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Betting the farm: Is FarmVille developer Zynga worth $9 billion?

Next Internet gazillionaire? Zynga CEO Mark Pincus is shown this year at the Zynga Unleashed event at the social gaming company's headquarters in San Francisco.
Next Internet gazillionaire? Zynga CEO Mark Pincus is shown this year at the Zynga Unleashed event at the social gaming company's headquarters in San Francisco.Stephen Lam / Reuters

Social gaming company Zynga turned millions of Facebook users into virtual farmers and mafia dons with its universe of virtual worlds. Getting consumers to pay real money for virtual goods was a tough nut to crack, but the nearly five-year-old company might have an even harder time convincing investors that it is worth $9 billion.

Zynga plans to price its shares at $8.50 to $10 a share, which would value the company at about $9 billion, when it goes public within the next couple of weeks. Only a few weeks earlier, its filings proposed a price target that would have given it a market cap of $14 billion. Even with these lowered expectations, Zynga's initial sale could generate $1 billion for the company.

Zynga dominates the social gaming space, a market that's predicted to grow 19 percent in the next two years, according to research company eMarketer. "They didn't necessarily invent social gaming, but they've really turned it into this large industry," said Paul Verna, senior analyst at eMarketer. "They dominate the market almost completely."  

But consumers are fickle, and fad-driven phenomenon can go from ubiquitous to late-night punchline very quickly. "Social gaming does continue to increase, but having said that, there's no guarantee six months from now this will still be a cool thing to do," Verna said.

If social gaming does prove to have long-term staying power, Zynga will have a lot more company in the future, as deep-pocketed competitors like Disney and Electronic Arts join the fray. EA recently acquired PopCap, a major Zynga competitor and developer of games like Bejeweled and Plants Vs. Zombies. Sam Hamadeh, CEO of research firm PrivCo., pointed out that Zynga's monthly average user number dropped by 8 million in just two quarters, and predicted the company will lose even more market share as competition intensifies.

Recent media reports indicated that the high-pressure atmosphere has led to discontent among Zynga's employees. Some analysts said that CEO Mark Pincus' management style, abrasive even in Silicon Valley terms, could be a stumbling block for a post-IPO Zynga as it tries to recruit and retain talent. 

"It would seem to me that Pincus burned a lot of bridges with employees and potential employees with his aggressive actions," Eric Jackson, founder of investment firm Ironfire Capital, said. "Once the IPO hype fades, people will say, 'Why would I want to put up with this?'"

Maybe employees will cash out and flee as soon as they can turn their stock options into cash. Rick Summer, senior equity analyst for research firm MorningStar, said the real problem created by Zynga's cutthroat corporate culture is that no one wants to be bought by them. "You never want to be the buyer of last resort," he said.

In other words, start-ups would rather stay on the sidelines until a more agreeable suitor comes by. That's not good, said Summer, because the influx of competitors into social gaming virtually mandate Zynga to spend some of that IPO cash on acquisitions. Startups that spurn Zynga create an opening for the company's competitors to expand at its expense. 

Even if it implements a warmer, fuzzier management style, Zynga will still face intense pressure. Jackson compared the company to movie or music producers."You're only as good as your last hit, and there's a constant need to come up with the next big thing," he said.

Some analysts voiced concerned about Zynga's lopsided relationship with Facebook. Zynga's Facebook advantage is that it can offer its games on Facebook's existing platform and can bypass the retail channel by which offline games reach the consumer. PrivCo's Hamadeh said the social behemoth, which is still privately held, confers a kind of halo effect on companies like Zynga. Investors think, "It's a great proxy for an investment in Facebook," he said.

But this leaves Zynga deeply dependent on Facebook, Morningstar's Summer pointed out. One option for Zynga would be to focus more on mobile games, a market segment predicted to grow even faster than social games. The drawback is that the solitary nature of these games don't offer the kind of organic growth Zynga enjoyed with the viral spread of games like FarmVille, where players recruited their friends to join the game. Plus, without Facebook, Zynga would have to decide if it wanted to develop games on platforms like Apple's iOS or Google's Android, or create its own platform and compete with these heavy hitters. 

"If you're only a developer of applications... that puts a cap on how big you can be," Summer said. But on the flip side, investors might be spooked if Zynga's success depended on going head to head with Apple or Google.

"They're just another gaming company," said Ironfire's Jackson. "I think there's way too much hype that's been attached to them."