September 7th, 2009
Via Hemispheres Magazine, an interesting look at the rise of online game company Zynga which has based its 
business on social networking and 
microntransactions. As the article notes:
“…Your new neighbor “Steph†just sent you some cherries and avocados, which will fit nicely in a tidy little plot next to your eggplants. You’ve still got your heart set on growing oranges, baut unless another friend decides to throw some extra inventory your way, they’re still well beyond your means. That is, unless you cheat by enhancing your virtual spending power with actual cash.
After all, this isn’t a real farm, but 
a wildly popular social networking game called FarmVille, which is 
played on Facebook around the world. While the game itself is free to play, real cash can go a long way. Ten bucks gets you 15,800 “coins,†enough for a toolshed, some corn, a bunch of apple trees, a chicken and those oranges. 
Want to invest? Buy a cow with the leftover change, milk it and earn even more coins.
In the wild new frontier of online social gaming, such microtransactions are increasingly big business. And Zynga, the creator of FarmVille (and more than a dozen other games designed to be played on the iPhone and social networks) is shaping up to be a Silicon Valley colossus. Since becoming the top application developer on Facebook last year—with 50 million active monthly users—Zynga has earned as much as $100 million (the company prefers not to disclose the actual figure). Between the various available platforms, 15 million people play the top four Zynga games every day.
That’s a lot of microtransactions. And as the technology pushes social gaming beyond Facebook, Zynga, which already has a hammerlock on more than half the social network gaming market, is only going to get bigger.
The brains behind Zynga is a 43-year-old Harvard-educated entrepreneur named Mark Pincus, who launched the hit social networking site tribe.net in 2003. Whippet-thin, with a shaggy haircut, bushy eyebrows and permanent five o’clock shadow, Pincus holds an ever-present herbal tea in his hands as he paces the corridors of Zynga’s headquarters in San Francisco’s Potrero Hill district. This refashioned potato-chip factory has the freewheeling aura of a dot-com company from the Digital Golden Age, complete with Segways, massages, foosball tables and free meals prepared daily by culinary academy–trained chefs.
Zynga’s games—which include Texas Hold’em Poker (the largest social gaming poker app on the planet), Pirates, YoVille and Scramble—are free to play, which explains their popularity. Mafia Wars is the most outwardly exciting of them all—players start out as Mafia stooges and advance by accruing weapons and whacking rivals. But no matter the game, after a user is hooked, he or she is then often persuaded to spend a dollar here and there on enhancements: a pistol, say, or a schooner. And those dollars add up.
“Microtransactions in a virtual economy represent the third business plan of the internet,†Pincus says, sitting in his airy office. “Web 1.0 was all about e-commerce, banner ads and low margins. Web 2.0 was considered the Google Search Economy with cost-per-click, but it was only a great business plan for Google. Now we’re in what I like to call ‘Web 3,’ where users pay for virtual goods and services, and everyone wins. High margins for all.â€
Zynga isn’t the only gaming company reaping high margins from micropayments, and while a virtual pinky ring may sound frivolous, so do many of the goods offered by Zynga’s competitors. In Pet Society, for instance, a game developed by Playfish, users can outfit their free virtual pets with accessories like a hot tub ($1.70) or a chalkboard ($2.55). Remarkably, Playfish is forecast to pull in about $30 million this year. That’s a lot of imaginary chewtoys. Meanwhile, an ecosystem of companies is involved in each microtransaction: PayPal and Paymo handle the money, for instance, and companies such as Blockbuster insert ads and coupons.
Now Facebook, sensing an opportunity, is set to introduce “credits†for purchase that can be used in any Facebook apps to buy virtual goods. That’s a game changer—and it’s not the only one. Apple’s new OS 3 for the iPhone, which arrived this summer, will be a boon for companies such as Zynga. Whereas before you could download its iPhone apps for free, the phone didn’t allow in-game microtransactions; OS 3 does. Want to purchase a new barn for your FarmVille farm? Go ahead. Nick Gibson, an analyst at Games Investor Consulting, says in 2008 the market for social networking games was about $90 million in North America and Europe; with the introduction of the OS 3 iPhone, he predicts the business will triple in 2009.
Pincus is even more bullish. “In the next eighteen months,†he says, “I want to see social gaming become a mainstream activity for the entire Western world.â€
To that end, Zynga recently released two new entries: a restaurant game called Café and the breakout hit FarmVille, a nod to Pincus’ interest in sustainable foods. FarmVille isn’t exactly a riveting game. Oftentimes it’s quite literally as exciting as watching grass grow. But no matter how silly it sounds, FarmVille already has two million daily users.
Launched this summer, Café is a throwback to the popular Diner Dash, in which players run a virtual restaurant and expand by satisfying their customers. Combining that concept with a sort of interactive Top Chef, Café pits users’ restaurants against one another and allows participants to interact—hiring friends to work in their kitchens and trading ingredients.
According to Pincus, Zynga’s next frontier is charitable giving. In June, Zynga asked YoVille users to purchase $5 virtual dogs and cats from an in-game SPCA shelter. They made $40,000 in six weeks and donated the money to a real-world SPCA. “I love the idea that what players do on a fantasy level within our games can actually affect what happens in the real world. So if our players purchase virtual farmland and seeds for crops in FarmVille, we can send those proceeds to farmers in Guatemala,†says Pincus.
Still, when it comes to tending to the needs of a flock of peckish hens, most users would probably prefer to keep the action purely virtual.”
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