December 14, 2011 7:05 pm

Zynga eyes growth paths as IPO pricing looms

As Zynga was running its IPO roadshow last week, there was a timely boost on the tarmac at Los Angeles airport for the leading social gaming company.

The actor Alec Baldwin was ejected from an American Airlines flight after he hurled abuse at the cabin crew for telling him to stop playing Zynga’s Words With Friends game and turn his phone off.

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His addiction extended to him locking himself in the lavatory to play the Scrabble-like game before being ordered off the plane.

This was great publicity for the San Francisco company, which issued an official statement in the form of an image of its gameboard with the phrase “Let Alec Play” laid out in tiles.

The incident helped it to illustrate that not only did it make compelling games, but the company had more to offer than FarmVille on Facebook – the game and platform with which it is associated.

With Zynga’s shares due to be priced on Thursday – its offering is expected to raise over $1bn, making it the biggest tech IPO since Google’s in 2004 – investors have been looking hard at how Zynga can grow within and beyond Facebook and in the face of increasing competition.

Words With Friends is available on Android and Apple platforms, with the company offering both free and premium versions of the game. Analysts at Wedbush Securities estimate Zynga could be earning $6m a month in app sales on just the iPhone, with 3.2m of the 16.7m Zynga apps downloaded in October paid for by users.

Mobile would still be only about 7 per cent of total revenues, but Zynga is expanding here – it bought Newtoy, developer of Words with Friends, a year ago as part of a strategy of global acquisitions of game companies. Another acquisition, Bonfire Studios, is responsible for Zynga’s latest Facebook hit, CastleVille, which brings a new sophistication to the Ville series of games.

This fresh injection of creativity helps Zynga answer critics who see it as being driven too much by its intensive analysis of player behaviour, resulting in formulaic follow-ups.

“They are in an excellent position in gaming on an important platform, but they’re at the point where there has to be a realisation that, with what has worked for them so far, they’ve sort of hit the wall on that,” says Doug Creutz, video game analyst with Cowen and Company. He says a modest increase in daily active users in November, with the launch of CastleVille, has to rank as a disappointment and there has been “essentially no growth in [daily active users] for two years despite an accelerating frequency of new title launches”.

Zynga’s problem has been a cannibalisation of its earlier games, as users quickly move on to the newest title in the Ville series.

As CastleVille went from zero to 22m players in November, CityVille and Empires and Allies lost 9 per cent of their players while Zynga’s Mafia Wars 2 and Adventure World were down 20 per cent and 30 per cent respectively. Michael Pachter, video game analyst with Wedbush Securities, sees more positive signs, noting Zynga’s total monthly gamers have grown around 9 per cent to 220m since mid-October, when Facebook adjusted the way it counted users.

He cites three ways Zynga can grow – through the continued growth of the Facebook platform, now at over 800m users, by persuading users to play more of its games and by engaging them to spend more money on virtual goods, the source of $575m out of $600m in 2010 revenues for Zynga.

The roadshow has revealed why 7.7m players – less than 5 per cent of users – chose to buy such goods from Zynga over the past year.

They buy “energy” to extend game time, gifts for family and friends, decorations and buildings such as haunted mansions and boosters to accelerate their progress or help them overcome obstacles.

Zynga’s presentation has a bold vision – one slide shows a CityVille skyline where Google Search, Amazon Shop and Facebook Share skyscrapers stand shoulder to shoulder with a huge Zynga Play merry-go-round.

Traditional publishers such as Electronic Arts with The Sims Social and Ubisoft with The Smurfs & Co, as well as rising social gaming start-ups such as Europe’s Wooga, would challenge this picture of Zynga dominance.

But Michael Pachter says its size and current leadership are a big advantage in cross-promoting games and moving large numbers of gamers to new ones.

“There’s room for others to take share, but I do think Zynga is like Google in search,” he says. “It might lose share slightly, but I think Zynga knows what it’s doing and will keep the momentum going.”

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