Zynga’s Quest for Big-Spending Whales

By Douglas MacMillan and Brad Stone

Joelle Ibgui collects horses. Lots of horses. In her stable of 108 colorful creatures is a Clydesdale, an Asian wild foal, a spotted appaloosa, and a clown pony, which sports a bow tie, a red honk nose, and a rainbow-colored wig—and cost about $5. The pony and its companions are not real animals, of course, but virtual ones in the hit online game FarmVille, produced by Zynga, the hottest gaming company on the Web and soon, perhaps, on Wall Street. Ibgui, a 30-year-old real estate manager from Kew Gardens, N.Y., has played FarmVille since its introduction two years ago and last year spent more than $500 to burnish her farm and get ahead in the game. “In the winter there came a point when I was playing six hours a day,” she says. “It does get addictive. It does get to the point where you’re not picking up your phone when it’s ringing.”

On July 1, Zynga filed with the Securities and Exchange Commission to raise up to $1 billion in a sure-to-be blockbuster initial public offering. To investors immune to ominous talk of tech bubbles, the numbers look alluring: The San Francisco company has 232 million active monthly users; last year it posted a net income of $90.6 million on revenue of $597 million, which was up fivefold from 2009. In the quarter that ended in March, profit was $11.8 million.

Although its games are free-to-play and widely accessible on Facebook, Zynga makes money by selling virtual items that are avidly hoarded by collectors, competitive players, and obsessives. Among the risk factors Zynga listed in its prospectus: “We rely on a small percentage of our players for nearly all of our revenue.” It didn’t specify the percentage of people willing to fork over a few dollars for a virtual barn, building, or tractor, but multiple people familiar with the booming business of digital goods, including one former Zynga employee who did not want to be named discussing internal matters, suggest that less than 10 percent of Zynga’s players spend money and less than 1 percent are responsible for between a quarter and a half of the company’s revenue. Las Vegas has a name for that kind of incredibly profitable patron: whales.

Game makers don’t like to talk about whale management, but people familiar with Zynga say it does internally refer to its high-value customers as whales and has offered them membership in a VIP “Platinum” club. Whales get special discounts and can wire sums of $500 or more directly from their bank accounts to Zynga. The company declined to comment for this story, citing its SEC-mandated quiet period.

One person familiar with Zynga’s business, who requested not to be named because his company works with Zynga, says a user spent $75,000 in one year on a single game. “The compulsion in Vegas is the illusion you can make money. The compulsion in social games is the illusion you can be more successful than your friends,” says Peter Relan, chief executive officer of CrowdStar, a Zynga rival that has about 24 million players, including as many as 200 people who spend more than $10,000 a year. “In both cases, you’re working with people’s emotions and psychological needs.”

So who are these whales? Relan and executives at other virtual-goods companies say they tend to be comparatively wealthy, older players. They’re also willing to pay to get ahead and avoid the slog of achievement—such as constructing buildings and collecting rent in CityVille—usually necessary to earn the in-game currency for buying virtual items. Tagged, a San Francisco social network and gaming company with 100 million registered users, says that for the first six months of the year, the top 1 percent of its players accounted for 46 percent of its gaming revenue. About half of those were American, and 59 percent of those U.S. players were male with an average age of 48. “A lot of these whales don’t have the patience or the time to go through all the stuff by playing,” says Greg Tseng, Tagged’s CEO who recently hired a former Myspace customer service executive to build a VIP concierge service to give deals to its best players. “They just dump in a lot of money to get ahead.”

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