Social gaming giant Zynga has finally filed for a float on the New York Stock Exchange, ending months of speculation as the company moves to become the first listed company based entirely on the sale of virtual goods.
The filing follows similar moves from group buying giant Groupon, social network LinkedIn and internet radio service Pandora.
With Zynga’s success so closely tied to Facebook analysts are beginning to question how long the social network can hold off from listing.
Zynga’s listing documents are filled with metrics and information on the social aspect of gaming but perhaps one of the most curious is chief executive Mark Pincus’ admission that free games are more profitable than paid alternatives.
“We have created a new kind of customer relationship with new economics — free first, high satisfaction, pay optional. This model aligns shareholder value with delivering the best player experience,” he said.
Zynga intends to raise up to $US1 billion, the company said in the filing, although that figure could change before the listing takes place. Sources have informed various publications that the company is seeking a valuation of between $US15-20 billion.
Zynga, which was founded by Mark Pincus, Scott Sale, Kyle Stewart and John Doerr in 2007, has become the biggest social gaming company in the world, with its four major games – CityVille, FarmVille, Zynga Power and FrontierVille – some of the most popular apps on Facebook and smartphone platforms.
The company has more than 60 million daily active users, 232 million monthly active users and it accounts for a massive two billion minutes of gameplay every day.
Revenue is sound. The company made $US597 million in 2010 and $US235 million in the first quarter of 2011, with profit at $US90.7 million in 2010 and $US11.8 million for the first quarter of this year. It has nearly $US1 billion in cash.
Unlike traditional gaming companies, which are suffering due to high development costs and a weak retail environment, Zynga’s financials are strong – its services are purely digital and therefore not subject to traditional overheads.
The simple nature of its games reduces the amount of time required for software development.
Zynga’s revenue does not come from the product itself and Pincus emphasises the fact that all Zynga products are free and it makes money from selling virtual goods from within the games.
“Free games are more social because they’re more accessible to everyone. We’ve also found them to be more profitable,” he said.
The concept of in-app purchasing has been one of the biggest changes in digital distribution during the past few years. Several app makers now choose to simply make their aps free and have people unlock new elements of the program by paying small incremental fees.
Pincus is the largest shareholder of the company and owns 16% or 91 million shares. Investors including Reid Hoffman, Google, Union Square Ventures, Andreessen Horowitz, Peter Thiel and Kevin Rose.
With that much stock if Zynga’s reported valuation of $US15-20 billion proves correct Pincus could become the next Silicon Valley billionaire, with stock worth over $US3 billion.
He owns the company’s offices and earned $US400,000 last year from leasing property he owns.
William Gordon, a former chief creative officer with Electronic Arts, owns 10.5% of the company.
Former MySpace and Facebook executive Owen Van Natta, who holds the title of executive vice president of business, holds no equity but earns $US200,000 in salary. He holds a massive $US43 million in options and stock awards including bonuses.
The filing showed Pincus sold more than 7.8 million shares earlier this year for $US109 million and a number of investors including Union Square, Kleiner Perks and Avalon also sold shares earlier this year.
At the heart of Zynga’s strategy is socialisation, which sets it apart from other game makers. By combining simple, graphically cheap games with social elements on Facebook, Android and iOS Zynga allows users to play and compete with their friends, which brings them back for more.
“Every week our teams test new features to make our games more social. Historically our players have created over 4 billion neighbour connections and currently our 60 million daily active users interact with each other 416 million times a day,” says Pincus.
Without that social ecosystem Zynga does not exist. It admits that, saying that “changes in our relationship with Facebook” and other mobile networks could affect the company, along with changes to the industry as a whole.
“If we are unable to maintain a good relationship with Facebook our business will suffer,” it says, adding that “we operate in a new and rapidly changing industry”.
Such an admission has left some analysts waiting for more direction from Facebook on its long-term prospects as the company reportedly prepares for a 2012 listing.
Zynga intends to use the money raised through listing for development and marketing.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
