Facebook and the internet games developer Zynga, which are closely tied, are likely to list their shares soon, possibly prompting a repeat of events a decade ago, writes Tony Glover
A The dot-com boom of about a decade ago looks it's like being repeated as investors await a flurry of new stock listings led by Zynga, a USinternet games developer, and expected to include Facebook.
Zynga hopes to raise about US$1 billion (Dh3.67bn), valuing the company at approximately $7bn, when it lists its shares. According to industry watchers, the initial public offering (IPO) of Zynga stock could take place as early as this month.
The company's website, however, gives little clue as to why Zynga should have almost the same market value as the established video games giant Electronic Arts (EA), which has a market capitalisation of about $7.7bn. Even Zynga's expected $7bn valuation is only half the $14bn some US analysts originally thought the company might be worth post-IPO. The Zynga website has a hastily put together start-up feel to it, with none of the sleek graphics and video trailers used by more established games companies such as EA.
Nevertheless, Zynga recorded nine-month revenues of $829 million, showing earnings of a little more than $30m. There are two important strengths underpinning Zynga's success. One is it is as much a social networking company as a digital games developer. The other is the company's number-crunching analytics software it uses to mine customer information.
Zynga's credo is: "The best games encourage people to engage with others."
By encouraging users to compete with each other across a range of fixed and mobile devices, Zynga is also able to merchandise some of its digital creations in the form of digital add-ons to games such as FarmVille, Mafia Wars and Words With Friends.
"Their social nature tends to encourage regular gameplay and, for an albeit small percentage of users, regular purchases of virtual goods, [such as] animals for a farm, buildings for a city, etcetera," says Tim Shepherd, a senior analyst at the research firm Canalys.
"That Zynga is at the forefront of social gaming which, along with mobile, are regarded as the two new frontiers for the gaming industry, has helped increase its value."
The other core value potential investors have identified in Zynga is its shrewd use of analytics software to mine the vast computer banks of information it holds on its users to encourage them to interact socially and try out new games. Its software is seen by some analysts as the key to its future growth and a path for other businesses to follow.
"Zynga does continue to generate engaging titles and that, combined with the value of an analytics-led approach to the gaming market, is compelling," Mr Shepherd says. "I believe that analytics and the intelligent use of data has an increasingly key role to play across business generally.
"In the technology sphere specifically, insights around [anonymous] consumers' behaviour will help steer online retail, application and content stores to target the right product at the right people; but it will also impact the design and targeting of products and services across the board," he says.
"Behavioural analytics, content personalisation and service recommendation are increasingly table stakes for web businesses," says Adrian Drury, a lead analyst at the research company Ovum.
Zynga has another advantage. It trials games on third-party computers, only developing its own data centre resources, referred to as "Z-cloud", once it believes it has identified a clear growth curve for a particular game.
Some Silicon Valley investors are now expecting the Zynga IPO to signal the dawn of a new dot-com boom.
"This is not exactly a dot-com bubble repeat, as there is genuine underlying value in play here," says Mr Shepherd. "But there are undoubtedly some similarities and I believe there is an extent to which hype around social media companies is driving up their value despite their as yet unmatured and unproven business models."
Zynga's success is closely tied to that of social networking giant Facebook. Zynga's games have about 227 million active monthly users in 175 countries, mostly via games on Facebook. Facebook, which has more than 800 million active users, is expected to have its IPO next year. It may have little choice in the matter; industry watchers believe it may already have 500 shareholders, the level where US fiscal regulations make a listing mandatory.
A sign any current dot-com boom could run aground even faster than the last is the precedent created last month by the online discount voucher company Groupon. Its share price fell in the weeks following its listing last month on the back of fears of continued global economic turmoil.
Since then, the news from the world's financial markets has become even bleaker, and the stars do not appear auspicious for any IPO at the moment.
However, it remains to be seen if social networking sites such as Zynga can begin to restore the market's faith in internet IPOs.