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 diversified as media, shopping and job hunting. Zynga is the most prominent exemplar of social gaming. Bing Gordon, who used to head marketing for Electronic Arts and is now a Zynga investor, says Zynga combines four disruptions in one: social media, analytics, alternative payments and apps ecosystems. And Zynga may only represent the tip of the social gaming iceberg.
Why Zynga Dominates Social Gaming
Zynga says 45 million users play its social 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, and spun off even more successful sequels like CityVille.
Its games run primarily as apps on Facebook, where it dominates the apps charts. Zynga coexists successfully — if a little uneasily — with Facebook. When Facebook changed how games could access its news feed, Zynga had to find other customer acquisition tricks. Now it combines lots of Facebook advertising with aggressive cross-promotion. When Facebook required apps companies to adopt Facebook Credits as their currency system, Zynga integrated the one it had built for itself.
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.
Competitors abound, but so far Zynga has fended them off. Disney has struggled to master social gaming even after acquiring Club Penguin, and traditional videogame leader Activision doesn’t want to get in the business. Electronic Arts does, via its Playfish acquisition, but only 20 percent of its revenues are online or digital.
What’s Next for Zynga?
Here’s what Zynga’s 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 an analytics play may require Zynga 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 that needed variety of activities. Likewise, its virtual economy could embrace other kinds of goods, both digital (music, books, videos) and otherwise (offers, affiliate e-commerce, coupons).
How Others Can Respond
Social gaming has moved beyond critical mass into mass-media territory. There’s room for innovation from Zynga competitors like the gaming companies named previously, as well as companies like Google, MySpace, and others:
- Without a hub, Zynga has to rely on advertising and cross-promotion. Consumers recognize the brands of entertainment titles and artists, not studios — aside from Disney. That means others can build hubs, and/or use Zynga’s own distribution tactics.
- Unlike previous online casual games, social gaming attracts both genders. Besides poker, there should be social gaming genres that appeal to hardcore-gamer guys but aren’t World of Warcraft. How about fantasy sports on social networks?
- Likewise, someone should aggregate other time-wasters, and perhaps specialize them for women. GetGlue’s check-ins for watching TV shows, movies, and music could play here. And LivingSocial is missing an opportunity to integrate daily deals with its Facebook apps like Visual Bookshelf.
- SCVNGR and, to a degree, FourSquare, mix location-based services with games around collecting things and leaderboards. They should add more rewards and loyalty programs, and explore other gaming experiences, like gambling and multiplayer competition.