Zynga’s Facebook games — particularly Mafia Wars, CityVille and the still ubiquitous FarmVille — are the model for success in the social video game market. Now that the company is about to go public, investors are familiarizing themselves with the company. Come Dec. 16, Zynga will begin trading at somewhere between $8.50 and $10 as the company aims to raise $850 million and $1.15 billion, placing its value somewhere between $7.6 and $8.9 billion.
Will those $10 shares balloon up to become a diamond in the rough of your portfolio? Maybe. After two years online, FarmVille alone pulls in 30 million players per month. The company’s S-1 filing for its IPO showed that revenue is growing. Zynga pulled in $306.8 million in the third quarter, up 80% over the same period in 2010.
It’s not all sunny, though. Net income was down 50% year-over-year, falling to $12.5 million. User growth also was stagnant, with monthly active users falling from 228 million in the previous quarter to 227 million. Zynga’s daily active user numbers were most distressing, though. In the first quarter of 2011, 62 million people played Zynga games each day. In the third quarter, just 54 million were playing every day. Pair these numbers with word of Zynga’s troubling corporate culture, and there’s good reason to be cautious about the IPO.
Another good reason to be leery of Zynga: Competition in the social game space is getting fiercer by the day. While big companies were caught flat-footed when Zynga’s games blew up two years ago, they’ve invested heavily in the months since to make sure they can keep pace. Investors looking to get in on the social games business would be wise to follow these three companies.
The house of Mickey should by rights have a social game business worth the same billions as Zynga. Disney‘s (NYSE:DIS) stable of brands, from The Lion King to Spider-Man, is unparalleled in its popularity. Yet Disney only has a measly 3.3 million monthly users on Facebook. Disney Interactive, the segment in control of all Disney’s game operations, made just $251 million in revenue during the second quarter — a wee piece of Disney’s $61 billion quarterly pie.
Part of the reason Disney Interactive has been struggling this year, though, is all the spending it has been doing to improve its social games business. In October, it fully integrated Facebook game studio Playdom and iPhone game maker Tapulous into its business. Playdom’s recently released Gardens of Time enjoyed 3 million daily users on Facebook in October all by itself. With 12 new games expected from Playdom in 2012, Disney should be a powerful presence in Zynga’s market.
Electronic Arts (NASDAQ:ERTS) has known all along how important social games are to its future and has invested accordingly. It has aggressively transformed its most profitable brands, like the Madden NFL football and FIFA soccer games, for the Facebook audience in the past two years. It also has been spending on other businesses to pad its own. ERTS spent $750 million on PopCap Games in July and promised the company an addition $500 million provided its titles reach specific performance goals over the fiscal year.
Before that, PopCap was going to be the hot social game company making its IPO alongside Zynga in 2011. PopCap’s games earned the company just $100 million in revenue in 2010, just a third of Zynga’s take, but now its new role as a limb of EA’s larger social and mobile game machine might make it a more reliable and profitable company. On Dec. 1, EA added yet another company, KlickNation, to its stable of social game makers. If Zynga should be afraid of anyone in the space, it’s Electronic Arts.
Unlike Disney and Electronic Arts, News Corp. (NASDAQ:NWS) isn’t an established presence in the social game market. It hasn’t acquired a major social game maker like Playdom or PopCap, nor has it spent millions opening its own studios. Instead, News Corp. has been quietly been infiltrating the market with small acquisitions of start-ups through its subsidiaries during the past 18 months. Facebook game maker Bossa Studios was acquired by the Shine Group, a News Corp. limb. News Corp. also acquired Irata Labs through former subsidiary IGN Media in April 2010. In February 2011, it acquired Making Fun, a studio making biblically themed Facebook games similar to Zynga’s.
Right now, News Corp.’s social game business isn’t earning a notable sum for the company, but potential Zynga investors need to keep it — and more importantly, the popularity of its game makers’ products — in mind during the coming months as they weigh the state of the market.