Zynga losing $150 on each new paying customer

Sterne Agee analyst claims user acquisition figures "won't work for long"

Sterne Agee analyst Arvind Bhatia believes that Zynga is losing $150 on every new paying customer it acquires.

Bhatia's estimate is based on the company's confirmed $120 million marketing budget for the first nine months of 2011.

"Almost all of that is for acquiring customers," he said in an interview with Benzinga. "We also know that they had 3.4 million unique payers in the September quarter, which is up from 3 million at the end of December 2010."

"In other words, they added 400,000 additional payers and they spent $120 million to acquire them."

The figures indicate that each new customer costs Zynga $300 to acquire, but each one will only spend and average of $150 over the 12 to 15 months that players stay with the company. "That math won't work for very long," Bhatia added.

This trend isn't limited to Zynga. Bhatia believes that there is a slowdown in social gaming in general, with many of the market's key players finding it difficult to raise interest through new products.

This is certainly true of Zynga, which has launched two games since its IPO last December: Hidden Chronicles on Facebook, and Scramble With Friends on iOS. Neither product has approached the early success enjoyed by Zynga's key titles, and its share price has suffered as a result.

"When we say that traffic hasn't gone up despite new introductions, that's telling us that maybe people are moving from one game to another, but you're not really getting a lot of incremental people trying them."

"The really hardcore are, perhaps, finding themselves trying FarmVille, Castle World and CityVille. The newer audiences are trying and finding that this is all the same and leaving."

"Again, the fact that there is such a small base of people who actually pay says that your risk is tremendous. This is spread out over 20 million people. You could say, 'Oh yeah, 5% could get bored.' Although, you only have 2 per cent of your people paying, and God forbid if those guys get bored."

Sterne Agee predicts that the results of this slowdown will become more apparent over the next 12 to 15 months, placing Zynga under intense pressure to find "their next Farmville" to keep investors satisfied.

"That's the bottom line. Until they can find that, if it's all incremental stuff that people are not really crazy about, it's gonna be tough to put up the kinds of growth numbers that the stock's multiple is implying."

More stories

Zynga reports revenues of $705m in Q3

Mobile firm sees 40% income increase year-over-year, and strengthens bottom line with reduced losses

By Danielle Partis

Zynga grants $1.4m to North Carolina A&T college of engineering

New partnership with university announced to address racial disparities in gaming industry and establish career pipeline

By Jeffrey Rousseau

Latest comments (23)

Alex Rigby Creative Director, Playdemic Ltd9 years ago
Zynga hold back new products from the full force of their cross-marketing power until they are happy with the balancing of the game. This is true of Scramble With Friends. See how their DAU is now rocketing. To write these new titles off early is naive to say the least.

[link url=
0Sign inorRegisterto rate and reply
Klaus Preisinger Freelance Writing 9 years ago
Create product, give it away for free.
Explosive growth.
Capitalize on users.
Capitalize on desperate and clueless financial sector by going public.
Cash out.

Sounds like a good plan to me.
0Sign inorRegisterto rate and reply
Raf Keustermans CEO, co-founder Plumbee 9 years ago
Math doesn't make any sense. It doesn't really matter how many incremental users they acquired, as long as their LTV (accross the Zynga network)>user acquisition cost, they are fine. Phasing can make the numbers look a bit strange of course.
Knowing Zynga's obsession with data, I find it hard to believe that they would run campaigns that are not profitable.
0Sign inorRegisterto rate and reply
Show all comments (23)
Bruce Everiss Marketing Consultant 9 years ago
Well, Zynga have not cashed out. They have only released a relatively small amount of stock.
Also they are an analytics company so they know far, far more than the analysts!

It is looking like Zynga are using the IPO cash to expand their business model across more titles and more platforms. It is their existing over reliance on Facebook that must be the biggest worry for them. There must be a limit to how much money people are willing to throw at casual games in a social networking environment.
0Sign inorRegisterto rate and reply
They say, in situations whereby the largest skyscrapers are built, this comes before a major financial crash. All the best to Zynga :)
0Sign inorRegisterto rate and reply
Andrew Harris Game Monetization Manager, GameLoft9 years ago
Klaus, I couldn't agree more
0Sign inorRegisterto rate and reply
Paul Trowe President & CEO, Replay Games9 years ago
I've been making games for 27 years now. This is the latest fad and just another bubble. Watch.
0Sign inorRegisterto rate and reply
Paul Baker Game Designer, Ubisoft9 years ago
Klaus - exactly.
0Sign inorRegisterto rate and reply
@ Dr Chee Wong - fully agree
When your audience has no real allegiance to you or your products thats how it turns out :-) . All the best to Zynga ;-)
0Sign inorRegisterto rate and reply
I'm broadly with Raf & Bruce here. I feel that Zynga are fine in the mid-long term. Maybe they came out slightly overvalued and that's what's reflected in the markets today, but they still have a huge consumer base that's very loyal. The flaw that I see in this piece is the assumption that Zynga's marketing budget was purely on customer acquisition, and not a distributed cost over acquisition and retention, plus brand promotion in the run-up to the IPO. That makes quite a bit of difference to how you can interpret the figures.

