Publisher 2.0 - Did The Social Bubble Just Burst?

The following is a small part of a larger article on [a]list. Read the full feature here.

At the [a]list summit in February, keynote speaker Michael Pachter took exception with an observation by DFC Intelligence president and principal analyst David Cole. Cole's statement that there is a "bubble" in social games was used in the summit's opening address, presented by your co-author of this piece Steve Fowler.

"I think David Cole said something that's wrong," Pachter, research analyst at Wedbush Securities, told summit attendees. "He said there could be a social bubble, because all the games are copycat, there's no originality... you could absolutely say that about first-person shooters. You could. They're all the same game. Except they're not. I would say that about Hidden Chronicles and Gardens of Time."

"I love Zynga games and I get why they're doing them," Pachter continued, then followed with a double-edged compliment, "Zynga actually does a great job with their games. Even when they rip somebody off, they do a better job than the person they ripped off."

That's one quote that Zynga probably won't be using in their marketing materials.

(Watch the video clip of Pachter's keynote here)

That was February 23 of this year. At that time Zynga stock was trading at $12.80 and on its way to an all-time high of $14.69 one week later.  Cole looked a bit over matched by the Wedbush analyst.  Fast forward to today and it is a whole different story. As of this writing, Zynga is trading under $3.00.  What did your other co-author, Cole, see coming that Pachter didn't?

Suffice it to say, this piece isn't going to be a long dissertation for who was right and who was wrong. We're going to explore the reasons for Zynga's slide, whether they can dig themselves out, and whether they are, were or ever will be the model for Publisher 2.0.

What Zynga created on Facebook was a new distribution channel for games, but they did not create a new type of game.  The game mechanics of Zynga games had been around in strategy, simulation and role-playing games.  What Zynga added was a virtual item business model based on free-to-play games, and one that leveraged the communication power of social networks to rapidly bring in users. 

An immediate apparent problem for Zynga was that their games were not strong at maintaining the users they brought in.  Retaining users for an extended period of time is a critical component of success in the free-to-play market.  By the time Zynga filed for an IPO, its prospectus made clear that the numbers did not look good for long term success.

But why didn't Zynga's games have staying power? Is the entire social network game category dead? If it's not dead what needs to be done to correct it? 

At DFC Intelligence, the belief is that Zynga did some very specific things that were not conducive to long term viability.  Some companies are likely to learn lessons from Zynga's experience that allow them to "reinvent" social network games and grow the overall category.  This is much like what occurred after the video game bust of the mid-1980s.

The Atari 2600 pioneered a cartridge based business model where they sold a game console and made money from consumers buying expensive individual games for that console.  This created the modern video game industry in the late 1970s and early 1980s.  However, by 1985, the game industry was all but dead because game companies focused on throwing 1,000s of poorly conceived products at consumers.  Consumers got frustrated and left many products sitting on shelves.  Retailers abandoned the industry under the belief that video games were a fad that had come and gone.

Clearly video games were not a fad, and Nintendo revived the retail cartridge model in the late 1980s.  Ironically, it was characters from Donkey Kong, an old game from 1981, which Nintendo used to rebuild the market.  Nintendo clearly understood the power of branding, and their iconic characters such as Mario and Donkey Kong brought consumers to Nintendo in droves. They continue to do so decades later.  To be fair, Nintendo does make some of the best games, but the secret to their continuous 25-year success (despite notable ups and downs) in the turbulent game industry has been mainly because of their understanding of the importance of branding and marketing.  This is something that has clearly been missing on most social network games to date.

Video game consumers are passionate about their brands. The secret to building a long-term business in this industry has been all about building a popular branded franchise over years. Products that keep a solid portion of existing users while steadily adding new users are generally the ones to bet on.

Read the rest of the feature here.