At that size, it claims to have outpaced Rovio’s Angry Birds, which took 20 months to hit 300 million.

If you haven’t heard of Outfit7, it’s probably because it hasn’t raised any institutional venture capital, it wasn’t founded in the U.S., and much of its application usage is spread across 120 countries.

But the company’s franchise of apps called Talking Friends, which are sort of like a modern-day Neopets, is gathering a large base of users.

The characters include Talking Tom Cat, Talking Ben the Dog and Talking Harry the Hedgehog — in other words, many more brands than Angry Birds alone. Of the 14 in existence, Talking Tom Cat is the most popular, having been downloaded 100 million times.

The animals serve as a virtual pet, which responds to your touch and repeats everything that you say. You can pet him, poke him or grab his tail. A popular activity is to record videos of the pet and send them to friends.

The number of users who come back to the app is impressive, with more than 90 million monthly active users worldwide. The company also averages more than 25 million downloads per month.

Executive Chairman Narry Singh believes Rovio and Outfit7 have similar growth trajectories; and like Rovio, which was able to create a strong brand from Angry Birds, Outfit7 is angling to create brands, as well.

Today, Outfit7 has offices in Palo Alto, Calif., as well as Slovenia, Cyprus, London and Seoul, South Korea. Its apps are primarily free, but users can make in-app purchases to buy virtual goods.

The company is also announcing today that it is partnering with Iconicfuture and Digital Artists to bring branded virtual goods to Talking Tom Cat. In a testament to its international pull, the merchandise will represent six of the world’s most popular soccer clubs, from Spain, Italy, England, France and Portugal.

Of course, Outfit7 is not the first company to want to replicate Rovio’s successes.

In the end, it won’t be important which company got to 300 million downloads the fastest, but which one was able to build a more long-term and sustainable company.

When you look at it in those terms, the jury is still out on Rovio, as well.

Facebook said today in its filing with the Securities & Exchange Commission that Zynga accounted for approximately 12 percent of the company’s revenue last year when Facebook’s revenues totaled $3.7 billion.

The revenue came from both its 30 percent payments processing fee related to the sale of virtual goods from games, such as FarmVille and Words With Friends, but also from advertising purchased by Zynga.

Additionally, Facebook said Zynga’s apps generate a large number of pages on which it displays ads from other advertisers.

The dependence on Zynga is so significant that Facebook warns that if it fails to maintain its relationship with the game maker, or if Zynga’s popularity declines, its financial results may be adversely affected.

Even more notable perhaps is that it’s not just Zynga. Facebook said social games are currently responsible for “substantially all of our revenue” when it comes from payments.

In December, Zynga went public, raising $1 billion, and is obviously one of the companies most reliant on the social network. But now with Facebook’s financials also public, we can see that the two companies are actually interdependent.

And, in fact, over the past three years, Zynga’s importance has only increased. In both 2010 and 2009, Zynga accounted for less than 10 percent of Facebook’s revenues.

The big turning point occurred in May 2010 when Zynga agreed to use Facebook Credits as its primary payment method inside games. As part of that, Facebook would collect 30 percent. That contract will expire in May 2015.

Some of the details of that contract were disclosed as part of Zynga’s public offering, but we wouldn’t be surprised if Facebook is also required to publish it at some point. In the version Zynga released, a lot of the contract was redacted.

In after-hours trading, Zynga was trading about 4 percent higher to $11.02 a share, nearing it’s all-time high of $11.50.

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The Mountain View, Calif.-based company tries to boost online companies’ revenue by placing targeted promotions and offering incentives at the point of checkout.

It’s a bit similar to how grocery stores try to boost sales by strategically placing tabloid magazines, gum and candy bars at the register to spur last-minute impulse buys.

Instead, TrialPay makes last-minute offers to give people incentive to make a purchase when they are on the fence.

As an example, TrialPay’s CEO Alex Rampell said that when people visit Fandango’s site, they may get an offer for a free movie ticket if they sign up for Netflix. Or, in a Zynga game, you might be offered a virtual bouquet for free, in return for purchasing real flowers on Valentine’s Day.

Visa’s participation in the investment, which is being announced later this morning, is rare. Over the years, the payments company has made a few acquisitions, including PlaySpan, CyberSource and Fundamo, but Visa’s only investment in recent memory was in payments darling Square, which allows anyone to accept payments using a cellphone.

Rampell said that with Visa’s help, TrialPay will be able to expand to offline merchants from working exclusively with online retailers, by giving it a way to track if a person visited a store and made a purchase.

“The question is, how do we send traffic to Starbucks or McDonald’s or any other offline merchant?” Rampell said. “We already have access to people online who are buying or thinking about buying something. It would be great if we could could give you 20 virtual coins if you shopped at McDonald’s. But how do we close that redemption loop?”

Today, TrialPay, which has 130 employees, reaches more than 70 million monthly active users worldwide. In 2011, Rampell said, revenues more than doubled; he declined to offer specifics.

Rampell also declined to provide details about potential partnerships with Visa. Visa also declined to comment.

Investors in the company’s fourth round included new investors Greylock Partners, Visa Inc., T. Rowe Price, DAG Ventures, DFJ Growth and QuestMark Partners. Existing investors also participated. To date, it has raised roughly $70 million.

For more of Rampell’s opinions on how the payments space will evolve, check out his Web 2.0 speech from October:

But one of PopCap’s original developers, Roy Liu, believes he has come up with an alternative. Gimmie, based in San Francisco, has created an incentives platform for mobile app developers.

It launches today with 10 mobile app developers in its beta program.

It works like this: In return for using the app, a player can earn points which can be redeemed for real-world products. It’s sort of like a traditional arcade, where players earn tickets that can be redeemed for candy and toys, but instead of gumballs and baseball cards, Gimmie primarily doles out game downloads and other mobile content.

Gimmie is also announcing today that it has raised $200,000 in funding from Tandem, an incubator in Silicon Valley.

Liu, who was one of the lead developers on Plants vs. Zombies for PopCap before it was purchased by Electronic Arts, co-founded the company with CEO David Ng.

The idea is not so different from other in-game incentive programs, which ask users to fill out a survey or download a different game in exchange for free virtual goods or other benefits.

Those types of programs, served by companies like TapJoy and others, have been immensely successful — although more recently, they have been received poorly by Apple and others because they can affect the most popular games list.

Gimmie believes what it is doing is different because it rewards users with items outside of the app for performing actions inside it.

Other companies are also trying to come up with alternative advertising platforms for mobile games. In games, banner ads are often completely ineffective because people are focused on playing the game, and don’t take the time to read the ad or leave the page to investigate it further.

A Chicago-based start-up called Tap.me is creating an ad network for virtual goods, which can gain advertisers on a broad scale for generic items, such as being able to jump higher or more energy across many games.

The company has confirmed to All Things D that it is actively investigating several opportunities, and is in talks with several partners about gambling on the Internet.

A Zynga spokesperson provided this statement to AllThingsD:

“We build games and experiences that our players want and love. Zynga Poker is the world’s largest online poker game with more than 7 million people playing every day and over 30 million each month. We know from listening to our players that there’s an interest in the real money gambling market. We’re in active conversations with potential partners to better understand and explore this new opportunity.”

