Can Zynga break free from Facebook?

Wed Dec 14, 2011 6:58pm EST
 
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By Liana B. Baker

NEW YORK (Reuters) - "We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future," Zynga wrote in its IPO prospectus.

Technically, the admission is called a risk factor. But since Zynga, the wildly popular maker of mobile and social games such as "Mafia Wars" and "FarmVille," generates about 95 percent of its revenue through Facebook, the worry for investors is that its relationship with Mark Zuckerberg's social network is less a risk factor than a business model.

And how Zynga ultimately performs as a public company -- it is aiming to raise $925 million at a $9 billion valuation when it begins trading on the Nasdaq on Friday -- will depend in large part on its ability to break free from Facebook. Or at least its ability to convince investors that it can do so.

So far, however, the skeptics remain unconvinced. At Zynga's IPO roadshow luncheon in San Francisco on Monday, investors spent most of the question and answer time with Zynga executives asking about Facebook.

"Any time you have such a large reliance on a single company, you have to be concerned," said Dan Niles, chief investment officer of AlphaOne Capital Partners, who didn't attend the luncheon but watched one of Zynga's presentations over the Internet.

From an investment perspective, ignoring the fact that all but 5 percent of Zynga's $828 million in revenue in the first nine months of this year came from Facebook could be detrimental.

Zynga conceded that point in its IPO prospectus, noting that, "any deterioration in our relationship with Facebook would harm our business and adversely affect the value of our Class A common stock."

Facebook takes a 30 percent cut of the revenue Zynga derives from the social network, which features more than 222 million monthly active Zynga users, according to the data tracking website AppData. Zynga itself makes most of its money from less than 3 percent of its players, who buy virtual items like trucks and poker chips.   Continued...