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Where is Zynga's supposed turnaround?

Where is Zynga's supposed turnaround?

Fri 26 Apr 2013 7:00am GMT / 3:00am EDT / 12:00am PDT
MobileBusiness

For all the talk of a changed company, Pincus' firm still seems to be making all the same mistakes in all the same ways

Nobody expected Zynga's results for this quarter to be great, so nobody was exactly surprised when the company announced a decline in almost every number that matters. It turned a small profit, but that's a bright spot in an otherwise deeply unimpressive set of results. The really important figures - the number of people playing and, crucially, the number of people paying - are all down. Zynga's business may not be hemorrhaging money, but it's losing audience, and in a business so heavily focused on scale, that's a really bad thing.

"Zynga's business may not be hemorrhaging money, but it's losing audience, and in a business so heavily focused on scale, that's a really bad thing"

The company likes to present itself as being on the cusp of a turnaround, or perhaps already embarked upon a slow but steady turn. If so, it's the oddest turnaround imaginable. The firm's MAUs - Monthly Active Users - dropped from 292 million to 253 million year on year, so nearly 40 million people have simply stopped logging in to a Zynga game even once a month. Worse still, though, is the disproportionate fall in the number of Monthly Unique Payers - those who make at least one transaction during a month-long period. This number fell from 3.5 million to 2.5 million, a precipitous year-on-year drop of almost 30%.

It bears emphasising just how bad that actually is. For a social gaming business, MUPs are the real customers. There is huge value to having a large audience (MAUs), of course, and companies need to be very careful about not trying to force players into becoming paying customers before they're good and ready - but ultimately, non-paying users are like footfall in a store. They're not customers, in a strict business sense. Zynga's not-quite-so-bad loss of 13% of its players (MAUs) is a side-show compared to the fact that it's lost 30% of its paying customers (MUPs). Imagine, by comparison, a shop loudly announcing that the number of people walking past its window had fallen 13%, distracting from the fact that the number who came in and bought something had fallen 30%.

Of course, the two figures are related, and the disproportionately large drop in MUPs figures into that relationship to some degree. The process of encouraging players of a social game to spend money is focused around a number of principles, but the key temptation lies in buying items or currency that will give you the ability to match or overtake your friends' progress, or to create a fantastic character, farm, castle or whatever which will "impress" the many friends who are also playing the same game.

For that psychology to work, of course, you actually need to have lots of friends playing the game. Most social games, as the name suggests, don't work terribly well if you don't have friends active in the game. "Active" is a key aspect here too - if you see that your friends are losing interest, logging in less often or spending less time tending to their farm, castle, town or whatever, then you also tend to lose interest rapidly. Hence, a game that gives the impression of being "in decline" - with players losing interest in some visible manner - will likely experience a precipitous decline in revenue, because even though lots of people are still playing, the sense of decline removes the key psychological drive to spend money on the game. (It doesn't help, of course, that social game operators have established a pattern of shutting down unsuccessful games rapidly, which creates a feedback loop in which players are unwilling to spend money on a game they think might be in commercial trouble.)

"GungHo's valuation is ridiculous, a bubble that will inevitably pop in relatively short order, but there's a genuine success driving the excitement"

The psychology of what Zynga is experiencing is clear enough, then, but the figures on the bottom line are still pretty dreadful. Whatever the reasons or the mechanism, the company is losing paying customers, and that kind of damage is extremely hard to recover from.

A stark contrast to Zynga's woes can be found on the other side of the Pacific, where mobile developer GungHo this week topped a $9 billion valuation on the Osaka Stock Exchange, making it into a larger mobile gaming company than even fellow Japanese giants GREE and DeNA. GungHo's valuation is ridiculous, a bubble that will inevitably pop in relatively short order, but there's a genuine success driving the excitement - a single game, Puzzle and Dragons, which is the most successful mobile game in Japan (and is launching in other territories as well). Puzzle and Dragons reportedly makes about $2 million a day; it certainly makes enough to justify prime-time adverts in evening slots on Japanese TV.