As with any new entrant in the space, Zynga will have to fulfill several requirements, meaning any major rollout is still months away.

The San Francisco-based social games maker will have to wade through a maze of state, national and international regulations. It will have to secure the correct licenses, and it also needs the right technology to make betting over the Internet secure.

For either of these last two requirements, a partnership or acquisition of an online gambling organization or other technology would make the most sense, instead of starting from scratch.

However, the effort could easily pay off.

Zynga was one of the first online gaming companies on Facebook, and continues to dominate the platform today. If it is able to get its toe in the door, just as the laws change in the U.S., it could be a leader yet again.

Back in October, Zynga first started showing broad interest in the casino category.

Zynga founder and CEO Mark Pincus announced at a press event that the company was going to launch Zynga Casino, which would serve as a single destination on Facebook to build off its strong brand in poker.

Its first new game, which has not launched yet, will be bingo.

Until now, the company’s efforts have been limited to building social and mobile games that are given away for free and monetized through the sale of virtual goods.

Getting users to make bets and part with real money could prove difficult, even for a company that has so many dedicated fans.

One thing Zynga has going for it is that social games are frequently compared to gambling because of their addictive nature — both lure consumers into spending a few more dollars to continue playing.

The casino genre has also been quietly racking up big numbers on Facebook.

Besides Zynga Poker, which is the most popular poker game on Facebook, and one of the company’s longest standing titles, there are many other sleeping giants. Sean Ryan, Facebook’s director of game partnerships, has even called them “unbelievable monsters.”

Said Ryan: “It turns out that people are completely okay winning virtual currency that they can never cash out.”

If players actually have the chance to win money, who knows the size of the opportunity?

A Facebook spokesperson said the company does not necessarily see a future for gambling on the social network. “We don’t have any plans to get into real-money gambling,” she said.

It’s unclear if that eliminates others from experimenting. In the meantime, it hasn’t stopped game makers from exploring the category or the concept.

Last week, Seattle-based Double Down Interactive, which was named by Facebook as one of the most popular game makers of 2011, was acquired by video poker giant International Game Technology for $500 million. It has 4.7 million monthly active users playing a variety of games, including blackjack, slots, video poker and roulette.

The deal closely followed Caesars Entertainment’s purchase of Playtika, an Israeli game company known for its Facebook title Slotomania. Caesars bought the company in two stages, the first of which was rumored to be purchased for up to $90 million.

Caesars, which filed to go public in November, declined to comment because it is currently in its quiet period.

However, some of its plans were revealed in a document filed with the Securities & Exchange Commission. It said its Caesars and World Series of Poker brands are dedicated to online gaming, and will take advantage of real-money gaming as it becomes legalized. Right now, Caesars Entertainment offers games “for fun” in jurisdictions where online gambling is not yet legal, but has identified the legalization of online poker in the U.S. as “the largest opportunity in online gaming in the near term.”

Still, the biggest hurdle is the law.

Internationally, several countries have permitted gambling for some time, and those areas represent the most immediate opportunities.

But there are signs of the U.S. beginning to open up, too. On the day before Christmas, the Department of Justice gave the online gambling community an early present, according to a blog post written by Nelson Rose, a professor and lawyer.

“President Barack Obama’s administration has just declared, perhaps unintentionally, that almost every form of intra-state Internet gambling is legal under federal law, and so may be games played interstate and even internationally,” Rose wrote.

Essentially, what the Justice Department did was to issue a new interpretation of the Wire Act of 1961. Under the new ruling, it interprets the act as only outlawing bets on sporting events — not all events and contests, according to an article in the San Francisco Chronicle.

With that clarification in place, it will now be up to every state to pass legislation outlining operating procedures. So far, Nevada and the District of Columbia have moved quickly to enact laws. To get other state laws passed could be a lengthy process, especially during an election year.

In the meantime, launching games only in Nevada and D.C. doesn’t represent the big opportunity everyone was hoping for.

To be competitive against Caesars and IGT, Zynga may have to partner or acquire companies that already have the licenses in place or the necessary expertise.

Some of the more obvious candidates include Bwin, which operates PartyGaming.com and is traded on the London Stock Exchange; Betfair, and other operators, like Bodog, Bet365 and 888.com. Many are based in the U.K. and handle a variety of casino games and sporting contests there.

The entrance into a new market, such as gambling, would take substantial resources, and Zynga has them thanks to its public offering. In December, it raised $1 billion, making it the largest Internet IPO since Google.

So, will Zynga be the next “unbelievable monster?” Clearly, it is willing to try.

The drop-off in players affected almost all developers, but did not hit all titles equally.

For example, Electronic Arts saw 1.2 million fewer monthly users over the past week for its top title The Sims Social; Zynga’s Empire & Allies game lost one million monthly users, and its newest game, CastleVille, lost 900,000, according to AppData, which publishes such information.

On the flip side, many of the games that performed well were old favorites; these logically would have longer-term, more-committed players, who would make a point of returning during the holidays to take advantage of seasonal promotions.

The games that benefited from the holidays include Zynga’s Words With Friends and FarmVille, which gained 1.3 million and 800,000 monthly active users, respectively, according to Inside Social Games. Other gainers rounding out the Top 5 were Tetris Online’s Tetris Battle; Wooga’s kingdom-building game, Magic Land; and Men vs. Women, a role-playing game by Social Point.

Still, the general direction for the week was heading down.

That contrasts with other game platforms, such as consoles, PCs and mobile, which largely benefit from the holidays and from more free time in general.

Console games often skyrocket in popularity as kids and adults unwrap new titles for Nintendo, Xbox or PlayStation on Christmas morning.

PC gaming also typically surges during the season. EA timed the launch of Star Wars: The Old Republic ahead of the holidays, in hopes of drawing new players who would be sold on sticking around for months, after spending time on the game during their time off.

But perhaps the biggest competitor came from mobile, which benefited from breaking records for the number of new Android and iOS devices that were gifted during the holidays. Flurry reported that more than one billion apps were downloaded worldwide during the last seven days of 2011, breaking the all-time weekly record. Games are often one of the most-downloaded categories of apps.

So the more important question to ask is, why would Facebook be an exception, if other platforms performed well?

Clearly, all of the platforms are competing for a limited number of minutes in the day, and so are other forms of media, like the Internet, TV and the movies. But when it comes to Facebook, a larger driver may be the environment — after all, it’s no big secret that a lot of social networking and social gaming is done in the workplace.

In a study conducted last summer, advertising agency Saatchi & Saatchi found that 47 percent of respondents said they play social games at work during a typical day, and that 28 percent play for at least 30 minutes. Without that dedicated time in front of the computer every day, people may have had the opportunity to be more obsessed with other screens, such as phones or TVs.

Another potential reason that Facebook and social games did not see a lift from the holidays is because they have not yet figured out how to capitalize on the Christmas economy.

For years, console games have been timed with the end of the year, so they could be wrapped up and placed under the tree. More recently, smartphones and gift cards for music and apps have helped mobile prosper. Perhaps there wasn’t enough hype and promotion for social games to compete for people’s dollars.

