Zynga: Business Model Explained
Johan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For investors who are not familiar with Zynga's (NASDAQ: ZNGA) business model, I will describe it in detail with the Business Model Canvas. The Business Model Canvas is a strategic management template for developing new or documenting existing business models. It is a visual chart with elements describing a firm's value proposition, infrastructure, customers, and finances. It assists firms in aligning their activities by illustrating potential trade-offs.
The Business Model Canvas was initially proposed by Alexander Osterwalder based on his earlier work on Business Model Ontology.
What problem does Zynga solve?
Zynga connects people to one another through games, it offers it games for free. The company operates in the arena of social gaming. Its games are distributed to people via the Internet and on mobile devices, chiefly smartphones and tablet computers. Zynga is one of the biggest game publishers on Facebook (NASDAQ: FB).
How does Zynga make money?
Zynga makes money in the following ways;
- It sells in-game virtual goods to people as they play one of its games,
- In-game advertising, and
- Banner advertising around its game portals.
A fourth revenue stream going forward will be
- In-game poker revenues
Online poker rooms make profits out of players. A small amount of money is deducted from the winning pot, every time a player participates in a hand. This small amount charged by the online poker rooms or online casinos is known as "rake". Rake is one of the primary sources of income for online poker rooms.
As mentioned before, a business model describes the rationale of how an organization creates, delivers, and captures value. In case of Zynga, the business model can be best described through nine basic building blocks that show the logic of how Zynga intends to make money. The nine blocks cover the four main areas of business: customers, offer, infrastructure, and financial viability.
The nine building blocks
The Customer Segments Building Block defines the different groups of people or organizations Zynga aims to reach and serve. Customers comprise the heart of any business model. Without (profitable) customers, no company can survive for long.
- Mass market - any one that's on the Internet via a computer or a mobile device.
- Advertisers (see Revenue Streams below)
The Value Propositions Building Block describes the bundle of products and services that create value for a specific Customer Segment. The Value Proposition is the reason why customers turn to one company over another. It solves a customer problem or satisfies a customer need.
- Make playing an integral part of the way people experience their relationship with other people on the Internet, and then become the dominant player in that market. Useful analogies for thinking about Zynga's strategic vision in that regard are "Search = Google" or "Share = Facebook" or "Shop = Amazon."
The Channels Building Block describes how Zynga communicates with, and reaches its Customer Segments to deliver a Value Proposition. Communication, distribution, and sales Channels compromise a company's interface with customers. Channels are customer touch points that play an important role in the customer experience.
- Own website zynga.com
- Mobile phones, tablets, and other mobile devices
The Customer Relationships Building Block describes the types of relationships Zynga establishes with specific Customer Segments. A company should clarify the relationship it wants to establish with each Customer Segment. Relationships can range from personal to automated.
- Network effects
- Switching costs - this is probably insignificant
The Revenue Streams Building Block represents the cash Zynga generates from each Customer Segment. If customers comprise the heart of a business model, Revenue Streams are its arteries. A company must ask itself, for what value is each Customer Segment truly willing to pay? Successfully answering that question allows the company to generate one or more Revenue Streams from each Customer Segment.
- Sales of virtual goods
- Revenues of money games (Poker)
The Key Resources Building Block describes the most important assets required to make a business model work. Every business model requires Key Resources. These resources allow a company to create an offer a Value Proposition, reach markets, maintain relationships with Customer Segments, and earn revenues.
- Intellectual Property
The Key Activities Buildings Block describes the most important things Zynga must do to make its business model work. Every business model calls for a number of Key Activities. These are the most actions a company must take to operate successfully. Like Key Resources, they are required to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and earn revenues.
- Developing new games
- Improving already existing games
The Key Partners Building Block describes the network of suppliers and partners that make the business model work. Companies forge partnerships for many reasons, and partnerships are becoming a cornerstone of many business models. Companies create alliances to optimize their business models, reduce risk, or acquire resources.
- Facebook and other social networks
- Smart phone manufacturers
- Manufacturers of tablet computers and other mobile computing devices
The Cost Structure Building Block describes all costs incurred to operate a business model.
Some additional thoughts
Possible suitors for Zynga could be large media companies, wanting to branch into social gaming, and traditional gambling companies that want to expand into online poker. At least one of the three big gambling names could be interested. MGM, Sands or Wynn will have to act to get a piece of the online action.
Some analysts think Yahoo! (NASDAQ: YHOO) could be interested in acquiring Zynga. I agree with those analysts because I think both companies would make a perfect fit. Yahoo! could become the number one "fun portal" of the world. For example On Yahoo! Finance Zynga could offer money games.
Even Facebook could still be interested in Zynga. Acquiring Zynga's customer base could still be worthy before all players leave Facebook to play on zynga.com.
Time will tell what is going to happen with Zynga. The company has a strong balance sheet, with more than $1 billion in cash and no debt. At least I am positive and think the share price could run to $5 in the short term.
Johan Seijkens has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of 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!