Zynga Needs a New Business Model
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) have been battling it out in the smart phone market for quite some time. Apple typically caters to the higher end users, and Google’s phones running the Android operating system are often on the lower end of the spectrum.
Right now Google is winning that battle. As of July 31, Google’s Android software is on 52.2% of mobile devices, ComScore reports, compared to Apple’s 33.4% share. To arrive at its findings, ComScore surveyed more than 30,000 users.
Zynga (NASDAQ: ZNGA) is immensely interested in this data because it will give the firm direction in pursuing its corporate strategy. For example, iPhone users are often perceived as willing to spend more money on apps than Android users, mainly because the iPhones are higher end. Now that Zynga is designing games for smart phones, this information is relevant.
Zynga has since released 20 mobile games for the iPhone and 10 for phones running the Android operating system, and it must decide on which platforms to develop future games.
Shift to Mobile
The PC business is slowly declining. Zynga is a Levi Strauss kind of company – Levi’s jeans was started to support miners going to San Francisco during the gold rush. In essence, Facebook’s (NASDAQ: FB) success has enabled Zynga to exist. However, remember that unless it obtains distribution independent of the social media site, Zynga lives and dies by Facebook.
Facebook saw its daily active users decline last quarter to 141 million, 16% less than one year prior. This has spelled disaster for Zynga, who watched its stock price drop 70% from its $10 IPO. So how does Zynga innovate? It plays the shift to mobile.
Zynga says that the number of people playing its games on mobile units is growing three times faster than its PC gaming community. The tectonic shift has hurt Zynga’s core business and leaves the company in dire need of a pivot.
Problems and Fixes
The move to mobile doesn’t come problem-free. Zynga still has to decide on what programming platforms it will roll out its games. Also, mobile screens leave less room for ad space – pinching revenues from games it releases for free.
In addition, mobile users are less likely to pay for games or upgrades in games. For example, Facebook’s Farmville is free to play, but users can purchase virtual goods with their credit cards. These problems leave Zynga with a few tough decisions to make – what is the best place to distribute their products, and how do they monetize them? Below are a few potential solutions.
First, Zynga can stick with upsells. If the game is Farmville, Zynga can sell virtual goods or equipment. If the game is “Words with Friends,” Zynga can sell harder levels, new backgrounds, or other in-game upgrades.
Next, the firm could roll out a subscription model. This monetization strategy would augment other strategies, but the idea is to sell unlimited access to a certain number of unlocks or new features for a monthly fee. For example, Zynga could give users a set number of new levels and equipment each month for $2.99. Better yet, Zynga could charge an amount like $3.99 per month and give customers all of Zynga’s newly released games for that month.
Finally, Zynga’s best bet may to be to integrate mobile with the web. Yelp! for example, has a mobile component and a PC component. The PC component is writing reviews for local restaurants (who wants to do that with a smart phone?). The mobile component is actually using the product to search for local restaurants.
Thus, Zynga could still get users to play their games on Facebook by allowing gamers to customize their playing background or style using a PC, the changes then carry over to users’ mobile phones.
Overall, Zynga is in dire need of a business model change. When Facebook struggles, so does Zynga. Choosing which phones to develop games for is a huge decision, but the even bigger decision comes from how to monetize those new games. If Zynga cannot innovate fast, a 70% price decline will be the least of the firm’s worries.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, and Google. Motley Fool newsletter services recommend Apple, Facebook, and Google. 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.If you have questions about this post or the Fool’s blog network, click here for information.