Regardless of the reasons, the drop may ultimately be a small a blip on the radar screen for most game developers, who also see several spikes in activity during the year.

The bigger impact may be felt at Facebook, which takes a 30 percent cut of all virtual goods sold inside social games, and would feel the cumulative impact across all of the games.

Last week, the Facebook game company sold 100 million shares at $10 apiece to raise $1 billion.

On its first day of trading, the stock fell 5 percent, and its losses are even deeper today. In early morning trading, the stock was down nearly 8 percent, or 73 cents, to trade at $8.77 a share. UPDATE: The stock ended up falling 48 cents, or 5 percent, to close at $9.02 a share.

No anti-wither serum exists in the real world to revive a stock price the way virtual crops can be revitalized in FarmVille, one of the game-maker’s hit titles.

Zynga is not the only recent Internet darling to take a nosedive.

It took a while longer, but about a month after Groupon went public, its stock tumbled and was trading for less than half its first-day high of $30 a share. Groupon has since rebounded, but it is also trading lower today, at $22.47 a share.

Zynga has not see those wild fluctuations yet.

Still, the losses do add up — at least on paper. Both the company’s public valuation and some of its largest shareholders’ shares are quickly dwindling in value.

The company is now trading at a valuation of $6.1 billion, down from its IPO valuation of $10 billion. Other big game companies, like Electronic Arts, are now more valuable, albeit only slightly higher.

Investors like Morgan Stanley are seeing their stakes drift further and further underwater.

Earlier this year, Morgan Stanley, which was also one of the Zynga’s underwriters in its IPO, purchased 5.3 million shares at $14 apiece, for a total of $75 million. Four other investors, which were unnamed, also contributed to the round totaling $490 million, according to the document.

Morgan Stanley’s stake is now worth only $46.5 million.

The dip is also hurting Zynga founder and CEO Mark Pincus’s stake, which is now worth less than $1 billion, or roughly $982.5 million.

One thing the company can look forward to is its first-quarter earnings, which will come out early next year and should be bolstered by a strong fourth-quarter performance. In the quarter, Zynga launched new games, including CastleVille, on Facebook, as well as some standalone titles for iPhone; the fourth quarter is typically strong because players have a little more free time to play — and pay — during the holidays.

The San Francisco social games company is looking to raise as much as $1.15 billion, which would make it the largest IPO from a U.S. Internet company since Google raised $1.7 billion in 2004.

Shares will likely be sold on Thursday, with the company trading under the ticker ZNGA for the first time on Friday. In the meantime, the company is trying to jockey for the best price and the most shares sold.

At a luncheon yesterday with potential investors, CEO Mark Pincus made one of his boldest predictions yet when it comes to how well its games will monetize.

Currently, Zynga has about 227 million monthly active users who play games for free on Facebook, such as FarmVille, CityVille, Zynga Poker and Mafia Wars. But only a small fraction — around 3 percent — pay for additional features, such as decorative items for a farm or new clothes for an avatar.

“We could see that doubling,” said Pincus, according to Reuters.

Doubling? That’s sure to whet investors’ appetites.

But it’s hard to know how the company will accomplish that.

To be sure, Zynga is about to enter one of its biggest growth periods yet and anticipates launching several new games over the next few months.

On one level, more games will likely translate to more players. But will it translate to more players willing to pay?

That seems like a leap of faith.

However, based on documents filed with the Securities & Exchange Commission, we have gleaned that some of Zynga’s growth prospects are guaranteed thanks to the company’s close – albeit complicated – relationship with Facebook.

As one of the conditions of its partnerships, Facebook is obligated to help Zynga meet certain growth targets. In return, Zynga has committed to offering Facebook a number of exclusive game titles.

The specific details of the relationship were redacted in the document, so it’s not clear how aggressive those growth targets are over the five-year life of the contract.

Zynga also has close ties with Google, which has recently launched its own games network. Zynga has already launched several titles there, including CityVille. Following the offering, Google will own 3.8 percent of the company.

Also during yesterday’s lunch, Zynga’s executives were grilled about player retention and churn rates and its growth prospects for mobile.

Among several responses, Pincus joked about how Alec Baldwin was recently kicked off a flight after getting caught playing Words With Friends while still at the gate.

It seemed investors were not as interested in hearing about recent negative reports that Pincus’s hard-charging personality has made it an unfavorable working environment or that some employees were asked to give up their stock options.

Plus, it’s a crowd that Pincus should be comfortable speaking in front of. This will be the second company the Wharton and Harvard Business School grad has taken public.

The company will continue to have meetings today and into next week. So far, reports indicate that the conversations are going well.

Zynga has apparently already received enough orders to cover all the shares being sold in its initial public offering, reports BusinessWeek, which talked to two people with knowledge of the situation. Zynga plans to sell 100 million shares for $8.50 to $10 apiece, which would value the company at as much as $7 billion.

The company filed documents with the Securities & Exchange Commission this morning, indicating that it intends to raise between $850 million and $1.15 billion in its public offering.

At the high end of the range, that would translate to roughly $150 million more than it had previously estimated it could raise.

The company is seeking to sell 100 million shares at $8.50 to $10 a share and will reserve 15 million additional shares for extra demand. It expects to trade on the Nasdaq under the ticker ZNGA.

Under the best circumstances, the company will be valued at nearly $7 billion based on 699.3 million shares outstanding. That falls below some of the rumored expectations that have been floating around over the past few weeks.

Still, at that value, it will come close to the public valuation of Electronic Arts, which hovers around $7.8 billion, but falls short of other game publishers, like Activision, which has a value of  $14 billion.

Zynga has made its riches off selling virtual goods in social games on Facebook. Some of its most recognizable titles include FarmVille, CityVille, Poker and Words With Friends.

Virtual goods often allow players to continue to play the game and level-up faster, such as an energy boost. They also can be decorative in nature, like an outfit for an avatar or seeds to plant on a farm. Of the roughly 230 million monthly active users, very few players ever bother making a purchase.

Since the beginning, the company has a very close relationship with Facebook, which has been contentious at times, especially since the platform started collecting a 30 percent tax on all virtual goods sold. More recently, the company has tried to expand to other platforms, including the launch of several games on mobile and Google+. It also has its own online game network in production.

The company’s IPO will be one of the largest tech offerings in recent memory.

In early November, Groupon raised $700 million including overallotments. It had originally sought to raise $750 million. Other recent tech IPOs include Angie’s List, Pandora and LinkedIn.

But some critics think Zynga is rushing its offering before a broad financial collapse. If it waited until reporting fourth-quarter results, it could paint a stronger growth story as it completes the busy holiday period.

The San Francisco company, which was founded in 2007, was named after Founder and CEO Mark Pincus’s dog named Zinga.

In 2010, Zynga recorded a profit of $27.9 million on revenues of $597.5 million. In the first nine months of 2011, it broke even on revenues of $828.9 million.

While its revenues continue to grow, the number of daily active users that play its games has fallen two quarters in a row and some critics question whether the company can keep up its aggressive growth.

