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Zynga Faces Questions Over Growth

NEW YORK ( TheStreet) --While Zynga has cultivated a loyal following for its Facebook games like FarmVille and CityVille, the company may face problems growing its user base, according to a new report.

Although Zynga converts about 90% of its players from an existing game to the next, only 10% of gamers are new, based on survey data from video game networking site Raptr.

"Having only 10% of players be new is scary considering the social gaming market as a whole is not growing as quickly as it used to," said Dennis Fong, Raptr's CEO.

These findings come at a crucial moment for Zynga, as it faces questions about its ability to sustain its growth ahead of its impending initial public offering valuing the company at $20 billion.

Last week, the social networking game maker revealed in an updated S-1 filing that quarterly profit during the June period fell more than 90% to $1.4 million from $13.9 million during the year ago period. Profit also dropped 92% sequentially from the March quarter.

Zynga said this decline was because it didn't put out any new games in the first half of 2011, which affected its revenue. The company was also affected by its transition to using Facebook's virtual payment system, Credits.

Facebook takes 30% of revenue generated by game developers.

Zynga is also battling new competition in the Facebook gaming arena, where it has dominated as the leading player up until now.

The Sims Social, a game from Electronic Arts (ERTS), launched on Facebook in August and quickly became the second most popular game on the platform.

"Up until this point Zynga hasn't felt threatened by anybody but it was just a matter of time," said Wanda Meloni, a senior analyst at M2 Research. "And the success of Sims Social shows there are people that are heading up the leaderboard."

Zynga joins other buzzy Internet companies who are now facing skepticism about their sustainability following eyepopping valuations.

Daily deals king Groupon, which filed for an IPO earlier this year, is now unclear about its timing for going public after cutting its sales figures for 2010 by more than half and announcing the departure of its COO.

Social media companies which went public recently have also seen a cooling off from investors.
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