Zynga: Big Catch for a Little Device

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Take a ten minute drive north of Zynga’s (NASDAQ: ZNGA) San Francisco headquarters, and you’ll arrive at Fisherman’s Wharf. The legendary market is home to hundreds of fisherman who come every day to buy and sell their daily catch. While Zynga has yet to enter the fishing business, recently the gaming company announced a catch of its own. The company reeled in Don Mattrick as its new CEO.

Faced with falling revenue and a failing mobile strategy, how can Mattrick turn Zynga around? Make a big catch.

Hooked

Since founder and former CEO Mark Pincus took Zynga public in 2010, Zynga’s stock has sunk by 70%. Mr. Pincus is the face of Zynga, but in an effort to right his sinking ship, abdicated the role of CEO to Mattrick. Pincus will still retain 61% ownership of the company’s voting rights, however, and will remain as Zynga’s chairman and chief product officer.

Mattrick was hooked from Microsoft (NASDAQ: MSFT), where he was the president of the firm’s Xbox division. At last month’s E3 conference, Microsoft released the Xbox One. Touting controversial policies that required users to connect to the Internet, and a regulated used game market, gamers were outraged. The backlash was great, and even though Microsoft quickly rescinded its unpopular policies, there is speculation that Mattrick was pushed out as a result of the disliked rules.

Despite his recent snafu, Mattrick previously led the Xbox division to record growth. When he took over Microsoft’s entertainment division in 2007, the company sold 10 million Xbox 360 consoles and had 6 million Xbox live customers. With his guidance, and the allure of social gaming, those numbers ballooned to over 76 million consoles sold, and 48 million active users, about a 700% sales increase for both metrics.

If he can draw these kinds of numbers at his new post, Zynga won’t be floundering for long. Rumors will continue to swirl about his departure, but one thing is for certain: Mattrick is Zynga’s new captain.

Reeling in revenues

I’ve heard it said that Zynga made its “first catch” on Facebook(NASDAQ: FB). The social media platform served as the perfect launching point for Zynga’s community-based games. The relationship was mutually beneficial, but both companies lost value when doubts over Facebook’s mobile revenue brought both stocks tumbling down.

Months later, Facebook is patching up its relationship with Wall Street, and Facebook’s mobile revenue is 23% of total revenue, up from 14% last quarter.

While Facebook proved it can successfully notch revenue by advertising on mobile devices, Zynga’s mobile advertising remains in question. Consumer usage is fast moving from PCs to smart phones, and Zynga needs to get on board. In the fourth quarter of 2010, sales of mobile devices, 100.9 million, overtook those of traditional PCs, 92.1 million.

In response to the growing pressure, then CEO Mark Pincus announced that the company would adopt a “mobile first” strategy. That’s a move in the right direction. After all, if Zynga can’t reach the largest pockets of people, those people can’t play Zynga’s games. The problem is that Pincus made the announcement nine months ago. How has Zynga’s plan worked out?

According to analytics firm App Annie, Zynga is the fifth-largest publisher of iOS games, yet it doesn’t crack the top 10 for iOS game revenue. In an industry where gaming revenue equals downloads, multiplied by price per download, Zynga only has half the formula correct. A “lots of eye balls” strategy works only when there are ads or back-end sales to subsidize it – otherwise it falls into the “grow fast, monetize later” category.

How can new CEO Don Mattrick make the mobile strategy work? There’s a solution: make a big catch. But not just any catch. Mattrick needs to hook a blockbuster.

Zynga’s blockbuster catch

If Zynga wants to avoid sinking to the bottom of the ocean it needs to raise revenue quickly. Sales fell 18% last quarter, and in a cost cutting effort, Zynga let go of 18% of its work force.

Zynga’s “big winners” lie in mobile gaming. Mr. Mattrick needs to let smaller games die, and direct focus upon the most profitable projects in mobile gaming. It shouldn’t be hard to prioritize – Zynga specializes in metrics-driven game design. The games Farmville and Words with Friends were both blockbusters, but if Zynga wants to catch big profits, its needs to throw out its line and hook another winner.

Mobile is the future. If Zynga can capitalize on the blockbuster profit model, the company might find itself needing a bigger boat, perhaps one too big for Fisherman’s Wharf.

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This article was written by Joshua Sauer and edited by Chris Marasco. Chis Marasco is Head Editor of ADifferentAngle. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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