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Investing in Zynga means betting that real people will put up real money for unreal goods. Can that really be happening? Zynga says yes, and it backs up its assertion by citing research that estimates sales of virtual goods to grow to more than $14 billion annually within three years.
I've no reason to challenge these numbers, which were supplied by researcher In-Stat, but after a week of playing the new Zynga game Empires & Allies, I can tell you that I'm having no trouble avoiding paying up. Mostly I work and then check in with the game during a break. If, at that time, I have got the resources and time to do things, I do. If not, I don't.
As addicting as E&A can be, it's not like Halo or Madden NFL, the hit console games from Microsoft (Nasdaq: MSFT ) and Electronic Arts (Nasdaq: ERTS ) where you sit and just play -- sometimes for hours. E&A and its Zynga peer games are ones you come back to, over and over again, often for just a few minutes at a time.
For those who don't want to wait, there's the option of paying up to accelerate things. Therein lies the key to the business. Get enough active players and this "freemium" model could draw in consistent, long-term revenue. Think of it like you would Activision Blizzard's (Nasdaq: ATVI ) signature subscription game, World of Warcraft.
But that's only if regular players ante up. I did once, shortly after signing up for E&A. So did a friend of mine. The only other two times I paid into the game I got something real in return: needed printer ink and a re-up of a magazine subscription. The bonus game points were a tagalong, which is a problem.
According to Zynga, only a very few of us love its games enough to be regular buyers of virtual doodads. "A small percentage of our players account for nearly all of our revenue," Zynga says in its S-1 filing. "We lose paying players in the ordinary course of business. In order to sustain our revenue levels, we must attract new paying players or increase the amount our players pay." [Emphasis added.]
Are there enough active social gamers -- gamers willing to pay up for goods that exist only on a computer screen -- to fund the outsized growth that Zynga's purported $20 billion valuation suggests? We're asking you. Please vote in the poll below and then leave a comment to explain why you will (or won't) invest in this IPO.
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Is there a real market for virtual goods?