more traditional, publicly-traded gaming companies like EA. And it is, from what we and others here, bringing in the money to prove that it is a real business.

So what’s going on with the IPO plan? This spring, a reliable industry source insisted that Zynga was in the process of closing a round of funding for possibly around $30 million. Another industry source now adds that it had at that point hired Allen & Co., the boutique investment bank, to raise a round of funding with a valuation between $550 million and $600 million. But when we asked about the funding, then, the company adamantly denied that it had raised any new round.

Here’s what happened. At some point, Zynga decided to stop looking to raise money, we believe, so it can plan an eventual IPO. By June, Business Insider heard that the company would IPO within the next “18 months.” A second new source has recently told us that conversations in this direction have become more serious.

When would Zynga IPO?

Outside estimates of Zynga’s revenue have been climbing over the past year, from $50 million, to more than $100 million, to what we most recently hear is around $200 million. Given Zynga’s across-the-board growth in top games, this number could very well be higher. On Facebook, the company has 125 million monthly active users on at least 31 games, according to our AppData service, although clearly a large minority of these users play more than one of the apps, and so are being counted more than once. It also has top games on MySpace and other social networks, including an exclusive deal with Tagged.

FarmVille on Facebook

The company has not excelled at originality in the games themselves, so much as its ability to execute. Nearly every one of its hit titles is derived from other companies’ versions of the same genre — poker, mafia role-playing games, virtual farming, etc. But it has figured out how to build, cross-promote, advertise and measure these games in ways that have made it twice as large as the second-largest Facebook app developer, Playfish.

Zynga makes money from selling virtual currencies so gamers can buy virtual goods, like virtual poker chips in Texas Hold ‘Em. Unlike Playfish and some other gaming rivals, it has also been making what must be a large portion of its money off of advertising offers. It has also, from what we hear, been bringing in more and more of these services in-house: building its own fraud system, for example, to help manage its virtual currencies.

There are questions about where some of Zynga’s money might come from in the long term, given that the company — as with most social gaming companies — is only as old as the launch of Facebook’s developer platform in May of 2007. Will offers prove less lucrative? Will other developers make more popular games?

The public markets

The virtual goods economy has only been panning out for Facebook developers since 2008, but it has been proven in countries like China and Korea. Games and social networks in those countries have long made far more money off of this revenue model. Perhaps most prominent is Chinese social network Tencent, and its $1 billion in annual revenue, predominantly from things like virtual clothes for avatars, coins in games, etc.

Two recent IPOs, from China’s massive multiplayer online game-makers Changyou and Shanda, also suggest that there is at least some overall interest for those gaming companies with this revenue model who go public. Certainly, Shanda’s IPO last Friday did not go as well as planned, even though its revenue and profits are looking healthy. In the first half of this year, net revenue grew 43% to $322 million, while net income increased 75% to $98 million, versus the previous year. The company raised $1.04 billion, the largest US-listed IPO of the year. This is in contrast to Changyou’s April IPO — that company raised much less money, and its stock has since more than doubled in value. Shanda, so far, appears to be overpriced versus what the market was hoping for. Shanda’s problem may be food for Zynga’s thought, as it considers when to go public.

changyou

So, do investors want to own the largest developer on Facebook and MySpace? They may be able to find out soon. Some industry sources we’ve talked to have suggested that Zynga could make a bold move to file before Thanksgiving, trying to immediately build on the overall attention it and the industry is getting. A more conservative strategy would mean waiting for the first quarter, or maybe second quarter of next year.

For now, though, the company is downplaying any public offering plans.”We are excited about the growth of the social gaming industry and our momentum,” Vish Makhijani, Zynga’s chief operating officer, tells us. “We are not focused on an IPO but on creating great games and building a company that has lasting value to consumers.”

