Game On as Zynga Files for $1B IPO

Social-gaming company Zynga filed for an initial public offering Friday, seeking to raise up to $1 billion. It joins the conga line of hot tech companies rushing to grab capital by going public while investors remain smitten about the sector.

Reports first emerged earlier this week that an IPO was imminent for the company, whose move is considered a litmus test for other casual gaming or social-media outfits seeking to go public, such as Facebook. After the LinkedIn and Russian search firm Yandex IPOs sent those companies out into the public realm earlier this year, all eyes went to Zynga, and the buzz about its future picked up volume in late May.

A filing with the Securities and Exchange Commission did not specify the number of shares it plans to sell, nor did it give an expected price range for those shares. The company, which makes money through advertising and by selling virtual goods such as tractors and weapons within its social games, is already in the black. In 2010, Zynga had a $90.6 million profit on sales of $597 million.The underwriters of Zynga's IPO deal are Morgan Stanley, Goldman Sachs, Bank of America, Barclays, JP Morgan and Allen & Co. The pre-IPO chatter placed Zynga at a total valuation of $15 billion to $20 billion.

Although Zynga’s founder and CEO Mark Pincus wasn’t quite as jocular in his letter to potential shareholders as Groupon CEO Andrew Mason was in his filing last month, he did say that the company’s mission was to make games accessible—anytime and anywhere. Although the company charges for virtual goods within its games, he said that the company also wants to keep the games free.

“Play is one of life’s big macros—it’s an activity people love to do and do often,” he wrote in the filing. “Zynga was founded on a deeply held passion for games that family and friends play together—connecting, collaborating, gifting, bragging, nurturing, admiring, and sometimes just doing silly stuff together. Reality is, we all wish we had more time to play together.”

Zynga says it has 60 million daily active users enjoying a combined 2 billion minutes of play per day. Based in San Francisco, it employs 2,000. He also said that while Zynga has generated positive operating cash flow since the fall of 2007, and raised hundreds of millions of dollars to invest in teams, games, and infrastructure, it will continue to make big investments and “big bets.”

The startup that managed to turn people who never picked up a shovel in their lives into FarmVille fanatics has thus far relied deeply on Facebook, using the popularity of its products on the social-networking site to launch new games that beckon players to not only play the game, but also invite their friends to join them.

Promotions within FarmVille helped send 100 million users to CityVille within two months of its debut. Zynga's ensemble of games, which also include Zynga Poker and the newly launched Empires and Allies, now average more than 270 million monthly users, according to AppData, a tracking service from research firm Inside Network. Zynga’s nearest rival has an eighth of that.

Although Facebook and Zynga have tussled over issues such as the latter’s heavy promotions of its games to social-network users and the virtual goods sold on the site (Facebook now takes a 30 percent cut of all sales), the two businesses are more mutually reliant than you might think, the Wall Street Journal pointed out this week.

Not only does Zynga share revenue from purchased game tokens, it also advertises heavily on Facebook. Together this could represent more than $500 million in 2011, says analyst Nitsan Hargil of GreenCrest Capital, perhaps 10 percent of Facebook's revenue.

With Facebook planning to issue an IPO next year that could value that company as high as $100 billion, it is probably glad to have one of its friends go first to see what happens.

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Teresa Novellino writes for Portfolio.com