Question

How does Zynga recognize revenue from virtual goods?

Zynga was founded in July 2007 and is headquartered in San Francisco, California. Around 80% of Zynga’s revenue comes from Facebook users. Facebook provides a social networking platform used by over 1 billion people, and Zynga is a video game developer with many products (e.g. FarmVille, MafiaWars) that interface with social technology sites like Facebook. Zynga has been publicly traded since December 16, 2011.

Zynga’s FarmVille players can use Facebook to purchase in-game currency they can use to acquire resources, such as hay and animals, in pursuit of a more productive virtual farm. Revenue from conversion of real dollars into in-game currency is big business: Zynga estimates that such sales, from FarmVille hay to Mafia Wars guns, accounted for nearly all of Zynga’s $1.1 billion in 2011 revenues and 12% of revenue for Facebook.

Revenue recognition in firms that earn money through socially-based use of virtual items is challenging. Zynga’s customers convert real dollars into FarmVille currency in order to purchase virtual goods. Customers’ real dollars become Farm Cash which the customers can use in the future to purchase virtual items in the Farmville application. When the customer uses Farm Cash to buy a tractor, for example, Facebook reduces the player’s Farm Cash, keeps 30% of the real dollar equivalent as a processing fee, and sends 70% to Zynga.

Starting in 2009, Zynga classified the game items it sells to players as either “consumable” or “durable” goods. The former category is for goods that players can immediately use, like energy in the game CityVille; the latter is for goods that players buy and keep for the duration of the game, such as tractors in FarmVille. Until 2010 Zynga estimated the average player life (the number of months a player on average continues to play the game) to be 19 months. In early 2011 it changed that estimate to 15 months. The shorter player life increased revenue for the six months by $27.3 million, turning a loss for the six months ended June 30, 2011 into a net profit of $18.1 million.

Required:
Discuss the revenue recognition at Zynga.

Answer 1