Zynga May Ultimately Have to Gamble on Its Future

Lennox is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Social gaming gem Zynga (NASDAQ: ZNGA) has been in the thick of bearish outlooks from industry specialists for a significant time. Amid thinning sales, an unprecedented employee exodus and hard-hitting restructures, the Silicon Valley company has resolved to a solution of sorts: real-money gambling. Though this is not the most recent news, the company's recent annual shareholder meeting candidly suggests that it has settled for this as the ultimate solution.

During the shareholder meeting, Zynga’s stance on real money gambling was unmistakably profound. This suggests that real-money gambling was not a tentative solution as earlier imagined, but instead is the proverbial silver bullet. According to a report by Richard Nieva of Pandodaily, a Zynga shareholder who opted for anonymity revealed that close to 80 to 90 percent of the meeting revolved around real-money gambling. The shareholder further added that Zynga referenced positive preliminary real-money gambling results in Europe.

I believe that Zynga may have to fully delve into real-money gambling if it wants to secure its future. Here are some of the reasons why.

Consistent revenue stream needed

Over the past several months, Zynga has been synonymous with costs cuts and layoffs. In its latest move along those lines, the company announced that it would lay off 520 workers, which equals 18% of its global workforce. The early June job cuts were also coupled with the closure of the Dallas, New York and Los Angeles offices.

Some of the employees who were laid off in early June vented on Reddit; in addition to saying that the company was bound to tank, they gave an inside scoop of its withering finances. One ex-employee, who hid behind the veil of anonymity, ventured with a gush of evident emotion that perks at the company like free food and free gym access were slowly fading away and reducing in quality, underscoring the depleted finances.

While costs cuts are a good way of containing thinning margins, they are not a permanent solution. Zynga will have to look for an alternative revenue stream that is not subject to volatility in the end. Social gaming is a huge income earner, but it is also highly volatile. Gambling, however, is a perfect way to make consistent money. The incentive of getting something for nothing is by far the strongest I have seen in this world. Real-money gambling will ensure that Zynga’s coffers don’t dip below a certain mark.

Social gaming as it is strewn with pitfalls

Social gaming, without real-money gambling, is a good way to make money. There is no denying that. It is laden with risk, however, and is not exactly the way to go for a company that’s teetering on the edge of a cliff.

The first notorious pitfall with social gaming is privacy. Apart from the obvious need to pass by as independent, why do you think Zynga distanced itself from Facebook (NASDAQ: FB)? The privacy concerns that have long been the thorn in Facebook’s side were spilling over to Zynga. Ardent fans of the "Farmville" publisher were not too cozy with the Facebook gateway. In light of this, Zynga created its own portal that bypassed the Facebook portal. This not only allows users to evade the lingering eyes of Facebook friends, but it also gives users the chance to diversify their opposition and improve their overall game experience. The reliance on social media is also myopic, in a way. Facebook, as expansive as it may be, has already started attracting naysayers. One of them is media magnate Rupert Murdoch, who earlier last month remarked that the social site could be going the way of MySpace. In addition, several budding social sites are using the privacy card to hit at Facebook, with a number of niche social apps and sites that feature strong inclines toward privacy are mushrooming. Zynga is better off distancing itself from Facebook at such times.

Secondly, the widespread shift away from social gaming to mobile gaming may be another nail in the coffin. Although Zynga has on several occasions hinted that it is porting games to mobile platforms, it will have to face off with a host of other startups in the frontier- some of which were started by former Zynga executives. TrapZen, a free online gaming model started by Zynga's former chief creative officer, is one of these startups that target tablets. Although Zynga has control in TrapZen though a $10 million investment, it has no control over the other dozens of similar startups hatched by its former top employees.

Trying to overhaul social gaming or transition to mobile at this time could therefore be too involved for a company that needs to plug its cash outflows and increase revenues.

Related sectors present a bottleneck

The PlayStation 4 and Xbox One video game consoles were recently unveiled. Traditional gamers who were passing time on social gaming are likely to direct their attention toward these two platforms once they are released. The platforms also support robust Internet features, particularly the Xbox One.

Electronic Arts (NASDAQ: EA), which is itself struggling to improve its outlook, has already named 11 titles for the new console generation; some of these are for the PlayStation 4 and others are for the Xbox One. The games, scheduled to grace shelves later this year and in 2014, will focus on action and sports. I believe that this will present an obstacle for Zynga, though perhaps not significantly. Considering Electronic Arts’ past disappointing earnings, I believe that it will market its games intensively. In the quarter that ended in March, Electronic Arts posted profits of $323 million. Despite low sales, the company's profits offset its past rickety performance. I believe that it will move heaven and earth to maintain if not improve this trend.

Conclusion

There are no two ways about it. Zynga may maintain its current social gaming front as spin-off, but real-money gambling is the only way to go. If not, the company may go under.

Zynga's post-IPO performance has been dreadful, and investors are beginning to wonder if it's "game over" for this newly public company. Being so closely tied to the world's largest social network can be a blessing and a curse. You can learn everything you need to know about Zynga and whether it's a buy or a sell in our new premium research report. Don't even think about picking up shares before you read what our top analysts have to say about Zynga. Click here to access your copy.

 


Lennox Yieke 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!

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