Inside Pulse 12

News: Zynga Valuation Placed (Wrongly) Above Electronic Arts

According to Industry Gamers, SharesPost has put social games company Zynga at a valuation of $5.51bn USD in a list of privately owned companies. This, combined with Electronic Arts’ recent devaluation of their publicly owned stock, shows a valuation of Zynga above Electronic Arts, the industry’s second largest publisher. Businessweek (link is a 404) adds this up to the fact that consumers want greater ease of use in their games.

“More consumers would rather play games within their social networks, rather than heading to a store to buy a shrink-wrapped program… That’s forced Electronic Arts to cut jobs and seek acquisitions for growth. Its shares have dropped 7.4 percent since March 1.”

It’s true that EA’s stock has taken a tumble, though I think that’s mostly blamed on speculation (though the indefinite postponement of NBA Elite didn’t help). However, the valuation of Zynga is completely out in left field. For some very good analysis on the subject, I’ll turn the floor over to GamesBeat’s Dean Takahashi:

EA’s market value has dropped this year. The company lost its title as the largest independent maker of video games to Activision Blizzard, which has titles such as World of Warcraft to fuel its growth. But EA is no slouch when it comes to online games. Digital online businesses at EA are expected to generate $750 million in revenue in the current fiscal year, or around 20 percent of overall revenue. That means EA’s online game revenue is significantly bigger than Zynga’s online game revenue (which, of course, is all of Zynga’s revenue).

Yet the market values Zynga as equal to EA in market share? Does this mean the market discounts the rest of EA’s nearly $3 billion or so in traditional video game console and PC game revenues? If so, then Zynga is truly overvalued.

Zynga was able to gain it’s market position based on blatantly copying other companies’ games, effective use of someone else’s infrastructure (Facebook), and ruthless marketing, the likes of which got them into trouble with the City of San Francisco. It’s working now, but we’ve already seen issues popping up. Their over-reliance on Facebook is biting them in the rump, as Facebook changes their network rules on a whim to cut down on spam – the same spam that Zynga’s games reward their users for bombarding their friends with – and keep more revenut for themselves. Furthermore, the casual fans who only want something to pass the time with will eventually want more. Games like FarmVille make a great gateway drug, to use a term, but eventually, these casual gamers are going to leave, or find something else. It’s entirely possible that another company comes up, and makes better games that utilize the same aspects that made Zynga as strong as they are. Personally speaking, Zynga’s rise reminds me of the housing bubble in a sense, in how meteoric everything rose. Bear in mind how that that bubble – and every other bubble we’ve seen – ended, when talk of Zynga’s IPO emerges, and especially keep it in mind when hearing that Zynga is “more valuable” than a company with $5.1bn in revenue.