In recent weeks, Pincus has come under harsh criticism for his heavy-handed leadership approach. But to his credit, he has overseen rapid growth, including the acquisition of dozens of smaller game studios. Today, his company has 2,500 employees.

At the mid-range of its expectations, Zynga will bring home proceeds of $889.4 million after selling shareholders take their winnings.

The primary purpose of the sale is to increase its visibility in the marketplace and create a market for its stock. Proceeds will go towards working capital, but also $83.6 million will be spent to satisfy tax withholding obligations related to stock of current and former employees. Additionally, it plans to use a portion of the proceeds for charitable causes through its Zynga.org initiative.

As part of the sale, the company will have three classes of shares. Class A stock will have one vote per share; Class B stock will have seven votes; and Class C will have 70 votes.

Pincus owns some Class B shares, and all of the company’s Class C shares. Following the offering, he will control 36.2 percent of the company’s voting power.

As Kara Swisher previously reported Pincus will not sell any shares in the offering.

No other executives have plans to sell stock, either. But a number of the company’s early investors will sell stock, including Institutional Venture Partners, Union Square Ventures, Foundry Venture Capital and Avalon Ventures. Other interesting names that made the list include Google, which will sell 1.7 million shares.

The company’s largest institutional holder, venture capital firm Kleiner Perkins Caufield & Byers, which owns 11 percent of the shares, will not sell any of its stock in the offering either.

The Paris-based company’s CEO Dan Serfaty has moved to Beijing with plans to help Tianji establish a new subscription revenue model. The Chinese website currently earns the bulk of its revenue from recruiting tools, but is free to regular users. Globally, Viadeo earns 30 percent of revenue from recruiting, 20 percent from advertising, and 50 percent from subscription fees paid by users.

The company plans to explore various models, including small, incremental payments (like those online game and instant messaging operator Tencent charges users for virtual goods) and subscriptions. Viadeo will also soon be launching a platform for third-party applications on its website, which is expected to earn some revenue as well.

Read the rest of this post on the original site »

The news we broke last week that Max Levchin, Slide and almost all Slide products would no longer be a part of Google just a year after being acquired was not particularly emotionally evocative for many readers. But for active users of SuperPoke Pets, it seemed lame, fraudulent, and evil — and they told us so in our comments section.

SPP fans left scores of angry comments in venues like our site and TechCrunch. They were particularly angry that SPP, which is a Tamagotchi-style game where users nurture pets, had enticed them to spend money buying in-game gold that will presumably be worthless once the game no longer exists.

Slide employees — who themselves are not particularly happy about getting shut down — tried to reassure SuperPoke fans with a user forum post this weekend that downplayed the long-term value of virtual goods. It’s an interesting line of argument that highlights the fact that expectations around virtual ownership of items within an online game are not firmly set. Should SPP users expect a refund or a transfer of value? Should they realize that a virtual game can be terminated by its owner at will?

Here’s the key part about the value of virtual goods:

The closest real-life analog to SPP items is probably a Halloween costume. You purchase it to dress up and enjoy the experience, but likely don’t wear that costume day in and day out, or for every Halloween thereafter. Unlike a costume, there are still months ahead for you to make the most of the items in your inventory and we are working on tools to help you export some of your SPP content/items to keep and access outside of SPP. We are still in the process of working out the details of what these tools might be and will update you as soon as we have more information to share.

(For whatever reason, the forum post is only available to players at SPP level six and above. My poor little frog is still at level one so I got the full text from a Google spokesperson.)

Part of the reason Google is shutting down the Slide apps is because they are not hugely popular. SuperPoke Pets has about 130,000 active monthly users, according to Facebook application analytics service AppData, though the game does not require registration with Facebook so that measure is probably low.

It’s possible that if SPP fans are loud and convincing enough, Google — which is in the process of launching its own games platform — will figure out a way to keep the game around. Asked for comment on that front, a Google spokesperson referred us back to the user forum post (which is printed in full below).

Posted: Aug 27, 2011 02:27 PMQuote | Reply

SPPers,

We understand that the last few days have been difficult for many of you. We are reading your posts and wanted to provide more information about several of the themes and topics we’ve seen emerge.

Since stopping active development on SPP, we’ve seen quite a bit of speculation about Slide turning off SPP altogether. We want you all to know that, until this week, we did not have a plan to shut down SPP. In our June announcement about the changes, you can see that at the time, we saw very little reason to turn off SPP and intended to keep it running for the foreseeable future.

Unfortunately, as all of us have experienced, the future is not very predictable. As you may have read in our recent Slide blog post or other articles, the Slide group will be splitting up to join other areas within Google. Unfortunately, this means that we will be shutting down almost all of our products, including SPP and several that we just launched. This is not something we anticipated or planned for when we made our announcements about SPP back in June.

Many people also brought up questions about the value of items on SPP and we want you to know that we have spent a lot of time thinking about this very topic. You can use and enjoy virtual items however much you want – and over the course of SPP, we’re sure that there are items you’ve used for hours, even months. While you can use SPP items in a number of different ways: trade, decoration, gifting, and collecting, one thing you can’t do is bring them home and keep them forever.

The closest real-life analog to SPP items is probably a Halloween costume. You purchase it to dress up and enjoy the experience, but likely don’t wear that costume day in and day out, or for every Halloween thereafter. Unlike a costume, there are still months ahead for you to make the most of the items in your inventory and we are working on tools to help you export some of your SPP content/items to keep and access outside of SPP. We are still in the process of working out the details of what these tools might be and will update you as soon as we have more information to share.

We know that the SPP community, and the friends you have made here, are incredibly important to many of you. We encourage you to transition the relationships you’ve built on SPP to an outside platform so that they may continue to grow and flourish. As an example, Nicole established a FB group for SPP users as a place where you can go to make these sorts of connections:http://www.facebook.com/groups/104602236311763/. I also anticipate that some of you will have groups of your own that you will wish to promote or invite your SPP friends to. We are also looking into whether we can find an existing public forum that might host SPP Community rooms so that you can continue your interactions there. If we are able to find something we can implement, we will communicate the details here. As I mentioned in my original post, we will not be shutting SPP down for about six months. One of our hopes is that this will provide you with plenty of time to re-establish these connections outside of SPP.

There is still a lot to plan and do as part of the SPP shut down, and as mentioned above, you will continue to hear from us. We are saddened by the eventual loss of SPP and committed to doing what we can to make this transition as smooth as it can be for you, the incredible SPP community.

Thank you,
The SPP Team

Developers have seen value in giving away their games to gain a larger audience and then charging players for items in the game. Now we are gaining some insight as to what users are willing to spend money on — turns out, it’s a whole lot of nothing.

Players are buying things that don’t even exist, including virtual armor, crops, fertilizer, energy beans, food or weapons. While it’s a small percentage of users who ever buy anything, the ones who do are paying, on average, $14 per transaction.

The results were published this morning in a blog post by Flurry, which sifted through a year’s worth of purchases on iOS and Android games, which are played by an average of more than two million people a day. Flurry is able to report on these aggregate numbers because thousands of developers use its tools to collect data within their individual applications.

