Why Zynga is a Great Business
With the Zynga IPO filing rumored to be hours away, I thought a light hearted blog post might be in order.
There are many aspects to economics behind video games that have been largely unchanged over the past two decades. Fundamentally, Zynga lept to an opportunity to take advantage of a social platform (Facebook) to challenge some of the fundamental limitations of distribution and monetization that plagued the software giants who dominated desktop and platform gaming.
Obviously, I am a fan of the company. The number of blog posts here about Zynga games should tell you that. But when people ask me in real life why I’m such a big fan of Zynga, I give them a simple tongue-in-cheek thesis.
Selling Things You Don’t Need
It’s a well know fact that selling people things they don’t need is a great business. Some might say it’s when retailers and/or products rise higher in the Maslow hierarchy of needs. By definition, when items rise up that motivation chain, more powerful emotions come into play. Fundamentally, no one needs a cotton candy tree. But Zynga gets to the emotions of why you might want one.
In the end, the willingness to pay for things you don’t need is shockingly high in an economy where people have disposable income.
Selling Things You Don’t Need that Don’t Exist
Hundreds of years ago, this was what selling “snake oil” was all about. Selling something that you don’t need, and that doesn’t exist has always been a great way to make money. Unfortunately, it also used to be a sure fire path to getting run out of town (and perhaps tarred & feathered in the process).
A little computer icon of a purple cow does not exist, and you don’t need it. But that doesn’t change the fact that Zynga has found a way not only to make you want it, but deliver it to you with an effective cost of goods sold of approximately zero.
So now we have a high willingness to pay, combined with low friction and low cost of goods sold.
Selling Things You Don’t Need, That Don’t Exist, and That Are Addictive
This might be called the holy trinity of virtual goods, but in the end, this is the most amazing part of the Zynga model. Certain types of social interaction are clearly pleasurable to people at a fundamental level. We love the inherent stimulation in getting a response, recognition or even just insight into another human being. Once we find a path for these interactions, we want more of it. By leveraging a social platform for its games, Zynga has integrated social stimulation into their economics with outstanding results.
So now we have a high willingness to pay, combined with low friction and low cost of goods sold, with relatively low distribution costs and a high propensity for repeat activity.
Any wonder that I wish I owned Zynga stock?
Congratulations (in advance) to all of my great friends on the Zynga team.