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As net stocks sizzle, Zynga aims high for its IPO

With a real-world profit and an inexhaustible supply of virtual cows, Zynga last week filed for what is expected to be one of the biggest Internet stock offerings ever, a debut whose fate is tied largely to that of Facebook?s.

Evelyn M Rusli

With a real-world profit and an inexhaustible supply of virtual cows, Zynga last week filed for what is expected to be one of the biggest Internet stock offerings ever, a debut whose fate is tied largely to that of Facebook?s. Zynga, the online gaming company behind the Facebook hits FarmVille and CityVille, said that it expected to raise about $1 billion in an initial public offering, a figure used to calculate the registration fee. But Zynga?s ambitions may be higher. The company is expected to ultimately offer up to 10% of its shares at a valuation near or above $20 billion, people briefed on the matter said.

For some of the biggest web start-ups, there is a growing sense of urgency to capitalise on the booming investor interest in new Internet stocks?as evidenced by the blockbuster debut of the professional social network LinkedIn in May. Groupon, the giant daily deals site, filed last month for its offering. Its rival LivingSocial is said to be speaking with bankers about an offering. And the juggernaut of the group, Facebook, is expected to file this year at a valuation above $100 billion, according to two people close to the matter.

Some clues to Facebook?s business model may be found in Zynga?s performance. As the largest game developer on Facebook, Zynga accounts for many of its page views and more important, the sale of virtual items.

Zynga?s filing shows how a business built on virtual goods, like animated sheep and Tuscan villas, can be so lucrative. The company offers its games free but makes the bulk of its revenue from a small percentage of users who spend money on virtual goods to enhance their stature in its games. Online ads account for a sliver of revenue.

Its games attract 148 million unique visitors a month across 166 countries.

Although Zynga started with a poker game in 2007, it has become best known for creating virtual world games that attract a broad base of users. Many of its top offerings encourage players to build, manipulate and share their virtual worlds with friends. Its reliance on Facebook is no accident. Early in Zynga?s history, Mark Pincus, the company?s 45-year-old founder and chief executive, focused on Facebook and quickly learned how to leverage the platform and its sharing functions to maximise the viral nature of Zynga?s games. ?Mark saw that this was going to be a land grab,? said Lou Kerner, a Wedbush Securities analyst. ?Now they can advertise their new games to this giant base and that gives them a huge marketing advantage.?

The model has become a powerful cash machine. While many players never pay a dime, Zynga sells about 38,000 virtual items every second. The company swung to a profit last year, $90.6 million. Revenue, meanwhile, roughly quadrupled to $597.5 million. As of the end of March, Zynga had $995.6 million in cash on hand.

And while Zynga has competitors in online gaming, including stalwarts like Electronic Arts, so far no rival has been able to shake its dominance on Facebook. Of the social network?s top five games, four are Zynga?s. CityVille is most popular with 88 million active users. The number 2 game, Empires and Allies, has more than 45 million monthly active users and it was introduced just a month ago.

And yet its success on Facebook also underscores its vulnerabilities. While Zynga has prospered, its dependence on Facebook represents one of the greatest threats to the game maker. The vast majority of Zynga?s revenue courses through the Facebook pipeline. In the risk factors section of its filing, Zynga warns investors that ?if we are unable to maintain a good relationship with Facebook, our business will suffer.?

Over the last year, Zynga has signaled to the markets that it is trying to become more independent. The company has signed partnerships with other portals like Yahoo and it has poured more resources into gaming on mobile devices.

When Zynga finally does go public, top executives and its venture capital investors will see their fortunes surge. Pincus, whose stake will be worth several billion dollars and represent the largest voting block, will also keep a firm grip on the company he founded.

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First published on: 03-07-2011 at 00:18 IST
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