When it goes public, the Facebook game developer will be the first major U.S. company supported primarily by the sale of virtual goods to do so.

To get an idea of what such an animal might look like, I talked to a handful of accountants, lawyers and game companies to get a sense of what we might find under the hood.

What’s immediately clear is that there are no obvious answers.

The Securities and Exchange Commission and other governing bodies have not yet come up with a legally prescribed method for taking into account the sale of virtual goods.

That leaves companies to come up with their own best guesses.

“There are no rules about this stuff,” said Bob Komin, the CFO and COO at Linden Lab, which operates Second Life, the four-year-old online virtual world. “I haven’t heard anything about a standard, but it’s probably the number one thing we talk about before we get audited every year.”

Revenue recognition on the sale of virtual goods is not exactly a sexy topic (unless we’re talking about an avatar’s undergarments!). But as more companies shift to a free-to-play model, where games are monetized through microtransactions and virtual goods, the subject will become more commonplace.

Zynga may be the first out of the gate, but many others are waiting in the wings — Facebook being the most prominent. Zynga declined to comment for this story.

Here’s what is known about Zynga

Four of its titles dominate the most popular applications on Facebook: CityVille (No. 1); FarmVille (No. 2); its newest title, Empires & Allies (No. 3); and Zynga Poker (No. 4).

All of those games are free and monetized through the sale of virtual goods, such as purple cows, energy boosts, clothing or premium buildings.

In-game items like these are either purchased directly on Facebook or through gift cards purchased in the store. Zynga also makes money from advertising and mobile games, but revenues from those are presumed to be far less.

In total, Zynga reportedly generated about $400 million in profit last year on about $850 million in revenue, although subsequent sources told AllThingsD’s Kara Swisher that the filing will reveal much more robust numbers.

But it’s not the sheer magnitude of Zynga’s business that has created problems for bean-counters. It’s the details on how to account for every last penny.

In a white paper, accounting firm Ernst & Young writes that there are three typical models being used today.

Here’s how they break it down:

• Game-based model: The company recognizes revenue over the life of the game.
• User-based model: Revenue is recognized over the estimated life a user plays the game.
• Item-based: Revenue is recognized based on the implied or explicit life span of the item — in other words, how long it would last in the real world. Examples of more durable goods are virtual vehicles, furniture or weapons. Revenue from these would be recognized for as long as the player stays active in the game. Revenues from a more consumable item, like a virtual cup of coffee or a jolt of energy, would be recognized almost immediately.

And there are still other factors to take into consideration, such as whether the goods were paid for with virtual currency or real cash, and how much information a company has for establishing the averages.

Lack of rules won’t stop companies from filing to go public

It can get really confusing really fast.

Kirk Soderquist and J. Dax Hansen, attorneys at Perkins Coie in Seattle, are looking at the legal ramifications of virtual goods.

“You have a bunch of alternative financial services companies that have sprung up on the Internet around social networks and gaming because there’s a need to deal with money in an innovative way. But the laws aren’t clear on how they apply to the Internet and the gaming space,” Hansen said.

Despite the lack of clear regulations, they said, they don’t believe that’s keeping any companies from filing for a public offering.

The one major aspect for a company to consider is unclaimed property laws. If a user purchases credits or coins but doesn’t use them, a company can’t necessarily set an expiration date and count them as revenue. In many states, it is considered “unclaimed property” — like an unused gift card — and the government can collect the revenue.

“Investors and acquirers will be interested in how you deal with that,” Hansen said. “If they are dependent on breakage for their business model, then they have another think coming.”

Linden Lab recognizes revenue over three years

Linden Lab’s approach for Second Life most closely resembles user-based accounting, which recognizes revenue over the average lifespan of a player, which is three years.

That time frame was picked, Komin said, because players tend to stick around for two to four years. “So, three years is not a bad estimate,” he said.

Komin prefers the long timeline because it evens out the revenues, making the company look like it has a very predictable and recurring business model. “If you have recurring and repeatable revenues over three years, it means that even if you are growing really fast, your reported numbers would be growing less quickly, but it would be more predictable. The other far extreme would be to report everything in the current period, and you’d see the growth as it was happening — but it would be more volatile.”

In other words, if Zynga does the same thing and reports FarmVille revenues over more than the two-year period it has been popular and revenues from Poker over three-plus years, revenues will be very consistent and not reveal much in terms of how well its games are currently performing.

