Zynga’s IPO Legitimizes Social Gaming

Social media gaming company Zynga has filed for an initial public offering and in the process may be legitimizing an industry.

Zynga said it is looking to raise $1 billion for its IPO according to an SEC filing. The company becomes the latest social phenomenon to go public, following in the footsteps of LinkedIn. According to a report from IHS Screen Digest, iSuppli's IPO is significant for its impact on the social gaming industry.

Not only will this preliminary filing completely legitimize the social network games market, which has experienced tremendous growth since its inception three years ago, it will also underline the game sector's increasing shift away from a traditional product-based business to a digital, online and service-based growth opportunity. The filing will also demonstrate the games sector's central role in growing and engaging users of social network, said Piers Harding-Rolls, head of games at IHS.

Harding-Rolls says social gaming revenue exploded to $1.4 billion in 2010, which was up by a factor of 20 from $66.7 million in 2008. Zynga has been at the forefront of this explosion with a 39.1 percent share of the global market in 2010.

Zynga's freemium and microtransactional business model, which in its games allows users to buy virtual goods, has driven its financial success. IHS says Zynga's success legitimizes these models for revenue as well. The company's 232 million monthly active users means mainstream adoption has been realized and will drive adoption of this monetization approach in the West says Harding-Rolls.

Interesting enough, Harding-Rolls says the relationship between Zynga and Facebook has been beneficial for the popular social network company.

I believe that Facebook's incredible growth in users has been aided significantly by the rollout of its app platform, a central element of which is represented by gaming titles from Zynga and other companies, he said.

However, Zynga admitted in its SEC filing that it was unable to maintain a good relationship with Facebook, its business will suffer.

We have benefited from Facebook's strong brand recognition and large user base. If Facebook loses its market position or otherwise falls out of favor with Internet users, we would need to identify alternative channels for marketing, promoting and distributing our games, which would consume substantial resources and may not be effective, Zynga said in the filing.

The best is yet to come for Zynga and others in this space according to IHS. The research firm is predicting revenue of nearly $3 billion by 2015 for social gaming. Another research firm, In-Stat, has high expectations for virtual good sales. It said the worldwide market for the sale of virtual goods was $7.3 billion in 2010 and will double by 2014.

Follow Gabriel Perna on Twitter at @GabrielSPerna