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Summary:

Last week’s stories said that social game maker Zynga was raising $250 million at a valuation north of $7 billion. By week’s end, the company was close to raising twice that, at a $10 billion figure. But why would anyone think Zynga was worth that much?

farmville

Last week began with stories that social game maker Zynga was raising $250 million at a valuation north of $7 billion. By the end of the week, the company was close to raising twice that, at a $10 billion figure. But bubble talk aside, why would anyone think Zynga was worth that much?

“Gamification” is an early contender for this year’s buzzword, as companies apply game mechanics to businesses as diverse as media, shopping and job hunting. Zynga is the most prominent exemplar of social gaming, with a reported 45 million users playing its games on a daily basis. Building off Mafia Wars and poker, the company has delivered a consistent string of hits, with franchise titles like FarmVille spinning off even more successful sequels like CityVille.

Another factor in Zynga’s success is its multiple revenue streams. Most of its estimated $850 million in sales comes from selling virtual goods like power-ups and farm critters. But the company is growing an advertising business based on sponsorships and even has licensed accessories.

So is Zynga worth that $10 billion I mentioned above? Perhaps, but here’s what Zynga should, and is likely to, do to maintain its momentum:

  • Expand its distribution channel: Zynga will add complementary channels to Facebook. It has signed up Yahoo and may be working on establishing its own site. A Zynga gaming hub would help in launching more mobile games and might even attract third-party studios.
  • Improve its advertising platform: Others are experimenting with offers as virtual currency “cash,” and Zynga hasn’t done much with in-game product placement. I’m skeptical that its customer data is useful for ad targeting yet, so Zynga may have to deliver different styles of interactivity via quizzes, other entertainment formats, or shopping.
  • Create an affiliate network: If Zynga creates a gaming hub, it could achieve and track the variety of activities it needs. Likewise, its virtual economy could embrace other kinds of goods, both digital (music, books, videos) and otherwise (offers, affiliate e-commerce, coupons).

Competitors abound, but so far Zynga has fended them off. To read how other players in the space should respond to Zynga’s growth, check out my weekly update at GigaOM Pro (subscription required).

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  1. Not public yet, Zynga is working on Spaceville. HEard it here first.

  2. It’s not just in NASCAR that crashes are far more entertaining when they occur at top speed. Jesus, this one should be fun!

  3. I like term “estimated”. Just try to estimate how much do I make per month if you have no idea which city do I live in, where do I work, what car I own, which restaurant do I usually go to and how often do I do shopping.

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