On the other hand, the thing that concerns me is that no matter how you slice and dice the figures the CPA is sooo much through the roof than the 1USD that their first customers cost to get. If you then factor out their cross-collateralization advantage, it makes it *hugely* difficult for anyone else to make a dent in the market.
0Sign inorRegisterto rate and reply
Ryan McGeough Studying Msc in Strategic Management, Dublin Institute of Technology9 years ago
@ Klaus & Paul Trowe
I think you guys are exactly right, firstly this is just another bubble. For all the talk of social gaming there seems to be minimal (and disputed) revenue streams coming from it. Zynga going public just seems to reek of a company making a mint out of investors who are being dazzled by user figures then it'll sink without trace.
0Sign inorRegisterto rate and reply
Alex Rigby Creative Director, Playdemic Ltd9 years ago
Zynga took almost a billion in revenue last year. Hardly minimal.
0Sign inorRegisterto rate and reply
Well, Zynga aside, I wonder how do sales compare for other non zynga developers who develop for FB. Do they use the same methodology or do they monetize successfully using more tried/true ways
0Sign inorRegisterto rate and reply
Arthur N9 years ago
finallyyy now Zynga can stop releasing crappy products...
0Sign inorRegisterto rate and reply
Teut Weidemann Consultant Online Games, Ubisoft Germany9 years ago
You know that calculation doesnt make any sense. If you have 3 million payers in month 9 and 3.4 million in month 10, it does not mean you "gained" 400.000. You could have:

Month 9: 3 mil, loosing 600.000
Month 10: 3.4 mil,thus gained 1 mil.

Which makes his calculation totally insane.
0Sign inorRegisterto rate and reply
Jeffrey Kesselman CTO, Nphos9 years ago

You are dead on target there, the calculation is naive and comparing apples and oranges.

I am the first one to criticize micro-transactions as the be-all end all of economic models but this argument is flawed. I do think Zynga is going to have to look beyond their traditional spaces both in terms of gameplay and economic models in the future. We are already seeing a segmenting in the MMORPG market where games that cannot, for one reason or another, attract an audience at $15.00 a month go micro-transaction and go for the bottom of the market, while games like SWTOR that can charge such a fee do and make an order of magnitude of more money per user.

(And "per paying user" is a meaningless number. Your costs are the costs to support all users, so thats the right figure for comparison purposes.)
0Sign inorRegisterto rate and reply
Ingolfur Aevarsson Global Brand Director - EVE Online, CCP Games9 years ago

Yeah, I was reading this and it was not making much sense to me. If the numbers are correct with the average user staying (and paying) on average 12-15 months with the company, that translates to me as average 7% monthly attrition.

If all the averages hold (and they don't), they are seeing 220,000 - 250,000 users lost each month with 7% attrition. To move from 3 million to 3.4 million in 9 months, they are therefore going to need around 275,000 acquisitions per month. This would be around 2.5 million acquisitions in the period.

With the 120 million estimated in marketing, this is around $49 per acquisition. This is also assuming that none of those 120 million are put into optimization, retention or other initiatives (that do not translate directly to acquiring new users and converting them to paying users, but increasing the value of what you already have - or as mentioned above, the IPO).

Not saying anything for or against what is being predicting, just that how the data is used to get there is a bit off to me. I am also just using the information given in the article, that might be off (haven't looked into this myself).

Edited 1 times. Last edit by Ingolfur Aevarsson on 21st January 2012 12:15am

0Sign inorRegisterto rate and reply
Klaus Preisinger Freelance Writing 9 years ago
There is no reason in the world to compare apples to apples. How would you know why an apple is special, when you only have another apple to look at? Look at an orange and you learn something about an apple. So allow me to look at Zynga and the military industrial complex; comparing them.

Zynga is still a company we know literally nothing about. We do not know which time during the year is the one they take on the most new customers and how many of them. We do not know how their snowballing effect exactly takes on more speed and how they did it in the past. For all we know, Zynga's publicly displayed behavior of doing advertisement might just be a ruse to throw off the competition, manipulate them into doing an inefficient type of advertisement leading them to financial ruin. Might cost Zynga a few Dollars, but if it kills the copycats, it is still a sound investment at any loss.

