What Now For Zynga?

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

For most of us Zynga (NASDAQ: ZNGA) is generally spoken of in the same sentence as Facebook (NASDAQ: FB). The maker of the popular title Farmville has recently amended its terms of agreement with the social media giant. According to the new agreement, Facebook will no longer have exclusive rights to Zynga’s titles and are allowed to make their own gaming titles starting in March 2013.

Zynga will no longer be obliged to show Facebook ads and support Facebook credits. However, with a few exceptions, Zynga will be required to publish any of its games on Facebook that are playable on its own or other third party platforms. However, while Facebook is allowed to make its own gaming titles, the company has clearly stated that it is not interested in proceeding in that direction.

It was easy to understand why Facebook cut the cord with Zynga. Mark Zuckerberg in October stated that Zynga was providing a reduced contribution to Facebook’s revenues. Facebook's Zynga quarterly revenues were down 20% from last year, while Facebook's monthly revenues from all other parts of their ecosystem went up by 40%. Zynga simply wasn’t yielding enough for the social media giant, and they decided to cut them off. For the fiscal third quarter, Zynga earned 84% of its revenues through Facebook, down from 93% in the same quarter of the previous year.

When Zynga opened its own platform at Zynga.com, other developers saw their chance. This brought players like Electronic Arts (NASDAQ: EA) into the picture. EA has transferred its own titles to Facebook, including Sims Social and Monopoly Millionaires. The entire gaming industry is going through a rough patch at the moment, and one can only question the logic behind EA entering the online social gaming platform. There are opportunities that are waiting in this space, of course, just like there are in any other; however, you need a title that will capture the imagination, such as Angry Birds, and that isn’t exactly easy to make. The online social gaming world is dependent on trends – Farmville was one, then came Cityville, and if I’m not wrong, something called Fishville; but then these seemed to die out as quickly as they started.

For EA, the move to online social gaming isn’t a particularly smart one. The company is facing enough trouble after losing 30% of its stock value in the past year. Video game sales have been steadily declining as of late: November sales dropped 11%, with the industry's total retail spending down to $2.55 billion for the month. The move into a platform that doesn’t have a strong monetary stream isn’t exactly a smart decision.

For Zynga, however, the move is definitely away from online social gaming. The company now has to prove that it isn’t reliant on Facebook, and can open doors for other gamers and enter new spaces. Zynga is definitely going to make a move into the $30 billion dollar online gambling industry. This might prove a lucrative move. In 2011, a PWC study claimed that state governments, in their quest to refill coffers, were looking at taking a more lenient view on online gambling and were moving to legalize it pretty soon. This puts Zynga in a good position, with one of their more popular gaming titles being Zynga Poker.

Zynga has cut its annual guidance twice as its board approved a $200 million share repurchase program to support the stock price. The company is also in the midst of a cost saving program that could result in pre-tax savings of between $15-$20 million. The company has also laid off thousands of employees worldwide. The company is also in legal trouble with Electronic Arts over copyright infringement claims.

Zynga hasn’t focused much on mobile gaming either – which could be an option for them. With a large number of people owning smartphones, it would be a good option as well. The fact is that Zynga is knee deep in trouble and needs to make an efficient switch to one of these more lucrative platforms, and it needs to do so fast.

ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. 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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