A Peek Inside Zyngaville

According to eMarketer, social gaming revenues in the U.S. are expected to increase 28% over the year to $1.1 billion in 2011 driven by sales of virtual goods and advertising spending. Revenues from virtual good sales are projected to grow 28% over the year to $653 million and advertising revenues at 60% over the year to $192 million. Lead generation offers, the virtual currency incentives offered by marketers to players to sign up for social games, will grow at a modest 10% over the year to $248 million. Twenty-seven percent of Web surfers, or 62 million Internet users, in the United States are projected to play at least one game on a social network each month, compared with 53 million Web surfers last year. The forecast bodes well for the online social gaming developer, Zynga.

Zynga’s Financials
Zynga was founded by Mark Pincus in 2007 to create the next mass-market video game phenomenon. In April 2009, it became the first Facebook app developer to boast of more than 40 million monthly active users. Zynga is best known for its FarmVille game, which established a record 10 million active daily users in August 2009, rising to 57.4 million monthly active users last year. The company’s new game, CityVille, reported over 3 million active daily users within the first week of its launch and surpassed FarmVille by recording 72.5 million active monthly users in December of last year. Overall, Zynga claims to have over 360 million active users across its game properties and owns six of the top 10 Facebook games.

Zynga earns revenues from two primary sources: sales of virtual goods and ad revenues. Last year, the global virtual goods market was estimated to be worth $7.3 billion. According to Inside Virtual Goods, the U.S. virtual goods market is expected to increase 40% over the year from $1.6 billion to $2.1 billion in 2011. It is estimated that last year, Zynga had a third of this market. Ads are the other big revenue source. Zynga claimed to serving a billion daily ad impressions to over 47 million active daily players on Zynga properties. Zynga focuses on engagement ad campaigns, which work on the principle of letting users earn virtual currency or points when they watch a movie trailer, play a game, or perform an activity related to a brand, and then share it on Facebook. In 2009, the company claimed it made half of its revenues through ad sales. At present, the company’s advertiser list includes Netflix, Discover Card, HSBC Direct, Gamefly, Book-of-the-Month Club, Snapfish, and even The New York Times. Its brand engagement ads advertise products and services of Visa, Sprint, XBox, Timberland, MTV, and TVLand, to name a few.

Industry observers estimate Zynga had revenues of $850 million last year and earned profits of $400 million. In the current year, the company projects revenues of $1.8 billion with profits of 35%, or $630 million. Reports published last month peg Zynga’s valuation at $10 billion. The company already has funding of $219 million and is working on another $500 million funding round with an IPO expected in 2012.

Zynga’s Controversy
While Zynga may have become successful financially, it has received a lot of criticism for copyright violations surrounding its gaming properties. Mafia Wars, one of its earlier games, was originally created by Psycho Monkey as Mob Wars and released in September 2008. Zynga released its version of the game, which was very similar to Mob Wars, in November of that year and enrolled more than 24 million users compared with Psycho Monkey’s 1.2 million. Zynga settled Psycho Monkey’s lawsuit for $7 million–$9 million. The controversy has also surrounded Zynga’s most famous game, FarmVille, which was earlier launched as Farm Town by another developer, SlashKey. The All Facebook blog called FarmVille “almost an exact duplicate” of Farm Town. Other games known to have been copied from other developers and little changed include Tall Tree Games’ Fish World, which became Zynga’s FishVille; Playfish’s Restaurant City and Pet Society, which became Zynga’s Cafe World and PetVille; and GameHouse’s Text Twist, which became Zynga’s Word Twist. According to businessinsider, Zynga has one original game in its 19-strong Facebook lineup. Of course, Zynga has its own copycats in the United States and elsewhere.

Zynga’s Global Expansion
Zynga has been expanding beyond the U.S. market. In February of last year, the company opened its first international office in Bangalore, India. The online gaming market is expected to be growing strong in India, with more than 41% of active users playing online games in 2008. Reports estimate that India will have 81 million Internet users by 2013, making it the third-largest connected market after China and the United States. Almost 10 million Facebook users in India play social games. Nasscom estimates the worth of the gaming market in India at $212 million in 2008 and more than $1 billion by 2012. Zynga hopes to address this market through its presence in the region. Recently, it also launched Game Cards in $2, $5 and $10 denominations in India, Singapore, Malaysia, Philippines, Thailand, and Indonesia. In India, the cards will be sold in Reliance and Sify cybercafes and will enable buyers purchase virtual goods.

To address the Chinese market, the company acquired XPD Media, the Chinese gaming company. China reported that it had more than 457 million Internet users last year, translating to a 34% penetration rate. The Chinese virtual goods market was estimated to be worth $5 billion in 2010, making it a high-potential market for Zynga.

Within Asia, the company also sees Japan as a big market. Last year, it entered into a joint venture with Softbank Corp., a leading provider of broadband infrastructure, fixed-line telecommunications, and mobile communications services. The joint venture will bring together market access and technology capabilities of the two companies to develop and distribute social games across Japan. Market research estimates the Japanese social game market to be worth $900 million in 2010 and to grow to $1.4 billion in 2011. To accelerate growth in the country, Zynga acquired social game developer Unoh. Unoh was one of Japan’s earliest social game companies and has published top Japanese hits Machitsuku!, Band Yarouyo!, and Kaizoku Chronicle. The acquisition will help Zynga to develop newer games suited to the Japanese market.

Besides launching new games in new regions, Zynga is working on adapting existing games for these emerging markets. Recently, it launched Zynga Texas Poker, its first “internationally localized game,” in Hong Kong and Taiwan. This poker game is now available in Chinese and English.

Zynga’s Other Acquisitions
Besides acquiring for geographical expansion, Zynga has also grown through acquisition of other smaller gaming companies within the United States. Last year, it acquired social game developers Serious Business, Challenge Games and Conduit Labs. Serious Business had founded hits like Friends for Sale and had 6.20 million monthly active users and 0.84 million daily active users. The company had raised $4 million from Lightspeed Venture Partners. Austin-based Challenge Games had been backed by Sequoia Capital and Globespan Capital partners and had received $14.5 million in funding. Prior to being bought, it had focused on social game such as Warstorm, a collectible card game. Market reports estimate that Zynga paid $20.5 million for Challenge Games. Conduit Labs was acquired last August for an undisclosed amount. The Boston based game developer specializes in free-to-play social games. Zynga hopes to improve its game development operations through these acquisitions.

Last year, Zynga launched FarmVille on both the iPhone and the iPad. It also released Zynga Poker, which was its first game on Android.  To continue to expand into the mobile segment, it recently acquired Newtoy, a Texas-based mobile phone game development company. Newtoy is known for games such as Words With Friends and Chess With Friends.

Social networks like Facebook have helped Zynga to gain access to the general population. But getting access is not enough. Keeping users engaged and returning is equally critical to the social gaming segment. Over the past few years, Zynga has mastered the art of ensuring that players keep returning. Pincus believes in “running games as a service,”a belief that has paid off and seemingly will continue to pay off well for them. The U.S. social gaming market is expected to grow by another 21% in 2012 to $1.32 billion, and Zynga will surely play a big role in that growth.