Zynga’s decisions

Meanwhile, Facebook itself is already cash-flow positive, through its brand and self-serve advertising services — mostly not through virtual goods — and is likely to bring in more than $550 million in revenue this year. Zynga, notably, has been buying up millions of dollars in some of these ads to promote its games to Facebook users. One of our sources suggested Zynga could be on track to pay Facebook up to $50 million, but we have not been able to confirm this.

bull marketFacebook’s strategy is to try to grow its revenue streams as much as possible, rather than first subjecting itself to the constant scrutiny and the short-term demands of the public market. Zynga, especially given the growth of games like FarmVille over the last few months, appears to be doing the same — that game only launched in June and is now at 51.5 million monthly actives, with nearly 19 million accessing the app every day. Perhaps Zynga will go public when its growth slows? The risk, of course, is that if it waits too long, investors may have become more cynical about gaming companies, and value it far lower than it would be now on the market, even if the money has well-proven revenue by that point. The Chinese gaming stocks could be an interesting indicator of public sentiment, until Zynga has an IPO.

If Zynga wants to buy other gaming companies or continue quickly building its own infrastructure, an IPO would be one way to raise cash. But it apparently doesn’t need to, instead it is financing its own growth and paying for its expenses like massive advertising campaigns and its 500 employees.

Once the user and revenue growth slows, going public would make more sense. The money from an offering would let it continue gaining market share in a way that other rivals are less likely to be able to do.

The other effect of a Zynga IPO would be that other market leaders, especially Playdom and Playfish, are validated. But because they are smaller, they may not look as promising for their own public prospects. Big media and game companies have been losing money in the last couple of years. These new social gaming companies, especially the biggest and most profitable ones, will look like tempting acquisitions.

But all this speculation is early. Remember, social games as we know them today have been around less than two years, and their revenue models even less time than that. We would be surprised to see a Zynga IPO within the next six months.

[Zynga photo via The New York Times.]

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31 Responses to “When Will Social Gaming Company Zynga Go Public?”

  1. When Will Social Gaming Company Zynga Go Public? says:

    [...] > Continue reading at Inside Social Games Add Comment » [...]

  2. Warren says:

    19mil users a day? OMG!

  3. Zynga’s New Café World Game Takes on Playfish’s Restaurant City says:

    [...] Zynga has many more opportunities to cross-promote Café World via massive hits like FarmVille. Zynga has also aggressively bought advertising for games on sites like Facebook. So, Playfish, for all of its success with Restaurant City, [...]

  4. Playdom: “Upwards of $50 Million” in Annual Revenue, and Growing says:

    [...] active users across the same platforms, and while we hear that company could make as much as $200 million this year, Playdom is proving itself to be a serious rival in the still-young world of social gaming. [...]

  5. Zynga’s Power Plays — A Review says:

    [...] plans: Zynga has long considered when it might make an initial public offering, as we reviewed in this in-depth piece earlier this week. While we don’t expect it to make any moves in this front this year, look [...]

  6. Zynga’s Power Plays — A Review | GoSocial.dk - Social Media Marketing says:

    [...] plans: Zynga has long considered when it might make an initial public offering, as we reviewed in this in-depth piece earlier this week. While we don’t expect it to make any moves in this front this year, look [...]

  7. Zynga’s Café World Goes from 0 to 8.6 Million Users in a Week, with Big Implications says:

    [...] is especially good for Zynga, as we believe the company could try to go public as soon as next March. Café World has a baked-in revenue model in the form of virtual goods. It’s another big hit [...]

  8. Zynga’s Café World Goes from 0 to 8.6 Million Users in a Week, with Big Implications says:

    [...] is especially good for Zynga, as we believe the company could try to go public as soon as next March. Café World has a baked-in revenue model in the form of virtual goods. It’s another big hit [...]

  9. Calculating How Playdom is Making $50M from 28M Users says:

    [...] had a hard time grasping Playdom’s revenue when I knew Zynga is reportedly making $200 million with nearly five times the audience on Facebook — and has games that are nearly 2 times [...]

  10. Zynga Trademarks FishVille — Get Ready for a Big Aquarium Game says:

    [...] This is not to say that Zynga is the least original developer. FarmVille and Café World both use some original dynamics. If anything, improving quality is now a key part of Zynga’ strategy. [...]

  11. Is EA Going to Buy Zynga or Playfish in Social Gaming Bid? says:

    [...] saying that the asking price was $1 billion. Zynga has flatly denied everything. We believe that Zynga could look to go public as soon as March, once its 2009 financials have been [...]

  12. Anthony J says:

    An Open Letter to Zynga CEO Mark Pincus and to Mark Skaggs, Eric Schiermeyer, Michael Luxton, Sim Sing, Scott Dale, Justin Waldron, Colleen McReary and Lisa Chang of Zynga News, Zynga Management and Customer Relations RE: Farmville Game

    Incident: 090930-002104

    Do you value your paying customers? Do you value your game testers?

