Take-Two CEO questions Zynga’s business model

Strauss Zelnick, CEO of publisher Take-Two, has questioned Zynga's business model, saying the social gaming titan's proposed IPO has yet to go through because of its "sketchy metrics."

Speaking at the Reuters Media Summit yesterday, Zelnick said: "Zynga is a direct marketing company, 97 per cent of [whose customers] don't pay them anything, three per cent who do. They churn quite quickly and they get new customers. That is their model."

Zynga filed for an IPO in July, through which it hopes to raise a billion dollars, and while it has been delayed it is expected to complete before the end of the year.

The US Securities And Exchange Commission (SEC) has reportedly queried Zynga's unusual accounts because less than five per cent of its enormous userbase actually contributes to its revenue. The SEC then asked for Zynga to break down revenue on a per-game basis – information the company was apparently reluctant to provide.

In other words, Zynga is struggling to complete its IPO because it is the first social gaming company to go public; it has to prove that the genre provides a viable, sustainable business model, and that its $14 billion valuation is justified.

"I would argue being the number one player in [social gaming] is complicated, which is why Zynga hasn't gone public yet because their metrics are sketchy," Zelnick said. "I think they have disclosure issues, I think you are seeing their acquisition costs go up, marketing costs go up and they have very high churn."

Zynga's problems extend beyond SEC anxiety at an unproven business model. Profits fell 54 per cent in its most recent fiscal quarter despite an 80 per cent increase in revenue; CEO Mark Pincus was alleged to have threatened staff with dismissal unless they gave up stock options given out in the early days of the company, a claim he described as "false and skewed"; and the recently launched Mafia Wars 2 is shedding users, losing a million daily players since the beginning of the month.