Playing The Zynga Way
Playing The Zynga Way
With the online poker sector reeling from the aftershocks of the clampdown on PokerStars and Full Tilt Poker, is Zynga ideally positioned to take a leading role in a rapidly changing industry?
Zynga is renowned for cornering the social gaming market, enabling users to play and interact with each other over a number of games, ranging from virtual world games to role-playing, puzzle and card games. Zynga’s poker product on Facebook has captured the limelight, with its 40 million-odd fans all buying virtual chips and communicating regularly on their progress through the social networking site.
However, Facebook is not the only online community where Zynga is active and its games are also present on Myspace, Yahoo and mobile platforms. It also controls the five most popular games on Facebook, with a combined total of 184 million monthly active users across its products.
The factors behind Zynga’s success are numerous and diverse. Andrew Trader, a member of Zynga’s founding team said earlier this year, ‘Social games hit a mass market for three reasons. Our belief when [Zynga co-founder] Mark Pincus and I and the rest of the founding team at Zynga were talking about social gaming was we could reach a mass market by making the games fun, quick and easy. And, by making them social so you’re playing with your real friends, and enabling the user to express themselves in the game.
If users were willing to express themselves, and if you provide a way for them to express themselves, they’ll be willing to invest their time, their social network and even some hard dollars.’ But if Zynga found a way to make its Facebook poker app fun, social and something users could enjoy with their ‘real friends’, prior to that, the problem was that ‘there wasn’t enough depth in the game,’ according to Trader. ‘It ended too fast.
That was the problem with a lot of gaming. If you remember all the way back to 2006, the online gaming experience was casual games where it was a single player experience, played on Pogo, Yahoo Games or AOL Games. It was solitary. You felt dirty after you played the games because they were fun and a little bit addictive. But it wasn’t a fulfilling experience because it wasn’t social, you weren’t playing with your real friends, and were looking over your shoulder trying to see if anybody was watching you.’
In terms of revenues, it is difficult to make any confident claims about what profits the company might be generating, but technology blog TechCrunch has a go at estimating the company’s profitability in May 2010.
Assuming an annualised revenue rate of US$600 million, or $50m a month and a monthly wage bill of around US$7.7m, to which should be added close to US$10m worth of monthly advertising on Facebook and transaction processing costs, TechCrunch estimates that Zynga is earning at least US$15m per month, or 30% net margin.
But the obvious question is whether Zynga has any plans to launch real money online poker in the US should the sector ever regulate. It has the scale and the technology to handle huge amounts of traffic and would be ideally placed to offer a US-centric product. The company reaches out to a wide range of poker players and people with different motivations for playing.
There are the social butterflies using the poker app to connect with their friends around the world. There are those who use the app as an education tool, away from the perceived seriousness of the real money sites. There is also a segment of serious players who have dedicated themselves to becoming the best players around and are looking to climb the leader boards or achieve a high ranking.
Real money ambitions
It should be acknowledged that social gaming is very different to real money online gaming as understood and executed by other operators. While it is true that most people in the online gaming sector would dearly love to crack the social media conundrum and recruit huge amounts of players without having to put in too much legwork or investment, there are big differences between the two segments.
According to GameInformer.com, the average social gamer is a 43-year old female and women outweigh men 55% to 45% in using social gaming products. This paints a very different picture to the real money gaming sector, where women represent a small minority of the player base.
Many online gaming operators are attempting to use the reach of social media to create excitement and exposure for their products. Traditionally, they would judge return on investment against their advertising budgets but without doubt being able to harness the power of social media would give them serious clout. Although the fact that Facebook won’t allow gambling advertising puts a serious dent in those plans.
The other major distinction between a social gaming company like Zynga and online gaming operators is that Zynga’s players are not all hell-bent on winning. If you consider that a Zynga user can get 100,000 virtual chips at a price of US$5 while a gambler ‘only’ has the actual value of his deposit to play with and then has to play a certain amount of hands to release a bonus, the mindset is drastically different for each gamer.
But just as importantly, while poker was the product that enabled Zynga to generate huge volumes and revenues through Facebook, the company has also shown that it is able to harness the ‘social’ element of gaming with the success of its other products such as FarmVille or Mafia Wars. ‘Poker was the first game we launched [on Facebook], but we were the third poker game to launch. It wasn’t about being early. It wasn’t about being in the right place at the right time. It was Mark Pincus’ stroke of genius to launch poker,’ Trader says.
‘It took great execution and understanding of both the viral piece of it, and innovating around the social elements. Every step of the way, every incremental improvement was always about testing, analysing, optimising, repeating. It almost sounds clichéd, but it always comes down to execution. Once you get the strategy generally right, it’s about who can execute their plan better,’ he adds.
Zynga’s player range, from totally recreational to highly dedicated and experienced, is its great strength. With such varied and huge traffic and with PokerStars and Full Tilt Poker seemingly out of the way in the US, a move into real money online gaming Stateside would complement its social gaming activities very nicely.
The Money Making Machine
How Zynga monetises freeplay poker
For a gaming firm that deals in free online poker and the trade of virtual goods, Zynga is doing a remarkable job of cashing in on social gamingThe way Zynga monetises its product is simple enough. It charges users for virtual chips and the scale it is able to harness by being on Facebook enables it to generate substantial revenues. What it has been truly successful in is figuring out how to get people to pay for virtual goods.
As TechCrunch reported in May 2010, ‘Despite years of hype and numerous failed attempts at building a business based on virtual goods, Zynga was the first US company to make it a reality. Who would have thought that millions of people would spend real money on a special octopus for their aquarium or a prized pig for their farm? Zynga deserves a lot of credit for effectively converting 1%-2% of its significant audience into paying customers.
It is estimated the social gaming sector could be worth US$5bn a year by 2015, with current estimates at around US$1bn a year. Forbes however picked up on a story published by the New York Post in March this year that Zynga opened up its closely-guarded books to potential investors as it looked to raise US$500m, and revealed that it expects to generate revenues of US$1.8bn in 2011, from which it would make US$630m profits.
According to Forbes, if Zynga raises $500m, it would be valued at about US$10bn At 16 times projected earnings, Zynga’s valuation doesn’t seem bubbly, especially given that the company appears to be generating decent profits, with a margin of 35%.
Reports in the US suggest that banking institutions such as JP Morgan have already raised close to US$1bn as part of a so-called social media fund while Zynga has already announced it has raised US$219m in funding. Among the investors to have ploughed money into the company are Peter Thiel, billionaire investor and founder of Clarium Capital and LinkedIn founder Reid Hoffman.
SecondMarket.com, one of the largest trading platforms for private company stock, has ranked Zynga as the fourth most exciting company on the exchange, trailing only Facebook, Twitter, and LinkedIn. Zynga has expanded from producing games on Facebook and now leverages its presence on various platforms, including iPhones and devices running on Google’s Android operating system, it reported.