zynga-logo2011small.jpgFollowing a strategy that has brought success to companies such as LinkedIn, Zynga (news, site) -- the maker of online social games such as FarmVille and CityVille -- is preparing for a limited initial public offering by the end of this month. But can a company really make a living selling imaginary cows?

'Low Float'

Citing an unnamed source, Bloomberg ran a report saying the company was planning to go public by the end of the month, but was planning to sell only a limited number of shares, perhaps less than 10%, to both help maintain control of the company and to promote demand by giving the impression of scarcity. This technique is known as "low float."

LinkedIn, which went public last month, followed a similar strategy, releasing just over 8% of its shares, and LinkedIn CEO Reid Hoffman sits on Zynga's board, Bloomberg notes, adding that a more typical figure among technology IPOs is 24%. The company is currently valued at US$ 7 billion, based on its most recent raising of capital, according to the investment site Seeking Alpha.

How Does Zynga Make Money?

Zynga Game Network Inc. (reportedly named after CEO Mark Pincus' dog) is said by Google Finance to be the world's largest social game developer, with titles such as Mafia Wars, FarmVille, Café World and Zynga Poker. More than 250 million users per month -- 1 out of 10 people worldwide -- play these free online games through social networking sites Facebook, MySpace and Yahoo!, as well as on Apple iPhones. The company makes money from selling virtual goods and game credits via credit card and PayPal to users within the games; it also sells prepaid cards worth virtual currency at 7-Eleven, Best Buy, Target and other stores.

While this doesn't sound like it would amount to much, Bloomberg cited ThinkEquity LLC, a San Francisco-based research firm as saying that the worldwide virtual-goods market is expected to more than double to US$ 20.3 billion in 2014, from US$ 9.28 billion last year.

Numerous studies have also shown that the majority of social gamers are female and have attractive demographics in terms of age, income and so on, though a recent study by MocoSpace found that men were much more likely than women to actually spend money on virtual goods, by a ratio of 9-1. 

Zynga's challenge is to keep people playing. A recent article in the Los Angeles Times described how people tended to work their way through the games in about two months, meaning the company constantly has to add to its 55 titles to keep people engaged, and noting that even FarmVille is down to 45 million players after a peak of 84 million. 

With about 49 million daily active users, between 3% and 5% of those players end up spending money on the game or signing up for a promotion. If each of those people spent a penny a day, its 49 million daily players would generate roughly US$ 180 million a year.

If through clever game design and marketing Zynga pushes that player to spend just a little more, say two cents a day, its revenue would double."

 That's a lot of imaginary cows.