Monday, November 23, 2009

Zynga May Be Valued at $1 Billion on Facebook Craze

Zynga Inc., maker of the “Mafia Wars” and “FarmVille” games played on Facebook, may be valued at $1 billion based on the sale price of a smaller rival.

Valuations for Zynga and its peers were established this month when Electronic Arts Inc. bought Playfish Inc. for three to four times its revenue, said Jesse Divnich, an analyst with researcher Electronic Entertainment Design & Research. Zynga may generate a value of $1 billion should the company be taken public, said Terry Schallich, head of capital markets at Pacific Crest Securities, a technology-focused investment bank.

“If the IPO were timed to price around mid-2010 or later, our expectation would be for a billion dollar or greater valuation,” said Schallich, who is based in Portland, Oregon.

That could make San Francisco-based Zynga the third-largest U.S. video-game publisher by market capitalization, bigger than Take-Two Interactive Software Inc., the maker of crime-game franchise “Grand Theft Auto.” New York-based Take-Two had 2008 sales of $1.54 billion and has a market value of $909 million.

Zynga will have revenue of $210 million this year and $355 million next year, according to Justin Smith, founder of the industry-tracking Web site Inside Social Games. The figures are based on estimates of Zynga’s revenue per player across all its games and its number of daily active users, Smith said.

“It is a real business and has huge momentum,” said Todd Greenwald, a games and Internet analyst at Signal Hill Capital Group LLC in Baltimore. “There would definitely be an appetite” for a Zynga initial public offering.

Venture Backers

Zynga’s investors include Kleiner Perkins Caufield & Byers and Institutional Venture Partners, both based in Menlo Park, California; Union Square Ventures in New York; and Boulder, Colorado-based Foundry Group.

Chief Executive Officer Mark Pincus, 43, said he has no immediate plans to take closely held Zynga public and that doing so would be a “distraction.”

“Our mission is to accelerate our product development and business plan,” Pincus said in an interview.

The U.S. market for games played on social networks including Facebook Inc. andNews Corp.’s MySpace will triple to $2 billion by 2012, according to ThinkEquity LLC. The growth contrasts with a 12 percent drop through October in the market for console games, such as those played on Nintendo Co.’s Wii, said industry researcher NPD Group Inc.

Redwood City, California-based Electronic Arts, the second- biggest game publisher, paid $275 million in cash for London- based Playfish, plus another $125 million in performance and retention incentives. That’s equivalent to three to four times Playfish’s revenue, Electronic Arts Chief Financial Officer Eric Brown said on a conference call.

$3 Chicken Coop

Zynga and its rivals offer free-to-play games and generate revenue when players pay to add new features like a $3 chicken coop in “FarmVille.” The game, which lets people manage a virtual farm, has more than 65 million users. That compares with more than 52.6 million units sold worldwide for the Wii, the most among consoles.

One risk to Zynga may be that, relative to Playfish, it gets a higher percentage of revenue from companies that pay for the ability to offer online movies, credit cards and other items to game users, said Eric Goldberg, an industry consultant and managing director of Crossover Technologies, a developer of online games based in New York.

Promotion Problems

Some of those offers on Zynga games have turned out to be misleading. An example is when a player is offered to receive more game currency in exchange for filling out an IQ quiz. A user will enter a mobile number to receive the survey’s results and unwittingly sign up for a subscription that will be added to their monthly bill.

Palo Alto, California-based Facebook temporarily removed Zynga’s “FishVille” from the Web site this month because of problems related to promotions.

Pincus said in a Nov. 8 blog posting that misleading ads were being offered in Zynga’s games and that the company is working with offer providers to ensure they don’t continue.

“We recognize it is our responsibility to ensure that offers which generate a bad user experience are not shown with any of our games,” he said. All offers have been removed “until we can control their inclusion and presentation.”

Promotions account for less than 20 percent of the company’s revenue, Pincus said earlier this month. Of that amount, a “very tiny portion” is from bad offers, said Shernaz Daver, a Zynga spokeswoman.

Virtual Goods

In a statement today, Zynga said 1 million of its 200 million active monthly users are buying virtual goods and the company now gets about 90 percent of revenue from those purchases.

Playfish said it receives less than 10 percent of its revenue from promotional offers and only works with offer providers it says are reputable.

Some analysts caution that the companies are new -- all three of the biggest social game makers have emerged since 2007 -- and the games may be a fad.

“Consumers’ appetites in these worlds change rapidly,” said Divnich of Carlsbad, California-based Electronic Entertainment Design & Research. “Somebody can be playing ‘FarmVille’ for a couple of weeks and then get bored and they are gone. It’s one click away.”

Zynga’s $1 billion valuation makes it less likely to get bought than Playfish, saidAtul Bagga, a San Francisco-based analyst at ThinkEquity. He said Activision Blizzard Inc. is the only game company that could afford that amount and isn’t likely to make the investment because it already has a strong online game presence with “World of Warcraft.” A large media company also could buy Zynga, though he said that was unlikely because of the cost.

Activision Chief Executive Officer Bobby Kotick, the head of the world’s largest game company, said Nov. 12 that social games will be a “great area for growth.”