Zynga Stalls

The much-anticipated IPO of Zynga stock has stalled on arrival - but with no clear strategy for future growth, what did the company expect?

It's not exactly a great time for a company to go public - market uncertainty and instability would depress the valuation of just about any company, no matter how fantastic its prospects. It's a fact that apologists for social gaming giant Zynga will return to again and again in the coming weeks and months. The firm's IPO may have been disappointing, they'll say, but it's in line with wider difficulties in the market.

To an extent, this claim is borne out by looking at other tech companies that have floated on the NASDAQ this year. It's been far from a golden year for tech IPOs, with the likes of Pandora (online music streaming), Boingo (global wi-fi access) and Friendfinder (online dating) all nosediving from their original offer prices.

It's worth considering, though, that these aren't exactly companies that any sane market watcher would have anticipated great things from. They all compete in extremely difficult markets in which they face stronger competitors, structural difficulties and uncertain futures. In other words, if you're comparing Zynga with those companies, you're already saying something pretty negative about Zynga.

There has, however, been one notable tech IPO this year that hasn't particularly underperformed, even if it's not exactly been stellar either. LinkedIn, a networking and recruitment service designed as the dark, suit-wearing mirror to Facebook's endless stream of social musings and drunken photographs, enjoyed a solid IPO and is still trading well above its initial price.

The difference between LinkedIn and the other companies mentioned above is that it has a clear market leadership in a sector it largely created and defined in the first place, and enjoys a dominant position that competitors have struggled to catch up with - not unlike Facebook's position, in other words. The suggestion is that while times may be tough on the NASDAQ, there's still room for companies with genuinely strong positions and prospects to succeed.

It doesn't speak terribly well of how the market perceives Zynga, then, that its early post-IPO performance and the bulk of its analyst ratings lump it in with Groupon and Pandora, not with LinkedIn or any other successful IPO of recent years. The tech market is prone to bubbles and fads, but at the moment we're in a bear market and investors are deeply wary of any company that doesn't have a clear path to success ahead of it.

In the videogame sector, many people are wearing blinkers when it comes to Zynga. The company's enormous success in growing one specific audience in social gaming has led it to be held up as a prime example of Where The Market Is Going, without there being all that much evidence to support that claim. Asked to pump cash into the company, investors appear to have been much more lukewarm on Zynga's claims than the games business itself has been.

The problem for Zynga - the problem which the stock market has identified but to which the company's apologists remain blind - is that it's reaching the end of its natural expansion potential, and it's going to have to work hard and reinvent itself in order to surpass its present size. Right now, Zynga appeals to one market - Facebook users in North America. You could be even more specific, and perhaps a little unkind, and point out that it particularly appeals to North American Facebook users with poor impulse control related to deferred gratification.

Beyond that group, the impact of Zynga has been minimal. It's expanding into the Far East through a deal with Tencent, but it's completely untested in that market - a market that hasn't traditionally been an easy one for Western online gaming companies (Blizzard aside, and let's not pretend for a second that Blizzard offers a readily replicable model for success) to break into. It's translating its games into other languages gradually, but faces major hurdles in non-English speaking countries, such as the fact that it's arriving there after Facebook was forced to crack down on the viral "spam" advertising which Zynga used to drive its explosive early growth in North America.

Then there's Facebook itself - the platform to which Zynga remains firmly wedded, despite its increasing desire to play away from home. There's an assumption among some in the industry that Zynga will find its feet on mobile platforms like iOS and Android, replicating its Facebook success on those platforms and creating a second growth spurt. It's worth pointing out that Zynga has had iOS versions of some of its most popular games for years now, and little has come of them. The company remains a bit-player on mobile platforms - its iOS versions are only ever used by Facebook users wanting to play the games away from home. If it's going to replicate its Facebook success on mobile, it's going about it in a very slow and unusual manner.

Bluntly, Zynga's fundamental problem right now stems from its fundamental reason for success in the early years. It's not, at heart, a videogame company - it's a viral marketing company. It's a company which understood long before anyone else how to manipulate Facebook's social graph to provide extremely compelling viral marketing, how to turn its freeloading players into valuable advertising assets and how to shunt its existing users around an ecosystem of new games rather than letting them burn out and leave the Zynga portfolio entirely.

There are lessons in there for the whole games business, and there's a lot of value in dropping the hard crust of cynicism many of us feel towards Zynga and understanding properly why the company's approach has worked for so long. However, there's also an enormous vulnerability in the Zynga approach. Its original viral approach is dead in the water now. Facebook no longer allows that kind of mass virality, because users got sick and tired of it. Mobile operating systems and other platforms never will, because what was annoying on Facebook would be outright intrusive on a mobile device.

