July 25th, 2010
Courtesy of The New York Times, an interesting article on Zynga. As the article notes:
Zynga’s FrontierVille game, which was released only on June 9, already has 20 million players. The company makes money, by and large, only when users pay real money for virtual goods.
ORIENTATION for new employees of Zynga, the fast-growing maker of Facebook games like FarmVilleMafia Wars, can be a heady affair given the company’s outsize ambitions — all of which are embodied in Mark Pincus, Zynga’s 44-year-old founder. and
In a pep talk this month, Mr. Pincus told his company’s newcomers that he had set out to build an enduring Internet icon, one that was synonymous with fun.
“I thought, it’s 2007, and this can’t be all that the Internet is meant to be,” he said. There has to be more than “a garage sale, a bookstore, a search engine and a portal,” he added in a good-natured putdown of the Web giants eBay, Amazon, Google and Yahoo.
And lest there be any doubt which of those giants Zynga aims to match, Mr. Pincus said the opportunity to build an online entertainment empire was “like search before Google came along.”
So far, he seems on track. The Zynga Game Network, as the company is officially called, is the hottest start-up to emerge from Silicon Valley since Twitter and, before that, Facebook. Unlike Twitter, which has meager revenue, Zynga is on a path to pocket as much as $500 million in revenue this year, according to the Inside Network, which tracks Facebook apps.
While Facebook needed four and a half years to reach 100 million users, Zynga crossed that mark after just two and a half years.
Zynga’s empire is made up of cartoonish online games that even Mr. Pincus acknowledges are goofy. And most striking, given its financial success, is the fact that the games are free to everyone. Zynga makes money, by and large, only when a small fraction of its users pay real money for make-believe “virtual” goods that let them move up in the games or to give their friends gifts.
For instance, in FarmVille, its most popular game, players tend to virtual farms, planting and harvesting crops, and turning little plots of land into ever more sophisticated or idyllic cyberfarms. Good farmers — those who don’t let crops wither — earn virtual currency they can use for things like more seed or farm animals and equipment.
But players can also buy those goods with credit cards, PayPal accounts or Facebook’s new payment system, called Credits. A pink tractor, a FarmVille favorite, costs about $3.50, and fuel to power it is 60 cents. A Breton horse can be had for $4.40, and four chickens for $5.60. The sums are small, but add up quickly when multiplied by millions of users: Zynga says it has been profitable since shortly after its founding.
The company has ballooned to nearly 1,000 employees, up from 375 a year ago, and now has some 400 job openings. And investors, including Google and the Netscape founder Marc Andreessen, have put about $520 million into the company. Though some of the money was used to buy out early investors and employees, it’s still a huge sum in Silicon Valley.
Zynga has been valued at more than $4.5 billion, putting Mr. Pincus, who has retained voting control over the company, on a path to become Silicon Valley’s next billionaire. And, not surprisingly, Zynga has caught the attention of people beyond Silicon Valley.
At a recent gathering of media and technology moguls, Jeffrey Katzenberg, the C.E.O. of DreamWorks Animation, was asked what he would do if he were to start his career over. “I said I would like to be Mark Pincus,” he recalled in an interview. “He has nailed the next killer app, the next compelling thing that’s going to happen” in media.
THERE have been some bumps on Zynga’s road to success. The games are programmed to send updates to players’ Facebook friends when certain actions are completed, like planting or harvesting crops. Six million Facebook users, who grew tired of constant updates about their friends’ games, joined a group called “I don’t care about your farm, or your fish, or your park, or your mafia!!!”
Facebook started restricting the messages, and Zynga’s traffic dropped sharply. For instance, FarmVille had a 26 percent drop, to 61 million monthly users, in July from a peak of about 83 million in March, according to AppData.com.
Mr. Pincus says he expects growth to resume with new games like FrontierVille, which a month after its release on June 9 had 20 million players. And Zynga investors say the drop in traffic had little effect on revenue because many players who dropped out didn’t buy virtual goods.
Even so, some analysts and investors question Zynga’s ability to keep producing hit games in an ever more crowded field. “There are only so many potential customers and only so many categories,” says Rick Heitzmann, a managing director of FirstMark Capital, a venture capital firm that has invested in online game companies, though not in Zynga. “And they are burning through categories quickly,” he adds, noting that Zynga already had games for pets, farms, restaurants and other subjects.
For now, however, it is hard to argue with Zynga’s record.
Its games have 211 million players every month, according to AppData.com. Though that figure counts a user for each type of game he plays, it makes Zynga about four times larger than its nearest rival, Electronic Arts. Playdom is third, with 41 million users.
“I have a very high-stress life,” says Alena Meeker, 32, a financial analyst at a major brokerage firm in San Francisco. “I love relaxing with the games.” Ms. Meeker, who plays several of Zynga’s games, says she devotes about an hour a day to them and spends $20 to $40 on virtual goods every week. She says she uses the games to connect with friends, co-workers and family.
Nathan R. Van Sleet, who lives in Oakland and is unemployed, says he plays YoVille, a game in which users create avatars and interact with others in custom-decorated homes, for up to 16 hours a day. Because he is hearing-impaired and doesn’t know sign language, online forums of YoVille players have allowed him to connect with various people.
“If it were not for the forums, I would have missed the opportunity to meet these people,” Mr. Van Sleet said in an e-mail.
