Developers Shifting to Mobile Gaming

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Zynga (NASDAQ: ZNGA) is a potential growth story. But just because there’s potential doesn't mean investors should ignore the execution of key strategies by management.

How to play this game

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Source: Zynga

The company’s daily-active-user and monthly-active-user figures continued to trend lower going into the second quarter of 2013. That means its social gaming strategy model has to change. When games like Farmville and Mafia Wars first appeared, the idea was to offer in-game incentives to players for inviting their friends. Regardless, if a game stinks, people will stop playing.

Previously, Zynga used a variety of strategies to sustain growth. One of them was to pump out low budget games. The games were then marketed to gamers that were already hooked on Farmville. The company thought that it could cross-sell players from one low-end experience to another. Eventually, that failed and both investors/gamers exited in droves.

New CEO and change in direction

The good news is that we have one of the most talented executives in Silicon Valley running the company. The new CEO is Don Mattrick, and I'm impressed by what he may be able to bring to the table. According to the conference call, Mattrick set up a desk in the middle of the game development studio. And that's so he can track the productivity and performance of his employees. This isn't completely out of the ordinary; even Steve Jobs was known to frequently check up on his research and development teams.

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Source: Statista

Zynga believes it can and will have titles in the top 10. The top gaming franchise is currently Candy Crush Saga. Unlike Zynga’s model of having users buy success, the Candy Crush Saga pushes players to buy expansion packs within the game. If a gamer wants to advance to the next level, he has to pay with real loot.

The monetization of mobile gaming should be taken seriously. If Candy Crush is able to sustain its current trend then the game could potentially generate $231 million in revenue per year, according to Business Insider.

The good news

So here’s the good news for Zynga. The company has approximately $2.3 billion in assets and $493 million in liabilities. So it has plenty of cash to plow into game development.

Don Mattrick does have a lot of experience developing game franchises around consoles and PC's. So it shouldn't be too difficult to move away from social gaming and ramp up development of multi-platform games that could work on both consoles and mobile devices.

Until the company is able to generate revenue growth and launch top franchises for Android and iOS, I would temper expectations. On the upside, it still has a revenue stream from its existing franchises along with plenty of ammunition to change the direction of the company. 

Mobile gaming is an opportunity

Electronic Arts (NASDAQ: EA) has been able to grow its mobile segment by 64% year-over-year. The problem has been that console video game sales have been down for both the Xbox 360 and PlayStation 3. The console refresh will have a temporary effect on earnings, but for the most part, analysts are starting to warm up to gaming companies.

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Source: Electronic Arts

For the time being, mobile franchises won’t be a large source of revenue for Electronic Arts. Presently, most of the company's investment will go toward maintaining its pre-existing franchises like Battlefield and Madden.

The industry hasn’t grown much in 2013 due to a console refresh cycle. Microsoft (NASDAQ: MSFT), however, estimates that its install base can increase by 30% over the Xbox 360.

To Electronic Arts, Activision Blizzard, Zynga, and other well-established gaming companies, mobile gaming is a tough nut to crack. All companies are investing some money into it, while others like Zynga, are making it a primary focus. The problem with mobile is that none of the major gaming studios have any significant market share.

The upside to mobile gaming is that the industry is expected to grow at high rates. The lack of predictability largely indicates that smaller more agile companies like Zynga may be able to get a leg up on the major game studios.

Microsoft  reported a year-over-year decline in console sales. Going into the next quarter, its gaming segment is expected to generate low single digit growth. This closely correlates with AMD's weak guidance. However, demand could pick up in the fourth quarter as new consoles become available.

Conclusion

Until we get conclusive evidence that Zynga can launch a successful mobile product, investors should stay on the sidelines. Microsoft’s guidance largely contradicts that of Electronic Arts. Because of this, it's tough to be bullish about the next quarter.

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Alexander Cho has no position in any stocks mentioned. The Motley Fool owns shares of 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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