Likewise, sales won’t spike when they release a new title, like Empires & Allies — which has jumped from the seventh most popular game to the No. 3 spot in the past week, according to AppData.com.

The iPhone is an example of the two accounting models

A good example for this is how Apple originally accounted for its iPhone.

When the first iPhone came out, Apple used subscription-based rules to account for the revenue. That meant that sales from the iPhone were spread out over many months, rather than right after a customer bought the phone. Wall Street analysts found the practice annoying because the company’s revenues barely budged despite selling two million devices in one quarter.

Apple was forced to report it this way because it technically wasn’t selling a finished product. Over the life of the product, Apple planned to push down free updates to the device. (This is also why Apple once charged for iOS updates for the iPod touch, so it could recognize all revenue immediately.)

The laws have since changed.

“Apple is a great analogy,” Komin said. And just as Apple figured it out over time, “I think there will be some adjustment as people figure [virtual goods] out.”

To be sure, Komin has his preferences for how he wants to do it, as the company considers an IPO.

“Generally speaking, investors don’t reward you for volatility,” he said. “Recognizing revenue that matches [a user's] life cycle feels better than recording it immediately. But whichever way we go, and whichever we choose to do, we have to make sure investors understand the business.”

Whatever Zynga decides, investors (and journalists!) will thank it for being transparent.

With all the noisy swirl around Yahoo of late–from its executive turmoil to its flat growth to its dashed partnerships in Asia to its brash CEO–its board has been unusually quiet of late.

Comatose, some might say.

In fact, many do say exactly that, pointing to the trauma of their disastrous performance when they fended off a hostile takeover attempt by Microsoft (MSFT) for above $30 a share as the cause.

Since then, the stock price of Yahoo (YHOO) has been mired in the low teens.

That is, until yesterday, when even more rumors of new plots emerged in the media, with private equity firms, media companies, Web rivals, big shareholders, Wall Street and others all machinating about trying to grab all or some of the Internet giant.

Now, it will be interesting to see if its directors will shake themselves out of their typical comfort zone of inactivity to actually do their job.

Which, as former GE (GE) star exec Jack Welch–in a recent smackdown of a spate of controversial moves by the Hewlett-Packard (HPQ) board–said in a recent interview, is to “pick the CEO, help them shape strategy, make them feel good about themselves, and, if the CEO isn’t doing a good job, to ‘get them the hell out of there.’”

According to sources close to the situation, the Yahoo directors are in a quandary, even as they are on the receiving end of a flood of suggestions and demands from big investors, ranging from merging with AOL (AOL) to aligning with News Corp. (NWS) to selling off the company’s lucrative Asian assets to replacing CEO Carol Bartz.

You get the idea.

But that might not happen as quickly as some want. Sources said that while the eight-person board has some strong personalities on it, there is no one who has emerged as a powerful leader, aside from Bartz.

Yahoo has recently tried to attract two execs who might be able to go toe-to-toe with her–OpenTable (OPEN) CEO Jeff Jordan and Akamai (AKAM) President David Kenny–but was turned down by both.

Neither apparently wanted the headache of dealing with Yahoo’s struggles.

The same goes for some on Yahoo’s board.

Said one person who had spoken to a few board members recently: “Each of them tells me, ‘I’m only one person and I can’t act alone.’”

Indeed not, which is why you have a board. Stone soup, people!

In any case, it is high time to put the spotlight on the Yahoo directors, which I have done in the past in other crisis moments.

Here’s a rundown, with their photos from Yahoo’s shareholder Web site, along with some BoomTown analysis:

Carol Bartz, CEO:

We all know her, the tough-talking longtime Silicon Valley software exec who was brought in to clean up Dodge in the wake of the rocky tenure of former CEO and co-founder Jerry Yang. She is under pressure here for not doing that well enough, of course, despite a very, very big compensation package.

Still, with an aggressive personality and a wimpish board, she might be able to stave off any challenges to her power.

Roy Bostock, Chairman:

The longtime airline board member and advertising exec has been at the top of the Yahoo board since 2008 and on it since 2003.

Which is why I called for his resignation after Yang and former Yahoo President Sue Decker gracefully stepped down, after their management was called into question.

Bostock was right there with them, making all those decisions, which turned out to be disastrous in hindsight. Still, he does not seem to be much for the honorably-falling-on-your-sword thing.

In fact, sources said he has been making the rounds of investors recently trying to gauge the mood. Memo to Roy: It’s bad.

