by Aparna Giridhar who, when not putting terminating CPs in the second year PGP course at IIM Kozhikode and marketing products for FMCG giants, loves dogs to death
47% profit margin in 2010, a profit of $400 million on $850 million revenue in 2010 (as per a report in WSJ) – that makes Zynga the most profitable company ever; or at least the closest to it. Now you would think that those are some brilliant numbers up there, these guys must have a great legacy and a superb, time classic business model; however that’s not really the case.
Zynga was founded in 2007 and by 2010 September they had about 1200 employees. What do they do? You must have heard of and in all probability played Farmville, Cityville, Mafia wars, Empires and Allies, right? Well, Zynga develops browser-based games that work on social networking websites such as Facebook and MySpace.
Fine, fair enough. But how do they make SO much money and be such a profitable business in no time? Tricky and yet smart moves from their part. The main reason for this kind of profitability is sale of virtual goods. They don’t cost anything to make (barring the game development cost but nothing in terms of the “good”), they don’t incur distribution costs to be shipped to shelves, and they don’t need any kind of sales force to be sold. The games are all free however they are ‘monetized’ by the sale of purple cows, energy boosts, clothing or premium buildings – the virtual goods.
What Zynga started out with and does well till date is to notch up the arcade environment that once existed and get the gamers to get them the revenue. Back then, arcade games made money by addicting people to simple games (like Pacman), introducing “friction” i.e. bring in induced difficulty into these games by making them tougher to beat at every subsequent level, and then charging small amounts of money to ease the difficulty by allowing gamers to buy “lives” or “nitros” or even “boosters”. That is precisely what Zynga’s social games do – charge us small amounts of money to reduce the difficulty in levels of the games we are addicted to. Only, instead of paying for another life, social gamers buy sub-machine guns in Mafia Wars, and new farmland in Farmville.
Interestingly and inevitably, there is a lot of speculation around the viability and sustainability prospects of this company. They thrive on novelty of games and the ability to better their creations with every new release. Zynga’s business model is dependent on Facebook continuing to operate in the same manner and users continuing to expect the same quality of games, among others. The world of gamers is in no way shrinking, with Farmville and Mafia breaking into almost all corporate offices the number of new social network gaming entrants is on an exponential increase. Gamers are smart, they know what they want and Zynga can receive some serious flak if they don’t meet the already set, perhaps hyped up, expectations.
With Zynga’s IPO likely to hit the markets anytime now, there is much work that this on the cards. Meeting quality standards with every new innovation and the ability to maintain the addiction to the gaming paradigm on social network will be the clincher. The key is to look out for their performance curve and the way their lifecycle evolves. Still in the first five years of existence, Zynga has much to prove especially after drawing everyone’s attention.