Zynga is getting ready to show the world why it deserves a valuation of almost $9B on net income of only $12M. Maybe I should cut Zynga some slack since it apparently made a profit of $400M in 2010 (I'd sure like to know where the WSJ got that number). Tomorrow's IPO will be a sweet deal for the founders once the lockup ends. The company only earns revenue from 3% of its user base. In other words, 97% of Zynga's brand-loyal users get a free ride. I wonder if the percentage of Microsoft Office users worldwide who pirate the software even comes close to 97% of the total market. Microsoft has the pricing advantage of an operating system accepted worldwide as a standard, with enormous switching costs and opportunity costs for businesses wishing to opt out on competing platforms. Online gaming has no switching costs at all. Continuously churning out hot titles is all that matters. The "Angry Birds" company Rovio is now envisioning big paydays from an IPO. Good luck with that. I hope the founders cash out as soon as they're able.
The dot-com bubble should have taught investors about the limits of a business model based heavily on giving away usable content for free. LinkedIn currently trades at a P/E over 900. That is clearly unsustainable. A platform that attracted tons of potential customers with free content will only be able to convert a small number of them to subscribers at a premium price. Investors chasing radical new business models need to know that customers accustomed to getting something for free can easily jump to another free service. This is why Alfidi Capital offers free content to all users. Let freedom ring.
Full disclosure: No positions in any companies mentioned at this time (except of course Alfidi Capital). No intention or desire to participate in any future IPOs of said companies. BTW, Alfidi Capital will never go IPO. No way is anybody ever going to own me.