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Zynga went public at a stock price around $10 in December, reached highs near $15, and is now closer to $2.The place is burning down, and employees and executives are fleeing. This week, the company pre-announced disaster ous Q3 earnings
So what’s CEO Mark Pincus thinking about where this is all heading?
We’ll have to wait till Zynga’s earnings call next week to know for sure, but last night, Pincus re-tweeted something interesting: analysis of his company by Softech VC Charles Hudson titled “THE ZYNGA HATE HAS GONE TOO FAR. MAYBE THEY SHOULD GO PRIVATE.”
There are really interesting opportunities available to Zynga – they’re just too risky to do as a public company. There is a lot of greenfield opportunity in front of Zynga. Social casino, both for-fun and real money, are both still markets that can be contested with good products and smart marketing spend. There are interesting opportunities in midcore and hardcore mobile games. And very few companies have really cracked social distribution. All of the segments I’ve mentioned above are speculative – they haven’t settled out yet and there’s still a lot of work to do to figure out what it takes to win. Winning in these market spaces will take experimentation, testing, and will inevitably involve some failure. That sounds more like work to do in private than in public.
Given Pincus’s re-tweet, Hudson’s headline and Hudson’s conclusion, it’s hard to believe Pincus wouldn’t rather Zynga be a private company right now.
It’s not implausible that he’d get his wish. Zynga has zero profits, but it does have big revenues and a large pile of cash. It’s getting cheaper by the second.
Here’s the meat of the analysis from Hudson:
Zynga will do over $1 billion in bookings in 2012, most of which will come from platforms that didn’t exist in meaningful form 5 years ago. Despite the decline in stock price, Zynga does roughly $200-300 million per quarter in bookings, the majority of which comes from a platform (Facebook) that didn’t exist in functional, meaningful form 5 years ago and with most of the growth coming from smartphone app stores that didn’t exist 5 years ago either. That’s really impressive growth. To go from zero to $1 billion in bookings is no small feat. It can be easy to lose sight of that fact in the stock price pummelling the company has taken.
Mobile games today is a “small numbers” business today for a company doing $1 billion in bookings. Just think about this. For a company that does over $1 billion in annual bookings, even a $100 million annual run rate for mobile only adds 10% to the top line. That simply isn’t enough to move the needle for Zynga. For mobile to matter in the grand scheme of things, it needs to be more like 20-30% of total revenue. The challenge right now is that while mobile (tablet and smartphone) is growing quickly, it’s still a small total dollars business for them and frankly for everyone else other than the largest Asian games companies. It will take time for mobile to catch up and eventually eclipse Zynga’s web business. In the meantime, their overall growth rate will be burdened by the slow growth of the Facebook platform.
Zynga is in the midst of managing a really difficult platform transition – this is really hard to do as a public company regardless of what industry you’re in.This is not just a games issue. Look at all of the traditional commerce companies that have tried to compete with e-commerce. And all of the print and analogue media companies in music and news that have struggled to cope with the transition to digital. One thing is clear to me – fundamental distribution and platform transitions are hard enough to do – doing them in the glare of being a public company is downright impossible. The reason is simple – public companies are measured quarterly and these kinds of transitions require quarters of hard work to effect. Zynga, and just about every knowledgeable analyst that covers the company, understands that the future is in mobile. Making that transition from a Facebook-centric world to one where they have a meaningful contribution on mobile will take time and that’s hard to do in public.
There is no reason that Zynga can’t build up a strong cross-promotion network in mobile that would be reasonably effective in recreating some (if not all) of the advantages they enjoy on the Facebook platform. Part of what made Zynga successful on the Facebook platform was that they both dominated newsfeed and other forms of on-platform social distribution and that they had a large network of users to which to cross-promote new games. There is one fundamental different between mobile and Facebook, though. While most “social” games were surfaced through the core Facebook walled garden experience, this doesn’t hold on mobile. In mobile, games are not ambient social objects that live in a larger Facebook experience – they’re effectively more like a collection of bookmarks that you save on your desktop. As such, you don’t have a time blackhole application like Facebook where you can capture engaged users – it’s just harder on mobile.
But there’s no reason to believe that Zynga can’t build up a strong, meaningful cross-promotion network that rivals what they have on Facebook. Independent companies like Chartboost, Playhaven, and Papaya (AppFlood) have proven that the model can work across developers. And Zynga has some good assets in mobile when you look at Draw Something, Words with Friends, all of the X-With-Friends games, and upcoming IP. The real secret, though, to making this work is that Zynga needs a sufficiently diverse portfolio of offerings in its quiver to have the right game to suggest to the right user at any given point in time. Right now, they are heavily weighted toward casual. I expect they will add more hardcore, midcore, and casino games so that they eventually have something for everyone.
On Facebook, Zynga competed with Playfish, Playdom, Wooga and others to build the strongest cross-promo network. They eventually won. Now they’re competing with a new set of formidable competitors in GREE and DeNA. Unfortunately for Zynga, they are competing with those companies on their home platforms (mobile) – but Zynga will compete and I think we’re still in the early days of seeing how this all plays out.
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