Everything that users will pay for in the game are considered virtual items, but even more telling is that they are willing to purchase items that don’t last very long.

These items are called consumables and consist of things that become depleted when used, such as energy, fertilizer, etc. Typically, these items help you advance through the game faster, as opposed to durable items, such as armor that helps you defend yourself in a battle or new buildings that stick around and may help you earn additional revenue.

Flurry said it found that more than two-thirds — or about 68 percent — of purchases are for consumable items, or the disposable items, and that only 30 percent of purchases are on durable items. The least popular category is on personalization items, such as trees, park benches and other items that are purely decorative. Only two percent of purchases fell into that bucket.

In conclusion, Flurry GM of Games Jeferson Valadares writes that the games with the best return on investment are the ones that are designed with consumable items in mind.

Flurry estimates that total iOS and Android game revenue will surpass $1 billion this year.

In particular, what should be frightening is that Google is attempting to break today’s 30 percent cut that has become standard across both Facebook and Apple.

In a video interview with reporters, Google+ Games Product Manager Punit Soni explained that initially Google will share 95 percent of the revenue from virtual goods sold with the developers and keep only five percent for itself.

That confirms what I originally reported hearing from sources last month.

Soni said it could change in the future, but pricing today will be based on the company’s new in-app payments platform, which charges five percent for microtransactions on the Web (unlike the 30 percent Google charges on Android).

While it’s obvious how this might make Facebook uncomfortable, it should also worry Apple, if there’s enough pressure from developers to shift the standard to something less rich.

Soni also said today that Google is interested in allowing games to be played cross-platform, meaning a person could pause their game on the Web and then pick back up in the same place on their phone.

“There’s nothing to announce today, but it’s something we are looking at,” he added.

Of the 16 games that were released by 10 developers today, one of them was developed in HTML5. The rest were built in Flash. The industry has high hopes for HTML5 unifying both the Web and mobile, by making it possible for software to be written once and run across multiple devices.

If Google+ games could run through the browser on the iPhone or iPad, it could undercut Apple on its own device.

In that scenario, of course, consumers would have to find a compelling reason to switch from playing games that are downloaded through the App Store to playing games through a Google+ experience. Regardless, it should be comforting to developers who are uneasy with the control that either Apple or Facebook has from time to time.

Bradley Horowitz, VP of Product for Google+, also dropped in to the “hangout” session with reporters to give his thoughts on expanding into games.

“We don’t consider ourselves experts at making compelling games, but we can bring a lot to the party,” he said. “There were some internal debates about whether Google was well-suited to have games in our repertoire and what is the value of games to the users. There’s tremendous value for users. They provide a way for people to connect, discover and interact with each other … We don’t see games contrary to our mission, or a diversion. We see them as being core.”

The revolving line of credit was secured last month, which coincides with the timing of its $1 billion offer to acquire PopCap, which was sold instead to Electronic Arts.

Zynga, which is obviously rolling in cash, may now be on the hunt to make other big acquisitions, including Rovio, the maker of the Angry Birds franchise.

The filing also revealed some other morsels, including that only five percent of Zynga’s players historically have paid for items inside of its games. In previous documents, the San Francisco company has been vague, saying only that a small percentage of Facebook users pay for games.

While that number sounds low, it is in line with other social games companies, which commonly report a conversion rate of less than 10 percent.

Zynga also explained that the opportunity for social interactions increases as the number of players increases, making even noncustomers critical to game play. “We believe that maintaining and growing our overall number of players, including the number of players who may not purchase virtual goods, is important to the success of our business,” the company said.

Going forward, Zynga believes that a small number of players who choose to purchase virtual goods will continue as its business grows.

In addition, the company said that only three of its top games have contributed the majority of its revenue. Its top games accounted for 93 percent, 83 percent, 78 percent and 63 percent of its online game revenue in 2008, 2009, 2010, and in the first quarter of 2011, respectively.

The company also said that it was required to restate its March 31 financial statements.

The impact of this restatement was to increase revenue by $7.5 million and increase the provision for income taxes by $2.5 million for the first quarter. It also decreased deferred revenue by $7.5 million.

As part of the terms of the revolving credit agreement to borrow up to $1 billion in loans, Zynga had to pay upfront fees of $2.5 million and ongoing fees of up to $625,000 each quarter, based on the portion of the credit facility that is not drawn down. In addition to the loan, it had $995.6 million in cash on hand as of March 31.

The company did not say what it would use the credit line for, although presumably such a big chunk of cash would be helpful to such an acquisition-hungry company.

Zynga walked away empty-handed last month after bidding unsuccessfully for PopCap, which went to Electronic Arts.

So what’s next for the acquisition-hungry company?

What about an even tastier target: Rovio, the Finnish developer of the popular Angry Birds franchise.

It’s not just a fantasy game. Rumors have been circulating in the gaming world that the two companies have already engaged in talks. Zynga, as it always does, declined to comment about that speculation.

But, if you think about it, an acquisition or partnership makes an awful lot of sense.

Most importantly, the pair would form a global powerhouse that would have a huge and active audience of players on both mobile and social platforms. Zynga has roughly 148 million unique visitors on Facebook every month.

And Rovio’s Angry Birds has passed more than 250 million downloads in a completely mobile market with one single and very addictive game involving pissed-off birds attacking egg-greedy pigs.

As a recent piece on Rovio in The Wall Street Journal noted:

“There are now 120 million active monthly ‘Angry Birds’ game players, the company says. To compare this to another media property, there have been more than 25 million copies sold of the best-selling console game of the past year, ‘Call of Duty: Black Ops.’”

Rovio certainly wants more and has been extraordinarily vocal about its intentions of raising more money, and its goal of achieving one billion downloads.

While that potentially offers one billion reasons alone that Zynga should be interested, here’s five more on why such marriage might be a good match:

1. Adorable stuffed animals: Rovio has done a much better job at building a brand and entertainment franchise than Zynga. And it has spread its wings way beyond games and into other categories such as movies, books and toys.
2. Plenty of cash: Zynga has a lot of cash on its balance sheet and is getting closer to raising $1 billion more in an IPO. And it has the appetite for big buys, offering to buy PopCap for $1 billion in a failed bid.
3. Free-to-play: Both companies have embraced the “free-to-play” business model, where games are given away and then monetized by selling virtual goods or additional content to players.
4. Zynga’s risk factors: One of the San Francisco company’s known risk factors is its dependency on Facebook. Mobile would offer some diversity. Since its track record so far on phones and tablets has been questionable, Rovio would cover them on that front easily and give them much needed talent in the arena.
5. One-hit wonder: Rovio developed a long list of mediocre games before it came up with Angry Birds. It’s obviously a major hit, but does Rovio have what it takes to be an independent company, or does pairing up with another organization give it some wiggle room to continue experimenting?

And, to be fair, here’s one reason why such a pairing might never happen: Both Rovio’s and Zynga’s top management are well known for their stubborn and definitive personalities and, more to the point, not playing well with others.

Ironic, but — if you want to use an Angry Birds metaphor — it would not be easy to join two companies who both want all of the eggs for themselves.

