For the third instalment of our Extraordinary Games Businesses series, let’s turn to a better-known company, the social network games phenomenon Zynga. Zynga is the market leader on a games platform barely 2 years old but which is outpacing every other in speed of growth of both revenues and audience.
Zynga was founded in San Francisco in June 2007 by serial entrepreneur Mark Pincus (amongst others) to develop and distribute games for social network platforms. Pincus has been launching and selling web businesses since the early 1990s, and was the founder of Freeloader, Support.com and Tribe (one of the first social networks). His team of colleagues’ successful start-up backgrounds is the first secret of Zynga’s success: experience and deep understanding of the social web’s potential.
Facebook’s decision to open its platform for third party developers in May 2007 triggered many social network game start-ups, including companies such as Zynga, SGN and Playfish. Since then, Zynga’s growth has been nothing less than phenomenal. Celebrating its 2nd birthday during a month in which its staff headcount neared 400, Zynga’s game installations on Facebook alone hit 67 million and its daily audience across all networks crested 18 million unique players. Zynga’s games are all persistent, server-based and multiplayer, and accessed via through Facebook, MySpace, Bebo, Friendster, Hi5 and Tagged. Zynga’s 30-odd titles are breaking little new ground in terms of gameplay but drive usage and revenues by catering, and listening very carefully, to the web’s largest online communities. Its most popular games are Farmville (a farm-based virtual world with 18m monthly users), Mafia Wars (15m monthly players recruit friends to fight between clans), Texas Hold-em (a poker game with 15m monthly players and no cashing out), and Yoville (a virtual world with 10m monthly users).
Most of Zynga’s popular games are designed like MMOGs or virtual worlds, featuring permanently free play monetised by microtransaction-based premium features plus advertising. Players pay to access certain game sessions, progress faster through games or purchase virtual goods and services. Despite being cash-rich, Zynga has raised around $40m in venture capital to date. It claims to have been profitable from month 3 and not to have actually spent any of this external finance to date. Speculation about its revenues has been feverish online with numerous VC sources suggesting Zynga is on course to exceed $100m in 2009, recording substantial month to month growth. Given its user levels (which, unlike other online games businesses, are independently verified from the source network) and models, we believe this revenue projection to be entirely credible. Zynga and peers such as Playfish and SGN have helped the social network games market explode, we forecast to over $270m.
Gaming on social networks relies on 2 key factors: virality and responsiveness. Viral propagation is built into social network games, with features which use the social network’s infrastructure to assist users to connect to, and communicate with, friends. Driven by recommendations which mean little from a stranger but much more from a valued friend or colleague, social network games rely on real friends connecting and socialising, making them powerful vehicles for viral distribution.
Responsiveness is a much repeated topic in our columns and Zynga is at the cutting edge of profiling, understanding and responding to its audience. Like all good online games companies, Zynga runs its games as services rather than products. Pincus says one of the key lessons learnt from earlier ventures is that data mining is critical to the company’s success. Deep and granular user profiling allows Zynga to “fail fast”, and amend or ditch services and applications that are not instantly popular with its user base. 40% of Zynga’s games have been dropped for failing to meet its aggressive success metrics.
Before this becomes too much of a hagiography, there are three downsides to Zynga’s success, all of them related to the increasingly crowded marketplace of Facebook, where around 85% of Zynga’s audience congregates. First, Zynga does not rely on virality alone, and has admitted to spending millions of dollars per month on advertising. As much about maintaining market share as reaching new audiences, this is an ongoing and rising cost even for such a cash-rich company like Zynga. The second cloud on the horizon is that the league table of top-ranked Facebook applications is very turbulent indeed, driven by a community whose interests can change suddenly and unpredictably, like the weather. Zynga is sensible to watch its stats like a hawk. Finally, although Facebook’s new in-house currency is a real opportunity, at some point Facebook could reconsider its stance on taking little or no revenue share from partners on its giant platform. Facebook’s terms and conditions are constantly changing, and whether Facebook decides to follow Microsoft or Apple by taking a material percentage of revenues will have a huge impact on its app developers’ bottom lines.
Few if any games companies have gone from a standing start to 10 digit revenues in under 2½ years, which makes Zynga a candidate for the fastest growing games company ever. Zynga is a company to watch.