Zynga's New Game: Diversification
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Facebook’s (NASDAQ: FB) second quarter earnings were actually in line with estimates. They reported $1.18 billion in revenue for the second quarter; the estimate was for $1.15 billion. One time compensation costs were the only reason they weren’t profitable. These compensation costs totaled $1.3 billion and related to their IPO; they also outweighed the 32% increase in revenue Facebook reported and resulted in a $157 million loss. Backing out the compensation costs and Facebook would have reported a 12 cent per share profit, which was in line with estimates. However, the Street was looking for more and Facebook’s stock dropped nearly 10% to a new low, 40% below their IPO price of $38 per share.
Facebook was not the only social site to disappoint with their second quarter results. Zynga (NASDAQ: ZNGA) the social gaming company behind Farmville, Cityville and now Draw Something posted a $22.8 million loss for the second quarter. This loss came despite revenue increasing 19% year over year to $332 million and Zynga’s purchase of mobile app Draw Something. Analysts polled by Reuters had expected revenue to come in at $344 million. Last quarter Zynga posted an $85 million loss on 321 million in revenue, mainly due to stock based expenses. This time last year, when Zynga was a private company, they had a small $1.4 million profit. Zynga’s shares dropped 40% on the bad news and Zynga’s results also pulled down Facebook, which gets roughly 12% of their revenue from Zynga games.
Zynga had several reasons for their poor performance. The first was that their older games that have been the bedrock of the company’s success are not being played as much as they used to be. These games include CityVille, CastleVille and FarmVille, they are all suffering from changes that Facebook made to social gaming. Facebook is promoting newer games over older games; this means that older games are showing up fewer times in its user’s news feeds. The impact this had for Zynga was a 34% drop in gamer engagement. The COO of Zynga stated that “Our users did not remain as engaged and did not come back as often.”
Another reason for Zynga’s poor performance was the delayed launch of their latest game The Ville. Zynga executives did not elaborate on why it was delayed. Additionally the $180 million purchase of the mobile social game Draw Something ‘underperformed;’ the once wildly popular game has been losing players almost since the day Zynga overpaid for it.
Zynga is addressing these areas, at least according to CEO Mark Pincus. Their new game The Ville already has 6 million active users and they are prepping a sequel to Farmville and a new game called ChefVille. Zynga is also tackling mobile by launching three new mobile games in the last quarter. However, they did mention that average revenue per user is far lower for mobile games like Draw Something. Zynga is hoping that the launch of two new ‘Ville’ games will help the company’s finances in the second half of 2012 as those titles are played on computers and are arcade style games.
Diversification is the key to Zynga’s success going forward. The first type of diversification they need is game diversification to appeal to a broader demographic of players. Sports and shooting games were mentioned by the company as a way for them to appeal to more male players. Zynga needs to increase their web presence off of Facebook, on their own websites and also on other social networks like Google+. Though the network has not taken off like Google (NASDAQ: GOOG) hoped, it has provided Zynga with a nice opportunity. Google has recently started accepting games on Google+, paving the way for Zynga to diversify.
Zynga also needs to boost their mobile offerings. Zynga says they see no reason that mobile won’t eventually provide the same average revenue per user that non-mobile does, however that is not the case currently. It is not just Zynga that is having trouble monetizing from mobile; Facebook is also facing lower mobile revenue. Until mobile revenue picks up, Zynga needs to provide a wide selection of popular mobile apps so they can make up their missing revenue with user volume.
Zynga is working on a platform called ‘Zynga with friends’ which should enter beta later this year. Zynga with friends is a ‘Social Lobby’ that allows friends to meet and play games cross platform. It will also include an activity feed, chat and multiplayer features. In 2013, Zynga also plans on making real money wagering games in markets that allow it, which at the moment does not include the US.
Daily active users on Zynga games are up to 72 million, from 59 million this time last year. Monthly active users are up to 306 million from 228 million last year. Zynga also claims to have seven of the top ten games on Facebook and generates 1.8 billion social interactions per day. Zynga is the undisputed leader on Facebook; becoming that leader on Android and iOS is their future.
To add insult to injury, Zynga is now being hit by two lawsuits from unhappy shareholders. They claim Zynga did not give proper warning about the changes being made on Facebook and their impact on this quarter’s earnings. In the long run, social mobile gaming will be a sustainable business model through a combination of advertising, exclusivity deals, merchandising and virtual sales. Rovio, the maker of Angry Birds is an example of what just one highly popular franchise can become. Going forward with no more one time stock issues or ridiculously overpriced purchases, the billion dollars Zynga raised from their IPO will allow Zynga to make the investments they need to secure their future.
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