This Dog Won't Hunt

By Brandy Betz - September 20, 2012 | Tickers: EA, FB, ZNGA | 0 Comments

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“That dog won’t hunt.”

I first learned this phrase from my Kentucky-born grandmother, who used the response when told details for a plan that was clearly not meant to work out. The phrase seemed appropriate when talking about Zynga (NASDAQ: ZNGA), both due to the company’s canine logo and the fact that the past year has raised numerous questions about whether Zynga can succeed.

At the Zynga Unleashed annual event in late June, a new slate of games was announced (to investor disapproval). Those titles have begun to launch and show some early metrics. It’s a predictably mixed bag but one title in particular shows that Zynga has embraced graphic and game play improvements. Will those efforts be enough to pull Zynga up from a tailspin that’s left shares in the $3 range and execs tripping over each other on the way out the door?

The “Dogs” Unleashed

There are three new games that show the strategies Zynga’s trying to straddle: The Ville, ChefVille, and FarmVille 2.

The Ville actually launched in the wake of the Unleashed event but it’s still earning headlines due to the fact that it’s a litigiously close copy of The Sims Social from Electronic Arts (NASDAQ: EA).  The concept will be familiar to anyone who has ever played a Sims title: create a character, customize its appearance, build a house, make the house nicer, make the simulated person happier, and establish virtual relationships.

This is far from the first time that Zynga has closely copied a competitor’s game. But it’s also another example of the company copying a competitor’s game that’s currently popular. There isn’t much reason for players to leave the previously existing, popular version (The Sims Social) just because something is stamped with Zynga branding. When AppData began tracking The Ville on August 17, it had 58.2 monthly active users (MAU) and 6 million daily active users (DAU). Those numbers have since dropped to 35.1 million MAU and 3.1 daily DAU, putting it below the seven year old Zynga Poker in users.   

ChefVille hit the Facebook platform on August 6 and currently has 6.5 million daily active users (DAUs) and 49.3 million MAUs, making it Zynga’s most played game at the moment. ChefVille bears more than a passing resemblance to Zynga’s CafeWorld and the game it copied, Restaurant World from Electronic Arts (NASDAQ: EA)’s Playfish. The graphics are improved but the game play hasn’t leaped forward. It’s a restaurant simulation. Make food, decorate the restaurant, make more food, and help friends. That’s mostly it for this game.

The one interesting inclusion is the ability to earn real recipes, via email, as a game play progress award. Fifty recipes launched with the game but more will be added at a later date. This arrangement has the potential for interesting cross-over deals, such as Food Network chef Robert Irvine appearing in-game with special challenges. The potential for a real-world reward may keep players around longer than the standard restaurant sim.

FarmVille 2, which launched September 5, stands the best chance at long-term success because it’s been completely retooled. FarmVille is the title that is most associated with Zynga but the original had its limitations. The rewards were limited and leveling up became easy before it became pointless. The sequel has vastly improved graphics and enriched game play. Players now have more control over what happens on the farm and can create things to sell to earn money to eventually move into town. In-game transactions could seem more attractive in this title, since there’s more to do and different ways to enrich the game.  FarmVille 2 currently stands at 340,000 DAU and 1 million MAU but the user base is growing.

The Big Issues

As I’ve previously discussed, user growth doesn’t necessarily equal earnings growth. Zynga’s overall average bookings per daily user (ABPU), or virtual goods sales per daily user, dropped 16% between Q1 and Q2 even though the user base grew the same percentage during that period. New game popularity only matters if players are inspired to complete more in-game transactions – and those transactions need a major growth very soon.

There’s also the matter that Zynga and Facebook (NASDAQ: FB) are rather hopelessly tied together in the minds of investors. If something bad happens with one, the other suffers. Facebook is trading low at the moment but it still has further room to fall than Zynga. While Mark Zuckerberg’s publicized faith in Zynga earned it some good will, Zuckerberg’s word doesn’t count for much right now. If there are further setbacks with Facebook this year, Zynga’s going to be hurting.

The Coming Months

A silver lining comes from the fact that Zynga is finally moving forward on real-money gambling projects, long discussed as the company’s best chance at monetization. The first offering is expected early next year in an international market. Legislation has not yet changed to allow real-money gambling in the domestic market but it remains a possibility.

Zynga reports its third quarter earnings on October 1. It will be important to watch the ABPU data in the third and fourth quarters to see if the decline continues, particularly if the number of users increases. There needs to be a sign that Zynga has realized what dogs will hunt when it comes to positive ABPU growth and will focus its attention on those endeavors.

The company needs to make a major, definitive shift towards original games that aren’t copies. That sort of thing worked when competition in the freemium arena was low but with big names like EA moving further into the casual gaming market, Zynga’s going to feel the pinch. Free games on Facebook are pretty much all Zynga has while EA has console and consumer titles to bolster it as it experiments with what works in social gaming.

Interested in Additional Analysis?

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