Why Zynga Unleashed was tame

The presentation left investors cold, and we look at the reasons

Zynga spent yesterday throwing a massive press event, making multiple announcements of new games, new technology, and new partnerships. Yet investors responded with about a 5 percent drop in Zynga's stock price, down to $5.75 in after-hours trading, where back in March it briefly traded at over $14. What just happened?

Fundamentally, very little of what Zynga announced today has much potential for a significant impact on revenue or earnings. Investors were looking for at least a few things that could mean significant growth soon; not hearing any such thing, they sold the stock.

"Very little of what Zynga announced today has much potential for a significant impact on revenue or earnings"

Let's look at what Zynga talked about. New games included Ruby Blast (a Bejeweled style arcade game); ChefVille (construct a kitchen and a menu); Zynga Elite Slots (a slot machine game with some twists); Matching With Friends (an iOS matching game); The Ville (Zynga's take on The Sims Social genre); and (someday) FarmVille 2. Which of those has the potential for major revenue impact on the scale of Zynga's other big hits? Only one: The Ville.


Ruby Blast Shuffle

Matching games (like Ruby Blast and Matching with Friends) are popular, but there are many already out there (like Bejeweled), and they certainly are unlikely to generate the kind of revenue you could see from a FarmVille. ChefVille, while nicely executed, is a fairly specific niche that is unlikely to be as broadly popular as a CityVille or a CastleVille, and it lacks any compelling design innovations (at least, none were touted). FarmVille 2 could be huge, but wouldn't it just cannibalize FarmVille's audience? It's hard to see where both FarmVille and FarmVille 2 could be running at the same time, each with huge non-overlapping audiences.

That leaves us with only one game with potential for significant revenue, which is The Ville. Not as exciting as the last Zynga Unleashed in October 2011, where we saw CastleVille, Zynga Bingo, Hidden Chronicles, and Mafia Wars 2. Granted, Mafia Wars 2 sank rapidly, but the others have done very well, and all the games showed interesting design features. This time, there wasn't a lot of design innovation on display, or at least nothing was mentioned.

OK, but what about the nifty technology Zynga talked about? The Zynga API, the Zynga With Friends Network, Zynga's rapid updates and the impressive zCloud? Those things are all nice, but they don't mean significant new revenue in and of themselves. Perhaps greater efficiencies from the Zynga API can mean better earnings, but we're talking about top-line impact here.

"There were no announcements of major partnerships with large companies"

Well, you say, perhaps the technologies don't result in more revenue, but what if they attract a lot of partners with dozens of new games that Zynga can profit from? That sounds like a potential source of significant revenue, but so far we're not seeing rapid progress in that direction. Zynga announced three new companies to add to the 6 they already had, which is not exactly huge progress since May. This does not yet represent a big revenue opportunity, though it may someday.


Matching With Friends

Other potential sources of significant revenue growth are either beyond Zynga's control, or they're not making enough progress to mention it at this event. Advertising? Yes, if Zynga can find a way to monetize the over 250 million monthly users they get, that could be huge. So far, advertising has represented a very small amount of revenue for Zynga. (To be fair, the Zynga Unleashed event wouldn't really be the place to talk about this in any detail, but if it was doing great you'd expect at least a mention.) Real gambling? Zynga stands to do very well if the laws ever change, but that's not something they can control.

Bringing major revenue producers like CastleVille or FarmVille to tablets? Possibly a lot of revenue, but it's a big technical issue and we don't even know if they're planning it any time soon. The only hint of any migration of core titles to tablets or smartphones is the Zynga With Friends Network, which aims to connect players across platforms. The implication is that all titles would have to be on multiple platforms, but while that may be the road map we have no indication that it's happening any time soon.

Some of the most important topics were left unmentioned at Zynga Unleashed. There was no mention of total users (either monthly or daily), though we heard all about the increases in those numbers at Zynga Unleashed in October of last year. This time... crickets. That's no doubt because they haven't been seeing growth; according to analyst Doug Creutz, Zynga's DAUs declined by 8.2 percent in May over the previous month. Now, that might not matter if those were not paying users, but then we'd expect the percentage of paying users to increase, or the average revenuer per user to increase. That may have happened, but it was left unsaid, which leads you to think those numbers didn't improve.

Mobile games received prominent placement in the slides and in discussions, yet the only new game announced was Matching With Friends. We were told about Draw Something being localized for 12 different languages, and it's now approaching 10 billion drawings total so far. Impressive, but we weren't told about the number of daily users. We didn't hear about other new mobile titles, which many investors might have expected given the continuing rapid growth in the mobile market. Another opportunity to excite investors was missed.

