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Social game maker Zynga, developer of games like FarmVille, filed for an initial public offering on Friday. The largest maker of games on Facebook will reportedly offer 10 percent of the company for sale at a $20 billion valuation. That compares to an $8 billion valuation for Electronic Arts, one of the biggest and oldest video game publishers, which competes head to head against Zynga for employees.

EA was founded in 1982 and makes games such as the upcoming Battlefield 3, pictured on the left. Zynga was founded in 2007 and makes social games on Facebook such as Empires & Allies, pictured right. While EA is part of the old guard, investors are chomping at the bit at the prospect of Zynga’s IPO because it dominates the market for games on Facebook, where it has 279 million monthly active users. Since Facebook is still private, investors may view a Zynga IPO as the next best thing.


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Zynga is growing faster than EA, but Zynga hasn’t completed its first year with a billion dollars in revenue yet. Meanwhile EA is generating nearly $4 billion a year making video games for consoles, PCs, mobile phones and social platforms such as Facebook; about $850 million in EA’s revenues comes from digital sources such as mobile, online, Facebook, and downloadable console games. Would investors be insane to view Zynga as more valuable than EA? For the first time, thanks to Zynga’s filing with the Securities and Exchange Commission, we can now do a side-by-side comparison of how the companies both performed in the first calendar quarter of the year.

Here are a few significant differences between two of the mightiest companies in the game industry:

Revenue: Zynga brought in $235 million in net revenue in the first quarter this year, up 130 percent from $101 million in revenue in the same quarter a year earlier. EA’s GAAP net revenue for the fourth quarter was $1.09 billion, up 11 percent from $979 million in the prior year.

Profit: Zynga made a net profit of $11.8 million in the first quarter this year, up 84 percent from $6.4 million in the first quarter of 2010. EA’s net income was $151 million, up five-fold from $30 million a year earlier.

Cost of goods sold: Zynga’s cost of goods sold were $67.6 million, up from $32.9 million a year ago. EA’s cost of goods sold was $328 million, up from $298 million a year ago. This is the cost for getting products out the door.

Marketing Costs: Compared to EA, Zynga spends very little on marketing. Zynga spent $40.2 million on marketing in the first quarter this year and $17.4 million a year earlier. EA spent $194 million on sales and marketing, up from $171 million a year ago.

Selling, General and Administrative Costs: Zynga’s administrative costs only make up a fraction of the company’s total costs. Zynga spent $27.1 million on administrative costs in the first quarter this year, compared to $16.5 million in the first quarter last year. EA spent $75 million in administrative costs in the quarter ended March 31, down from $79 million a year ago.

Employees: Zynga had 2,268 employees at the end of May and 1,858 at the end of March 31. EA had 7,645 employees at the end of March 31. Back in December, 2008, Zynga had 157 employees. About 64 percent of the Zynga employees have been there less than one year and 92 percent have been there less than two years. But Zynga has a number of former EA executives, including John Schappert (former No. 2 at EA), Steve Chiang, former head of EA Sports, and Mark Skaggs.

Cash: Zynga has $995.6 million in cash and marketable securities. EA has $2.2 billion.

Social game users: Zynga had 236 million monthly active users on March 31, flat compared to a year ago. EA had 36 million monthly active users (from its Playfish acquisition), down from 51 million a year ago. Zynga has more users than the next 15 competitors combined on Facebook.

What does it all mean? EA beats Zynga on just about every measure, but it is valued at less than half of Zynga, based on the expected valuation of the IPO. That’s insane, and it shows how frothy the market is for internet stocks. Zynga’s hold on its users is fragile. If it doesn’t come up with a hot game, users will cycle through its games and move on to others. If Zynga launches games that are duds, the bubble will pop.

On the other hand, Zynga has become a distribution powerhouse, with games like Empires & Allies growing to 46 million users in a month because of viral links to other games. Each new Zynga game is turning out to be more successful than prior games. If Zynga can also grow in other parts of the world and make headway in mobile games, it will be less dependent on Facebook for revenue.

The danger for EA is that froth has a way of becoming real; Zynga’s higher potential valuation means that the market views Zynga as the future and EA as the past. Zynga is expected to be even more valuable than Activision Blizzard, the largest video game company, which has a $13.5 billion valuation. Again, that’s crazy, considering Activision Blizzard’s strength in online gaming via World of Warcraft. To truly earn its place as the world’s most valuable game company, Zynga will have to live up to its tradition of being a disruptor.

Please take our poll on which company is more valuable:
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