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Zynga's IPO filing gives glimpse into viciously competitive realm of social games

Details in documents filed with the SEC describe generous incentives to attract talent and substantial spending on settlements with rivals over copyright infringement.

July 12, 2011|By Alex Pham, Los Angeles Times
  • A Zynga employee works on the game FarmVille at company headquarters in San Francisco.
A Zynga employee works on the game FarmVille at company headquarters in… (Paul Sakuma, Associated…)

Zynga Inc.'s bid to raise $1 billion through an initial public stock offering provided a lens into the dog-eat-dog world of social games.

Details in documents filed July 1 with the Securities and Exchange Commission give a glimpse of how the hottest online gaming start-up has become a dominating force on the world's largest social network since its founding in 2007.

Zynga disclosed a half-million-dollar bonus last year to the company's chief counsel, Reginald Davis, for "securing a company-favorable settlement" in a major lawsuit. Although Zynga did not disclose the nature of the suit, it did announce in November that it had privately settled its high-profile dispute with Walt Disney Co.'s Playdom social games unit. At the same time, Zynga itself recorded a loss of $39.3 million from paying out its own legal settlements.

Such lawsuits brought by and against Zynga's competitors hint at the viciously competitive nature of the burgeoning, $7.3-billion social games business, where titles released by one company are freely cloned by others, triggering flurries of copyright infringement disputes that keep attorneys like Zynga's Davis busy.

In June, for example, Zynga filed a lawsuit against Vostu, a Brazilian game developer founded by three Harvard University graduates. The suit alleges, among other things, that Vostu's MegaCity game is identical to Zynga's popular CityVille.

"The general response to the lawsuits was that it was the pot calling the teakettle black," said Billy Pidgeon, a game analyst with M2Research. "Zynga itself has been accused of ripping off other games."

A spokesman for Zynga declined to comment, citing regulatory restrictions on speaking about matters related to the company's IPO.

"Lawsuits, sadly, have become endemic to the social games business," Pidgeon said.

One lawsuit, filed last month by a Los Angeles company called SocialApps, claimed Zynga copied its myFarm Facebook game, which came out in November 2008, six months before Zynga released FarmVille. The suit claims Zynga had engaged in discussions to buy SocialApps in May 2009. During those negotiations, Zynga was able to access the source code for myFarm, the suit said. Zynga called off the negotiations shortly after it received a copy of the myFarm source code. Weeks later, Zynga released FarmVille in June 2009.

Zynga was also sued in 2009 by David Maestri, the creator of Mob Wars, a popular social game on Facebook. He claimed that Zynga's Mafia Wars was a knockoff. Zynga settled the lawsuit that same year for an undisclosed amount.

"Very few of these social games are original," Pidgeon said. "That's because there's an aversion to risk and a tendency to replicate what's already out there that's doing well."

In its lawsuit last year against Disney's Playdom, Zynga alleged that Playdom recruiters raided Zynga employees and asked them to suggest how they would use Zynga game features to improve Playdom games. One Zynga employee hired by Playdom stole the Zynga playbook containing the "secret sauce" to Zynga's games, according to Zynga's lawsuit. Neither Disney nor Zynga disclosed the settlement terms.

What makes Zynga special is that it has managed to capture the lion's share of a market that's rife with aggressive copycats. As of Monday, 279.7 million users had played a Zynga game within the last 30 days, according to AppData.com, a site that monitors Facebook applications. Its next-biggest social game rival, Wooga, had 34.3 million players in the same time period.

Part of Zynga's ability to grow has come from its aggressive pace of acquisitions. The San Francisco company announced Friday that it had purchased Five Mobile Inc., a mobile game developer in Toronto. It was the company's 15th such deal in 13 months.

"Zynga has become the 800-pound gorilla in what is the largest social network in the world," Pidgeon said, referring to Facebook, which has 750 million active users. "And gorillas eat a lot of bananas."

Much of Zynga's purchases has been geared toward acquiring talent. But it's also been handing out big incentives to attract key people away from rivals. Among them was Steven Chiang, who had managed Electronic Arts Inc.'s sports business in Florida before joining Zynga last year as president of games.

In addition to his base salary of $242,308, Chiang received a $2.9-million bonus that included a $601,900 "relocation bonus" as well as $42,458 in moving expenses last year. Chiang also received stock in the company valued at $25.7 million.

Though Zynga has not yet priced shares for the public market, some investors are speculating that shares could be $20 or more, which would give Zynga a market valuation of roughly $16 billion.

"At the end of the day, what investors care about is growth," said J.T. Taylor, managing director of Arcadia Investment Corp. "I don't think the generous spending, and to some extent the lawsuits, will be the main things investors will look at. It will be more about how they maintain their dominant position and whether they can continue to grow."

alex.pham@latimes.com

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