Plenty of companies in the games business are contentious in their own ways - just look at the heat generated on specialist games websites every time anyone from EA or Activision opens their mouths in public - but few have ever polarised viewpoints quite as much as Zynga. The company is alternately lauded as the vanguard of the new games industry model or roundly condemned as exploitative and unoriginal; its adherents believe that it's going to overcome present market difficulties to become a long-term industry giant with a fervency that feels worryingly ideological, while its detractors often rub their hands with thinly disguised glee at the prospect of a fall to ignominy for Mark Pincus and his ilk.
"Hard evidence suggests that this isn't a company that's going to turn out to be an industry leader"
When feelings run high, it's hard to evaluate a company's performance objectively - there's a tendency instead to try and appear "uninvolved" by coming down firmly in the middle, which is not so much statesmanlike as simply a useless exercise in fence-sitting. So instead, let me start by saying that I wish no ill will to Pincus and his merry band - but I certainly think that his company is facing immense problems right now. Zynga's cheerleaders may wave their pom-poms all they like, but hard evidence suggests that this isn't a company that's going to turn out to be an industry leader.
Why do I say that? A variety of reasons - some of which I've talked about in earlier articles on the topic, but many of which are exposed (or enhanced) by the company's rather grim second quarter results, announced earlier this week. There were bright spots in this report, especially in terms of growth of player base (although there's a major caveat to that which I'll address in a moment), but not remotely enough to make the firm's investors or market watchers feel happy with the situation.
Let's look first of all at what Zynga itself presented as the reasons for its troubles, in a telling paragraph of excuses which preceded its downgraded projections for the 2012 fiscal year. "Delays in launching new games, a faster decline in existing web games due in part to a more challenging environment on the Facebook web platform, and reduced expectations for Draw Something."
Let's put some context around that. Zynga is a company that's intricately wedded to the Facebook platform. There's a strong (if harsh) argument which says that the only true masterstroke Mark Pincus has ever come up with at the company is the ruthless exploitation of Facebook's unregulated and open-to-abuse social graph in order to cross-promote networks of games between users, back in the Wild West days before Facebook cracked down on application spam on its networks. By the time the crackdown came, Zynga was deeply established as the biggest provider of games, and could continue to cross-promote within its own games to shuffle players around its ecosystem rather than losing them to competitors' games. If that sounds like it was resting on its laurels, well, that's because that's precisely what it was doing, for the most part.
Meanwhile, virgin territories were opened up elsewhere and Pincus completely failed to seize the moment. iOS and latterly Android have become the dominant platforms for growth in social gaming (not necessarily for social gaming itself, but all the growth is on mobile, not on the web). Zynga sat back heavily on its Facebook success, allowing faster, more nimble companies to land-grab on mobile - a land-grab encompassing not only users, revenues and reputation, but also the experience required to build successful social products on mobile.
"Zynga's symbiotic relationship with Facebook is crumbling, and the only two escape routes - new product releases or acquisitions in the mobile space - aren't working out"
So when Zynga says that the Facebook environment is "challenging", what it means is "the sky is falling". That sounds dramatic, but it's no exaggeration. A huge proportion of Zynga's business flows through the Facebook platform, and if it's hitting growth barriers on that platform - either due to a slowdown in Facebook's own growth, or new policies which keep aggressive games-related posts off most users' timelines, or even due to more aggressive competition from rival game makers - then that's disastrous, because Zynga has nowhere else to go right now. I'm not sure very many blacksmiths reacted to the advent of the motor car by announcing that the horseshoe environment was "challenging", but their more colourful language would have meant exactly the same thing.
The other two aspects of that telling paragraph explain why Zynga has nowhere else to go. Draw Something has collapsed since being acquired by the company - probably largely because the concept itself didn't have much long-term potential for players (there was a distinct lack of a goal or reward system to keep people engaged), although it would be interesting, in this era of deep social interconnectedness and fragile reputations, to see if the downturn was spurred by the negative word of mouth which sprang up around the game at the time of its acquisition by Zynga. This was perhaps Zynga's most high-profile mobile acquisition, and its failure suggests that the company still lacks a basic awareness of what's working on mobile, why it's working, and how to make it keep working.
