30 November 2010

Short Take – Random Thoughts

• Zynga Patent Application
• Venture Beat – Why Zynga wants a payment patent
• TechCrunch – Zynga Business Model

To be perfectly clear, I am no Zynga expert.. I have no Zynga account… and have never played Farmville, but with Kleiner’s John Doerr saying “Zynga is the most-profitable, fastest-growing, and has the happiest customers of any company that Kleiner Perkins has invested in ” I thought I would spend a little time assessing how a company that is just three years old can have an estimated market value above $5 billion with more than 320 million registered users and estimated revenues above $500 million.

Zynga of course is the leader in social gaming, started in Facebook and now available on mobile. They have proved that the old axiom “payments is the lifeblood of commerce” also extends to social gaming and “virtual commerce” (essence of Farmville). Their virtual success is also embedding itself into retail and traditional payments. For example, this Christmas I have just bought FarmCash using my American Express rewards (just announced today).

From my perspective, Zynga’s secret sauce has been its ability to get 1-2% of their customer base to pay for game credits (see Gawker article). Although they have recently agreed to a 5 year deal with Facebook, this patent (if granted) will provide them leverage in future negotiations and extending their services outside of the Facebook platform. The patent application itself is focused on value transfer and ensuring that digital currency never makes its way out of the system. From patent app:

…the virtual currency cannot be redeemed for legal currency. Consequently, the purchase is a one-way transaction that provides a benefit to the purchaser only in the context of the virtual environment….

Zynga Terms of Service also support these restrictions http://www.zynga.com/about/terms-of-service.php

d) Transfers of Virtual Currencies and Virtual Goods are strictly prohibited except where explicitly authorized within the Service. Outside of the game, you may not buy or sell any Virtual Currency or Virtual Goods for “real world” money or otherwise exchange items for value. Any attempt to do so is in violation of these Terms and may result in a lifetime ban from Zynga Service and possible legal action.

Regarding expansion plans, it would seem Google’s $100M-$200M investment in Zynga will drive a new GoogleGames platform. Which makes me wonder how many social gamers there really are?

PayPal Micropayment http://venturebeat.com/2010/10/26/paypal-microtransaction-support