Zynga, like most other social games makers, relies on a small percentage of users for a huge chunk of their virtual goods revenue, as it disclosed in its S-1. For Zynga, 1% of users are responsible for 25-50% of revenue, according to sources who spoke to Bloomberg BusinessWeek.The name for these players is “whales,” which is what casinos call big-time gamblers.
It’s no revelation that a minority of players drive the majority of revenue for social gaming companies. What could be unsettling is that some players spend thousands of dollars per year on their Zynga games, some even tens of thousands.
That was the angle of an exposé by Ryan Tate at Gawker a while back, that unveiled Zynga’s “Platinum Purchase Program” for players who make purchases above $500, and said that basically Zynga turns lonely losers into addicts and milks them for every penny.
The reality is probably more nuanced.
People spend tens of thousands of dollars building dollhouses or refurbishing their cars or, as the “whale” expression indicates, gambling. That’s human nature. As long as Zynga isn’t defrauding or lying to anyone, we’re not sure there’s anything morally wrong here. Zynga games can be addictive, but just in the same way that dozens of other things all of us do are addictive.
From a business perspective, all fremium businesses rely on a small number of users for the majority of revenue. For example, 6% of Skype users account for almost all the revenue. That’s what freemium means.
It’s important for prospective investors to know that a small minority of users account for the majority of Zynga’s revenue. But by itself, that’s not alarming.