GungHo is an extreme example of a phenomenon which is completely unavoidable in the social and casual game sphere. Mobile utterly dominates this sphere. Facebook, it turns out, was a flash in the pan in gaming terms. Smartphones, and to some extent tablets (though they're arguably more "midcore"), are the social gaming platforms of today. Zynga, for all its cash (the company still has plenty of liquid assets), its clout and its former dominance, still hasn't made a successful transition to being a mobile-first company. Clinging to the wreckage of the Facebook social gaming model which it so successful exploited (in doing so, perhaps hastening the downfall), Zynga is being overtaken time and again by smaller companies who have mobile gaming in their DNA from the outset. With this week's results came a fresh claim that the company will be focusing more heavily on mobile, but a good, nimble firm would have accomplished that focus shift 12 months ago, at least. Zynga right now feels like it's plodding along in everyone else's wake.

The other great white hope for the company, of course, is gambling. It has cautiously launched gambling services - what it calls "real money gaming" - in the UK, and wants to expand into other territories. Plenty of pundits like to tap their noses sagely and suggest that Zynga will become a gambling giant down the line - although in doing so, they're just following in the well-worn footsteps of a large number of video games industry pundits, executives and even developers who have regarded the gambling industry with something like the avaricious wonder of wannabe prospectors hearing about a new gold rush.

"The notion of Zynga having an open goal in 'real money gaming' is born either from complete naivety or utter desperation"

I don't see any gold rush for Zynga in "real money gaming". Investors and executives consistently overstate the allure and possibilities of this kind of gaming, because by dint of being investors and executives, they tend to be exactly the sort of person who is very attracted to gambling risks (you wouldn't have an investment, or a career, anywhere within spitting distance of tech stocks otherwise). Moreover, by moving into the online gambling arena, Zynga is entering a market that's already incredibly crowded with companies who are deeply, deeply expert in this field - not just in the customer-facing psychology of the casino, but also in the legal and regulatory minefield of operating a gambling enterprise online. Many major markets simply aren't open to this kind of business; most others require you to jump through all manner of hoops simply in order to set up shop. The notion of Zynga having an open goal in "real money gaming" is born either from complete naivety or utter desperation - it could make money in the gambling business, but it has its work cut out for it.

It's worth highlighting, all the same, that Zynga did make a small profit this quarter - it may only be one bright spot, but it's bright all the same. The company's scale still also arguably works in its favour, allowing it to buy talent and IP that smaller firms could never afford. Yet after several grim quarters, it's also worth highlighting that talk of a "turnaround" is optimistic at best. Something about Zynga - its culture, its leadership or a combination of both - is blocking this company from moving in the agile, intelligent way a firm in its position desperately needs. Inventing fairy stories about the magical potential of gambling games or constantly reassuring the world that a pivot to mobile is definitely happening any day now won't cover up the cracks for much longer. If Zynga wants the world to buy the "turnaround" story, it needs to start showing evidence; if not, it needs to start making big changes, starting right at the top.

3 Comments

Eric Pallavicini Game Master, Kabam

329 223 0.7
Zynga is being overtaken time and again by smaller companies who have mobile gaming in their DNA from the outset.
Same could happen with Gambling games.
Something about Zynga - its culture, its leadership or a combination of both - is blocking this company from moving in the agile, intelligent way a firm in its position desperately needs.
If that is accurate, it doesn't apply only to Zynga and many other companies in the industry have the same issue. It is quite "typical" of companies that have a leadership (or at least some key positions within it) who doesn't understand how and why it works (beside what matters to them), and get all the glory when it works (to be understood here as "when the line of the number that matters still go up") but are scared to anticipate and do the necessary moves (improvements, changes) while it works till the day it eventually doesn't work anymore because they were too scared to change anything, to take any risk or make any mistake (other than not doing anything). As this article shows, it may be even that when it doesn't work anymore they still fail to improve which is nothing surprising since they did not understood before what to do, so why would they understand now that things are falling apart? It is a bit like if an officer was unable to take the right decisions in a military training situation in time of peace, he will hardly be able to take the right ones when he and his men are under heavy fire in time of war, except that in the latter time there are potentially dread consequences (in our case, lay-offs, company closures).