Mr. Pincus points to these kinds of testimonials when he says that the games, while simple, have a higher purpose: connecting people. The company also donates some proceeds from virtual goods to earthquake relief in Haiti and other causes.
While some traditional developers grumble about the social-game phenomenon, which they see as a step backward in sophistication, the popularity of Zynga and some of its rivals has made the multibillion-dollar video game industry take notice. In November, Electronic Arts bought the Zynga rival Playfish for as much as $400 million. But some analysts say that most other traditional gaming companies are falling behind the trend that is taking the industry by storm.
“The only one that can catch up is Electronic Arts,” says Michael Pachter, a research analyst at Wedbush Securities.
BY the standards of Silicon Valley, where people like Mr. Andreessen, Mark Zuckerberg, Larry Page and Sergey Brin built Internet empires while still in their 20s, Mr. Pincus is something of an aging whiz kid.
Clad in jeans and a T-shirt, Mr. Pincus could easily blend in with Zynga’s new recruits, a group of hoodie-wearing, 20-something engineers and product managers.
A serial entrepreneur, he sold his first company, Freeloader, an early Internet broadcast service, for $38 million, and took public his second, a business software maker called Support.com. He owns several homes and an airplane. Yet five years ago, around the time his third company, a social network called Tribe.net, was headed for failure, he groused in an interview that he had not yet made Silicon Valley’s “A-list.”
With Zynga, Mr. Pincus believes he will finally get his due. He talks of building a “digital skyscraper,” a company whose services are so indispensable that someday we will look back and wonder how we managed to do without it.
As he has carved his path in Silicon Valley, he has earned a reputation as a visionary leader. Yet he is also known for his sharp elbows and irreverent style, an image he does little to dispel. He often brags about being fired from a consulting firm job for having little patience with his bosses. “I didn’t believe in paying dues,” he said in a public talk.
He’s open about his distrust of many venture capitalists, and doesn’t want to be at their mercy. “We were profitable before we raised any money,” he says. “I think that gives you a better chance to sit at the table with your investors as a peer, not an employee.”
He says he once barred the partners at one firm that had invested in Support.com from attending meetings “because they were not adding any value.” With a touch of pride, he adds that a Silicon Valley firm turned down an investment in Zynga, telling him he was “not coachable.”
Now that Zynga has shone a spotlight on Mr. Pincus as never before, his bravado has come back to haunt him. While speaking to entrepreneurs in Berkeley last year, he said: “ I knew that I wanted to control my destiny. So I funded the company myself, but I did every horrible thing in the book to just get revenues right away.”
Bloggers seized on those comments as an example of questionable ethics at Zynga after critics said the company was allowing deceptive advertisers into its games. Without being clear, some ads, for instance, signed up players for subscriptions to costly text-messaging services. TechCrunch, the technology blog, called the practice “ScamVille,” and some users filed a class-action lawsuit against Zynga. The company has since filed a motion to dismiss the suit, and a hearing is expected in September.
Zynga has since pulled the ads, and Mr. Pincus now says he was misunderstood. He says he was trying to convey to would-be entrepreneurs that they needed to earn revenue quickly to gain independence from investors. “I never meant to imply you should do anything unethical,” he says.
And he says he recognized that with Zynga’s success, he needed to temper his attitude. “As the company has had more exposure and visibility, I have had to realize that more people take what I say seriously,” he says. “I’ve had to grow up.”
AS Zynga has emerged as the most successful maker of Facebook applications, its relationship with the giant social network has become more complicated. First, there was the brouhaha over the notification system and the drop in traffic. Then Facebook said it would push all applications to use a virtual currency, Credits, on the site, and take 30 percent of proceeds. Tensions mounted, but the two companies eventually settled their differences. In May, they announced a five-year partnership expanding the use of Credits in Zynga games.
Ethan Beard, who heads Facebook’s platform team, acknowledged the strains. But he said that the relationship between the two companies now was “very, very strong.”
Still, some analysts predict more friction ahead, as the balance of power between the two companies shifts.
“Most people think Facebook would have been a phenomenon without games,” says Mr. Pachter, the Wedbush Securities analyst. “I am not sure that’s right. Twenty to 30 percent of visits to Facebook are to play games.”
Zynga, which is said to be contemplating a public offering, clearly does not want to have all its eggs in the Facebook basket. It recently signed a sweeping agreement to bring its games to millions of users on Yahoo. And Mr. Pincus shared the stage with Steven P. Jobs, the Apple C.E.O., at the unveiling of the iPhone 4 to announce that FarmVille was available on the handset.
In addition, Zynga’s $520 million in financing includes a recent infusion of $300 million through two, roughly equal investments from Softbank and Google, according to people briefed on the investments who spoke on condition of anonymity because they were not authorized to discuss Zynga’s finances publicly. Google and Zynga are also in the early stages of exploring a collaboration, these people said. Zynga and Google declined to comment or confirm a Google investment.
When Mr. Pincus first envisioned Zynga, most investors and peers doubted that a gaming start-up could become the next big thing. But the success of games like FarmVille has silenced the critics.
“Zynga has the most revenue, growth and happy customers of any three-year-old venture we’ve ever backed,” says John Doerr, a partner at Kleiner Perkins Caufield & Byers, the venture capital firm that has backed Amazon, Google and Netscape.
Asked how big Zynga can become, Mr. Pincus has a difficult time hiding his ambition.
“I am drinking the Kool-Aid more than anyone,” he says.
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