As much as I'm an avid supporter of the social gaming movement - which is bringing a vast new audience to the gaming medium and providing opportunities for a host of innovative new creative ideas and business models - I've hardly been a lone voice in arguing that valuations in this sector have become insanely over-inflated. In the past year, billions of dollars have changed hands in acquisitions or funding rounds for companies whose true worth is a long way from being proven, operating in a market whose true scope and potential is little understood.
Throughout all of this, one firm has stood head and shoulders over the rest of the sector, and has rebuffed all acquisition bids in favour of positioning itself for a stock market IPO. Yet as the sector's most successful and most valuable firm, Facebook game giant Zynga is also the canary in the coalmine.
This week, that canary's song faltered. Zynga's most recent financial report makes for slightly grim reading, and should serve as a warning sign to investors and executives - perhaps even casting doubt on the value of Zynga's much-delayed IPO, when and if it finally happens.
It's not that the results are utterly terrible - profits fell off dramatically, dropping almost 95% compared with the same period last year, and revenue growth slowed down but still almost doubled year-on-year. Digging deeper into the figures in the company's S-1 filing, however, reveals a somewhat deeper malaise than the headline statistics suggest.
Zynga has been shuffling the same 200 million consumers around its various new game launches, not really attracting a wider audience.
Due to a quirk of how Zynga recognises revenues (basically, it doesn't record purchases as revenues instantly, instead spreading them out over a period of time), it's important to look at a second figure in the company's filings - "bookings", the actual measurement of money changing hands between customers and Zynga in the reporting quarter. By that measurement, Zynga's sales to customers are almost completely flat. In the past three months, Zynga stopped growing.
That's actually not all that surprising if you look at the company's figures for Monthly Active Users (MAUs), which, in spite of the firm's dramatic growth in other regards, have remained largely flat for quite some time. It looks for all the world as if Zynga has effectively been shuffling the same 200 million or so consumers around its various new game launches, getting better at monetising them (hence the revenue growth) but not really attracting a wider audience.
Which is not to say, of course, that 200 million consumers isn't already a wide audience - it's huge, obviously. However, this isn't the position that one would want or expect a top-flight start-up to be in at this point in its development, especially with an IPO potentially around the corner. Right now Zynga only seems to be growing by raising ARPU, not by growing audience, and there's fairly obviously a cap on how high the ARPU of a videogame can go. The company's most recent S-1 filing suggests that they might be reaching that cap.
Does this mean that Zynga is a failure? No, it doesn't. A company which is generating millions of dollars of quarterly profits from 200 million active monthly users is definitely not a failure - but a company whose growth has hit a brick wall so early in its lifespan is definitely not an attractive IPO option, and it's a stark warning to everyone else pouring millions into the social gaming market. It's a very big market - it just might not be quite as big as its advocates like to think.
Of course, the problem with Zynga isn't entirely down to underlying market factors. The reality is that the company itself has some serious problems that aren't necessarily shared by competitors - primary among them being the extent to which its core products are wedded to the Facebook platform and the Flash plugin, which has left it effectively broadsided by the enormous growth of gaming on mobile devices and particularly on iOS, which makes a point of refusing to support Flash (a decision which is singularly unlikely to be reversed and which now seems to be being embraced by Microsoft as well, with the Metro browser in Windows 8 also dropping Flash support).
The ceiling the company seems to have reached on Facebook suggests audience numbers for social gaming is somewhat lower than many have expected.
Zynga does have some iOS apps for its more popular games - the Farmville app, in particular, launched with some fanfare - but they're somewhat desultory offerings from a company whose heart is still in web-based games on social networks. The reasons for that are baked deep into the DNA of the company, whose strength has never really been in game design (it is still dogged by persistent and often quite well-founded allegations of directly copying the designs of other social game developers) but rather in building and maintaining the vast infrastructure required to run such a successful service, in leveraging the Facebook platform to its best advantage, and in innovating, not in gameplay, but in areas such as subtle, widespread testing of new features and designs on portions of its active userbase.
On Facebook, Zynga is the big beast - the 800 pound gorilla whose extraordinary success continues to breed more success and effectively locks developers of other games out of the system to some extent, since most of the marketing for the launch of a new Zynga game can be done directly to players of an existing Zynga game. On iOS or Android, however, Zynga is just another company, and will have to engage in some very stiff competition in which its advantages on Facebook are largely meaningless. This doesn't mean Zynga can't or won't be successful on non-Facebook platforms, but it's extremely unlikely to replicate the extent of its Facebook success elsewhere.
For the rest of the social games market, this is both a blessing and a warning. Few will be sad if Zynga's dominance fades a little, and few would have welcomed it extending that dominance over mobile platforms as it has over Facebook. However, the ceiling the company seems to have reached on Facebook suggests that the ceiling for audience numbers for social gaming is somewhat lower than many optimistic commentators and investors have expected.
Social gaming is huge, and will continue to be huge - but it's about time that developers in this market realised that it's not a limitless market which endlessly throws up fresh new consumers, ripe for the picking. As we start to perceive the limits of the market more clearly, the strategies for retaining customers and keeping them happy - often so wilfully ignored by social game developers - are going to become increasingly important. Investors, meanwhile, are likely to pull back once they realise that the market has limits to its potential growth - limits that may already be being reached. And Zynga? For Zynga, I suspect that the time for a successful IPO may already have passed.