In the First Wave of Social Media IPOs, Advertising Takes a Back Seat

LinkedIn ventured forth into the public markets with great success earlier this month and now comes word that Zynga, the casual game juggernaut, is preparing to go public sometime in June. Going beyond the simple spectacle of tech geeks frolicking in frothy billions, it's worth noting one element that's mostly absent in the first round of IPOs: advertising.

Zynga, which has established itself as one of the world's great time-wasting organizations, has grown to 295 monthly active users and 61 million daily active users as of February, 2011. And it has some impressive financials to show prospective investors: in 2010 Zynga had total revenues of $850 million, yielding a profit of $400 million, which is a heck of a lot more than most social media companies can claim. In 2011 Zynga expects revenues to more than double to $1.8 billion, while profits should jump to $630 million.

The company has already raised hundreds of millions in venture capital funding from investors including Digital Sky Technologies, Tiger Global Management, and others. The previous valuation of $10 billion seems certain to go up -- probably, way up -- following an IPO.

But advertising is a bit player in this, as Zynga still makes most of its money from the sale of virtual goods. At the end of 2009, virtual goods accounted for 90% of Zynga's revenues according to an inside source cited in the press, while Next Up Research put the figure at 80% in mid-2010. For the industry as a whole, eMarketer predicts advertising will contribute 20.5% of total social gaming revenues in 2012 -- up from 14.1% in 2010, but still a minority of total revenues.

Indeed, advertising appears to play a relatively small part in the other big social media IPOs (and acquisitions) of recent weeks. For example, while LinkedIn makes one third of its revenues from "marketing solutions," including text and display advertising on the site, its main growth area is "hiring solutions," which includes job-matching and automated headhunting services, and which soared 486% from $17.4 million in 2009 to $101.9 million in 2010, or from 22% to 42% of total revenues.

And although it wasn't an IPO, Microsoft's acquisition of Skype put the spotlight on another social media company where ads have taken a back seat -- at least so far. Skype's revenues (up until the introduction of display ads in March 2011) have been based entirely on people paying subscriptions for certain premium services, including calls to non-Skype phones and unlimited international calling. That may change, of course, now that Microsoft needs to justify the $8 billion price tag, and Skype CEO Tom Bates touted the potential of advertising, focusing on video ads: "We think advertising is a very powerful monetization stream for us, if you think about the size of our user base." But how this turns out is anyone's guess.

1 comment about "In the First Wave of Social Media IPOs, Advertising Takes a Back Seat".
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  1. Steve Schildwachter from Enterprise CMO, LLC, May 26, 2011 at 7:50 a.m.

    Erik, you've made an interesting observation. It depends on what we mean by "advertising". Social Media has turbo-charged word-of-mouth. Advertising's role has always been to drive word-of-mouth, not replace it. What you observe may just be a modern-day validation of this relationship.

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