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Did You Know Mafia Wars & Zynga Are Generating >$200 Million a Year?

It certainly was a surprise to me.  I have a few Facebook friends that have drunk the Mafia Wars Kool-Aid – some to the extent that they must be spending a couple of hours during each work day executing various nefarious plots.  Thanks to TechCrunch’s Sarah Lacy I have developed a much better understanding and respect for the Zynga team and business.  There one of the first companies aside from Facebook and MySpace that have successfully monetized the social media market place.

In her most recent post, Is Zynga a Target for State Attorneys General, Sarah describes some impending challenges for Zynga.  Before I could appreciate the import of the post, I had to trace back and understand how Zynga became a $200 million company to begin with.  The trail starts with an article Sarah wrote for BusinessWeek in April entitled Social Gaming Scores in the Recession.  Here’s a relevant quote:

“Despite the low costs associated with social games, many actually make money. That’s where entrepreneur Mark Pincus comes in. Pincus missed the last countercyclical gaming surge. Unlike most Silicon Valley geeks, Pincus isn’t into video games; and in the early part of the decade he was too busy starting a company called Tribe, an ultimately failed effort to merge local newspapers with the burgeoning social networking trend then made popular by Friendster.

Pincus doesn’t intend to make the same mistake twice. So he started Zynga, a site that specializes in social gaming. He’s raised almost $40 million from some of the most well-regarded names in venture investing, including über-angels Reid Hoffman and Peter Thiel. Other investors include Union Square Ventures’ Fred Wilson, and Kleiner Perkins Caufield & Byers.

Zynga’s most popular game is Texas Hold ‘Em on Facebook. It gets 2 and a half million players a day. Across all networks, 45 million people per month play Zynga games. The bulk of that is on Facebook. In April, Zynga passed widget maker RockYou, owned by NetPickle (NetPickle), to become Facebook’s top application maker, with 40 million monthly active users, according to Facebook. That’s one-fifth of Facebook’s 200 million users.”

It turns out that the Texas Hold ‘Em game is what might be getting Zynga into a little trouble.  To quote Sarah again,

“A few weeks ago a good source gave me a legal document written by a former federal prosecutor and senior Department of Justice official. It was arguing that social gaming company Zynga could be breaking multiple state and federal anti-gambling laws via its popular Texas HoldEm game.

A few things are striking about this. First off, Zynga is one a handful of companies building Facebook and iPhone apps that has found a way to make money. Lots of money. Close to $200 million dollars in revenues to be precise. The fact that it could be the next target for an overzealous state attorney is a big story in and of itself. Second, the fact that competitors are this threatened by Zynga’s cash machine shows an ugly battle royale brewing in the application space.”

You should go and read the full post where Sarah details why she thinks some aggressive Attorney General or politician could go after Zynga and what Zynga’s defenses might be.  The crux of the problem appears to be the ability to ‘gift’ Zynga chips to other players.  Evidently an unauthorized secondary market has sprung up in these chips.  While Sarah’s piece talks at length about how Zynga has worked through litigation and other means to try and shut these black market sites down.

A key implication of this threat to Zynga is that it might apply to all types of virtual good exchanges.  If nothing else, it may provide the politicians in Washington with something else to tax.  When I saw NationalJounral.com’s Peter Cohn report today that the Senate is considering a 10% excise tax on plastic surgery to help close the gap on healthcare reform costs, I knew that the idea of taxing virtual goods would be a winner.

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