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Zynga's quest for 'player liquidity'

Zynga CEO Mark Pincus: "The most important predictor of next month's usage is how many people you play with this month. We need to make sure you have enough interesting people to play with."

Zynga CEO Mark Pincus at "Zynga Unleashed" on June 26, 2012 Rafe Needleman/CNET

Mark Pincus has spent nearly a decade gambling on social networking. His bets have clearly paid off. With Zynga, which he founded in 2007, Pincus rode Facebook's social network to bring social gaming to the masses. Zynga's first game was, appropriately, Texas hold 'em poker. The company went public in December 2011, making Pincus a billionaire. Prior to Zynga, Pincus co-founded, a "friend" network that faded unevenly into history as Facebook began its rise to social-network dominance.

He was also an investor in Friendster, an early social network focused on dating, and along with LinkedIn founder Reid Hoffman, acquired the "Six-Degrees" patent, which covers "methods and systems for communicating about updates to the profiles associated with members of personal communication networks."

Hedging his bets, Pincus took a chance on Facebook in 2004, reportedly investing $40,000 in the fledgling company. That investment turned out handsomely, adding a few hundred million more dollars to his fortune.

After his decade of investing and exploring the social-networking jungle, Pincus has discovered a key element for harnessing the network effect -- player liquidity. In the poker world, player liquidity refers to the fact that games with the most players and filled up tables tend to attract more players. The same kind of liquidity principle applies to Facebook -- the more friends you have in common, the more likely that a friend request will be confirmed.

For Zynga, player liquidity is tied into Active Social Network (ASN), a metric that tracks how many people are actively playing with each other. "The most important predictor of next month's usage is how many people you play with this month," Pincus said. "We need to make sure you have enough interesting people to play with. Our poker game grew because of network effects, and has high player liquidity. For a given game you want to play, you want to know how many people are at your fingertips to play with at that moment."

"As we open to other game developers, we can help them measure ASN and drive their's higher, which will help our ASN get higher," Pincus added. "When they bring users to the network and have players stay on longer, then you have player liquidity." Zynga is opening its platform to third-party developers, allowing them to use its infrastructure and gamer network.

Zynga stock price since its IPO

With nearly 300 million users and 65 million active each day, Zynga has a substantial base of players. Its games generate 1 million player activities per second and 2.8 billion social interactions per day, with 1.8 trillion minutes of play over the last three years, according to the company.

But the shift to mobile, the hit-driven nature of the business, and new competitors are concerning investors, and it is reflected in the company's sinking stock price since its IPO. Currently, less than 10 percent of Zynga's social gamers are mobile, and user growth and daily activity has slowed.

"App data trend lines are not always up, but for one, two, or five years, they have all been up. New product launches drive step-function growth. We don't sweat the daily numbers," Pincus said. "We are looking more at whether we are putting good games in the market and doing a better job than others in keeping an audience engaged. If you compare us to other major players in the industry -- such as EA, GRI, and DNA -- and look at the percent of traffic with our games over quarters or a year, as well as revenues, you'll see that we have done the best job in the industry at maintaining traffic."

Pincus is focused on maintaining a high standard of player liquidity with a constant stream of new features and games that span the Web, smartphones, and tablets. Most of the upside for the company is still in Web games, however, which have a bigger audience and more revenue than mobile platforms. "Mobile is smaller, but the growth has the potential to make it more valuable," Pincus said.

Zynga's new The Ville game adds a Sims-like life-simulation title to a family of "Villes," games, such as Farmville and Cafe Ville

Some analysts have criticized Zynga for its dependence on Facebook.

"Everything we build is built on top of Facebook. It provides the first level of network effects, but there is space for us to build a game-dedicated network on top of that, and it is different than what Facebook is trying to be in the world," Pincus explained.

At the Zynga Unleashed event Tuesday, the company introduced Zynga with Friends as its network that sits on top of the Facebook 900 million user base. "Facebook has a Google-like opportunity to power every industry vertical, such as shopping, as they become more social," Pincus said. Well, not every category, as he noted that Zynga leads in the games vertical.

Both Google and Microsoft are offering platforms that could extend Zynga's user base, but Pincus is not ready to devote resources to them. "We apply a 90-10 rule -- when an application platform gets to the size we can see free apps grow to 10 million daily users in 90 days, then we invest in the platform at scale," Pincus said. "Microsoft and Google have not yet passed the 90-10 rule."

Google+ appears to be on its way to satisfying the 90-10 rule. Google just announced that Google+ has 250 million total users, 150 million monthly users, and 75 million daily users, and more usage from mobile than desktop.

Zynga team at "Zynga Unleashed" on June 26, 2012 Rafe Needleman/CNET

Adding new platforms, and even dealing with all the flavors of the Web, Apple's iOS, and Google's Android creates a level of complexity that makes it difficult for Zynga to maintain its entrepreneurial culture, especially with more than 3,000 employees around the world, many who joined through acquisitions.

"It's easier if you are building one product at a time. If you have Web and mobile, as well as the infrastructure and the network, you have a lot of competing products," Pincus said.

"You want each of them to feel they are the most important for the future of the company. We are dealing with a huge amount of complexity and competing priorities all the time. It takes a lot to be an entrepreneurial company at scale -- it's the hardest part."

If player liquidity is moving in the right direction, "employee liquidity" will likely follow -- loyal employees who then attract new, talented employees and a stock price that puts them in the black.