GamesBeat

Zynga points to the obvious IPO risk: Facebook

Social game company Zynga’s just-announced S1 filing, its first step towards an initial public offering, not surprisingly lists its relationship with Facebook as its first (and potentially biggest) risk factor.

Zynga’s social gaming success has become inexorably intertwined with Facebook over the past few years. Zynga provides the games, including hits like Farmville and Cityville, and Facebook provides hundreds of millions of users (over 500 million today) who ended up being the perfect market for casual games. Should anything happen to disrupt the companies’ relationship, both Zynga and Facebook could lose big.

“Facebook is the primary distribution, marketing, promotion and payment platform for our games,” the company wrote in its S1 filing. “We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future. Any deterioration in our relationship with Facebook would harm our business and adversely affect the value of our Class A common stock.”

Last year, both companies were in a nuclear standoff over Facebook’s demand that Zynga, as well as other social gaming companies, use its Credits virtual currency exclusively. Just like Apple does with transactions on its App Store, Facebook gets a 30 percent cut from Credits transactions. Zynga went as far as to build a separate site, dubbed Zynga Live, that would house its games if its relationship with Facebook fell apart. Luckily, the companies avoided all out war and eventually entered into a five-year “strategic relationship.”

In its S1 filing, Zynga notes that its business would be hurt if Facebook limits access to its platform by game developers, changes its terms of services, develops better relationships with competing game companies, or develops its  own game offerings. And of course, if Facebook goes the way of MySpace, then Zynga would have to find a new online home.

Outside of Zynga’s relationship with Facebook, other IPO risk factors include the fact that the company operates in “a new and rapidly changing industry,” which makes evaluating its business somewhat difficult, as well as the fact that it relies on a small portion of players for all of its revenue.

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