We do not know why people buy the Zynga gameplay accelerators. Do players need them to make playing at work possible? I looked at a few corporate firewalls and that might be one of the reasons. Filtering Facebook games but not Facebook is a feature most professional firewalls can do these days and for very good reasons. At home, there is less pressure to make things go quicker. Countless MMOs have shown people are willing to invest just about any amount of time at home. If you spend playing 5 minutes at work and you see the deadline coming, it might be a reason to spend the money then. The fact is, we do not know where people are when they purchase stuff for Zynga games, we do not know which device they are using (home computer, office computer, portable, etc.). The same can be said about vanity items, the who, where, when and why is relatively unknown and any competitor has to build his own knowledge by trial&error. We do not know anything. All we are told by Zynga is "invest your money with us, we make a lot of money". That's the same thing everybody will tell you.

Basically, Zynga is a blind investment and these are not the times where people outbid each other to get in on such a thing. That is what a rising stock price would be, an auction to get on the train. Without knowledge, or at least a working model of the market Zynga is operating on, nobody will get in on the auction and stick with investments where the inner workings of the industry and the external influences are better known.

Compare and contrast your knowledge about the inner workings of Zynga and its market with the knowledge about the workings of real world politics. If Iran nuked an U.S. city, we would know which stocks to buy and which stocks are a sound investment. If the same degree of catastrophic event would happen to the Zynga ecosphere, we would probably not even be able to know where to look for debris from the explosion.

That was the problem with the first technology bubble during the millennium, it is still the same problem today. Market predictability beyond five years is utterly ZERO. What constitutes a crisis is unknown. How the market reacts to a crisis is unknown.

Look at any publicly traded weapon manufacturer, then you know just how little you know about Zynga.

0Sign inorRegisterto rate and reply
Aleksi Ranta Category Management Project Manager 9 years ago
"Zynga took almost a billion in revenue last year. Hardly minimal."

No company operates on revenue alone....
0Sign inorRegisterto rate and reply
Teut Weidemann Consultant Online Games, Ubisoft Germany9 years ago
"We do not know why people buy"

Well maybe you don't. f2p is 7 years old now and counting. And yes many companies DO know why and make millions. Its no longer start ups, its a thriving business. And lets face it. Zynga is LATE into the business, only their platform is new and this is their biggest limitation as well.
0Sign inorRegisterto rate and reply
Klaus Preisinger Freelance Writing 9 years ago

try to see it from an investor's perspective. It is basically public knowledge that the U.S. military machine likes to fight with a lot of air superiority and a lot of long range weapons. This is what helps an investor make good decisions about how to allocate his money.

in the f2p space there is not that much public knowledge about how the customer machine tries to spend its money. There is that knowledge inside some companies, but it is secret knowledge. You cannot make good investments based on that. At best you can see what a company is trying to sell, but you do not have the data to compare the marketing hype with reality.

This stacks the odds against the Zynga stock. If I invest $10.000 in the company developing the next generation U.S. fighting drone, I know the buyer and how much he likes it. I read the news and I can make a good judgment call about the chances of global peace ruining the need for fighter drones.

If I invest $10.000 in a company trying to bring a free2play game to the market the risk is much higher, because I know that much less. I do not open the newspaper and read about a global trend towards the product I invested in. All I can tell is that the companies tries to market similar items to the users, but I cannot tell if they get it right. I have to take them by their word.

In the global financial market, that is a huge disadvantage. As a result, video game companies tend to perform weird at the stock market. The only company I know which is brutally candid with details on which of their games makes how many Dollars exactly is NCsoft. The price of their stock went up by a factor of six in the last four years, with only one major game release in that time. I take that as a sign of information to being key to raising money. Compared to what you can say about NCsoft games from NCsoft quarterly reports, you really cannot say that much about Zynga. If some other company knows the secret but hides it in a drawer, they might make money, but I do not expect them to raise money on the financial markets.
0Sign inorRegisterto rate and reply
Teut Weidemann Consultant Online Games, Ubisoft Germany9 years ago
Speaking from an investor perspective here is some free advice: Zynga lives inside Facebook. FB is their frame of reference. If FB doesn'T grow, Zynga doesn't.

In other words getting larger for Zynga is very very hard. Getting larger for any other free to play company without the FB contraint is very easy.

My hint: leave Zynga, go to other f2p companies who offer their services on all platforms without access or reach restrictions.
0Sign inorRegisterto rate and reply
Teut Weidemann Consultant Online Games, Ubisoft Germany9 years ago
lol,someone is reading this thread and copy/pastes stuff and turns it into his theory:
0Sign inorRegisterto rate and reply

Sign in to contribute

Need an account? Register now.