Stripped of that potential, Zynga has been treading water for some time. Its IPO arrives just as its inertia feels exhausted. Right now, its greatest asset is the existing userbase - a userbase to whom it very successfully markets its own new products, and from whom it's become increasingly skilled at extracting cash. Growing that userbase, however, is a challenge to which Zynga has shown little sign of rising.

If Zynga were to justify a successful IPO, it would need to show off a clear plan for conquering new markets - new audiences, new platforms and new platforms. As it stands, the plan seems to be "keep going as we always have, but in new places". It won't work. The stock market knows it - and the coming year is likely to drive that understanding home to even Zynga's most fervent apologists.

Related stories

Zynga returns to full-year profits for the first time in seven years

Net income up $138.4m year-on-year to $26.6m, daily active users reaches four-year high at 20 million

By James Batchelor

Pincus: For new mobile devs, it's organic growth or bust

At Slush, Zynga founder Mark Pincus advised mobile startups to set a "high bar" for organic growth before investing in advertising and UA

By Matthew Handrahan

Latest comments (20)

David Thomson Founder, Ludometrics6 years ago
I'm certainly not a Zynga apologist (I've never even heard of such a beast), but you could make the argument using the same reasons you provide that they timed the IPO perfectly: they sold $1bn of shares. Which sounds pretty successful to me. If they'd left it another 2-3 months, they would have raised less, I'm sure, but the quarterly reports are going to be interesting reading.
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James Boulton Owner, Retro HQ Ltd6 years ago
Now, "poor impulse control related to deferred gratification" isn't a phrase I hear everyday.

It's interesting how iOS versions of Zynga games haven't done as well. I assume this is down to the inbuilt marketing functionality of Facebook (everyone seems to love telling their friends about their latest scores), social structure and immediate accessibility of the games.

But surely as everyone knows about Farmville, then the marketing is already done, and spread to other platforms is inevitable. So does this mean the games aren't really considered worth playing on other platforms? Or just that the demographic they are targeting sit in front of Facebook all-day anyway, so other platforms aren't really necessary?

All very interesting.
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Sandy Lobban Founder, Noise Me Up6 years ago
In my own personal opinion....

Good article and an accurate account in my view. Zynga have done a great job of the part 1: Getting attention. Now for part 2. Keeping that attention and making better, deeper and more entertaining experiences. Welcome to the games industry Zynga. :)
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Show all comments (20)
Jonathan Withey Producer 6 years ago
Great article.

Their business model is what fascinates people the most and you can see why with all the positive metrics produced so far.

Their game design and technology hasn't varied dramatically since FarmVille (If it ain't broke, don't fix it). Personally I'm fascinated to see whether they will try something different. Like you say, perhaps they will have to if their facebook games aren't translating well to mobile.
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Lewis Brown Snr Sourcer/Recruiter, Electronic Arts6 years ago
I think Zynga have done a fantastic job by being so focussed on monopolising the facebook gaming space what would concern me as an investor is a total lack of establised diversification. Still you cant knock the growth and success so far.
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Zynga succesful - yes.
Making games? no - its more of delayed gratification + click
Strategy - minimal
Collection mania - yes, Experts at tapping into the collectionist mindset

Thus No branium or gaming involved.
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Bruno Patatas Senior Game Designer, Outplay Entertainment6 years ago
Zynga has been doing a great job in adding deeper gameplay experiences to their games. Titles like Adventure World or CastleVille show that evolution.
Their growth and success are terrific and everyone who knocks them down saying they don't know what they are doing or that they don't have strategy is simply trying to avoid to look at social games as the extremely important market that they are right now.
I'm quite sure that we will continue hearing about the success of Zynga. It's good for the industry at large. If we have similar giants on the AAA space why shouldn't we have the same in social games? And to be honest, the quality of Zynga's products can be better than a lot of AAA shovelware we have in the market.
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Adventureland - will you recommend this game or ask friend for help to get 10x object x. Click click, ooh, smack a snake. Take y action points. Add more obstacles . Whoops all action points taken up. i.e Will you recommend or use up points in our arbitrary system that defines your movement on a grid. Whoops, you cant do anything more for the week, unless you pay us fifty million credits... (where is the gameplay???)

At least Castleville is slightly better, but there is no life long lesson, cameraderie, or objective to be learnt except, if you have money, are a fool, keep on clicking on a digital paywall that has no depth or breadth to anything except to waste your precious life away.

Oh wait, maybe the life long lesson is angst and frustration. Did I miss the memo?
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Chris Wood Lead Game Designer, Waracle6 years ago
I kind of sit on the fence. On one side I can see why Zynga are seen as the Evil Empire of "social" games. On the other, I have to say that they are fulfilling a market driven need, even if it is for 5 minute snippets of clicking on stuff. If someone didn't enjoy it, they wouldn't make any money.