"You would never have known that Zynga derives more than 90 percent of its revenue from Facebook by listening to this presentation"

There were no announcements of major partnerships with large companies. Majesco? Please. Atari? Yeah, they were big 30 years ago, weren't they? There's no sign of any large social gaming company, or any traditional game company looking to take their brands into social gaming, lining up to be a partner with Zynga. Investors were looking for something to be announced, and so far Zynga has not produced much in this area. Is the price Zynga charges too high? We don't know, because Zynga hasn't revealed the terms of its partnerships. Perhaps some adjustments to the terms might start getting more partners to sign up.


The Ville

Facebook announced subscriptions last week, and even pointed out that Zynga was testing that out with FrontierVille and FarmVille. Yet we heard nothing about this at Zynga Unleashed. For that matter, neither Pincus nor any other Zynga executive ever dropped the F-bomb in the presentation. No, not that word; the Facebook word. You would never have known that Zynga derives more than 90 percent of its revenue from Facebook by listening to this presentation. Subscriptions would seem to have significant potential for increased revenue, but apparently it's too soon to say anything about that.

With all of that said, it seems shortsighted for investors to be running for the exits. Zynga still has well over $1 billion in cash, lots of very savvy employees, an impressive technology platform, some world-class brands, and an enormous audience of over 250 million people. We should hear more about their numbers and their strategy at their next earnings call in July. Let's hope it's a more inspiring event for investors, industry observers and most of all, game players. Zynga is performing well on basic business execution, but we need to see some creative dealmaking, some sharp business development, and some innovative game designs that point to some great revenue potential before investors pile back into Zynga stock.

Related stories

Subway Surfers becomes first Android game to pass 1bn downloads

Sybo and Kiloo's mobile hit achieves new milestone after outperforming all other games last year

By James Batchelor

Mobile increasing its share of the games industry - Report

App Annie and IDC find mobile consumer spending was double that of PC/Mac gaming last year, 3.6 times that of consoles

By Brendan Sinclair

Latest comments (18)

Looking at this analysis and report, If I were a investor - I'd vote to sell (there just is not any titles of interest)
0Sign inorRegisterto rate and reply
GameViewPoint Game Developer 5 years ago
I think in this industry you need to shock and surprise, usually giving people what they expect isn't enough.
0Sign inorRegisterto rate and reply
Robin Clarke Producer, AppyNation Ltd5 years ago
Three clones, two retreads of successful formulas (without the games that made them successful), and (another) Farmville sequel.

How many years have Zynga been banging the drum about becoming a creative company now?

Zynga API is a more promising development, if they're able to stick at it until they get partners on board.

And because I've been seeing this weaselly turn of phrase being used a lot in the tech press's Zynga coverage of late: There isn't a "Sims Social genre", beholden to no-one, that Zynga have blithely wandered into. There's a game called The Sims Social. The Ville appears to be a clone of it. They're perfectly within their rights to do that but let's call a spade a spade.
3Sign inorRegisterto rate and reply
Show all comments (18)
Why not come out and call it SimVille :)
0Sign inorRegisterto rate and reply
Ben Simpson CEO & Co-founder, Box Of Frogs Media5 years ago
Bruce? anything to say here?
4Sign inorRegisterto rate and reply
Shhhhhh - do not mention the name of youknowdigitalwho!
1Sign inorRegisterto rate and reply
Ben Simpson CEO & Co-founder, Box Of Frogs Media5 years ago
Just in mild shock that we don't have the statutory 'Zynga understand gaming as a service, design by metrics, buy their stock' comments we have all been so used to.
1Sign inorRegisterto rate and reply
Steve Peterson Marketing Consultant 5 years ago
I should note here that analyst Michael Pachter, after the showing yesterday, reiterated his guidance for Zynga, valuing the stock at $17 a share.
0Sign inorRegisterto rate and reply
A genuine question to the crowd. Do you reckon we are in a giant bubble in terms of tech stock including kickstarted. If so, when would this bubble blow itself out (adjust due to natural market forces)
0Sign inorRegisterto rate and reply
Not sure what all your past experience with the stock and investment sector - but the current falls in interest and investment seems to be spiraling out of control with all the major names in the consumer game sector. I wonder if this is just a transient blip while Gen-7 comes to an end - or if Gen-8 hardware will be able to reinvigorate the markets to invest in publisher and producer?

I know that Zynga is a casual game / social network format, but it seems to be another game company with a serious hole in its investment stream?
0Sign inorRegisterto rate and reply
My analysis of the situation is

Zyngas always knew that its rise to prominence would not be self sustaining with the original biz model (of rape and pillage cloning). As such, it sought to build a nice hefty war chest and purchase itself some nice social/mobile developers whilst developing alternative APIs and platforms having built itself a name.

