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It’s time to start taking bets on this question: Could Zynga become the most valuable company in the video game industry?

With its rumored funding round of $500 million, Zynga’s value is estimated to be $10 billion. That puts the company far ahead of Electronic Arts, which has a market capitalization of $6.47 billion. Activision Blizzard is the industry’s most valuable company, valued at $13.3 billion. This may be “bubble money” for sure. But like it or not, the video game industry is going to have to admit that the game is changing.

At the rate that Zynga’s value has been growing, you can expect that it will likely surpass Activision Blizzard’s value. I know for a fact that the executives at Electronic Arts and Activision Blizzard are thinking, “WTF?” How can this be? Zynga is just around four years old, while EA and Activision Blizzard are among the oldest in the video game industry.

On its face, it is absurd. EA’s projected revenue for the fiscal year ending March 31, 2011, is expected to be as high as $3.7 billion (non-GAAP). For calendar 2010, Activision Blizzard’s revenues were $4.8 billion (non-GAAP). EA and Activision both have more than 7,000 employees. Both are profitable on a non-GAAP basis.

Zynga’s revenues in 2010 are estimated to be $850 million, with a profit of $400 million, according to confidential sources cited in a Wall Street Journal story. The company has more than 1,500 employees and it has been buying a game studio once a month. By comparison, EA has said it is on track to hit digital revenues of $750 million in the fiscal year that ends March 31.

Back in October, Zynga’s value was a mere $5.27 billion, according to limited trading on secondary markets, where employees and other shareholders are allowed to sell their stock to well-heeled investors. At that point, its value surpassed EA’s. What did Zynga do to double its market value in a little more than three months?

If you look at Zynga’s value in terms of a multiple of revenues, it is trading at more than 11 times 2010 revenue. Activision Blizzard is trading at around 2.7 times 2010 revenue, and EA is somewhere around 1.7 times revenue. Is somebody overvalued here?

Zynga is most likely being valued on the basis of its potential revenues and earnings; since it is growing at a faster rate, investors are naturally going to value it higher. And Zynga is clearly part of the rarefied social media technology club that also includes Facebook, whose value has soared to $50 billion in a recent funding; Groupon, valued at more than $6 billion; LinkedIn, which is preparing to go public; and Twitter, valued at $8 billion to $10 billion. To give you an idea of how this group’s value has grown, we wrote a story in 2008 asking, “Is Twitter worth $150 million?”

Zynga has attracted enormous investor interest since it cracked the free-to-play gaming model, where the games are free but players pay for virtual goods. Asian game companies have done that as well and it is worth noting that Tencent’s value is around $46 billion on the Chinese stock market. Most of China’s online game companies, however, are valued at under $4 billion.

Zynga’s value has also grown in the past there months because it has moved past its first big hit, FarmVille, with its new game CityVille becoming the fastest-growing game ever. Plus, it’s getting serious about international expansion and mobile gaming (in the latter case through the acquisition of Words With Friends-maker Newtoy).

Mark Cuban, the investor who made $5.7 billion selling Broadcast.com to Yahoo in the last dotcom bubble, said in an interview that we’re in a pyramid scheme, not a bubble. He said investments in the hot companies are like an “internet chain letter,” where early venture capitalists are happily selling to late-stage venture capitalists, who are selling to private equity investors. Somewhere along the line, the last investor either gets caught holding the bag or the company goes public.

You can argue that Zynga’s value isn’t real, since we’re in a bubble, and it is bound to deflate. But traditional game companies shouldn’t get comfortable with that thought. That’s because Zynga could use its valuation to buy assets with real value. It has been buying a small game studio every month, but it has built enough of a cash hoard to buy a traditional game maker. It can invest enough money in new games where it will become a threat to be reckoned with. That is how bubble value turns into real value.

The naysayers have plenty of ammo, as they can argue that upstarts such as Zynga are still small in the grand scheme of things. Zynga learned during much of last year that being No. 1 is a fragile position; after FarmVille peaked, and before CityVille launched, Zynga was losing millions upon millions of users. Then a new hit game, CityVille, lifted it back into growth mode.

Lots of brands are going to attack Zynga’s core market of Facebook games this year. But it will likely be very hard to dislodge Zynga, which has moved into a kind of self-perpetuating state. Zynga has to spend a lot of money on marketing to stay there, but as long as it has the cash, and can get more of it, Zynga is very formidable on Facebook.

But let me point out the obvious. The gaming market’s growth isn’t done. With each major disruption, the audience tends to grow ten-fold, as noted by game pioneer Richard Garriott. We’ve seen that happen as social games exploded, reaching far more casual gamers than hardcore games ever did. And we could see this happen again with the arrival of game-capable mobile devices.

The biggest area of growth in the coming years is likely to be games for tablets and smartphones. In that market, EA has a huge position, while Activision Blizzard isn’t a player. And Zynga is just getting started in competition with big Japanese companies such as DeNA, which bought Ngmoco for $403 million, or roughly 13 times revenues.

If EA and Activision Blizzard think of themselves as console gaming companies, they aren’t thinking big enough. If Zynga thinks about itself as a Facebook company, it isn’t thinking big enough. Mobile gaming and the larger digital markets that go with it are going to be where the real value gets created, since the audience size will grow from the potential of 600 milllion Facebook to billions of users.

Mobile gaming is where the battle royal is going to be. And nobody has that market locked up yet. If everybody’s dreams about mobile come true, then the valuations of game companies are low. Now how’s that for a WTF thought?

Is Zynga’s rumored $10 billion value justified? Please take our poll below and leave a comment.

[photo credit: Joi]

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