Personally I don't see how a game like Dirt teaches you life long lessons or camaraderie but then I don't play racing games. Beauty is in the eye of the beholder and if people enjoy playing these types of games, who are we to argue with that?
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Neil Alphonso Lead Designer, Splash Damage Ltd6 years ago
Surely now that the IPO has arrived, up next will be stories of key developers joining other studios.

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Nicholas Lovell Founder, Gamesbrief6 years ago
There are some structural issues too. Pincus has preferred stock which means he controls all important voting decisions; the company increased the free float to ensure it raised $1 billion; the banker's priced the deal to maximise the amount raised by the company, not to see a day one "pop".

on the other hand, I do think that Zynga is struggling to innovate. Having just started Castleville, my overwhelming impression was "I've played this game before - I know the script - I'll just level up to about level 30 then not be prepared to spam/spend enough to go much further without huge frustration. Why don't I just stop now...."

Zynga needs, as you suggest, to move beyond their viral marketing roots. Luckily, they've got a billion dollars in cash to help them do it.

But my suspicion is that the shares will go sideways for most of 2012.
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God help us when ZNGA do add some decent gameplay to its future crop of games. Perhaps then, there will be something to cheer for. However for now, it just feels like a false pretender to the thrown that no one elected
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Anthony Gowland Consulting F2P Game Designer, Ant Workshop6 years ago
> no one elected

Except their many millions of players.
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> many millions of players.

if that is defined by mindless click clicking...then yes :)
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Anthony Gowland Consulting F2P Game Designer, Ant Workshop6 years ago
Ah, we're back to the old "people who play Zynga games don't enjoy them / aren't players" rubbish again. I'll bow out here, it's not worth the time.
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Julian Cram Producer 6 years ago
understanding properly why the company's approach has worked for so long

For so long?!? Zynga has been around what, 4 years now?

THIS is the problem when talking about Zynga - or any new tech company for that matter. This idea that 4 years is somehow a long time, and that their short term success has any baring on their long term viability.

Apple, Activision, Microsoft, EA, Nintendo all took decades to become the ubiquitous monoliths they are, and it took them a world of hurt at times.

Zynga has a long, long way to go. It's going to make the owners / main shareholders a lot of money in the short term, but looking at their current game design, revenue stream and even working conditions all point to a short life.
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Daniel So Strategic Planning, GAMEVIL Inc.6 years ago
rather than betting on the investors being smart, i'm more willing to bet that investors -- having been burned from other IPOs like linked-in, groupon -- are playing it stupidly safe. Add the fact that the normal investor has no idea what DAU stands for and what a high Paying User Rate is, and it's easy (for me) to conclude that investors are making a huge mistake on a firm with the best analytics in the industry and huge room for growth in mobile (don't forget about their newtoy buys, plus have you seen dream zoo lately? it's not doing bad -- top 10 grossing)
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Greg Wilcox Creator, Destroy All Fanboys! 6 years ago
"No brainium" made me laugh off my chair, Dr. - thanks.

I wonder what would happen to the industry if it dumped analysts, speculators and non-gamers form investing and instead relied on earnings from folks who understood the business model a lot more and how it relies on pinching the collector nerve in all of us and not letting go 'til it shook the pocket lint out with all the change?

Not going to happen any time soon, but it would be nice to see some fresher ideas appear in social games...
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Bo Lasater Sr. Producer, Kixeye6 years ago
If Zynga had gone out at $9 a share as many had advised it to, then this IPO would have looked successful, but the Zynga founders wouldn't have had such a big initial payout.

This is really more about pricing than about company fundamentals.
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James Rankin CEO, Appatyze6 years ago
Remember that almost all of their revenue comes from 3% of their audience, the payers, whether they be whales or minnows. Zynga have one of the top 10 biggest ad networks that is capable of driving very significant revenues through video and display advertising in addition to the in-game integrations they have already been rolling out in their games.

Ad technology is advancing extremely rapidly which means they are well placed to open the huge amount of inventory they have to the various demand sources in the market and drive significant additional revenue through a broader advertising business, helping them to monetize the other 97% more effectively. If they can use advertising to get the LTV (Life Time Value) for non-payers to a meaningful % of the LTV for their payers then their business will be taken to the next level.

I'm not best placed to comment on game design although clearly they have a lot of talent and now a bank full of cash to develop and market new titles. However most of their growth in revenues on facebook will almost certainly come from advertising not in-game virtual goods as their relatively stagnant user numbers show they don't have many stones left unturned on the platform.

Note: Appatyze is an online ad platform that helps Facebook developers acquire users and drive ad revenues.
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