It could be that genuinely, there are some new IPs in development squirelling away in secret, but not developed for the Facebook platform. Meanwhile, until gamers squirm and leave in droves, it probably feels its alright to continue the Zynga 2.0 version of mass regurgitation (contrary to it touting being innovative, creative, blah blah)

As such, rather than saying the writing is on the wall, it remains to be seen what the next game plan is. I suspect investors are canny enough to know, that they require further definite proof that the names Zynga titles will turn a profitable profit. However because of Facebook's ongoing fall and poor monetization methods, it could be that Investors in the know are not investing any further, whilst investors who have no clue are burning their cash.

And on the background, I am still not sure of the legitimacy of the Facebook flotation. In a nutshell, I understand that the valuation was waaay overvalued, and it continuously being corrected. However, would it be fair to say that all the punters that invested in the initial IPO have less valuable stock now and have the grim choice to hold on for the long term or cut the losses and re invest elsewhere?
2Sign inorRegisterto rate and reply
Kieren Bloomfield Software Engineer, EA Sports5 years ago
People who play the markets aren't interested in the long term good of the company they sink money into. They're only interested in growth and potential for growth. When you hit your ceiling there's no money left to be made trading the stock and your price drops. With the console market we lose the potential for growth at the end of a console generation as anyone who was going to buy the hardware already has and as such you know how big the audience is. Stock prices tumble. But then new hardware appears and if there's a whiff of it being successful then the investors return. In the PC/casual market you don't get this fluctuation. Maybe Zynga have hit their ceiling; they're as successful as they ever will be.

Maybe that last part is just wishful thinking...
1Sign inorRegisterto rate and reply
Steve Peterson Marketing Consultant 5 years ago
Facebook has had explosive growth for years, and lately that has slowed down. Zynga's growth paralleled the expansion of Facebook's market, and now that the rapid growth has ended both companies need to figure out how to grow when the overall market isn't expanding like it was. Zynga's stock has continued to drop today, down almost another 5% since yesterday.
1Sign inorRegisterto rate and reply
Bruce Everiss Marketing Consultant 5 years ago
The thing about Zynga is that they have a massive war chest and are spending it wisely.
They now have a lot of very good people and they understand metrics like nobody else.
Their games are masterpieces of dopamine management.
And they have an entrenched position on Facebook that was set up when the rules were slack, giving them a position of dominance.

The problem comes with the jungle that is mobile, where the market is completely different and where they cannot so easily attain and maintain a position of dominance.

It will be interesting to see between EA and Zynga which is the best long term investment. They are both trading at low prices and they both have massive potential if they get it right.
0Sign inorRegisterto rate and reply
"Their games are masterpieces of dopamine management"
Medically, this statement bugs me to no end, but one gets the drift.

FYI - dopa is related to alot of things, with shock, parkinsonism, mood disorder, anxiety, is in particular with patient with Parkisons that they need medication to top up the levels of Dopamine. Thsi in turn builds up various side effects and cravings due to tolerance.

So to wit, the statement above is wrong on so many counts...
1Sign inorRegisterto rate and reply
Gary LaRochelle Digital Artist / UI/UX Designer / Game Designer, Flea Ranch Games5 years ago
"The thing about Zynga is that they have a massive war chest and are spending it wisely."

Spending $210 million for Draw Something is spending money wisely?
2Sign inorRegisterto rate and reply
Bruce Everiss Marketing Consultant 5 years ago
@Gary LaRochelle

Zynga did not pay $210 million for Draw Something. They paid it for OMGPOP, who have an award winning multiplayer game website with a huge player base and an Alexa of under 10,000.
So the aquisition gave Zynga another platform for their IP. And at the same time they got Draw Something.
0Sign inorRegisterto rate and reply
Gary LaRochelle Digital Artist / UI/UX Designer / Game Designer, Flea Ranch Games5 years ago

If OMGPOP did not have Draw Something, would Zynga have bought them?
Yes, Bruce, you are right. The deal included purchasing OMGPOP. Sorry I left that out. But $210 million? Zynga probably could of bought the studio for half of that price.
I just checked the reviews of Draw Something now that Zynga has control of the game. People are not very happy with the iOS version. The game is a bug-fest. Currently listed as 32 on the paid app leader board and dropping.

Edited 1 times. Last edit by Gary LaRochelle on 29th June 2012 9:42pm

0Sign inorRegisterto rate and reply

Sign in to contribute

Need an account? Register now.