Zynga Falls Back to Earth

Only six months since its IPO, Zynga risks being social gaming's first high-profile failure

Zynga's IPO dream is rapidly turning into a nightmare. Admittedly, it hardly started out as the sweetest of dreams - the company's share price didn't deliver the expected "pop" in its early days on the NASDAQ stock market last December, which led to plenty of criticism of the firm. Although it did make modest gains this spring, it's never exactly been a stock that soared - but even such modest success must seem like halcyon days to Zynga's investors and management team now. So severe has the collapse of Zynga's valuation in recent weeks been that the NASDAQ had to step in to halt short-selling of shares in the company - a humiliating step for a company which only listed six months ago.

What has happened? How could the darling of the social and free-to-play gaming scene have fallen so far, and so fast? A variety of answers have been proposed, some of them more plausible than others. Some explain Zynga's awful performance in purely stock trading terms - ZNGA shares were being used as a proxy for Facebook shares by investors who wanted to have money in FB but couldn't buy shares on the open market yet. With Facebook shares now launched, and not doing terribly well as yet, Zynga's listing is surplus to requirements - investors have withdrawn their holdings and put the stock into free-fall as a consequence.

"With Facebook shares now launched, Zynga's listing is surplus to requirements - investors have withdrawn their holdings and put the stock into free-fall"

That's almost certainly a factor, but it's not the primary reason for Zynga's problems. Facebook's somewhat underwhelming IPO was a catalyst for Zynga's decline, but not a root cause. For the root causes, we have to look at two much more fundamental problems with Zynga - problems which are extremely important to understand, because they give us an insight into serious issues which will impact on almost every business in the video games market at some point down the line.

Firstly, and perhaps most widely discussed up to this point, there is the question of Zynga's transition between the web and the mobile device. This transition is one of the most fundamentally important things that's happening in technology right now. It's not that the web is going away - we're going to continue engaging with games, social services and software through laptop and desktop computers for a very long time, no doubt. However, the bulk of the growth in engagement is coming from people on mobile devices. Smartphone and tablet devices are an enormous growth market, and they're both generating a new market and cannibalising functions which would traditionally have been seen as web functions.

Zynga, though, is primarily a web company. More than that; despite its best efforts, it's primarily a Facebook company. It built its business around titles like Farmville (which at its peak enjoyed almost 100 million people logging in every day), spreading their influence through viral marketing channels, many of which Facebook has since disabled, and through cross-game promotions that drove existing users of one Zynga game across to another one. The shutting down of the viral channels Zynga used to grow so rapidly has led many in the industry to view Zynga as having scrambled up the ladder just before it broke; their path to dominance of the Facebook ecosystem no longer exists, and cannot be followed. They were in the right place, at the right time.

The same thing does not, however, seem to be true of mobile devices. Zynga has struggled on mobile - as, in fact, has Facebook, whose primary threat right now comes not from rivals on the web like Google+, but from the threat of a mobile-first social network emerging which takes users' attention and engagement from Facebook. Both Facebook and Zynga have pursued similar strategies in attempting to overcome this problem - they've whipped out their wallets and paid huge sums of money for companies who do mobile right. Facebook dropped a cool billion dollars on mobile-based photo sharing service Instagram, while Zynga's immense and seemingly ill-advised investment in Draw Something is likely to become the stuff of industry legend.

For all the cash they've spent, neither company seems to have been able to find the acquisition with just the right blend of magic pixie dust that can turn them into competent, mobile-first operations. Facebook's core mobile application is still inexcusably dreadful, and the company's launch of a "Facebook Camera" application which bluntly copies Instagram's functionality only days after the Instragram acquisition was announced didn't do much to convince anyone of the firm's competence in this field either. Zynga, meanwhile, has watched Draw Something's popularity decline sharply and still seems to lack the competencies required to launch a successful mobile property of its own.

