23 Feb 2013
Posted by Ki 
ZZynga’s troubles have been well documented. They were the belle of the ball in the gaming industry. They dominated the social gaming space with poker, Mafia Wars and the ‘Ville franchise. They were the digital age version of Electronic Arts (makers of the Madden football series, Mass Effect and The Sims). Like Electronic Arts, they had several dominant franchises that they could milk while they continued to develop new games. They were also large enough to acquire any competitor who seemed to get any traction (exhibit #1 – Draw Something). Because they were so successful, they were able to attract the best developers and increase budgets for their new games. Zynga’s market value got as high as $11.5 billion back in March of 2012. To put that in perspective, at that time Electronic Arts had a market value less than half of Zynga’s at around $5 billion.
Then something happened on the way to rolling over the gaming world – consumers seemed to get bored with their games. According to Appdata they currently sit at around 129 million Monthly Active Users which is down from their peak of 265 million. Unlike Electronic Arts who can put out a new Madden update and have consumers purchase it every year, Zynga does not seem able to keep consumers interested in anything that makes money. People still love playing Words With Friends or Scramble but that isn’t paying the bills. As a result the market has fallen out of love with Zynga as its market value is down to $2.5 billion with almost $1.3 billion of cash on their balance sheet. Therefore the market is really valuing the actual assets of Zynga at $1.2 billion. Nobody should shed any tears for founder Mark Pincus but that is a long way from $11 billion.
Daily Active User performance by title post individual game launch
This exhibit shows how several of their big titles performed in the period after their launch. Other than poker, the shape of the line is the same for each tittle. There is a big run-up right after launch and then a huge drop in usage. Poker is the one game that has seen steady growth for Zynga. Thus it is no surprise that poker is likely to be core to Zynga’s strategy going forward.
Media reports indicate that Zynga is spending more and more time looking at the cash gaming market overseas and in the US. No, they are not contemplating setting up Scramble for money (although that sounds pretty damn good). Right now they have a huge installed base in poker that they hope they can convert to cash based players. They have talked about joint ventures with the likes of MGM Resorts and Wynn. It will be interesting to see how that works as the cultures of Zynga and traditional casino companies like MGM and Wynn are like oil and water.
In the end, it is going to be difficult for Zynga to succeed. They have several issues that will be difficult to overcome:
- Playing poker for free online is a lot different than playing for cash. The first time a player who is used to playing for free loses real money, they may not want to come back. It is unclear how many of their free players will convert to cash players.
- They will only be able to offer cash gaming to people who are over 18. Current estimates are that 34% of their customers are under 18.
- The competition is going to be very stiff. In particular Pokerstars is a dominant force in the online poker world. According to PokerScout.com, as of 2pm on Saturday 42.4% of the people playing poker for cash are playing on Pokerstars or a Pokerstars owned site. Poker is a game that requires a large network of people playing to be successful (in the industry this is called “liquidity”). When someone logs in to play they need to be able to find others to play with. If there is nobody there they will log off. This puts Pokerstars in a really strong position since they have such a large installed base. Getting people to switch to Zynga will be difficult and expensive.
- Managing their brand will also be a challenge. Zynga is current known as a for fun social and mobile game company. Dipping their toe in the gambling waters could change how they are perceived – especially by the parents of that aforementioned 34% under 18 group.