Then there's the news that product launches are being delayed. That's standard for any company in this business, of course - game development timelines aren't straightforward or easy to manage, and the biggest and most experienced firms experience slippages. However, the contribution to the overall picture is clear. Zynga's symbiotic relationship with Facebook is crumbling, and the only two escape routes - new product releases or acquisitions that propel it into the mobile space - aren't working out. Beyond blind faith that "Zynga is really big so it'll be fine", which of course explains why big companies never fail (which is why my insurance is with AIG, my power comes from Enron, my car is from General Motors and I can't wait for the next Atari console to come out), I'm not sure how Zynga's apologists process that one.
How about those bright spots, though? Zynga's monthly active users (MAUs), one of the key metrics that's emerged as a measure of success in the social age, are up 34 per cent year on year, after all - rising from 228 million back in 2011 to 306 million in the same period in 2012. If Zynga's resting on its laurels, then those are surely some pretty comfortable branches they've found to sit on?
Except that when you look more closely, there are caterpillars on the laurels. In the same period, another statistic - Monthly Unique Payers - also rose, but it only rose by 16%, from 3.5 million to 4.1 million. That's a really important figure, because it encapsulates the number of Zynga's customers who actually paid for stuff - forking over money for energy boosts or items in the company's games. There's a temptation to say Zynga has 306 million "customers" because of its MAU figure, but the reality is that the company has 4.1 million customers - and 301.9 million users whose participation in the firm's games is a net marketing expense, not a positive contribution to the bottom line.
That's okay, sort-of. Free-to-play mechanics mean that you expect the vast majority of users to play for free, effectively acting as cost-effective marketing to entice the small minority of players who'll pay money and make the service profitable overall. However, in Zynga's case, the trend is all wrong. Back in Q2 2011, 1.5% of Zynga's players were paying money for things. A year later, the figure is 1.3%. That 0.2% figure may not seem like a lot, but it's a trend moving in the wrong direction - and it actually translates to about half a million players who ought to be paying, if Zynga could maintain its ratios, but aren't. Moreover, that isn't being compensated for by "whales" dragging the average expenditure of the paying players upwards - in fact, the company's average income per DAU (Daily Average User) dropped by 10% year on year. In short - costs are up, and revenues aren't rising to match them. Those laurels don't look quite so comfortable now, do they?
"Zynga talks about reaching record audiences - but that's worse than useless if you're losing your touch when it comes to monetising those audiences"
Zynga is still talking a great game when it speaks to the markets. They talk about reaching record audiences - but that's worse than useless if you're losing your touch when it comes to monetising those audiences. They talk about building a huge mobile gaming network, but have done so through some fragile acquisitions whose success they seem unable to replicate. With extraordinary chutzpah, they claim that they've got a window of opportunity to create a social gaming revolution on mobile just as they did on Facebook - a claim which both overstates the company's role in the establishment of Facebook social gaming, and ignores the fact that plenty of far more experienced companies are already way ahead of Zynga in that regard on mobile. Unsurprisingly, the markets aren't impressed. Zynga's share price collapse continues apace, dropping off almost 40% after these results were announced, and while Mark Pincus may claim that that's not really a primary concern, you can be damned sure that the stock price is one of the first thing he glances at in the mornings.
Zynga has arguably done many things which deserve scorn, but not remotely as many as the firm's detractors claim - and those detractors casually ignore the fact that this is a large company employing and providing job security to a large number of talented developers and other staff. Nobody in their right mind should wish ill on the firm to the extent that some people seem to. Equally, however, this feels like a company sliding downhill without any real idea of where to find the brakes. As investors are constantly told, past success may be no indication of future results. Zynga's ability to replicate the success of its Facebook glory days cannot be assumed. On mobile, it needs to prove itself anew - this time without the benefit of the dirty tricks Pincus proudly admits to having used first time around. This is the ultimate test of both him and his company. Thus far, both are struggling for a passing grade.