Zynga depends on Amazon's cloud at a critical juncture--as it launches a new game.
A Zynga IPO will enhance and extend this cloud-leveraging strategy. Zynga with 2,000 employees and $598 million in revenues last year, is engaging millions of new users with each launch and is likely to double its revenues this year. Zynga gets its revenue by selling virtual assets to game players, using Facebook Credits. FarmVille players may play for free; they also can buy tractors, choice seeds, or other assets to accelerate the productivity of their farms. Avid players tend to spend small sums on their plots. (Under an agreement reached last July, Facebook takes 30% of this revenue.)
This revenue model has raised concerns that Zynga is dependent on Facebook, and Zynga acknowledged that concern in its IPO filing: "If we are unable to maintain a good relationship with Facebook, our business will suffer."
The deeper dependency in Zynga's business strategy, however, is Zynga's reliance on Amazon's cloud infrastructure. "A significant majority of our game traffic is hosted by a single vendor and any failure or significant interruption in our network could impact our operations and harm our business," the filing notes. The single vendor that it's talking about is Amazon Web Services.
After many pages, toward the end of the filing, this risk is assessed with some candor:
"Our technology infrastructure is critical to the performance of our games and to player satisfaction. Our games run on a complex distributed system, or what is commonly known as cloud computing. We own, operate, and maintain elements of this system, but significant elements of this system are operated by third parties that we do not control and which would require significant time to replace. We expect this dependence on third parties to continue."
As if Zynga knows the question will come up, it addresses the issue of Amazon's Easter service outage in its northern Virginia data center: "A significant majority of our game traffic is hosted by Amazon Web Services. ... We have experienced, and may in the future experience, website disruptions, outages and other performance problems due to a variety of factors. ... For example, the operation of a few of our significant games, including FarmVille and CityVille, was interrupted for several hours in April 2011 due to a network outage.
It continues: "If a particular game is unavailable when players attempt to access it or navigation through a game is slower than they expect, players may stop playing the game and may be less likely to return to the game as often, if at all."
An even greater risk is if an Amazon service outage were to occur in the midst of a game launch--at the sensitive stage when word of mouth and "buzz" are about to bring it to critical mass. Zynga depends on Amazon infrastructure to get it through these launches, and it will need Amazon to always be there as the games reach their exponential expansion point.
Zynga acknowledges any future Amazon interruption will not only harm Amazon's but its own reputation as well. But the filing also notes, "We do not maintain insurance policies covering losses relating to our systems and we do not have business interruption insurance."
At the same time, Zynga has gotten this far on venture capital that totals $219 million, leading to a valuation that could be 90 times that amount. It is beginning to diversity into mobile games that run on the Apple iPad and iPhone, which might make it a little less dependent on Amazon.
A successful IPO will enable Zynga to address several problems. With fresh capital in its hands, it could rapidly build out its Z Cloud and bring more of its operations back in-house. It can produce more games for mobile platforms that don't use Facebook or Amazon. Or it could simply invest in deeper recovery methods that shift its operations out of an Amazon facility the moment it was disabled. That capability wasn't available in April.
Whatever its choices, Zynga has employed an unusual hybrid cloud strategy to reach the position it is in today. With IPO cash in hand, it's likely to continue to innovate in how it fits pay-for-use cloud infrastructure into its overall business strategy. I look forward to seeing where it tests the limits--and avoids the risks--in its future cloud decisions.
Charles Babcock is an editor-at-large for InformationWeek.
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