The games industry is used to there being casualties from platform transitions, but few are quite as dramatic as this. It's hard to characterise Zynga's behaviour as anything other than panic-buying. The company is terrified of mobile - a platform where it won't enjoy the dominance it did on Facebook, where Apple (in particular) expressly forbids many of the exploitative viral techniques it used to build that dominance in the first place, and where smaller, more nimble developers seem to be building empires while Zynga tries to figure out what the hell to do next. Throwing money at some of those developers is a better strategy than complete inaction, but it's not a winning strategy in the long-term - and the markets know it.

"Zynga is terrified of mobile - a platform where it won't enjoy the dominance it did on Facebook"

The second thing the markets know, or are beginning to realise, is a little less openly discussed right now - perhaps because it makes a fair few investors and commentators look rather bad. That second thing is this: both the stock markets, and Zynga itself, completely misunderstood what kind of company Zynga is. In their excitement over things like the social graph and the undeniable power of free-to-play business models, they forgot that Zynga is still, essentially, a video game company - and they forgot how that kind of company operates.

Video game companies are no different to any other kind of media company - a film studio, a book publisher, a record label. You have a back catalogue that generates some revenue, but your growth has to come from new releases. You're relying on a schedule of new releases to generate at least a few break-out hits which will drive your profits and keep your company looking healthy. A good back catalogue evens out your annual revenue figures, but if you don't make hits, then the strength of your back catalogue is irrelevant - except as a bargaining chip when the time comes to sell out to a healthier rival.

Zynga is no different - but it thought it was, and some investors believed it. Zynga is a games company. It's important for it to keep its back catalogue healthy and thriving, but ultimately, if it wants to grow, it has to generate hits. Farmville is back catalogue - a comfortable set of laurels to rest on, and nothing other. Zynga, like any other media company, is only as good as its last release, and only as bankable as the strength of its forward release schedule. There is a sense that the company and its investors thought that the social graph and F2P business could change that reality, but they were utterly deluded in this. If your business is making games, then no matter which business model you use to monetise those games, the reality is this - you have to be prepared to release new games down the line, and those new games have to match or exceed the market performance and quality of your previous titles, or you're a shrinking business. Zynga, for whatever reason (we could return to the mobile question here, or look a bit more closely at some of the less palatable business practices of which Zynga stands accused), doesn't seem to be capable of that. The stock market sees the problem, and wants out.

"Both the stock markets, and Zynga itself, completely misunderstood what kind of company Zynga is. They forgot that Zynga is still a video game company - and they forgot how that kind of company operates."

This is a hugely important lesson, because Zynga is not alone in having this kind of flaw to its business thinking. There are plenty of other companies out there which have had a couple of hits and which seem to believe, thanks to the new business models enabled by social gaming, that those hits can sustain them almost indefinitely. They've forgotten that media businesses can never, ever rest on their laurels, no matter how impressive the laurels may be. There's a reason why "one-hit wonder" is a term uttered with a sneer - and plenty of businesses that look exciting today are likely to find themselves slapped with that term in a few years time, I suspect.

Zynga is a stark example to those businesses. You're still in the business of making games, and if you can't meet the expectations of that business, you're going to fail. For Zynga, the only route out of their current predicament is to start producing some genuinely exciting, high profile and appealing new games - preferably games which lead on the mobile platforms. My suspicion, sadly, is that neither of those things is in the company's DNA. Social gaming may see its first truly high-profile casualty before long.

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Latest comments (30)

Bruce Everiss Marketing Consultant 9 years ago
Zynga know that this is the route out and they have a big mountain of cash to do it with, which they are buying up the best talent they can find.
You don't get to where Zynga are by being stupid. Class is permanent, form is temporary.

Edited 1 times. Last edit by Bruce Everiss on 15th June 2012 11:22am

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Alfonso Sexto Lead Tester, Ubisoft Germany9 years ago
What did they expect?, they burned the market like EA did, and EA went into a crisis... They burned the market like Activision did with Guitar Hero, and now there is no more guitar games...

