When Zynga goes public, Mark Pincus will become a very rich man. Based on what? Ultimately, based on his understanding of human addiction. With analytics to back it up.
Online multiplayer games really should be included the in the list of "sin industries" -- cigarettes, alcohol, gambling -- for the way they profit from human behavioral weakness. It is a great thing to base a business on, and it has been for thousands of years.
Here's how Zynga has appropriated the best practices from these businesses to build what could become an enduring, flexible, and very profitable business, occasional down quarters notwithstanding.
The first one is free. And the second. How can you get someone to pay, over and over, for something the didn't need until they get hooked on it? Zynga makes its games all free to start, but to truly compete in many of them, you'll want to buy in to unlock, or extend, your capabilities. You pay for the real high, a little bit at a time if you like.
As Zynga's S-1 says: "Our free-to-play approach attracts a larger audience than a traditional pay-to-play approach. This enables a higher degree of social interaction and improves the game experience for all players. Our players can choose to purchase virtual goods to enhance their game experience."
The company made $574 million from in-game purchases in 2010.
Peer pressure. Here, Zynga games use Facebook to multiply the social pressure well beyond what occurs in the physical world. Zynga games are fun, and they're more fun when you're playing with, and competing against, your friends. Zynga works hard to offset the potential annoyance of friends asking friends to join them in-game by giving the new players social rewards for coming into the group. It's been fine-tuning this balance since the company launched. This is Zynga's marketing engine. The customers, even the freeloaders, are emissaries.
Zynga says that, "60 million daily active users interact with each other 416 million times a day."
Different delivery systems. Not everyone who wants to get drunk wants beer. Not everyone who wants to wager money on random mathematical outcomes plays craps. Different people like their addictions in different forms. But Zynga's most successful products are different delivery systems for the same chemical: the empire building game. See Farmville, Castleville, CityVille, Empires & Allies, Mafia Wars 2, etc. There's an illusion of choice with Zynga games, but they all hit the same pleasure centers in the brain.
A few heavy users support the whole thing. As I said, you don't have to pay Zynga to enjoy their games. But even if you don't, you're contributing to the Zynga business by supporting the habits of the people who are: The heavy users who need other users to further their in-game experiences. Everyone contributes to the Zynga economy, even those who never give the company a dime.
You're either in or you're out. The most effective Zynga games require frequent attention. Ignore your world and it might whither. Step back in and you can zap in some wins, but different ones each time. Zynga games, like all good games, use variable-ratio reinforcement to encourage users to participate when they don't know exactly what the outcome will be. Zynga adds to the addictiveness by tacitly reminding players that when they're not playing, they're losing.
You can be a closet junkie. Zynga also makes it possible hide your addiction, even while partaking of the product. Nobody has to know you spent money for in-game energy. You could just be a good player.
I will grant, happily, that users do not suffer physical withdrawal when giving up Zynga games. I'll also admit that in some ways, paying $60 all at once for the single-player game of Elder Scrolls V: Skyrim, and paying $60 for Zynga credits to play CastleVille over the course of a year are not, economically speaking, all that different. Both take your money and eat up your time.
You can't rack up hundreds of dollars on your credit card playing a single-user game like Skyrim. But nor can you play it for free. Zynga has a plan for people to spend anywhere from nothing to "you spent what?" It lets its users find their own levels.
Zynga also takes well-understood addictive behaviors and makes them social, and does this better than almost any other company. Zynga works because of its ability to constantly fine-tune the delivery system and the revenue collection mechanism. It's manipulative by design in a way that no product you pay for up front can ever be.
It's absolutely the right way to run an online game business.