Eric Hippeau

Now the CEO of the Huffington Post, the longtime Web investor and publisher has a lot of online experience and should be one of the leaders on the Yahoo board. Hippeau has certainly been a director long enough to be one–since 1996, as an early investor in the company.

He’s also known as a super-nice guy in Internet circles, which means he is no head-smacker. Too bad.

One idea floated to me by an investor: Yahoo could buy the upstart online media darling and install him as CEO. Pretty please, because the entrance of the fab stylings of Arianna Huffington into this mess would send me into the stratosphere of reporting nirvana.

Vyomesh Joshi

Also a very endearing dude, the top HP exec was one of those on the short list for CEO of the tech giant recently. He runs its gigantically profitable printing and imaging business.

He’s been a Yahoo director since 2005 and should be a key decision maker, since he is an experienced operator. He’s not been, unfortunately.

Arthur Kern

Also a lifer, also having been on the Yahoo board since 1996, the investor and radio exec has also worked in marketing at Digitas.

Among the board members, he seems to be the quietest of the bunch, so I am not sure what to say about him except that he has very white teeth.

Gary Wilson

Another investor–in private equity, he has been on the board of airline companies (what is with this plane stuff on the Yahoo board?), as well as a top financial exec at Disney (DIS) and Marriott (MAR).

Again, a nice résumé, and he should be a leader. He was definitely more involved in the Microsoft situation than others.

Since then? Meh.

Sue James

The accountant. Retired from Ernst & Young. Used to work for Bartz, as lead partner for audit work for Autodesk (ADSK). Joined the Yahoo board early this year.

Probably just figuring out that this whole thing might not be adding up.

Patti Hart

Also new, since June. Worked in the digital video business, and is now the CEO of a “global provider of electronic game equipment and systems products.”

Say what?

Okay, I will go with it, as I am liking that Bartz has brought on two women to the board, which has mostly been stacked full with men.

Brad Smith

The president and CEO of Intuit (INTU), the financial management software powerhouse, also joined in June. This guy should be able to shake the trees, right?

But he is probably still trying to learn everyone’s name. Brad, not to put too much pressure, but everyone is counting on you.

Jerry Yang

Last, but certainly not least, the man who is ultimately the power player here.

The Internet pioneer and industry legend checked out of Yahoo for a bit after he stepped down in early 2009–time to tee off!

But many sources said he has been back at Yahoo for a while–glad-handing advertisers, meeting with entrepreneurs, sussing out trends, piping up in strategy meetings and doing the behind-the-scenes thing that he does so well.

Reports vary on how much he likes Bartz–he expresses support for her to some, but seems to have soured on her to others.

Who knows with the endearingly prickly Yang, whom I have been covering for a dog’s age and who should return my emails once in a while, like in old times when I stalked him.

Dinner is optional, but I will pay this time (see video below of our last semi-enjoyable meal).

Still, here is what I know for sure: Yahoo is Yang’s creation and legacy, and he’s the one who has to make sure that it survives and thrives.

For all the uncertainty surrounding Yahoo once again, that much is true.

]]> http://allthingsd.com/20101014/meet-the-yahoo-board-something-old-something-new-but-will-they-do-something/feed/ 4 http://allthingsd.com/20100216/burkle-off-yahoo-board-as-bartz-solidifies-control-is-bostock-next/ http://allthingsd.com/20100216/burkle-off-yahoo-board-as-bartz-solidifies-control-is-bostock-next/#comments Tue, 16 Feb 2010 21:53:43 +0000 Kara Swisher http://kara.allthingsd.com/?p=24502

Like victims in the thriller, “Ten Little Indians,” the directors of Yahoo involved in its Microsoft takeover debacle are moving off its board.

Today, it’s billionaire businessman Ron Burkle (pictured here) doing the leaving, after serving since 2001, when he was brought onto the Internet giant’s board by former CEO Terry Semel.

So far under the tenure of CEO Carol Bartz, who came to Yahoo (YHOO) in January 2009, Carl Icahn, the activist shareholder who was also a big player in the MicroHoo fight, departed in late October 2009.

(Icahn has since been dumping Yahoo shares, which reached a high of 75 million and are now at about 12 million, as reported by Digital Daily’s John Paczkowski earlier today.)

In addition, Maggie Wilderotter–who was once thought to be a candidate for Yahoo’s CEO job after former CEO and co-founder Jerry Yang stepped down–left in late September 2009.