To do so, subscribers enter their phone number and a PIN code at checkout, rather than entering a 16-digit credit card number. The service will work for shopping on any Internet-connected device, including a PC, phone or tablet.

Subscribers will also have to sign up for a Serve account through American Express, which is very similar to a PayPal account and can be funded by a bank account or a credit card.

While the system is designed to make checking out more simple, it could take awhile for consumers and merchants to adopt it. Not only will Verizon subscribers be required to have a Serve account, but online retailers will also have had to integrate Serve as a payment mechanism.

“Yes, they have to be Verizon and a Serve customer, but we are preloading a number of devices — smartphones or tablets — with the Serve app, and when you preload there’s a much greater uptake,” said Dan Schulman, group president, Enterprise Growth, American Express. “They’ll be able to simply or easily transact for any size good, whether it’s a virtual good or hard good.”

Schulman declined to say how many customers have signed up for Serve since it launched in April, but said that the deal with Verizon Wireless is not exclusive, meaning it could partner with other carriers in the future.

Despite these hurdles, this may be a logical intermediary before we see people using their phones to pay for items in the store using near field communication. A number of companies are scrambling to become a player in the digital wallet space, including Google, PayPal, Square and the credit card and payment providers, so this will be one of many options consumers will be able to choose from.

Verizon Wireless has also formed a joint venture called ISIS with AT&T and T-Mobile USA that will launch a near field communication trial next year.

A number of companies have also pursued carrier billing as an option, but convincing carriers to allow large payments on the bill for physical goods has proven difficult. Companies that fall into this bucket include BOKU, BilltoMobile and Zong, which was just acquired by PayPal.

Up until now, the items most often charged to a carrier bill are ringtones, or virtual goods that are purchased inside online games.

Greg Haller, Verizon’s president of enterprise and government, said its partnership with American Express is not designed to compete with carrier billing or its ISIS joint venture. “We’ll still allow virtual goods to go on the bill, but the real opportunity now going forward is that a customer won’t have to go in a shopping cart and enter a 16-digit number. This really turns it into a one-click process. The benefit is the simplicity for the customer, who can now buy it on their phone, by entering their mobile number.”

Over time, additional services will be added, such as coupons and loyalty programs. One partner is vente-privee.com, a French-owned flash sales site that partnered with American Express to enter the U.S.

“We are pleased and we are deploying with more and more functionality all the time,” Schulman said. “We’ve announced a number of partnerships, all of which are being integrated, this being the largest and most strategic that we have. We’ll start to integrate and be in market [with Verizon Wireless] by the end of the year, and we have high hopes for it spurring mobile commerce.”

American Express and Verizon Wireless are also working with Payfone, a New York-based company that the two companies backed financially in the spring. Payfone is running all the authentication in the background to ensure that the phone number entered is valid and corresponds with the correct account.

In Japan, DeNA is known for its mobile-only social network called Mobage-town, which runs on lower-end feature phones and makes money selling virtual goods within its network of games.

With this launch, which was carried out through its acquisition of San Francisco-based Ngmoco, DeNA will now expand into the U.S. and transition the company from operating a feature-phone platform to a smartphone platform.

The idea behind the platform is that it will give players with common interests from around the world a place to meet up to play games — similar to Facebook, where you play games with friends from anywhere.

“Mobage’s release outside of Japan marks the next step in our company’s global expansion,” said Neil Young, Ngmoco’s CEO and DeNA’s Executive Officer. “We’re tremendously excited about the potential for the platform, both as a great way for players to experience the very best games and for developers to access a global audience easily and effectively.”

The launch of Mobage, which is available now for download on Android Market, has been expected since DeNA purchased Ngmoco for $400 million late last year.

Out of the gate it will have about 20 games, including Zombie Farm from the Playforge, Pocket God by Bolt Creative, Haypi Kingdom from Haypi Co., Pocket Frogs by NimbleBit, Paper Toss by Backflip Studios, Touch Hockey from FlipSide5 and Zoo World by RockYou.

In addition, DeNA claims to have more than 100 game titles in development.

For developers, it offers an advertising network and a way for users to purchase virtual currency within the free-to-play games.

In Japan, Mobage already has more than 30 million players.

OpenFeint, another mobile social network that was purchased by Japanese-based Gree, already claims to have 100 million users worldwide.

Here’s a video with Young, who, back in January, described his very ambitious goals for Mobage, which included having the potential to be as meaningful to today’s generation as MTV was to the rock ’n’ roll era.

]]> http://allthingsd.com/20110727/dena-launches-social-game-network-on-android-worldwide/feed/ 0 http://allthingsd.com/20110719/live-gamer-makes-two-acquisitions-to-expand-from-virtual-goods-platform-to-ad-network/ http://allthingsd.com/20110719/live-gamer-makes-two-acquisitions-to-expand-from-virtual-goods-platform-to-ad-network/#comments Tue, 19 Jul 2011 11:30:38 +0000 Tricia Duryee http://allthingsd.com/?p=99555 Live Gamer, which for the past few years has been focused on building a platform to monetize games through virtual goods, has acquired two ad-based companies to help expand more into the freemium-based models.

The New York-based company has acquired gamerDNA Media, a videogame ad network; and BrandPort, an advertising platform. The terms of the deals were not disclosed.

Now game developers can partner with Live Gamer to monetize games both through virtual goods, which users must pay for, and through advertisments, such as videos that users must watch to earn virtual goods within a game.

Andrew Schneider, president and co-founder of Live Gamer, said advertising can make a difference to a game developer that may only be getting 10 percent of its players to pay for games. “How many players aren’t monetizing? It’s a dramatic uplift in revenue, and brand marketers love this because they [gamers] are engaging in ads,” he said.

Under the acquisition, BrandPort will be renamed Ad Elements and will provide a video platform, which allows a player to watch a video to earn an in-game item. GamerDNA Media is one of the larger game-focused ad networks in the U.S., reaching more than 48 million unique monthly visitors worldwide. It works with advertisers such as Blizzard, Best Buy, KFC, Sony Computer Entertainment, Wal-Mart and Namco, to insert pre-roll ads into games.

After users watch a video, they often have to answer a question about the clip or rate the video in order to be awarded the virtual good.

Other companies are in this space as well, including WildTangent and hi5, which are both promoting their own social networks; and AdColony on mobile.

 

]]> http://allthingsd.com/20110719/live-gamer-makes-two-acquisitions-to-expand-from-virtual-goods-platform-to-ad-network/feed/ 0 http://allthingsd.com/20110707/mobile-games-generate-more-revenue-if-given-away-for-free/ http://allthingsd.com/20110707/mobile-games-generate-more-revenue-if-given-away-for-free/#comments Thu, 07 Jul 2011 18:27:32 +0000 Tricia Duryee http://allthingsd.com/?p=95458 Freemium is one of those made-up terms that might be here to stay.

As it turns out, game developers are finding it is easier to make money on the iPhone if they give their applications away for free and sell virtual goods inside the game, instead of expecting users to plop down 99 cents on a game they’ve never played.

According to Flurry, which tracks the performance of more than 90,000 apps that use its analytics service, more than half of the top performing games on Apple’s iOS are making money by using a free-to-play model, up from only 39 percent in January.

