Zynga Addresses Strengths And Potential Weaknesses In IPO Filing

As part of its recent filing for an IPO, Zynga lays out an extensive listing of strategic strengths and potential risks that provide an illuminating look at how the c
As part of its recent filing for an IPO, Zynga lays out a bevy of information for potential investors, including an extensive listing of strategic strengths and potential investment risks that provide an illuminating look at how the company sees its social gaming market-leading position. Among its strengths, Zynga lists a "deep base of talent" across 2,268 full-time employees and an existing global player base of 232 million monthly average users, which it notes is "more than the next 15 social game developers combined," according to independent monitoring site AppData. Zynga highlights the network effects that come with this size, saying Zynga players "are more likely to find and connect with others to play and build relationships," and notes the strength of social gaming IP that has led Facebook's most popular games since the beginning of 2009. The company also stressed a proprietary technology infrastructure that allows for millions of simultaneous players and strong player analytics. Zynga's evolving code base can also be used across games and studios in the future, decreasing development time and costs, the company said. But there are also plenty of potential problems that could impact Zynga's future performance. The first potential risk listed in the filing has to do with the company's reliance on the Facebook platform, and highlights how any deterioration in that relationship could hurt the Zynga immensely. "Facebook has broad discretion to change its terms of service and other policies with respect to us and other developers, and those changes may be unfavorable to us," the company notes, citing the recent decision to require Facebook Credits for all app developers as impacting its bottom line. Zynga notes that its revenues are largely concentrated among a small percentage of players and a small number of top-performing games, and that it "expect[s] that this dependency will continue for the foreseeable future." This means the company has to constantly attract new players to make up for those departing, and constantly update and release new games to maintain player interest. "It is difficult to consistently anticipate player demand on a large scale, particularly as we develop new games in new genres or new markets, including international markets and mobile platforms," Zynga writes. "If we do not successfully launch games that attract and retain a significant number of paying players and extend the life of our existing games, our market share, reputation and financial results will be harmed." The company also sees the growth of mobile gaming as a challenge that needs to be met with "substantial resources," even though the company's "limited experience makes it difficult to know whether we will succeed in developing such games that appeal to paying players or advertisers. Zynga also warns that versions of its games made for increasingly popular non-computer platforms --such as tablets, televisions and set-top boxes -- "may not be compelling to players" thanks to technological constraints. The virtual goods market that Zynga relies on can be a fragile economy, Zynga warns, with perceived value "dependent on the relative ease of securing an equivalent good via non-paid means within the game" as well as the general availability of free Facebook credits in the wider market. Third-party sites that sell these goods and "cheating" programs that allow players to acquire these items with little to no effort also present risks to Zynga's bottom line. Zynga's cloud computing system is highly dependent on Amazon Web Services (AWS), the company warned, a dependence highlighted in April 2011 when an AWS problem caused many popular Zynga games to go down for hours. The company does not have an insurance policy to cover losses pertaining to service interruptions or system failures, the filing states. Other risks cited in the document include everything from fluctuating foreign exchange rates and potential changes in international tax policies to the possibility of a data privacy breach or even an earthquake or other natural disaster damaging the company's California headquarters.

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