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This is precisely Zynga’s aim. “You start spending time playing a game, and you find that you care about it for any host of reasons, if we [design] it well,” Pincus told TR, “and at some point you may see that by spending some money you can save yourself a bunch of time [or] get something that has status or changes your friends’ view of you.”

If this doesn’t sound persuasive to you, Pincus doesn’t mind. In fact, he accepts that most players won’t cough up money. The company has said in its pre-IPO filings that fewer than 5 percent of players ever buy something.

And yet Zynga makes it work because the total number of players is so large: an average of 54 million people every day, the company says. Zynga pulled in $829 million in revenue in the first nine months of 2011, double what it got during the same period a year ago. Nearly all of it comes from virtual goods; advertising in the games accounted for just 5 percent of revenue. Zynga’s net income was $31 million in the first three quarters of this year. That’s tiny compared with what some other video-game companies earn. For example, Activision Blizzard, a maker of games for consoles, PCs, and mobile devices, had nearly $1 billion in net income in the same period. And yet when Zynga begins selling shares to the public, its value is very likely to surpass Activision’s $13.6 billion market capitalization.

The challenge for Zynga will be to keep people coming back for more. Its tally of users has dropped slightly in each of the past two quarters. Most people play its games on Facebook, whose own growth is naturally slowing as the social-networking market becomes saturated. And when those people do buy virtual goods from Zynga, it’s often in the form of Facebook Credits, and Facebook takes a 30 percent cut of those transactions. Zynga is responding with games for mobile devices that don’t require going through Facebook—although that could make it harder to incorporate some of the social elements that made Zynga big in the first place.

Those elements, Pincus told TR, are crucial to the company’s plans to give people “a five-minute break from their day” that is entertaining and social. He said, “I think we’re at the beginning of a new medium of entertainment, just like the beginning of TV in the ’50s.”

Erica Naone contributed reporting to this story.

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Credit: Top: Robert Scoble. Bottom: Zynga

Tagged: Business, Business Impact

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