In a blog post, Flurry’s general manager of games, Jeferson Valadares, who worked previously at EA’s Playfish and Digital Chocolate, writes that when the game is free, two things can happen: “First, more people will likely try your game … and second, you will likely take more total money since different players can now spend different amounts depending on their engagement and preferences.”

In other words, if a user really likes your game, he or she may end up spending more than 99 cents.

Flurry said that can represent a lot more money, even though more than 90 percent of players never spend a dime.

Valadares writes that the number of people willing to spend money in a free game ranges from 0.5 to 6 percent.

The freemium model has been well demonstrated on Facebook, where game companies like Zynga are making millions of dollars from users willing to pay for small items inside of games, such as crops for the farm or energy boosts to continue playing.

Zynga has disclosed that a majority of its revenues come from a very small percentage of users.

While many independent game studios have embraced freemium models, it’s been more difficult for other companies. Nintendo is perhaps the most vocal company speaking out against the trend.

]]> http://allthingsd.com/20110707/mobile-games-generate-more-revenue-if-given-away-for-free/feed/ 0 http://allthingsd.com/20110701/zynga-finally-files-for-ipo-to-raise-1-billion/ http://allthingsd.com/20110701/zynga-finally-files-for-ipo-to-raise-1-billion/#comments Fri, 01 Jul 2011 16:13:25 +0000 Tricia Duryee http://allthingsd.com/?p=92889 Zynga, a four-year-old company which has made its riches off selling virtual goods in social games, has filed to raise $1 billion in an IPO.

The IPO may potentially rank among the largest of the year, especially among tech companies. For instance, Yandex, which is considered the Google of Russia, secured $1.4 billion last month.

Zynga said it will use the cash for general corporate purposes, including game development, marketing activities and capital expenditures. It also may continue to make acquisitions. In an interesting twist, it also said it will use a portion of the proceeds to contribute to charitable causes through Zynga.org.

The company’s underwriters include Morgan Stanley, Merrill Lynch, Barclay’s Capital, Allen & Co. and Goldman Sachs. (One item sadly missing from the filing — a list of investors.)

In particular, what’s interesting about Zynga’s offering is that it will represent the first publicly held company that makes its revenues mostly from the sale of virtual goods, like an energy boost or a virtual collectible garden gnome.

The company said it operates in 166 countries and sells 38,000 virtual items every second. It has 60 million daily active users and 232 million monthly active users. Astoundingly, people play two billion minutes of play a day and have four billion neighbor connections.

The San Francisco-based company, which was founded by Mark Pincus in 2007, was named after his late American Bulldog, Zinga. It got an early start from launching Texas Hold’em Poker on Facebook, and today dominates the four largest applications on the social network.

Some of its hit titles include CityVille, Empires & Allies, FarmVille and Mafia Wars.

The game-maker has grown extremely quickly, acquiring more than one company every month for the past year. Today, it has 2,000 employees (some of whom, as my colleague Arik Hesseldahl notes, are about to become very wealthy).

In 2010, the company’s revenues totaled $597.5 million, compared to $121.5 million in 2009. In the first three months of 2011, it’s revenues already totaled $235.4 million.

In 2010, profits totaled $27.9 million, reversing a 2009 loss of $52.8 million. In the first three months of the year, the company broke even.

That’s how the company accounts for its revenues by the law, but Zynga has come up with its own methods in dealing with its financials as one of the first virtual good companies to go public, a subject I’ve written a lot about.

From 2008 to 2010, it said so-called bookings increased from $35.9 million to $838.9 million, and that its adjusted EBITDA increased from $4.5 million to $392.7 million.

It says bookings is defined as the total amount of revenue from the sale of virtual goods during the same period the purchase was made by the player. Under GAAP accounting, it typically spreads revenues over a 12-month period, which it believes is the average life of a virtual good.

Much of its success has been tied to the ability to create games that are attractive to a large userbase. Many of its early players were women who were looking for a way to unplug after a long day of changing diapers, or while a young baby was napping. Zynga and other social game makers are largely credited with expanding the number of people who play games beyond the traditional gamers, who play on the Xbox or PlayStation.

However, because of this social element of playing games with friends, Zynga’s success so far has been closely tied to Facebook. Over the years, the two have shared a hot-and-cold relationship. A year ago, Zynga entered into a five-year partnership with the social network, in which it agreed to expand its use of Facebook Credits in games.

The benefit of Facebook Credits is that there is a common currency across all games, which makes it easier to conduct microtransactions. The downside is that Facebook takes a 30 percent cut, representing a big chunk of a company’s revenues.

In the filing, Zynga revealed a huge piece of its business comes from games on Facebook. As of December 31, 2010, and March 31, 2011, 69 percent and 82 percent of its accounts receivable were amounts owed to it by Facebook, respectively.

The company’s dependency on Facebook is just one of its risks. Revealed in the filing is that Zynga does not have any special terms with Facebook. In other words, it must share three cents of every 10-cent credit that is sold to a user, like every other game company.

Another risk is that Zynga also relies on a small percentage of its players for nearly all of its revenues, meaning that many players play for free and avoid having to ever buy any virtual goods. It did not disclose that percentage.

As for growth, one blemish on the company’s record is that the number of daily active users has fallen to 62 million in March from 67 million in the same period a year earlier.

However, many other companies have seen a drop in that same time period, and is likely correlated to Facebook’s crackdown on allowing game companies to post an unlimited number of messages to a users’ wall promoting a particular game.

Related posts

• The Zynga IPO: Who Owns What, Who Makes What
• Zynga Has Raised $845 Million in Capital, But No Mention of Google as an Investor
• The Zynga-Facebook Codependency Becomes More Clear
• Here’s the Zynga S-1 to Play With (Get It?!?)
• Zynga Finally Files for IPO to Raise $1 Billion
• Day 3: Zynga Holds Tech Reporters Hostage in Endless IPO Watch
• What to Expect When You’re Expecting a Zynga IPO (Insider Selling, Natch!)
• A Sneak Peek at Zynga’s IPO: How to Turn Virtual Goods Into Real Money
• Exclusive: Zynga About to File for IPO
• Zynga Full Coverage

]]> http://allthingsd.com/20110701/zynga-finally-files-for-ipo-to-raise-1-billion/feed/ 0 http://allthingsd.com/20110629/what-to-expect-when-youre-expecting-a-zynga-ipo-insider-selling-natch/ http://allthingsd.com/20110629/what-to-expect-when-youre-expecting-a-zynga-ipo-insider-selling-natch/#comments Wed, 29 Jun 2011 15:07:46 +0000 Kara Swisher http://allthingsd.com/?p=92568

So exactly how fecund is “FarmVille”?

If reports hold, we’ll all find out today what the yield is from the online gaming phenom Zynga, which will finally be filing its regulatory documents sometime today.

The S-1 for a public offering valued at up to $20 billion, which will contain all kinds of juicy information about the San Francisco-based start-up’s business, is likely to come out after the markets close. Zynga is expected to raise $2 billion in the offering.

Before everyone gets to see what’s in it, there’s a lot that investors should be looking out for, based on recent IPO filings by similar companies, such as Groupon.