Yahoo named Sue James, a former high-ranking Ernst & Young exec, as a new board member in January.

More appointments are likely as Bartz adds directors of her choosing.

Yahoo said in a press release this afternoon that Burkle, who made his giant fortune in the supermarket business, had decided not to stand for re-election at its 2010 annual stockholders’ meeting.

Speaking for BoomTown alone, it is a welcome departure, since it was Burkle, along with Yahoo Chairman Roy Bostock, who was most influential and involved in key decision-making in Yahoo’s disastrous battle with Microsoft (MSFT) in 2007 and 2008.

The fight wounded Yahoo badly, both on Wall Street and within the organization, leaving the Silicon Valley icon struggling to return itself to relevance and growth.

Here is the full press release from Yahoo about Burkle’s leaving:

Yahoo! Announces Ron Burkle Will Not Stand for Re-Election to Board

SUNNYVALE, Calif., Feb 16, 2010–Yahoo! Inc. (NASDAQ: YHOO) announced today that Ron Burkle has decided not to stand for re-election to the company’s Board of Directors at its 2010 annual stockholders’ meeting in order to devote more time to his other business interests. Mr. Burkle has served on the company’s board since November 2001.

“On behalf of our entire board, I would like to thank Ron for his distinguished service and invaluable contributions to our company and board,” said Roy Bostock, chairman of Yahoo!’s Board of Directors. “Yahoo! and its stockholders have benefited greatly from the counsel, insights and objectivity Ron has brought to the company during his nine years on the board. We wish him well in his future endeavors.”

“It has been a great privilege to serve on Yahoo!’s board and to work with such an outstanding group of people,” said Ron Burkle, managing partner of The Yucaipa Companies.

]]> http://allthingsd.com/20100216/burkle-off-yahoo-board-as-bartz-solidifies-control-is-bostock-next/feed/ 0 http://allthingsd.com/20081213/weekend-update-121208/ http://allthingsd.com/20081213/weekend-update-121208/#comments Sun, 14 Dec 2008 00:19:40 +0000 Beth Callaghan http://digitaldaily.allthingsd.com/?p=9600

In this week ramping up to the holidays, good cheer–unsurprisingly–was hard to find. 2008 may well be remembered as the year the econalypse stole Christmas.

Yahoo (YHOO) was bereft of cheer, for sure. BoomTown covered its long-dreaded layoffs and published Jerry Yang’s complete memo to Yahoo staff about the painful process, which began on Wednesday. Ex-Yahoos from all corners of the company declared their preferences (and vented) to BoomTown about the as-yet fruitless search for a CEO to replace Yang, who laid himself off last month. But wait–Digital Daily pointed out a singular moment of misplaced cheer–akin to fiddling while the proverbial Yahoo burns–as the company, uh, celebrated the holidays with a bafflingly lavish year-end party last Saturday–four days before its massive layoffs began.

Digital Daily covered a lot more bad news this week–even some for Apple (AAPL). Belkin, historically the largest exhibitor at January’s MacWorld, announced it won’t be at the convention this year. In addition, registrations for the annual Macfest are down 20 percent since last year. Fairchild became the latest in a long procession of semiconductor companies to lower estimates in the face of dwindling demand, and IPO activity dropped 50 percent in 2008, according to Ernst & Young’s year-end Global IPO Update. What’s that word? Oh yeah, schadenfreude. In a cold bit of circumstance, almost any company can feel a little bit better by comparing itself to Nortel (NT), which lost an astonishing 97 percent of its value this year.

MediaMemo wrote about CBS’s (CBS) appointment with the piper–it spent $1.8 billion on CNET last year, and started paying the consequences this week. The re-org of the entire CBS Interactive group is laid out in Quincy Smith’s memo to its staff. Hulu was hurting this past week, too. Its traffic dropped sharply in the absence of Tina Fey/Sarah Palin viral videos. There was at least one happy anomaly in this week’s news, though: Microblogging site Tumblr brought back memories of the heady early days of Web 2.0, announcing a $4.5 million-dollar round of funding from Union Square Ventures and Spark Capital.

On the Mossberg front, Walt is on a holiday break, but Personal Technology is not. Nick Wingfield sat in for him this week with a column about digital projectors, which are getting smaller and more portable. And in anticipation of Mac-themed holidays for Windows PC users, Katherine Boehret discussed reliable methods of getting data from a PC to a Mac.