They just didn't learn and their employees may have to pay for that now (hope that won't happen)
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Zan Toplisek9 years ago
Great article Rob, I really appreciate your editorials.
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Show all comments (30)
Rob Jessop R&D Programmer, Crytek9 years ago
The shutting down of the viral channels Zynga used to grow so rapidly has led many in the industry to view Zynga as having scrambled up the ladder just before it broke; their path to dominance of the Facebook ecosystem no longer exists, and cannot be followed. They were in the right place, at the right time.
That's certainly how I felt when Steve Ellis, Dave Doak and I made some facebook games after Free Radical Design closed. Our games were fun, but paid advertising was the only viable channel for us to grow and it was too expensive.
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Oh well, looks like the Big Z has to actually make some decent games afterall to survive. Lets see how well that is for the future of gaming :)
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Maarten Brands Director, Cook & Becker9 years ago
"Where is the money Lebowski?"
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Rick Lopez Illustrator, Graphic Designer 9 years ago
My comment has nothing to do with the business aspect of whats going on... But honestly im glad this is happening to Zynga... because they either copied or bought the IP of some great games, they didnt let those games rise to the potential they could have reached. True true... those small companies didnt have to sell there IP, but Zynga used there resources to buy out the market instead of making there own good games.

They burned the market down to the ground, Together with anybody who had a chance. They were only succesful cause they saw the growing opportunity facebook had in the beginning. but lets see what they can do without relying on facebook.

Lets see if now they can create there own IP and games that are actually good and not rip offs of pet society and social city.
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Thomas Dolby Project Manager / Lead Programmer, Ai Solve9 years ago
I too will say I'm glad this is happening. It feels slightly wrong to wish failure upon people, but these guys went about games the wrong way. They copied other games and cannibalised their users, they based their design on nothing other than metrics and expanded by absorbing other companies and forcing them to do the same.

Their games had no soul, designed by figures and spreadsheets, designed on exploiting psychology, they had no creativity, and I want to believe that with this kind of thinking your business is not sustainable.

Edited 1 times. Last edit by Thomas Dolby on 15th June 2012 1:33pm

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Robin Clarke Producer, AppyNation Ltd9 years ago
Great article, sums up Zynga's dilemma perfectly. Buying into shortlived fads and trying to clone existing successes is not the same as building something of intrinsic value.

The echo chamber of 'social experts' who've spent the last three years convincing themselves that a bubble can keep expanding forever will try to ignore this for a while yet.
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Christopher Bowen Editor in Chief, Gaming Bus9 years ago
There's still good news. Zynga has a very strong market capacity - comparable with EA - so they have options.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.9 years ago
What I want to know is who is responsible for the over investing?

Investors that jumped wallet first onto the hype train or incompetent financial analysts that gave them the bad investment advice?
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Klaus Preisinger Freelance Writing 9 years ago
Try to see it from Zynga's position. They were selling part of their company. If the stock price goes up, then it basically means they were not asking enough and people outbid each other for the short supply. If the stock price goes down, it means Zynga managed to get every Penny they could.

If you speculated with Zynga stock, you got a 50% increase of share value within the first three months. That is not a moment to wait for stocks to go higher these days, this is the moment where you sell and be happy.

For now, Zynga is treated like the one hit wonder they are.

Just observe Facebook. They will probably go the same route. Initially overpriced, early drop, great recovery, great cash in opportunity, drop to being meaningless.
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Steve Ball Software Engineer, Ubisoft Montreal9 years ago
Great article!

It maybe wrong to say it but I too am glad to hear that certain aspects of their business strategy are failing. After hearing a lot of the practices and news reports that have been coming out about Zynga for the past couple of years, it seems a nice vindication that it is proved that a company cannot operate like this and succeed...
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Tin Katavic Studying MSc-Games Technology, University of Abertay Dundee9 years ago
Is it evil of me to think "Karma!"?
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I see the problem is in investors' mentality not in Zynga's ability for making good games or overall social gaming crisis. Some VCs put huge money into the Zynga and they are expecting to return investments with profit very soon.
Apple said they pay 4 billion dollars to developers for the 4 years since AppStore was created. So iOS market capacity is about 1 billion per year. How much of that Zynga expects to earn itself?
In my view investors just don't get that Zynga can't grow forever with pace as it was in 2007-2009. That's why all this share price frustration happening.
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Hugo Trepanier Senior Game Designer, Ludia9 years ago
Bruce, it annoys me slightly to see you always praise Zynga in these forums, no matter the topic. Are you paid by them to cheer up the crowds in their favour? It's as though you believe they can never do any wrong.

