Game Over On Wall Street?

The lacklustre stock market debut for Zynga raises questions over whether the new tech bubble is already deflating, before Facebook's IPO

Shares in the US social media gaming firm Zynga, famed for its hit Facebook game Farmville, failed to sparkle on its stock market debut yesterday.

The initial public offering at $10 a share, which was at the high end of expectations, valued the company at $8.9bn (£5.7bn). But when the shares began trading on Nasdaq, they rose only a fraction before falling back below the IPO price.

Zynga was being closely watched on Wall Street and in the City because it is widely seen as a precursor to the flotation of Facebook, expected next year with an astronomic price tag of $100bn.

Investors have been desperate to buy into any company involved in social media as consumers spend more and more time on such sites. With Facebook not yet ready to float, Zynga offered the next best way to reach that audience of 800 million members and rising.

Zynga has more than 200 million monthly users, on a par with Twitter, and it publishes five of the top six games played on Facebook, including Cityville, Mafia Wars and Zynga Poker as well as Farmville.

The Zynga flotation, run by Goldman Sachs and Morgan Stanley, was hardly a damp squib. The IPO, equivalent to 11 per cent of the company, raised $1bn, making it the biggest US internet float since Google raised $1.7m in 2004.

Chief executive Mark Pincus, a 45-year-old ex-Lazard banker, only founded Zynga in 2007, naming the company after his dog. Pincus has become an instant billionaire with his 15 per cent shareholding worth around $1.34bn.

Ian Maude, analyst at Enders Analysis, said he was not surprised by the lacklustre opening. "They priced at the high end of the target price and there is always a lot of speculation about IPOs with people going in to turn a quick profit," he said. "And Zynga have just got one billion dollars in the bank."

Even so, some shareholders may be jittery. Many have got their fingers burnt before by dot-com stocks. Two recent debuts, by business networking site LinkedIn and discount website Groupon, have also been disappointing. LinkedIn shares are above their IPO price in May but have nearly halved from the peak. Groupon has gone sideways. Other social media firms such as MySpace and Bebo fell as fast as they rose.

Investors can always find reasons why it will be different this time and Zynga has shown it is possible to generate significant revenues, as opposed to just audiences, from social networking. Wall Street and the City also like gaming.

At a time when many consumers are reluctant to pay for digital content, people will still spend on games — witness the new edition of Call Of Duty, made by Activision Blizzard, which grossed more than $1bn in just 16 days. The global video games market is worth around £40bn, with the UK in third place with 7 per cent, after the US and Japan.

Zynga operates a "freemium" business model, a mixture of free and paid-for content. The games are free but users pay small sums for extra features or to give virtual gifts to their friends.

Zynga generated $829m in sales in the first nine months of this year, double a year earlier. Facebook takes a 30 per cent cut of revenues.

The Zynga model is not just about charging fees, indeed it is said only around 3 per cent pay. The other key revenue source is advertising. Farmville's sponsorship deals have included Starbucks paying for a virtual coffee store on the site.

The games firm can also tap into a trove of personal data thanks to being on Facebook. Click on Farmville for the first time and a user is asked for permission to let Zynga see their "name, profile picture, gender, networks, user ID, list of friends, and any other information I've made public".

Zynga may also look at a user's birthday, "current city" and "games and app activity". Then Farmville "may post status messages, notes, photos, and videos on my behalf". Lorna Tilbian, analyst at Numis Securities, believes advertising is a big opportunity for social sites. "I think they will take a lot of display advertising the way Google took classifieds," she said , pointing to the fact people are spending so much more time on games and online. "It just takes people's time away from traditional media."

Zynga's rise has hit established games-makers. The Farmville company is not far behind Activision Blizzard's $13.6bn valuation.

The fear is that Zynga is overpriced. At $8.9bn, it was valued at around nine times annual sales while Activision is on three times.

Consumers can also be fickle as even Farmville has lost users. Maude of Enders said: "We expect social games' life expectancy to shorten over time, due to increased numbers of games available and slowing growth in the number of social gamers."

Other analysts worry that Zynga is too closely tied to Facebook, responsible for 95 per cent of the games-maker's revenues.

Investors care so much about Zynga because of Facebook. Mark Zuckerberg, Facebook's founder, will certainly be monitoring every move of Zynga's share price after its less-than-inspiring debut. He knows its fortunes will be the best indicator of how Facebook's IPO will fare.

Still tempted: here's how to buy

Can Britons buy Zynga shares?

Most UK fund managers will have a North America desk so can buy Zynga shares easily.

An individual can also buy shares through a UK private-client stockbroker who will hold them in a nominee account. Dividends will be paid in dollars and are subject to US withholding tax.

But Lorna Tilbian at broker Numis Securities, says most individuals are likely to stick to UK firms rather than invest in the US.

"They don't want the currency risk, you're away from the action and something dramatic can happen overnight when you're asleep," she said.