That is typically the "why fix it if it is not broken?" attitude... and well maybe because doing some maintenance time to time helps you hone your "repair" skill and know the "machine"'s mechanics better (and aren't leaders paid to anticipate instead of waiting for something to go wrong?). On the other side, I am guessing there is always something "external" to blame for the failure, the audience, the competition or maybe a fellow subordinate.

EDIT : That is why MAU is important and that is how you want MUP to feel. Note those ads are pretty old, but hey still very accurate.

2nd EDIT : Just let me be clear about my statements above, I do not know Zynga nor its management and what I said was a general opinion/explanation, nothing related specifically to Zynga or its leadership. I am just wondering why a company that has been successful with a "blue ocean strategy" is now looking for ways to maintain its income levels in a "red ocean" and not exploring the blue one further (eventually blue oceans turn red at some point of course but that would be Zynga being challenged and not Zynga challenging others), especially when assets are available if it is not because of a lack of self-understanding/confidence/innovation capabilities in its own market/previous strategies while on the other side, there is a proven record of skills in that matter. It just look like a fine mess of the company and employees potential and I really hope for the latter mainly that the worries of the author which I also share will be proven wrong.

Edited 10 times. Last edit by Eric Pallavicini on 27th April 2013 2:45am

Posted:A year ago

#1

Klaus Preisinger Freelance Writing

1,156 1,219 1.1
If you can analyze the state of a publisher (or whatever you want to call Zynga) without once making a reference to the quality of their games, you pretty much know all you need to know.

And that is why EA will still be around when Zynga is already forgotten. One company aspires to make great games which still counts for more than anything else.

Posted:A year ago

#2

Eric Pallavicini Game Master, Kabam

329 223 0.7
If you can analyze the state of a publisher (or whatever you want to call Zynga) without once making a reference to the quality of their games, you pretty much know all you need to know.

And that is why EA will still be around when Zynga is already forgotten
@Klaus Preisinger
I would be curious to know how we can compare EA to Zynga and their products. EA browser F2P games are not really much different from Zynga's Social Games for example and use very similar mechanics. Zynga's platform doesn't allow what EA can do on so many different platforms either.

But for the rest of your comment, I do agree to some extent that it is about aspiration and goals (i.e. makking great games). And the history of Farmville for example has shown Zynga has focused on getting partnerships (basically making their "game" an advertizing platform on the related social network, notably for McDonalds for example) instead of making the "game" a better one (and you'll notice the quotation marks because I know a lot disagree about those being games). Which was exactly my point in my first post about the leadership not understanding what really matters, making good games, good products and then you don't have to worry about customer retention. Zynga had the means to go there, while they already said they will focus their talent on core products to improve their quality since they now have closed so many "games" of theirs. But whatever that means to them, why wasn't it done in the first place like that ?

I know I am a bit unforgiving with any leadership, as they have the right to do mistakes and choose wrong strategies too. My main problem being the collateral damages, all the lower level employees paying for their choices (and often within those employees you will find out that many were aware a strategy or a decision would not work and reported it but haven't been listened to). It is just very annoying to me that we give more and more importance to social networking, but less and less to social responsibility (both toward employees and customers by the way) while corporate PR nearly always state those things as being paramount but dismiss them in practice (to which situation I do not believe it happens on purpose - would be evil - and only partial ignorance/incompetence can explain it). Both being socially responsible and growing social networks (to be understood here in a wide range of meaning like i.e. customer base) seem to me to be of nearly equal importance in any industry aiming at sustainable development and not short terms sights.

Edited 1 times. Last edit by Eric Pallavicini on 29th April 2013 10:55am

Posted:A year ago

#3

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