"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Wednesday, July 20, 2011

Farmville and Zynga IPO

Now that we are in the next wave of desperate, risk-on, equity IPO's, this may be a good entry point for some easy money in equities.  Lately EA Sports has been saving face and Activision has been steadily rebounding.  The gaming sector has been under the public watch thanks to investor risk appetite and the news jumping on anything that is easily opined upon and analysis that isn’t required to be deep enough to go past ten minutes of catchy graphics with sounds (CNBC) and fast paced analysis.  Console style gaming will not be disappear anytime soon (within ten years).  

Here I offer a look at Farmville.  Awhile back (about 18 months or so) my girlfriend started playing Farmville.  I was getting the stupid spam in my email box thanks to her willingness to pass it in on for Zynga.  I decided to join after her relentless nagging so that I could send her things to “build” her various houses, barns, etc.  and because of my own curiosity into this new gaming style.  I discovered two things quickly; (A) the game is predominately played by women (all my “neighbors” were the women I was friends with on Facebook) and (B) that the profits were hidden in the math.  So like any good analyst I decided to breakdown what was at the time, the biggest game on Facebook having recently surpassed Mafia Wars with monthly users.  

The business plan of Zynga is similar to Social Security, they always need new people.  The game gets old and for anyone who has experimented with it.  Users discover the extreme waste of time one partakes in as they click aimlessly for silly achievements.  Those who are stupid enough to pay to play the game will easily spent 25 dollars to have a blue barn instead of the generic red one the game gives you to store all that extra, unused shit in, you know, so that as the seasons change you can spend an un-Godly amount of hours rearranging the farm to "keep up with the Jones'".  

Farmville has two basic price structures, FV Coin and FV Cash.  1 USD = Players get coins in the games by default and FV Cash is used to lure people in to get the big ticket items.  Where it gets sloppy is the way some items in Farmville are priced drastically different depending on what is used to buy them.  Whether users want a red or blue barn, the code is the same expect for the world “blue” or “red”.  Yet Farmville banks on players playing on emotion and not reason.  Below is the simple pricing structure from 2010 (for $5 users can receive 25 FV Cash or 7,500 FV Coins).  To represent what users receive as the USD value increase, I created the utility table.  You can see how steep the curve gets for FV Coins in relation to FV Cash.  Keep this in mind for later when you see the chart comparing one item that when exchanged for USD either cost $17 or $4, same item with a spread for $13 depending on whether FV Coins or FV Cash is used for the purchase, crazy shit.

Cash Table

Zygna Utility

I went through one Saturday morning and priced everything Farmville was offering, I mean everything. My girlfriend has never spent a dime on Farmville but if I were to assume that the majority of her farm, outside of any animals, was paid for with USD then it would cost roughly $1,273.95.  Given that single farm valuation I carried it through the table below and calculated (A) what Farmville itself should be worth with 80 Mn users having $1200 farms and then I assumed (B) 800K spend roughly $6000 (that could include some cost for advertisers that build custom farms on the platform).  Depending which way you choose (A) implied the current $10 Bn Zygna Market Cap is grossly undervalued or the more likely (B) that Zygna is over valued, strictly in terms of Farmville, without regard to advertisers or anything.  This is because this analysis was intended more to understand the granularity of how Zygna draws cash from users through Facebook and its platform only.

Zygna Price Table

And again, to wrap with with the miss pricing in the game, 1 Garden Shed sells for either 30,000 FV Coin or 30 FV Cash.   So for either $17.00 or $4.62 respectively you can own a Garden Shed in Farmville, or a Used PS3 controller for $17 or a used game for $4.  Given the current market sentiment and consumer spending habits, this model is doomed to fail without revenue coming solely or 90% from Advertisers.

Finally an article on the crazy shit one person did for stuff in this game

"The mother said: "The first use of my card was on 14 March. I discovered it on the 29th and the card was stopped at that point. Any transactions after that date were already in the system, so what I thought was a £427 spend turned into £625 over the next few days.

'The total spend is about £905, but the credits are still rolling in. Facebook and [game creator] Zynga will not refund anything as [the son] lives in my house. Facebook has disabled his account and http://www.guardian.co.uk/money/2010/apr/07/farmville-user-debt-facebook.'"