Zynga Courts IPO Investors With Hybrid Cloud StrategyZynga Courts IPO Investors With Hybrid Cloud Strategy

Zynga has grown in four years from an online game startup that was losing millions to a powerhouse that is expected to be able to raise $1 billion in an initial public offering. Zynga's rapid rise would have been impossible without its partnership with Facebook and its hybrid cloud strategy.

At the same time, that hybrid operation remains a risk to its business, one that investors would do well to heed.

Zynga's prospectus, part of a cross-country tour by Zynga executives that starts Monday, aims to focus attention on the pending IPO. It notes that it offers "a new business model and a short operating history," which makes it difficult to judge its prospects. At the same time, investors are likely to flock to its stock because it's been able to attract 227 million active monthly users, or more than the next eight online competitors combined.

Most of those users play for free. That means Zynga is committed to serve a petabyte of content to its 54 million active daily users, who will collectively be online for two billion minutes, then collect 15 terabytes of data for analysis, with only a modest guarantee that all this activity will lead to sufficient revenue. Zynga makes virtual goods that players purchase in games like Cityville and Farmville; by some accounts, 4% do so.

[ Want to learn more about how Zynga's approach to cloud computing turns hybrid cloud on its head? See Zynga's Unusual Cloud Strategy Is Key To Success. ]

At the same Zynga knows it must continue to build an expanding set of game users to retain its value as a company. "Because the opportunity for social interactions increases as the number of players increases, we believe that maintaining and growing our overall number of players, including the number who may not purchase virtual goods, is important to our success," its prospectus states.

To do that, Zynga has to develop and launch new games, knowing that many will succeed but some will fail. Allen Leinwand, Zynga's CTO of infrastructure engineering, told information that his firm had launched Mafia Wars and Farmville on its own infrastructure, but in November 2010, it initiated Cityville on Amazon Web Services' Elastic Compute Cloud. Any game has a hard-to-predict growth curve. It can grow very slowly for months, then suddenly become popular, he said.

To be prepared for the sudden demand of millions of players requires a huge infrastructure investment by a gaming company. Farmville was a capacity planning challenge, growing slowly at first then bursting to 43 million players in 100 days. After that experience, Zynga decided to launch in the public cloud, with its ability to expand capacity on demand, then add data center space as demand for the new game levels out. Zynga doesn't build data centers. Rather it leases space from builders of wholesale data centers, puts its servers in them, and manages them to cope with predictable traffic.

In an appearance Nov. 30 at CloudBeat, an event organized by VentureBeat, an online publication for venture capitalists, Leinwand told attendees: "We were able to scale Cityville very fast (to 61 million active monthly users in 50 days on Amazon's infrastructure). We have the ability to move operations between the Amazon public cloud and the Z cloud, our private cloud." Leinwand noted at CloudBeat that Zynga employs 2,100 game developers "and people do cost money." Zynga is now developing games for multiple geographies "with individual game mechanisms," such as games slated for use in China. To employ the developers needed for all its varied game projects, it needs to keep launch costs down and does so by employing a common underlying engine for most of its games' logic. It also holds off investing in its own compute infrastructure until a new game's track record is established on Amazon's EC2.

Zynga's Z Cloud is "our private copy of Amazon Web Services," which eases the compatibility problem as game traffic moves back and forth between the external and internal cloud, Leinwand said at CloudBeat. He complimented his Z Cloud team's ability to expand capacity, when needed. "Our ability to deploy up to 1,000 servers a day is a reflection of the excellence of the teams we've built," he said.

The hybrid cloud has allowed Zynga to rapidly expand its user base without overinvesting in capital expenses before traffic has materialized. To build out data center capacity for a game that isn't going to succeed would be a costly mistake, Leinwand noted at one point.

Zynga has its own game logic and systems in the Z Cloud, but relies on the Facebook platform for the sharing and social networking aspects of its games. Friends may help a player run their farm in Farmville or build a neighborhood in Cityville, or trade assets built up in their own activity in one of the games. In July 2010, after negotiations with Facebook, Zynga started using Facebook Credits as its purchase mechanism for virtual goods in games. Facebook retains 30% of the revenue.

Zynga is expected to price 100 million shares of its stock somewhere between $8.50 and $10 during the week of Dec. 12, and offer shares for trading at that time. The IPO is expected to raise up to $1 billion and value Zynga as a $9-10 billion company. Zynga says in the prospectus that its future success may hinge on whether it gains players on mobile platforms, such as the iPhone, as well as Facebook. Zynga was founded in April 2007 as Presidio Media.

In the roadshow presentation, founder and CEO Mark Pincus states Zynga "is the only scalable platform for social gaming that delivers powerful network effects."

Zynga's ability to live up to that claim is based on its symbiotic existence with Facebook. It's also based on its ability to utilize the Amazon cloud in a way that other game vendors have not--as a low-risk launchpad for its new ventures. Investors will now have to decide whether companies like Zynga represent a high-risk proposition, given their dependence on other cloud players, or the way of the future.

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