Lack Of Focus Proved Fatal
Rekha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Zynga,Inc.’s(NASDAQ: ZNGA) stock traded near its lowest level ever on Friday after the online game maker behind "FarmVille" and “Cityville” predicted a Q3 loss amid weak demand for its Web-based games played on Facebook(NASDAQ: FB). It's also taking a hefty charge related to its March acquisition of mobile game company OMGPop. Zynga Inc's nosedive over the past six months, capped by a sharp reduction in its 2012 outlook on Thursday, has sharpened interest in what the company’s next move would be.
Zynga,Inc., also known for "Words With Friends" and "Mafia Wars", announced on Thursday that it expected to post a loss for the third quarter owing largely to the $85 million to $95 million charge on the OMGPop purchase. It bought the company behind "Draw Something" for $183 million. Zynga, however, is trying to reduce its dependence on Facebook,Inc., where the bulk of its games are played, by shifting focus online gaming to mobile gaming.
Facebook has officially announced that it now has one billion users worldwide. This is roughly equal to one-seventh of the total human population. The one-billion milestone was achieved on September 14th this year as Facebook announced.
If that was not all, the company has reported that people from all walks of life are now joining Facebook. The median age of Facebook users has now fallen from 26 in 2008 to 22 this years which comes four years after Facebook hit 100 million users worldwide. This means that the social network has become an integral part of one’s life. There are but a few negative aspects of Facebook. Yes I am talking about fake and duplicate accounts. To avoid any security threats the company has asked its users to eliminate their dubious friends online.
Zynga now expects 2012 bookings of nearly $1.09 billion to $1.1 billion, down from earlier expectations of between $1.15 billion to $1.23 billion. The San Francisco company decided to go on public December 16 last year.Shares of Facebook Inc, which derives over a tenth of its revenue from fees paid by Zynga, also fell 2 percent to $21.53 in morning trade.
The fate of Zynga Inc. now rests with Pincus, its co-founder. Analysts opine that he needs to cut around 3,000 odd jobs in its total workforce and come up with a strategy that can captivate the growing number of players now moving to mobile devices, where its presence is relatively weak.
The transition from online gaming to mobile apps might not turn out well for a company that spawned on Facebook's rapidly growing platform to build a formidable business. "FarmVille," "FrontierVille," "Zynga Poker," "Mafia Wars" and "CityVille" took off primarily as Facebook games on personal computers. They accounted for 83% of total revenue last year.
In July, the company witnessed a nosedive in revenues in the second quarter as it struggled to retain users on Facebook. The revenues continue to fall as percentage of paying users continue to decline as greater variety of games became available for free on Facebook. The company has also been hit by delays in its game pipeline as older ones fade and it has struggled to come up with new hits for mobile devices given its inexperience in the sector. The company will continue to struggle because of newer titles constantly outdating older and more successful games and lower revenue generation rates for its mobile games. Zynga's popular mobile titles such as "Words With Friends" and "Draw Something" are not as lucrative as their other games from the franchise.Though the company's new web-based games such as "The Ville", "ChefVille" and "FarmVille 2", began well, growth stagnated after hitting about 7 million daily active users.
Several of its top executives including Chief Operating Officer John Schappert and Chief Creative Officer Mike Verdu have quit the company since August this year.
Zynga has not been able to prevent the users from abandoning its previously lucrative Web-based games for offerings on smartphones or games from competing publishers.
Monthly-paying players rose to 4.1 million in the second quarter from 3.5 million. The scenario would've been different had it not been for new players attracted to "Draw Something," which Zynga purchased in March.
One saving grace for Pincus may be Zynga's large cash holdings, which amount to roughly $1.6 billion. This means that Zynga's revenues, though shrinking, remain substantial.
Pincus' attempt to revive his company has been undermined by an accelerating employee exodus.On Friday, the two creators of "Words with Friends," one of Zynga's most popular mobile games, announced that they had departed, following more than a dozen key employees who have left in the past six months.
The departures, says Brian Pitz from Jefferies & Co underscores the skepticism about ZNGA and its ability to address the challenges it faces as it pivots towards mobile and its in-house gaming platforms. Besides betting big on mobile, Pincus hopes to capture growth in online gambling games.
Zynga Poker, where players win virtual currency as opposed to real cash, is the world's largest online poker game. The game constituted 18 percent of Zynga's $332.4 million revenue last quarter, behind "FarmVille," which brought in about 29 percent.
Zynga plans to capitalise on overseas markets such as the United Kingdom and France, where online gambling is partially legal. Pincus told analysts on an earnings call last quarter that these first real-money gaming products would launch in the first half of 2013.
There have been hushed talks about Amazon.com (NASDAQ: AMZN) buying Zynga Inc. Amazon.com Inc had announced on Friday that it will spend over $1 billion to buy its Seattle corporate headquarters in what will be the United States' biggest commercial real estate deal so far this year for a single property.
Amazon.com Inc., the world's largest internet retailer has plans to buy 11 buildings in the posh South Lake Union area, comprising 1.8 million square feet of corporate office space, for $1.16 billion from Microsoft Corp. co-founder Paul Allen's investment firm.
Based on the value of the deal, Amazon is paying the highest ever price for an office building over 100,000 square feet in Seattle at around $644 per square foot. This is more than double the average rate of $308 per square foot for the city's office space, according to Real Capital Analytics.
The big daddies in the industry have time and again said that one should always invest in something they specialize in. This, however, does not seem to be the case with Zynga Inc. as they are turning away from something they’ve specialized in and have earned their bread-and-butter from for so long. Their move to invest in mobile gaming, to their misery, has gone against them. It has also clipped down company’s shares. Zynga,Inc. must take a cue from this and either go back and focus completely on what they’ve been doing since their inception or Pincus must rethink and on a second thought consider proposing to sell it off to a good bidder. Taking into account the goings it is just not a good decision to be investing in the company right now.
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rekhamarwah has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com and 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.If you have questions about this post or the Fool’s blog network, click here for information.