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Zynga's Not-So-Quiet Period

NEW YORK ( TheStreet -- Zynga (ZNGA - Get Report) CEO Mark Pincus can't seem to stop running his mouth.

In the latest example, according to Venture Beat, Pincus told 100 potential investors at Warburg Pincus last week that the company could double its number of paid subscribers.

That would be news to the Securities and Exchange Commission because that figure isn't in the company's S-1 filing and the company is in a quiet period, meaning it is restricted in what it can say while promoting the upcoming offering.

"I don't see how the SEC can let that go without putting it in the prospectus," said IPO Desktop President Francis Gaskins. The prospectus says, "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."

Gaskins points to paying customers as Zynga's Achilles heel. Paying customers declined from March to June by 9%, although in September the metric increased 2%. Quarterly bookings per player have remained relatively stable in the $69 to $73 range.

The SEC wouldn't comment on the Zynga filing but the comments by Pincus get to the heart of Zynga's problem: Monetizing free games.

Zynga gets its cash through mainly through "Facebook Credits" as the social network is the dominant home for its games, such as Farmville. Facebook keeps 30% of the payments and gives Zynga the remaining 70%. The agreement is in effect until 2015.

Facebook delivers 93% of Zynga's gross revenues, and it's always risky to be so dependent on one partner. There's always the chance that Facebook may change policies as it did in 2010 when a tweak of communication channels for application developers. Zynga has said this change caused the number of players to decline.

Zynga is looking to raise $925 million through the sale of 100 million shares expected to price in a range of $9 to $10 each. The IPO is expected to price on Friday. The company faces competition from Electronic Arts (ERTS), Rovio, the maker of Angry Birds, as well as a host of other companies vying for game players.

Even Facebook could enter the social game space if it isn't content to just collect its 30% from Zynga. On a positive note, Zynga does have brand recognition, which is huge in the after-market for IPOs. Its players are dedicated and loyal and the company will have lots of money going into the development of new games.

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-- Written by Debra Borchardt in New York.

>To contact the writer of this article, click here: Debra Borchardt.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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