On topic, I think Zynga were pioneers in their own way but mostly because they got lucky (right time, right place, as the article says). The "free to play" world will be in transition from the old models and hopefully will move towards more meaningful game experiences. We can't keep exploiting addiction and spending patterns at the expense of quality entertainment, or we'll lose the customer in the end. Zynga was there early and had good success but unless they dramatically turn around they'll be left behind by more creative companies that deliver much better gameplay.

Also, the article made me smile with its mention of one-hit wonders. Anyone else pictured Angry Birds in their mind at that point? :)
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Dave Knudson Sr. Technology Manager, Electronic Arts9 years ago
As a a company I think they at least have options to do well going forward.

I think the stock blowback may be from pre-IPO. At that point the company valuation was being made in part off low volume trades in the pre-IPO secondary market, as well as how much MAU/DAU was growing. Investors may have been conditioned to put a heavy weight on MAU/DAU, and thus when that slows/regresses they now respond as such.

Then there are other factors, like the amount of stock offered...Zynga's has 7x more shares available than LNKD. LNKD has held value, despite a seemingly ridiculous forward P/E.
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There is another factor that you could have mentioned, which again is a factor in *all* games markets.

Facebook's initial success was predicated on refining one particular formula for a relatively simple game model. But formulas quickly become tired in entertainment, and player grow up demanding deeper and deeper content in each wave of release.

Zynga missing this is endemic to Zynga's culture. They may be in the games market but they are NOT a game company. They are a sales and marketing company. Quite a few years ago someone else in such a business told me "We are a sales and marketing company, the product is just our widget." Thats how sales and marketing companies think, they really believe what the product is is secondary to how they sell it.

But in entertainment, product is everything. The movie industry has known for a long time that all the marketing money in the world will only help the first two weeks of box office. After that, its up to word of mouth and the success of the product itself.

Edited 1 times. Last edit by Jeffrey Kesselman on 15th June 2012 7:05pm

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It also should be mentioned that in both Zynga's and Facebook's case, irrational exuberance made them come out the gate at unreasonably high prices and expectations that no rational market analysis could support. Some of what we are seeing now is simply the market finding the real value.

But I wouldn't waste any tears on the founders or backers of those companies. They may be losing some money on paper now, but they have already made a real killing on all the shares they have unloaded on the public at inflated IPO prices. Their remaining shares could go to 0 value and they would still be well ahead.

Edited 1 times. Last edit by Jeffrey Kesselman on 15th June 2012 7:10pm

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JUST think of locust. They eat. breed and hopefully burn out!
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Gary LaRochelle Digital Artist / UI/UX Designer / Game Designer, Flea Ranch Games9 years ago
"Zynga CEO and founder Mark Pincus said, "I don't f*cking want innovation. You're not smarter than your competitor. Just copy what they do and do it until you get their numbers."

How can you be an industry leader with thinking like that? They may be hiring "the best talent they can find", but Zynga handcuffs them once they are hired. It's like Zynga is walking backwards through the business world. They keep looking at what had made them money and just do more of the same. The problem is that the customer is growing tired of what they are offering and are looking for something different.

With the amount of the money, resources and so called "talented developers" Zynga has, you think they would at least try to do something new. It's almost like they are afraid to be innovative.
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Boris Van De Ven Managing Director, Blammo Media9 years ago
Fascinating how gamers always want something new and (preferably) innovative and publishers have such a hard time delivering just that. Zynga is indeed no better than any ol' gaming company. Hooray for mobile and hooray for Apple!

