Zynga 2012 Annual Report Download - page 48

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction
with the consolidated financial statements and the related notes included elsewhere in this Form 10-K. The
following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual
results could differ materially from those discussed in the forward-looking statements. Factors that could cause
or contribute to these differences include those discussed below and elsewhere in this Form 10-K, particularly in
“Special Note Regarding Forward-Looking Statements” and “Risk Factors.”
Overview
We are the world’s leading online social game developer with approximately 298 million average MAUs for
the three months ended December 31, 2012. We have launched some of the most successful social games in the
industry in each of the last three years. Our games are accessible on Facebook and other social networks, mobile
platforms and Zynga.com. Our games are generally available for free, and we generate revenue through the in-
game sale of virtual goods, mobile game download fees and advertising.
We are a pioneer and innovator of social games and a leader in making play a core activity on the Internet.
Our objective is to become the worldwide leader in play by connecting the world through games.
Consistent with our free-to-play business model, compared to all players who play our games in any period,
only a small portion of our players are payers. 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 of players who may not purchase virtual goods, is important to the success of our business. As a
result, we believe that the number of players who choose to purchase virtual goods will continue to constitute a
small portion of our overall players as our business grows.
The games that constitute our top games vary over time but historically the top three revenue-generating
games in any period contributed the majority of our revenue. Our top three games accounted for 55%, 57% and
78% of our online game revenue in 2012, 2011 and 2010, respectively. The percentage of online game revenue
related to our top three games has declined during these periods as we continue to launch new games. These
more recently launched games increased our total online game revenue without necessarily being included as a
top three game.
We made significant investments in 2012 to drive long-term growth. We continue to invest in game
development, creating both new games and new features and content in existing games designed to engage our
players. We are also investing in other key areas of our business, including international market development,
RMG, mobile games, our technology infrastructure and our With Friends Network. In 2013, we expect to make
capital expenditures of up to $48 million as we invest in network infrastructure to continue to improve the player
experience.
How We Generate Revenue
We operate our games as live services that allow players to play for free. We generate revenue primarily
from the in-game sale of virtual goods and advertising. Revenue growth will depend largely on our ability to
attract and retain players and more effectively monetize our player base through the sale of virtual goods and
advertising. We intend to do this through the launch of new games, enhancements to current games and
expansion into new markets and distribution platforms.
Online Game. We provide our players with the opportunity to purchase virtual goods that enhance their
game-playing experience. We believe players choose to pay for virtual goods for the same reasons they are
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