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The Economics of Zynga

In the wake of LinkedIn’s rock solid IPO, the social networking buzz on Wall Street has shifted to Zynga, the social games behemoth with offices in San Francisco and Marina del Rey. It’s going to be another monster.

Perhaps one day, an IPO will circulate to all those who “like” Goldman Sachs on Facebook; under a heading like NYSEVille, players will be able to buy, sell, and trade commodities in a weird world launched each day by ceremonial bell ringing. In the meantime, there’s this fascinating tidbit from LA Times writer Alex Pham‘s recent profile of the company:

Brian Reynolds, Zynga’s chief game designer, in February 2010 gave a rare clue to the financial math involved in social games during a talk at an Academy of Interactive Arts & Sciences convention in Las Vegas. Reynolds said social games focus on the number of “daily active users.” In Zynga’s case, that number is around 49 million, according to AppData.com.

Between 3% and 5% of those players end up spending money on the game or signing up for a promotion. Reynolds threw out a hypothetical average of a daily player’s worth — a penny a day, or $3.65 a year. At that rate, Zynga’s 49 million daily players would generate roughly $180 million a year. If through clever game design and marketing Zynga pushes that player to spend just a little more, say two cents a day, its revenue would double.

Bottom line: Thanks to the upcoming IPO and Zynga’s unstoppable growth, the late American bulldog that Mark Pincus named the company after in 2007 will soon be tied to a much bigger footprint.

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