NOV. 10, 2009 • Zynga has become the fastest growing company in the game industry and has pioneered a successful business model delivering casual games across social networks. The company was founded by Mark Pincus and several others in June 2007. In just over two years, Zynga has experienced very rapid growth and by November 2009 was claiming 50 million daily users and a total of 129 million users worldwide.

Zynga develops well-known game titles and applications for social networking platforms, including Facebook, Bebo, Friendster, MySpace, Meebo and hi5. Zynga has standard card and word games, but the companies recent success has been more developed social games that follow along the lines of proven hit game franchises. Many of Zynga’s games resemble a textbased RPG, with MMOG qualities, such as gathering as many friends as possible to yield better results in the games.

The games on Zynga are free to play and the company makes money from advertising and users purchasing virtual currency to buy virtual items.

A key part of Zynga’s business model relies on refilling “energy” and “stamina” for money, as well as selling “favor points” or game credits through PayPal and credit cards that allows users to purchase special items with them. It is estimated that in 2008, Zynga made as much as $50 million in revenue, a good portion of that came from selling virtual goods like poker chips in its Facebook poker application.

However, beyond selling virtual goods, Zynga is also an advertising and marketing platform and that has been the cause of some controversy. In November 2009, a story broke on Tech Crunch that Zynga made about one-third of its revenue from virtual item sales, one third from advertising and the final third from companies channeling offers to users. Zynga gets paid revenue for lead generation on these offers.

This form of advertising is known as cost per action (CPA) advertising. CPA is a form of advertising where the advertiser only pays Zynga for results such as getting a consumer to sign-up for a subscription or some other offer.

Some offers are legitimate like an offer to subscribe to Netflix. The problem is many of the offers are basically scams that encourage users to sign-up for subscriptions. Zynga has said it is taking steps to remove scams from its products, but it is clearly a major revenue source. Because of significant criticism, in November 2009, Zynga stated it would review its policy towards all CPA advertising.

In its short life span, Zynga has already received $39 million in funding. In early 2008, $10 million funding for Zynga came from VCs such as Avalon Ventures, Foundry Group, Union Square Ventures, and Clarium Capital, and also from some noteworthy individuals like Hoffman (chairman of LinkedIn) and Bob Pittman and Andy Russell (MTV, Century 21, AOL). Another $29 million came in July that same year.

Zynga Funding

1/2008 $10M in Series A funding from:
• Reid Hoffman
• Bob Pittman
• Andy Russell
• Avalon Ventures
• Clarium Capital
• Foundry Group
• Pilot Group
• Union Square Ventures

7/2008 $29M in Series B funding from:
• KPCB
• IVP
• Union Square Ventures
• Foundry Group
• Avalon Ventures

Zynga’s first big success was its poker game, mainly on Facebook. However, in 2008 and 2009, Zynga started enjoying some great success with more robust products like Mafia Wars and Farmville. In June of 2009,

Zynga hired renowned game designer Brian Reynolds as its chief designer. Reynolds designed several major PC games including Civilization III, Alpha Centauri and Rise of Nations.

During 2009 Zynga exploded, with estimates showing a monthly average of over 10 million U.S. unique visitors. However, Zynga is a true worldwide story and by September 2009, Zynga was claiming over 34 million daily users with that number growing to 50 million by November. What demonstrates Zynga’s subscriber base growth even better is the company’s announcement in September 2009 that it has more than quadrupled its number of users in the last six months from 30 million monthly active users to 129 million, with 70 million monthly unique visitors. Zynga has four top ten games on Facebook FarmVille, Mafia Wars, Zynga Poker and YoVille.

FarmVille was not even released until June 2009, but in just two months it grew to become Zynga’s biggest game. In August 2009, Zynga acquired MyMiniLife, a social network that allows users to decorate characters and homes with virtual items. In October 2009, Zynga launched Cafe World and the game quickly gained 10 million users in just its first week.

Seeking to continue the success of its most known titles, Zynga started publishing for the iPhone/iPod Touch when they released Live Poker in November 2008. This was followed by Scramble Live and Mafia Wars for iPhone in April 2009.

Whether it is poker chips, garden gnomes or a whole farm, the sale of virtual items is the most exciting part of Zynga. Founder Mark Pincus estimated in October 2009 that the company’s revenues from virtual goods will be at least $100 million in 2009. Zynga claims it is profitable and that is not hard to believe. There are also speculations that the company will go public in 2010.

Most of Zynga’s growth has been directly tied to Facebook. As might be expected from a company that was able to grow its subscriber base through Facebook, Zynga delivered 97 percent of its ads on social networking sites according to a comScore report. That report found that social networking sites account for more than 20 percent of all U.S. online display ad impressions:

Although Zynga have been very successful, its success has been somewhat controversial. Not only have there been the concerns about Zynga being a front for marketing scams, but there are also issues over game copyright and even the legality of some of Zynga’s products.

In September 2009 Zynga sued its competitor Playdom and four ex-Zynga employees now employed at Playdom for misappropriation of trade secrets, breach of contract, and unfair competition among other charges. The former Zynga employees are accused of illegally taking 70 proprietary documents, including the Zynga Playbook (about how to create social games), two weeks before joining Playdom.

On a different legal front – Zynga’s Texas HoldEm game (now Zynga Poker) may make it a target for prosecution for multiple state and federal anti-gambling laws, even though the chips that can be purchased for real money and earned in the game cannot be redeemed for real money. Nevertheless, going forward, regulators may start taking a closer look at the type of trading Zynga specializes in.

The long-term business model for social gaming is still unproven. The amount of revenue per user is extremely low and a major chunk of revenue comes from dubious advertising sources. Nevertheless, Zynga’s substantial financial backing and presence across platforms makes it a solid contender to be a long-term player. In just two years, Zynga became a dominant leader in the social games market. In 2009, Zynga has more than quadrupled its users and launched several major new products. With designers like Brian Reynolds the company is clearly putting a major focus on, and a major investment into, quality and that could give it a long-term advantage.

Zynga Info

For more info on this subject see the DFC Intelligence report The Market for Browser and Social Network Games