The Most Important Question for Zynga Investors

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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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Fool contributor Tim Beyers is a level 29 Empires & Allies player and a member of the Motley Fool Rule Breakers stock-picking team. He didn’t own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Microsoft and Activision Blizzard and has opened a short position on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard and Microsoft and creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 15, 2011, at 6:54 PM, davaidesign wrote:

    "The Motley Fool owns shares of Microsoft and Activision Blizzard. The Fool has opened a short position on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard and Microsoft and creating a synthetic long position in Activision Blizzard."

    Wait... what?

  • Report this Comment On July 15, 2011, at 10:06 PM, peterpallesen wrote:


  • Report this Comment On July 17, 2011, at 5:57 AM, Vornheder wrote:

    I'm not a huge fan of Zynga's games, but my wife and a lot of people I know spend way more than a few minutes at a time on them (I played one once and can attest to how easily it is to be "hooked" -- it can become a real time-sink).

    While I also never paid into the game, I know a number of people who do so regularly. Those who don't or can't pay in can also speed their advancement by recruiting their friends to play with them -- this is in fact how I was first talked into joining Facebook to begin with many years ago.

    Zynga's games leverage both friendship and compulsive behavior -- I'm definitely going to bet on both of those things continuing to consistently make money for 'em.

  • Report this Comment On July 18, 2011, at 8:41 AM, Jbay76 wrote:

    Chris, with all your holdings, I never thought you'd have time to play video games, online or otherwise.:)

  • Report this Comment On July 18, 2011, at 10:32 AM, jeremy9999 wrote:

    If you think about it, buying a few in game items for $0.99 and playing the game for "free" is less expensive than paying $50-$70 for a console game. Depending on the player and the game, console games will generally take 20 hours before you've finished it. Then what? The game is traded, sold or forgotten about. Games like Farmville are a great way to attract different segments of the gaming market and for longer periods of time. You get a different price point and a different target market. Companies like Zynga, who can keep players interested and can continuously develop new games and twists, will be profitable.

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