'Farmville' Makers Putting Stock In Virtual Goods

Nov 6, 2011
Originally published on November 6, 2011 5:57 pm

Zynga is a company that makes money by selling nothing. Or, to be fair, by selling imaginary things, like tractors that plow farms on Facebook.

A "virtual good" is the term of art for an industry that minted $9 billion last year alone. Zynga is America's first virtual goods company to file an initial public offering. The IPO is expected to go through before Thanksgiving and will test whether the company's modern day alchemy — turning virtual goods into real money — is a game-changer for the gaming industry.

Misiek Piskorski is a professor at Harvard Business School. His job: to play and study popular online games like Cityville by Zynga.

"I forgot to come back to my city, so some of my plants have withered away," Piskorski explains as he plays the game on Facebook. "My friends actually have been kind enough to come back and unwither some of my plants."

Piskorski harvests his virtual crop and sells to a local grocer. Not for cash — at least, not the green, folding type. His money, like his goods, is virtual.

But for 5 percent of Zynga's 200 million monthly users, that's not the case. They buy a special currency to get ahead in the game, without relying on friends for help.

Or, Piskorski explains, they use the virtual money to buy luxury condos, yachts — goods that don't have a use per se, but are "just really beautiful to look at."

Zynga raked in $1 billion this last year, in sales of virtual tractors that plow virtual farms, or avatars that embody gamers' Web personas.

Tierra Cates, 19, sells Zynga currency at a CVS in Washington, D.C. She points to a shelf lined with pre-paid cards for Starbucks, Loews theaters and other businesses. One card has a goofy duck waddling up a pasture. It's for Farmville, Zynga's original mega-hit.

"I've seen kids come in with their parents and cry for these cards," Cates says. "My dad does it, too. And I think it's like, ridiculous."

Traditional video games make you pay up front. Zynga inverted the model: play for free. And, once you're hooked, pay to get ahead.

Revenue from virtual goods has helped Zynga kick the addiction to ad revenue — the curse of online businesses. The ads it does feature enhance the game. American Express sponsors blue virtual windmills that help grow crops. Lady Gaga sexed up the scene by releasing her album Born This Way on Gagaville.

Zynga officials declined an interview because, they said, they're in a "quiet period" required by the Securities and Exchange Commission before the IPO.

Eric Ries, author of The New York Times bestseller The Lean Start Up, is a Zynga fan. To be more precise, he's a defender of virtual goods. For skeptics who think virtual goods aren't real, he has this retort: "I don't think that you're using the word 'real' correctly."

Fashionistas spend $2,000 on a Prada handbag. Gamers spend $20 on an imaginary tractor or avatar or sword. It's the same, Ries says, except "the virtual objects are all tied to the specific environment in which they were developed." A sword purchased in the game World of Warcraft can't be taken into the real world, or into other games.

Sam Hamadeh, CEO of PrivCo, sifts through the financial data of private corporations and isn't so sure that virtual goods sales are anything more than a fad. Yet he estimates Zynga is worth $5 billion. Others say $20 billion.

The value comes down to whether competitors — traditional gaming companies like Electronic Arts or Activision — buy into the business model, Hamadah says. "Will Disney start offering games with their characters, in the same model?"

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LAURA SULLIVAN, HOST:

Now for the occupiers, it may be all about the Benjamins, but what happens when you use real money to buy imaginary things? It's happening every day on Facebook. People are paying to buy things for pretend farms and cities, thanks to Zynga, a virtual goods company. This industry took in 9 billion real dollars last year alone from consumers buying tractors and buildings that don't exist.

Now, Zynga's going public with an IPO expected in the next few weeks, and Zynga's trying hard to get ahead of the game by dropping millions of dollars on a few new games including "Castleville." NPR's Aarti Shahani set off to understand the market value of a business built on nothing.

AARTI SHAHANI, BYLINE: We'll start with a tour of Piskorskiville. It's a bustling city full of stores, row houses and red brick condos. A policeman patrols downtown, waving his baton. Northeast, there's a small community garden.