    If so…please do the right thing and hear my plea.

    I have waited almost a week now to get my 300 plus Farmville bucks restored to my account because of some out of syncing problems after I tried the video professor offer.

    All I got was a response saying that I have already been credited.

    Thanks for your response but I don’ t think you got what I meant.

    I know I was credited for that Video Professor offer but what I am writing about is what happened within 5 minutes after I was credited for 300 farmville bucks.

    Can you check your records how many times the system went out of sync within that 5 minutes of me getting credit for the offer?

    My credits were lost in the system due to that numerous glitches from the synching process….

    I was writing to have my credits restored because I didn’t get the chance to use it.

    If you notice several purchased items in my account…that is because I actually bought it using my credit card….and not because of the free trial bucks that I was supposed to have received.

    If you cannot restore my 300 plus farmville bucks lost from your numerous out of sync messages on that problematic day on sept 24 when your system deleted my farmville bucks….

    I would have no other option but to ask for a refund of my $40 dollars….and stop playing farmville.

    It is just deceitful on Zynga’s part to offer these products only for you to actually erase it or lose it in the system by your “out of sync” messages.

    If your system messages have a choice of “yes” or “no” in terms of when the “out of sync” messages appear and you give the players a notice in advance that if you press “yes” we will lose our farmville bucks…then I would have not pressed the button after the out of sync messages.

    Please do the right thing and restore my missing farmville bucks because even though it was credited…I didn’t get the chance to use it because of the out of sync messages.

    Thank you and I am hoping for your kind consideration.

    Anthony J
    Level 33 Farmville
    Lveral 63 Mafia Wars
    Yoville player
    Vampire Wars player
    Fashion Wars player
    Pirates Player
    Cafe World player

  13. Suburb@MacVillage » Spielegiganten auf Einkaufstour? says:

    [...] Unternehmen Zynga und Playfish großes Interesse zeigt. Zynga, dessen wohl Wert für den wohl bald anstehenden Börsengang auf rund 1 Mrd. US-Dollar taxiert wird, streitet aber jede Art von Vorgesprächen mit EA ab. Mit [...]

  14. App Developers Repeat After Me: The Platform is Not Your Friend « @ the intersection says:

    [...] little opportunity is left for the remaining 350,000 applications once you get past the success of Zynga, Playfish and Playdom, the leading developers on Facebook and OpenSocial platforms. A similarly [...]

  15. NotSoHapPy says:

    Zynga the worse company I have ever seen in my life. Their games are worse than anything I have played, they are full of glitches and the security is none existence, you will get hacked it’s just a matter of time. This company doesn’t care about it’s players one bit, they are only after your money. Don’t give it to them. They remind me of a get rich quick company, take everyone’s money, and they will probably disappear just as fast as they came in.

    Stay away from anything Zynga!!

  16. Zynga’s Vision for the Social Web, in PowerPoint says:

    [...] social applications, and he’s not afraid to say it. Given his social gaming company’s user and revenue growth on Facebook and MySpace, it was not surprising to hear him say so yesterday during a presentation [...]

  17. Why Zynga couldn’t go public soon enough – Customer Ecosystem Weakness « Customer Ecosystem says:

    [...] stands) is in a bad position… and probably knows it. Hence the desire to push out an IPO very soon. Good luck with [...]

  18. Zynga Raises $15.2 Million At a $625 Million Valuation — Or Is This Old News? says:

    [...] Until the company clarifies when this funding happened, we should not conclude that it is new. As a result, if the valuation of $625 million is months old, we can only assume that Zynga is worth far more now. Possibly as a result of these reasons, we heard rumors earlier this fall that the company had been talking to Electronic Arts about an acquisition with an asking price of around $1 billion. Instead, as it turned out, EA bought Playfish in a deal worth up to $400 million — while Zynga appears headed to an initial public offering. [...]

  19. Rumor: Zynga to Introduce Employee Stock Sale Plan as It Waits On IPO [Updated] says:

    [...] about a $1 billion valuation have gone around already; we heard it in October, when rumors of a Zynga IPO were also circulating. Others have heard or estimated a similar [...]

