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Zynga will drive in-game mobile purchases with IPO funds

Zynga is looking to raise funds through an initial public offering so it can invest in driving further growth in mobile and in-game purchases.

Last week, Zynga filed for an IPO with hopes of raising up to $1 billion. Among other things, the company will use the funds to boost sales for in-game purchases and build a bigger mobile presence.

“The future for Zynga is mobile, which can provide an ongoing gaming experience for users,” said Tole Hart, a senior analyst at Yankee Group, Boston. 

“Zynga makes a lot of money from in-app buying,” he said.

Sales are growing
San Francisco, CA-based Zynga is a social network game developer that has 148 million monthly unique users in 166 countries. Its revenues were $328 million in 2009 and $597 million in 2010. It offers popular games such as Farmville and CityVille and is leading game publisher on Facebook. 

Players of Farmville and CityVille can purchase digital goods such as seeds for their farm to improve the gaming experience. These purchases can enable users to extend their play sessions, personalize their games environments or accelerate their progress.

Sales of these digital goods are already one of Zynga’s leading sources of revenue and volume is growing.

For example, Farmville achieved record revenue in the quarter ended March 31, according to Zynga’s SEC filing.

“Some of the studies that I’ve read report that over 50 percent of the money that free apps make is based on in-app purchases,” Mr. Hart said.

“These games can be very addictive and consumers want to improve their game experience with these purchases,” he said.

In general, sales of digital goods  are also growing.

According to recent data from Juniper Research, digital goods purchases make up the largest segment of mobile transactions. The segment is forecast to more than double by 2015.

Zynga will look for ways to capitalize digital goods sales through further monetization of its games.

“We strive to offer increased selection, better merchandising and more payment options to increase the sales of our virtual goods,” the filing said.

The combination of mobile, gaming and in-app purchases could prove to be a powerful one for Zynga.

Games are the second most popular Internet activity based on time spent, according to Zynga’s filing.

Additionally, games are the most popular category of apps on smartphones and represent nearly half of the time spent there.

The company sees a large opportunity to extend the brand and games to mobile platforms such as Apple iOS and Google Android and will use the funds from the IPO to help it reach this goal.

In the filing, Zynga said it will invest in developing and acquiring mobile development talent, technologies and content.

“One of the reasons Zynga did the IPO was to have resources to invest in mobile apps – mobile expands Zynga’s market,” Mr. Hart said.

Mobile is already a quickly growing category for Zynga, with its number of daily active users on mobile platforms growing more than tenfold between Nov. 2010 and June 2011.

“Some of the games require a response back to the game, so if users are away from their PC and their crops need to be watered, they can do it on a mobile phone,” Mr. Hart said.

The company will also focus on advertising as a growth opportunity, including branded virtual goods and sponsorships.

One of the biggest hurdles facing the company going forward will be recreating its success on PCs in the mobile space.

“The biggest challenge is to be able to replicate the PC experience and provide a good gaming experience for mobile users,” Mr. Hart said. “If they can do that, they will do well.”

Final Take
Chantal Tode, Assoc. Editor, Mobile Commerce Daily