Is Zynga The Most Profitable Company Ever?
Zynga's made a $400 million profit on $850 million revenues in 2010, reports the WSJ. — If that's true, that's an astounding 47% profit margin. — 47%! — By way of comparison, Google's profit margin is is 29% and Apple's is 28% …
Context & Ripple Effects
The WSJ numbers turn last year's private-market chatter into hard arithmetic: back in April 2010, GigaOM floated that Zynga could be worth $5 billion on little more than growth and FarmVille momentum, with no verified profitability to point to.
A reported $400 million profit on $850 million in 2010 revenue — a 47% margin that clears Google's 29% and Apple's 28% — is the kind of figure that forces investors to reprice that valuation from speculation to earnings multiple.
First-order effects
- If the WSJ figures hold, Zynga's implied valuation no longer rests on the 2010 hype cycle but on earnings power, putting direct upward pressure on the price any IPO or secondary sale would command.
Second-order effects
- Rivals in social gaming — EA's Playdom, Disney's Playfish and the rest — now have to justify why their margins trail a company distributing through the same Facebook channel, and Zynga's scale gives it leverage over that channel's terms.
Third-order effects
- Free-to-play social games emerge as potentially the highest-margin segment in all of consumer software — but one whose economics sit on top of Facebook's platform fees and viral reach, meaning the margin structure is only as durable as the platform relationship underneath it.
The trend: Social gaming is shifting from a growth-story sector valued on users to an earnings story where free-to-play operators out-margin the biggest names in tech — and platform dependence becomes the key risk to those margins.