Most developers on Facebook have many ups and downs, with an emphasis on the downs over the last 12 months or so as Facebook has cut back on viral channels. Zynga stands out not just for dwarfing the rest of the market, but because it has managed to keep traffic so high for so long.
A look back at the past few years of data provides a quick explanation of Zynga’s story, that will get the attention of investors trying to decide how to value it when it reportedly files to go public later this year.
The Data Timeline
At the end of 2008, Zynga was in a pretty good position. It had figured out how to monetize through virtual goods in its first hit, Texas Hold’Em Poker. It was in the process of launching Mafia Wars and a long line of other text-based role-playing games on Facebook, MySpace and other social networks. It was on its way to dominating that category through copying the competition, then using a careful combination of aggressive viral tactics, gradual but consistently improving game quality, back-end scaling expertise to handle the incoming traffic at the right times, and everything else that would eventually become the so-called “Zynga Playbook.”
It had 23.9 million monthly active users.
(Note that you can access the full data history for Zynga and its games, in our AppData Pro tracking service.)
Almost all of its growth since then came in 2009. It moved into the simulation category with the launch of FarmVille in June of that year, with the tailwind of Facebook’s spammily-designed Twitter style of news feed pushing the game far and wide across the social network. It also had capitalized on Facebook’s increasingly sophisticated advertising tool to cheaply and effectively reach users before most other developers (or other advertisers) were. Well-timed investments into all parts of the company, including fast hiring of experienced leaders in gaming, and in business and technical fields in other parts of Silicon Valley — a story that the company hasn’t talked about much yet.
Zynga had already managed to double MAU traffic when FarmVille launched in late June of that year, to around 44 million. From there to the end of 2009, it grew to by more than five times that size, to 239 million. On top of FarmVille, it rushed out other increasingly polished simulations including Café World, PetVille and FishVille. All three games took on and matched or beat established competing titles.
We began tracking daily active users around the time of FarmVille’s launch — the company in total had 6.16 million at that point. It ended the year at 63.7 million, an increase of more than ten times. Daily active user numbers over time more clearly signify revenue generation, because people who come back every day have more time and generally more desire to buy goods in a game. Zynga had been doing well before, but by this point it was well into the hundreds of millions of dollars in revenue, according to all reports and these numbers. Its “sticky factor,” the DAU over MAU and a good benchmark for the health of a game, has stayed solidly above 20% for most of the time that we’ve been following the company.
But that fall, Facebook reverted its home page to the algorithmically-driven structure it had previously had, in what proved to be the first of many reductions in viral channels over 2010. Users who don’t play social games, and don’t want to know that their gaming friends are doing on Facebook, may have breathed easier. But Zynga went into defensive mode, cutting back on the number of launches and trying to improve the games that had already grown.
Its 2010 launches, which started off with the failed Poker Blitz and going into the successful but not mind-blowing-traffic-wise simulations Treasure Isle and FrontierVille, helped make up for some traffic losses. But it continued to hang on to millions of users.
Before the launch of CityVille at the beginning of December, its MAU total had fallen to below 200 million and its DAU count was down to 43.4 million. The city-building simulation brought everything back up. Today, its monthly active user count — generally a better measure of marketing efforts, total possible reach, but not revenue — to 244 million. Its DAU is meaningfully staying in better shape, at nearly 52 million, and flat.
Looming over the rest of Zynga’s plans has been Facebook’s Credits virtual currency, which will possibly get more users paying but has also come with a 30% fee instead of the single-digit cuts Zynga has had to pay out to PayPal and other companies. After a bitter fight with Facebook over the last couple years, it said last year that it would do what Facebook required, and make Credits the single way to pay for virtual currency or goods in its Facebook games.
Zynga’s Stock: Obviously Valuable
Today, Zynga seems to be especially focused on mobile. Although virtual goods revenue hasn’t been making as much on any mobile platform compared to what Zynga has done on Facebook, it is an obvious growth opportunity. And although Zynga’s past efforts in Apple’s App Store and elsewhere have been on the experimental side to date, the company has been busy building a dedicated mobile team. It will be in charge of the mobile versions of big games (like CityVille), rather than the main social studio handling as they have in the past.
So for those investors thinking about buying Facebook, it’s not clear how big of a growth opportunity Facebook will be for Zynga in the future. But the company has shown that it can hang on to users and successfully launch new games in hard times or easy ones. And do so with a serious profit. Revenue grew last year, with the help of its ongoing attention to the guts of payments operations, to $850 million, almost half of which was profit, according to The Wall Street Journal — although AllThingsD says that “the filing will reveal much more robust numbers.” Given Zynga’s strong 2009 growth, we’re also interested to see how much cash the company has stored up.
In sum, Zynga may have maxed out its original market opportunity on Facebook (or maybe not), but now it’s big and just as aggressive. It can hold what it has and expand in any direction it wants, whether that means launching a new site for all of its games, or launching all of its games on other platforms.
Source: Inside Social Games
Monday, May 30, 2011