]]> http://allthingsd.com/20081213/weekend-update-121208/feed/ 0 http://allthingsd.com/20081211/report-2008-ipo-market-obviously-lousy/ http://allthingsd.com/20081211/report-2008-ipo-market-obviously-lousy/#comments Thu, 11 Dec 2008 13:40:47 +0000 John Paczkowski http://digitaldaily.allthingsd.com/?p=9485 With the economy in contraction and the stock market going all to hell, 2008 was not a good year for the IPO market. In fact, volumewise, it’s looking like it was one of the worst in the last 13 years. Global IPO activity has more than halved since 2007, according to Ernst & Young’s year-end Global IPO update. Through November 2008 a total of 745 IPOs worldwide raised $95.3 billion in capital. That’s sharply off from 2007, when there were 1,790 offerings, which raised some $256.9 billion.

Clearly, the so-called IPO window has been slammed shut by the capital crisis. Indeed, data from Dealogic show that 298 IPOs were postponed or withdrawn over the past 11 months–quite a few more than the 167 that met that fate in all of the 2007. And those companies that went through with their offerings didn’t fare so well. Almost 50 percent of new issues fell on their first day of trading, and aftermarket performance was poor, according to Renaissance Capital; the average new issue was down 38 percent by year-end.

“Performance of 2008 new issues in the US was abysmal by historical standards, although not surprising given the steep decline in equities,” says Renaissance. “The average first day pop was a paltry 2%, down from the more than 10% average first day return investors became accustomed to in each of the last five years. A whopping 58% of all new issues traded down in their market debut, the worst first day showing in at least a decade and almost four times the IPO market’s 10-year average.”

Little wonder, then, that the U.S. went three months without an IPO during the second half of the year–the longest dry spell since the recession of the 1970s.

When will the IPO market return? Tough to say. Renaissance says there’s a lot of pent-up demand by potential issuers to raise equity capital. But they’re not likely to test the IPO waters until the financial markets stabilize.

]]> http://allthingsd.com/20081211/report-2008-ipo-market-obviously-lousy/feed/ 0 http://allthingsd.com/20071105/web-2over/ http://allthingsd.com/20071105/web-2over/#comments Mon, 05 Nov 2007 07:44:20 +0000 John Paczkowski http://digitaldaily.allthingsd.com/20071105/web-2over/

Web 2.0 will be known as the name of a bubble. And 3.0 would only be a marketing disaster.”
Ross Mayfield’s Weblog, Nov. 12, 2006

Web 2.0 acolytes who shelled out 1,100 euros for admission to Web 2.0 Expo Berlin, which kicks off today, will no doubt be dismayed to learn that the term “Web 2.0″ is no longer an enchanted aegis under which to quest for venture capital. Seems the VC community has finally had it with Web 2.0, its hobbies masquerading as businesses and start-up brands with a reclusive letter “e.”

To wit, Kleiner Perkins Caufield & Byers, one of Silicon Valley’s most prestigious venture capital firms, is reportedly no longer investing in Web 2.0 start-ups. “We have absolutely no interest in funding Web 2.0 companies,” KPCB partner Randy Komisar recently told Silicon Valley Watcher’s Tom Foremski, adding that he’d recently told John Battelle, conference chair of Web 2.0 Summit, that the term is viewed with disdain in the VC community.

As the Globe and Mail’s Mathew Ingram notes, Komisar’s remark is for Web 2.0 devotees “a little like King Arthur telling you he’s really not that hot on the whole Grail thing any more, and you can stop looking now.”

It’s also more than a little ironic. Because, according to a report from Dow Jones VentureOne and Ernst & Young, emerging Web 2.0 companies snared almost $1 billion in venture capital worldwide in the first six months of 2007. That said, very little of it was from KPCB, which seems to have sat most of Web 2.0 out. “I’m personally not doing much in Web 2.0 at the moment,” Komisar told VentureBeat in January. “I’m looking for more fundamental innovations. I’m less interested in the content and media fallout. There are no strong barriers to entry in Web 2.0. If by Web 2.0, you mean companies that build an audience to be monetized by Google, I am not actively pursuing them; though I should never say never. I’m not sure how long YouTube would have remained an independent business had they not been bought by Google. Google has an efficient search engine to monetize large audiences. If you’re creating Web 2.0 products and media, its tough to build anything of sufficient scale to remain independent–you are more likely to end up being a feature on Google, Microsoft or Yahoo.”

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