Zynga won’t be the first start-up to raise $1 billion in an IPO, but I’m pretty sure it stands to become the first video game company named after a deceased bulldog that was sort of named after a 17th century African queen to raise that amount.
In a prospectus filed with the SEC last week, the online game developer reported a 500% jump in sales for 2010, driven by the growing popularity of its titles, resulting in the company’s first profitable year. Zynga’s move to capitalize on this momentum comes at a time when other big Web businesses are looking to cash in on renewed investor interest in technology stocks. Social media and e-commerce companies in particular have been turning up the IPO heat. In May, LinkedIn debuted in the biggest Internet IPO since Google made waves in 2004. Online bargain hunter favorite Groupon filed the following month, and Facebook is rumored to be plotting an IPO for next year amid keen investor interest. The Wall Street Journal reported several weeks ago that the social media juggernaut’s public offering could potentially be valued at $100 billion.
Zynga’s sometimes rocky relationship with Facebook has been the key to its success. Most of the company’s sales since its founding in 2007 have been made through Facebook. (A minority of Zynga game players get their fix via Yahoo! and Myspace, or on an iPhone or Android mobile device.) Last year Zynga entered into a five year partnership with Facebook aimed at further integrating the payment systems of the two companies to solidify their bond. GreenCrest Capital Management estimates that Zynga will bring in $500 million in revenue for Facebook in 2011, including $100 million in ad sales. That figure could represent about 10% of Facebook’s total sales for the year.
It should be noted that Zynga doesn’t make money selling games in the traditional sense. Titles like CityVille, FarmVille, Zynga Poker and Empires & Allies (the four most popular games on Facebook) are free to play. The company generates revenue by selling virtual goods such as poker chips, colorful livestock and townhouses within the games to enhance play. This is a bit of head-scratcher for the uninitiated, but modern gamers clearly see the entertainment value of this model. How investors will respond over the long term remains to be seen.