Great Article!
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Abraham Tatester Producer 9 years ago
Hey Rob, very interesting read. However...maybe it's just that I'm a former financial journalist, but I don't know how you got through this article without mentioning the actual share price or the percentage change since the IPO or peak. That should be in the lede. And hey, how about a chart: a picture is worth a thousand words. Looking forward to improved financial coverage at

Edited 1 times. Last edit by Abraham Tatester on 16th June 2012 4:04am

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Excellent read Rob.

The only part I would question is the last, about back catalogues and hits. It is possible to continuously grow a game, as Jagex and CCP show, with enough of a commitment to quality over time. The real issue for Zynga as I see it is similar to that which hit MMO publishers a few years ago: they come to believe that their products are commodities at the game design level, and that sort of logic leads to formulaic design.
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Brian Smith Artist 9 years ago
All that talent bought in to advance this business model is a waste to our industry. I can't say I'm worried for their future.
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Tamir Ibrahim Programmer, Splash Damage9 years ago
I understand the industry hate here. Although it's never cool to wish a company to fail kids.

Regarding Zynga, they do have some major talent now and I don't believe they handcuff them as someone suggested here. I may not agree with some of their past decisions but I do think they have the money and the talent to not fail.

Does this mean I'm agreeing with Bruce for once? That makes me question everything I've just written...
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Gary LaRochelle Digital Artist / UI/UX Designer / Game Designer, Flea Ranch Games9 years ago
"Another issue was skewing gameplay for the sake of profit, example; I actually resorted to BAD MATH, to make the case for making a feature more fun. At the end of one sprint, a QA dude was complaining about the drop rate of a specific item being absurdly insane, and therefore UnFun. I looked at the code, and tweaked some values, gave it back to QA guy, and fun was restored. Product Manager overrides this, goes for unfun, yet more profitable version.

And later, “Zynga is a marketing company, not a game company.”


When a designer comes up with a fun idea and the test folks like it, then Metrics comes by and says to take it out so Zynga can make more money, that's Handcuffing.

I play games to have some fun, not to see how much money I can spend.
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Tamir is right on one point, they have acquired some decent talent base. Whether they let them run loose and make some quality, well the proof is in the PuddingVille
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Peter Dwyer Games Designer/Developer 9 years ago
Sadly the problem with Zynga is the same thing that is hitting the likes of Take Two etc. etc. IP eventually get's stale and if it isn't replaced with new IP then the gamers you've come to rely on simply move to the next company in the line.

I can't even name the last new thing Zynga released.
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Rick Lopez Illustrator, Graphic Designer 9 years ago
Zynga CEO Mark Pincus said: "I don't fucking want innovation," the ex-employee recalls Pincus saying. "You're not smarter than your competitor. Just copy what they do and do it until you get their numbers."

You know... to start the company it would have worked. The smart move for Zynga would be to use its resources to be a full blown videogame company, producing original IP and different games for multiple hardware, formats and media.

Instead they purchase talent, IP and rival companies, handcuff them, juice them to the ground and if they cant they just copy what there doing and use all there economic muscle to push there copied product in the market overshadowing the rival company who created the original game in the first place.

i used to play Pet society and Social city then they came out with their versions of it and suddenly all my friends started playing those, when pet society was much better to me. But since they had so many farmville fans, I guess those same fans were looking for the next "VILLE" game.

And the sad thing is if your a small company that had your game idea stolen by Zynga... the best thing you can do is sue them... only for them to laugh at your face and say "with what money"... cause suing costs money in lawyer fee's. And Zynga has money... And i belive the law doesnt exist in the name of justice, its just like any business that caters to those who have money. The law system at least in the US is bullshit to me. If you have money your good, if not then you are totally fucked by small companies who dont have the monetary resources like Zynga to Sue them.

Honestly i truely do dislike them.

Edited 1 times. Last edit by Rick Lopez on 18th June 2012 4:38pm

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