MISIEK PISKORSKI: I forgot to come back to my city, so some of my plants have withered away. And my friends actually have been kind enough to come back and un-wither some of my plants.

SHAHANI: That's Misiek Piskorski, the city's namesake. But city is a slight misnomer. Piskorskiville doesn't really exist, or one could say it totally does -- on his computer screen. Misiek is sitting in his office at Harvard Business School. He's a professor. His job: to play and study popular online games like Cityville by Zynga. Misiek harvests his virtual crop...

(SOUNDBITE OF COMPUTER GAME)

SHAHANI: ...and sells to a local grocer. Not for cash, at least, not the green folding type. His money, like his goods, are virtual. But for five percent of Zynga's 200 million monthly users, that's not the case.

PISKORSKI: You can buy a special currency and you can use it in two ways. You can spend it on speeding up certain processes or getting some functionalities that are available to you that are not available to others, but you can also spend the currency on beautifying the city.

SHAHANI: Luxury condos, yachts -- they won't have a use.

PISKORSKI: But they will be just really beautiful to look at.

SHAHANI: Zynga raked in $1 billion in sales this last year. That's 1 billion U.S. dollars, the green folding type, in sales of virtual tractors that plow virtual farms or avatars that make gamers just a bit more beautiful to look at. Nineteen-year-old Tierra Cates sells Zynga currency at a CVS in Washington, D.C. She points to a shelf lined with prepaid cards: Starbucks, Loews Theater, and one with a goofy duck waddling up a pasture. That's for Farmville, Zynga's mega-hit.

TIERRA CATES: I've seen kids come in with their parents and cry for these cards. Or older people, like, between late 30, early 40, a lot of them buy the Farmville cards.

(SOUNDBITE OF LAUGHTER)

SHAHANI: Why are you laughing? Why is it funny?

CATES: Because my dad does it too. And I think it's like, ridiculous. I think it's - say it's a $20 gift card. When it's gone, you'll be buying another one.

SHAHANI: That's exactly the point. Traditional video games make you pay up front. Zynga inverted the model: play for free, and once you're hooked, pay to get ahead. Zynga officials declined an interview because, they said, they're in a quiet period required by the Securities and Exchange Commission before the IPO. Eric Ries, author of The New York Times bestseller "The Lean Startup," is a Zynga fan, or to be more precise, a critic of the critics. To those who say virtual goods aren't real...

ERIC RIES: I don't think that you're using the word real correctly. What is real?

SHAHANI: Fashionistas spend $2,000 on a Prada handbag. Gamers spend 20 on an imaginary tractor or avatar or sword. Same difference, except...

RIES: Unlike in the physical world, the virtual objects are all tied to the specific environment in which they were developed. So if you have a sword in a game like "World of Warcraft," you can't take that sword with you into the real world, but you also can't take it with you into other games.

SHAHANI: The Zynga IPO is a test of whether this new thing, the virtual good, is durable.

SAM HAMADEH: Maybe just - it's a fad.

SHAHANI: That's Sam Hamadeh, CEO of PrivCo. He sifts through the financial data of private corporations. He estimates Zynga is worth $5 billion. Others say 20 billion. Ironically, it comes down to whether competitors buy into the business model.

HAMADEH: Now that they've shown the way, the question is will traditional gaming companies like Electronic Arts, like Activision, you know, will Disney then start offering games based on its characters in the same model.

SHAHANI: Zynga broke the curse of online businesses. It kicked the addiction to ad revenue, the bane of the Web. The ads it does have enhance the game. American Express sponsors blue virtual windmills that help grow crops. Lady Gaga sexed up the scene by releasing her album "Born This Way" on Gagaville.

Zynga's IPO will now test whether the company's modern-day alchemy - turning virtual goods into real money - is a game changer for the gaming industry. Aarti Shahani, NPR News. Transcript provided by NPR, Copyright NPR.