Zynga Inc, maker of the Mafia Wars and FarmVille games played on Facebook, may be valued at US$1 billion based on the sale price of a smaller rival.
Valuations for Zynga and its peers were established this month when Electronic Arts Inc bought Playfish Inc for three to four times its revenue, said Jesse Divnich, an analyst with researcher Electronic Entertainment Design & Research.
Zynga may generate a value of US$1 billion should the company be taken public, said Terry Schallich, head of capital markets at Pacific Crest Securities, a technology-focused investment bank.
“If the IPO [initial public offering] were timed to price around mid-2010 or later, our expectation would be for a billion dollar or greater valuation,” said Schallich, who is based in Portland, Oregon.
That could make San Francisco-based Zynga the third-largest US video-game publisher by market capitalization bigger than Take-Two Interactive Software Inc, the maker of crime-game franchise Grand Theft Auto.
New York-based Take-Two’s sales last year reached US$1.54 billion and has a market value of US$909 million.
Zynga’s revenue is expected to reach US$210 million this year and US$355 million next year, said Justin Smith, the founder of the industry-tracking Web site Inside Social Games.
ACTIVE USERS
The figures are based on estimates of Zynga’s revenue per player across all its games and its number of daily active users, Smith said.
“It is a real business and has huge momentum,” said Todd Greenwald, a games and Internet analyst at Signal Hill Capital Group LLC in Baltimore. “There would definitely be an appetite” for a Zynga IPO.
Zynga chief executive officer Mark Pincus, 43, said he has no immediate plans to take the closely held company public and that doing so would be a “distraction.”
“Our mission is to accelerate our product development and business plan,” Pincus said in an interview.
The US market for games played on social networks including Facebook Inc and News Corp’s MySpace will triple to US$2 billion by 2012, ThinkEquity LLC forecast.
The growth contrasts with a 12 percent drop through last month in the market for console games, such as those played on Nintendo Co’s Wii, industry researcher NPD Group Inc said.
Redwood City, California-based Electronic Arts, the second-biggest game publisher, paid US$275 million in cash for London-based Playfish, plus another US$125 million in performance and retention incentives.
That’s equivalent to three to four times Playfish’s revenue, Electronic Arts chief financial officer Eric Brown said on a conference call.
Zynga and its rivals offer free-to-play games and generate revenue when players pay to add new features like a US$3 chicken coop in FarmVille. The game, which lets people manage a virtual farm, has more than 65 million users. That compares with more than 52.6 million units sold worldwide for the Wii, the most among consoles.
One risk to Zynga may be that, relative to Playfish, it gets a higher percentage of revenue from companies that pay for the ability to offer online movies, credit cards and other items to game users, said Eric Goldberg, an industry consultant and managing director of Crossover Technologies, a developer of online games based in New York.
Some of those offers on Zynga games have turned out to be misleading. An example is when a player is offered to receive more game currency in exchange for filling out an IQ quiz. A user will enter a mobile number to receive the survey’s results and unwittingly sign up for a subscription that will be added to their monthly bill.
CAUTION
Some analysts caution that the companies are new — all three of the biggest social game makers have emerged since 2007 — and the games may be a fad.
“Consumers’ appetites in these worlds change rapidly,” said Divnich of Carlsbad, California-based Electronic Entertainment Design & Research. “Somebody can be playing FarmVille for a couple of weeks and then get bored and they are gone. It’s one click away.”
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