  20. Interview with Zynga CEO Mark Pincus on Social Gaming in 2010 says:

    [...] million round of funding, in part to let employees sell stock. The signs, more than ever, point to an initial public offering, even though the company and our sources insist this is not likely to happen any time [...]

  21. Qu’est-ce qui devrait Zynga faire ensuite ? | Tissu de folie says:

    [...] jeu favori serait quelque part près du haut… 4.) IPO (ou sont achetés par EA) Tous les deux ont été dits, avec celui-là probablement mieux que le dernier. En tout cas, les 6 mois suivants ressemblent [...]

  22. Что должен Zynga делать затем? | Tkan' bezumija says:

    [...] около вершины… 4.) IPO (или куплены ЗЕМЛЕЙ), Оба были известны по слухам, с прежним вероятно более вероятно [...]

  23. Was sollte Zynga, als nächstes tun? | Stoff der Albernheit says:

    [...] irgendwo in der Nähe von der Spitze sein… 4.) IPO (oder werden durch EA gekauft) Beide, sind mit dem ersteren wahrscheinlich wahrscheinlicher verbreitet worden als die Letzteren. Auf jede Weise [...]

  24. ¿Qué debería Zynga hacer después? | Tela de locura says:

    [...] favorito estaría en algún sitio cerca de la cumbre… 4.) IPO (o son comprados por EA) Ambos han sido rumoreados, con el antiguo probablemente más probablemente que éste. Los uno o el otro camino, los [...]

  25. Platform Wars: Twitter’s Chirp Conference Will Take Place A Week Before Facebook’s f8 says:

    [...] such as Zynga. In fact, the Zynga revenues are so huge that there is no shortage of talk that they could go IPO soon — maybe even before Facebook itself. Twitter has a ways to go before it reaches that level as a [...]

  26. Twitter、デベロッパー・カンファレンスChirpの開催を発表―APIを使って受付開始 says:

    [...] Facebookは2010年のf8のプレビュー・ページで、Facebookプラットフォームにはすでに50万のアプリケーションが登録されており、そのうちの300種以上にそれぞれ100万人を超えるユーザーがいると紹介している」。FacebookプラットフォームにはZyngaを始め、巨額の収入を得ることに成功したデベロッパーがすでに多数現れている。Zyngaの売上はあまり巨額なので、Facbookの上場以前にすぐにも株式を新規上場するのではないかという噂が絶えない。Twitterがプラットフォームとしてそのレベルに達するまでにはまだ道のりは長いが、サードパーティのデベロッパーのコミュニティーは急速に拡大している―だからこそ、このカンファレンスの開催となったわけだが。TwitterはイベントのプロデューサーとしてCarsonifiedを使っている。このグループはFuture of Web Appsカンファレンスのプロデューサーとしても知られている。 [...]

  27. Platform Wars: Twitter’s Chirp Conference Will Take Place A Week Before Facebook’s f8 | Channel321 says:

    [...] such as Zynga. In fact, the Zynga revenues are so huge that there is no shortage of talk that they could go IPO soon — maybe even before Facebook itself. Twitter has a ways to go before it reaches that level as a [...]

  28. Yahoo Heads to FarmVille - Bits Blog - NYTimes.com says:

    [...] but only after lengthy negotiations that were widely reported to be tense. As Zynga grows and perhaps prepares for an initial public offering, it is likely working on ways to lessen any reliance on any one Internet [...]

  29. Zynga’s Confusing Deal Terms Result in Acquisitions, Padding in Case of Hard Times says:

    [...] more mature and maybe harder times in social gaming. The long-term goal is still, we assume, is for Zynga to go public eventually. To dig deeper into the social gaming market, check out our new report: Inside Virtual Goods: [...]

  30. ThinkEquity Says It Advised Peanut Labs Deal says:

    [...] that JP Morgan may have worked on Playfish’s sale to Electronic Arts last year, and that Allen & Co has advised Zynga on its various funding rounds (hiring managing director David Wehner in July to be its new chief [...]

  31. Report: Zynga Filing for IPO This Week or Next Week says:

    [...] company’s history of rapid growth and successful game launches on the Facebook platform (and long-standing speculation about an IPO). A recent filing shows that the FarmVille developer appears to be selling $490 million in Series C [...]

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