Not a good opening day for Zynga

In its debut as a public company, the online game maker saw its stock fall below the offering price - an unsettling indication of how Wall Street views Zynga's Facebook-focused business model. The initial offering price was $10, and the stock opened at $11. But in the first few minutes of trading, the price fell below $10 and closed at $9.50. From the WSJ:

Zynga's weak initial performance, which is unusual compared with other recent Web IPOs like that of Groupon Inc. or LinkedIn Corp., may have implications for the coming public offering of Facebook Inc. The social network is targeting an IPO between April 2012 and June 2012 that would raise $10 billion at a valuation of more than $100 billion, people familiar with the matter have said.

Zynga's problem, in a nutshell, is a shaky strategy for making money. I explain in the December issue of Los Angeles magazine:

Last summer San Francisco-based Zynga, which created FarmVille and other casual games for use on Facebook, began preparing a public offering that valued the company at up to $20 billion--an insanely high number for a business that's only four years old. Then came a sharp drop in earnings, followed by the stock market tumble, and by October the number being thrown around was closer to $10 billion. With the IPO being finalized, reality is setting in. Since Zynga's games don't cost anything to play, the company makes its money through the sale of add-on virtual goods like imaginary chickens or skyscrapers--and only 5 percent of the 150 million unique monthly users spend money on those items. In addition, Facebook takes a 30 percent cut of whatever Zynga collects. True, the games are relatively cheap to develop, but when so few players are paying customers, it's bound to raise questions. Recognizing the vulnerabilities, Zynga has announced plans to start its own social network, though it will continue to offer games on Facebook. Denis Dyack, president of Canadian video game developer Silicon Knights and an outspoken critic of casual gaming, told a trade publication earlier this year that when the business crashes, "it's going to crash very hard. I don't see there's an economy there."