Digging Up New Accounting Ground

As Tricia Duryee pointed out, Zynga will be the “first major U.S. company supported primarily by the sale of virtual goods” to file.

That’s what will likely make the Zynga filing very interesting, from an accounting point of view.

How Zynga handles its accounting is sure to be much scrutinized, especially since Groupon attracted all kinds of ugly from its unusual treatment of its financial results.

To defocus from its money-losing under GAAP acounting, the Chicago-based social buying service used the more attractive “Adjusted CSOI,” which is defined as adjusted consolidated segment operating income.

My definition: Sketchy!

Zynga’s finances are expected to look better, reportedly generating about $400 million in profit last year on about $850 million in revenue.

It will be important to pay attention to the breakdown of those revenues and about what period of time the company accounts for them.

As Duryee wrote, Zynga has several choices:

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 model: 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.

In the Revenue Weeds

Another interesting thing to study will be the revenue breakdown for Zynga, especially as it relates to its biggest platform provider, Facebook.

Such as: How many in-game items are purchased directly on Facebook versus through gift cards purchased in the store? How big (or small) is Zynga’s advertising business? What about mobile games? Will the profitability of individual games be called out, with details about their performance?

And, of all its various distribution platforms for its games, where does it get the most mojo?

That’s important, since Zynga will be seen as a proxy for Facebook’s business. Thus, a lot of investors might find some nuggets of information, since the pair are so tightly intertwined as businesses.

Facebook, of course, has been famously trying not to IPO, so any indication of the social networking site’s business will be carefully studied.

Reaping the Insider Rewards

Lastly, it’ll be important to see who is selling what and when among current Zynga investors.

Groupon ran into a buzz saw of criticism from the giant payouts its founders took out of the company from its massive venture funding rounds.

As Peter Kafka wrote:

Groupon raised a total of $946 million in two funding rounds last winter. It kept $136 million of it to help run the money-losing company. The remaining $810 million was paid out, via stock purchases, to CEO Andrew Mason and some of his backers, including Eric Lefkofsky, and, notably, the Samwer brothers, who sold their CityDeal company to Groupon in 2010 … Of note: This wasn’t the first time Groupon had raised money and taken cash off the table. In April 2010, the company raised $130 million, and handed $120 million to many of the same people.

My definition: Even sketchier!

Along with its founder and CEO Mark Pincus, Zynga investors are the pantheon of venture players, including Digital Sky Technologies, Kleiner Perkins, Union Square Ventures and angel investors LinkedIn founder Reid Hoffman and Peter Thiel.

How much Pincus and others inside the company have taken out and are selling should be one of the first places new investors should look.

Because with the hyped valuations that many of these Web 2.0 companies are getting, who’s zooming who should be a key sign to pay mind to.

]]> http://allthingsd.com/20110629/what-to-expect-when-youre-expecting-a-zynga-ipo-insider-selling-natch/feed/ 0 http://allthingsd.com/20110628/one-more-use-for-facebook-credits-incentives/ http://allthingsd.com/20110628/one-more-use-for-facebook-credits-incentives/#comments Tue, 28 Jun 2011 13:30:14 +0000 Tricia Duryee http://allthingsd.com/?p=91776 Facebook Credits initially were used to help pay for virtual goods inside social games, then were used for other digital goods, like movies. Now other companies are leveraging Credits to lure consumers into connecting with their brands on the social network.

Today, ifeelgoods, which helps brands implement these incentive programs, has raised $6.5 million in capital. The first round was led by IDInvest Partners, a venture capital firm in Europe, with Tugboat Ventures also participating.

Michael Amar, co-founder and CEO of ifeelgoods, said its platform enables retailers to give away Facebook Credits to consumers, who can then perform tasks including liking the retailer on Facebook, signing up for an email distribution list, making a purchase, checking into a location or answering a survey.

Amar said giving Credits often works better than offering a coupon or discount code, because consumers like to believe they are receiving something, especially if they know they don’t have to make a purchase.

When the company launched in September, Amar said, there wasn’t a lot of awareness about Credits. But awareness has increased rapidly, because there is a lot of natural overlap between the demographic retailers are looking for and Facebook gamers, who may be 40-year-old housewives killing time between diaper changes.

Facebook Credits reach a new milestone on Friday when the payment service comes out of beta and the company requires all social-game developers on Facebook to use it — and consequently share 30 percent of the revenues.

An example of a promotion on Facebook is an advertisement that offers consumers five free credits if they enter their email address to be added to a distribution list. With one or two clicks, consumers can earn the points.

They can then post the offer to their wall so their friends can see it. Amar said consumers are willing to share this information 60 to 70 percent of the time.

Some of the retailers using ifeelgoods include 1-800-Flowers.com, GameFly, Ice.com, Meijer, Shopping.com, FTD and La Redoute.

Retailers must pay 10 cents apiece for the Credits, but Amar said the economics pencil out because it’s a small cost to get users to connect with a brand. Other applications using Credits as incentives include Booyah’s MyTown and Shopkick, which both require check-ins in the real world for a chance to win.

Amar said he imagines being able to provide other incentives in the future, such as credit on Skype.

With the funding, ifeelgoods plans to hire engineers and sales people and estimates it will have 20 employees in the fall. It also plans to expand in international markets.

]]> http://allthingsd.com/20110628/one-more-use-for-facebook-credits-incentives/feed/ 0 http://allthingsd.com/20110626/accounting-for-the-actions-of-the-winklevoss-twins-and-virtual-goods-are-both-hard-to-do-video/ http://allthingsd.com/20110626/accounting-for-the-actions-of-the-winklevoss-twins-and-virtual-goods-are-both-hard-to-do-video/#comments Sun, 26 Jun 2011 14:45:14 +0000 Tricia Duryee http://allthingsd.com/?p=90982 On Friday’s Digits, AllThingsD’s Liz Gannes and I discussed two difficult subjects both having to do with Facebook: Why the Winklevoss twins won’t give up on suing the company and why it’s so difficult to account for virtual goods inside social games.

Liz kicked off the show by talking about how the twins dropped their fraud suit against Facebook in favor of a new one that accused the company over whether it  ”intentionally or inadvertently suppressed evidence.”

Specifically at issue are a number of instant messages written by a young Mark Zuckerberg, which were too explicit for Liz to mention on air.

Later, I chatted about how the laws are not yet clear on how companies should record revenue from virtual goods, leaving them to come up with their own best practices. Meanwhile, Zynga will likely become the first example as it is expected to go public any week now.

Here are the clips:

]]> http://allthingsd.com/20110626/accounting-for-the-actions-of-the-winklevoss-twins-and-virtual-goods-are-both-hard-to-do-video/feed/ 0 http://allthingsd.com/20110624/what-zynga-will-look-like-as-a-public-company/ http://allthingsd.com/20110624/what-zynga-will-look-like-as-a-public-company/#comments Fri, 24 Jun 2011 13:00:34 +0000 Tricia Duryee http://allthingsd.com/?p=87539 With Zynga’s IPO filing likely to hit any day now, the question is: What will it tell us?

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.

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