BI Research Express 11/7/2011

A Look At The Biggest Trends In Mobile

us phone platform install base

Photo: Asymco

ComScore has data out on the US phone market and Asymco breaks them down, including this great chart at right on the evolution of the US phone platform install base.It highlights a few key points, some of which are already known, but some of which don’t get talked about enough:

  • The Blue Ocean is still HUGE. For all that we (justifiably, more on which below) talk about who among Apple, Google, RIM, Microsoft et al. is winning in smartphones, the biggest opportunity remains the Blue Ocean of getting smartphones in the hands of non-smartphone users. (This is true of the US, but also very true of developing markets where the shift to mobile is enormous.)
  • In turn, this means the game is far from over. Given that most of the market is still a blue ocean, the opportunity for newcomers is great. Particularly for platforms with lots of resources and distribution, i.e. the Microsoft-Nokia duo. 
  • Holy cow, Android! With all these caveats out of the way—the other thing that jumps out is how big and how fast growing Android is. Google’s open-source, broad distribution strategy is textbook disruptive innovation, and at least so far, seems to be working just like it should: i.e., it is eating the market. 
  • Yes, Apple should be worried; but no, it’s not over, far from it. First of all, Apple is huge and still growing very nicely. Second of all, because the mobile wars are platform wars, smartphone marketshare undercounts iOS marketshare because of the enormous successes of the iPad and iPod Touch, which aren’t phones but are still mobile iOS devices. And thirdly, this chart doesn’t count the two big potential gamechangers Apple has recently introduced: the iPhone 4S, which looks like an excellent device and could be a record-breaking seller; and, less flashy but at least as important, the FREE iPhone 3GS, which allows Apple to have an offering for the bottom of the market and be competitive with Android. How these devices perform could make things look very different three months from now.

ZYNGA: Still Not Growing, Still Not Profitable
Zynga just released its Q3 numbers in an amended S-1 filing to the SEC.

At first glance, the numbers look OK. But as with the Q2 numbers, the details are distressing.

The bottom line is this:

Zynga is not growing.

Yes, “revenue” grew sequentially to $307 million, which led to a profit of $13 million for the quarter. 

But there are three problems with that picture, which we’ll explain in turn:

  1. The company’s measure of “revenue” is actually pretty useless when it comes to how Zynga’s actual business is doing;
  2. Zynga’s “bookings,” which are a better measure of revenue, have been flat for three quarters.
  3. Zynga’s user numbers are declining.

One reason for the flat bookings and declining users is the fact that Zynga did not launch a big new game in the first three quarters of the year. It has now launched one, CastleVille, which should help the numbers for Q4 and Q1. But still, the flat bookings of the past three quarters is discouraging.

Revenue
Just what do we mean when we say Zynga’s “revenue” figures aren’t particularly meaningful?

 As we have previously explained, Zynga discloses two types of revenue metrics:

  • Revenue, and
  • “Bookings”

Of these, “bookings” is actually a more meaningful measure of the company’s performance in a given period.  This is because “Bookings” represents the dollar-amount of virtual goods sold to game players in the period. “Revenue,” meanwhile, is the amount bought in prior periods amortized over the expected life of the virtual goods.

Got that?

“Bookings” is what Zynga actually sells in the quarter or year. “Revenue” is what Zynga sold over the past 4-6 quarters and then spread over the next year or year-and-a-half.

Zynga’s bookings for Q3–their more meaningful measure of revenue–was $288 million. Now, this is still higher than last quarter’s $275 million, but it’s basically flat with the Q1 total of $287 million.

Zynga’s revenue, which represents the amortization of goods sold in prior quarters, continues to grow nicely, but this is mostly due to changes in the amortization schedules. Without these changes, as Zynga states clearly in its filing, the company would not be profitable:

Cumulative 2011 changes in our estimated average life of durable virtual goods for various games resulted in a net increase in revenue of $21.2 million in the three months ended September 30, 2011.

In other words, Zynga’s profit would have been wiped out (and then some) if the company hadn’t shortened its amortization schedules.

Users
So, Zynga’s bookings are flat. Worse, it’s user base is declining.

Zynga’s two most meaningful metrics of user engagement, daily active users (DAUs) and monthly active users (MAUs), are both down from last quarter, from 59 million to 54 and from 228 million to 227 respectively. 

That’s not a collapse (a 1 million difference is more stagnation than decline), but both those numbers are WAY down from the previous quarter, when DAUs were 62 million and MAUs 236 million.  They’re also down from the numbers of 18 months ago.

What does that mean? 

It means that Zynga has grown its business over the past 18 months not by growing the number of people who play its games, but by getting better at wringing money out of those existing users. That growth has a limit. It means that for all the growing revenue, what Zynga is really doing is finding efficiencies in a stagnating business instead of riding the wave of a growing business. 

This is a big problem for a company that is trying to go public by selling itself as a “growth” story. Not growing users puts a ceiling on Zynga’s growth, which is exactly the opposite of what investors expect.

THE BOTTOM LINE
We draw two conclusions from this:

  • Like it or not, like plenty of other media companies, Zynga is a hits-driven business. Zynga’s user numbers are stuck in neutral at least in part because it hasn’t had a major game launch for six months. Zynga likes to say that because of all the data it gets on usage of its games and because it can cross-promote games, and because people keep playing (and paying) continuously, it has taken the “hits” factor out of games, and instead turned it into a recurring-revenue science. The numbers suggest otherwise. Zynga needs regular hits or its growth stalls.
  • Zynga needs to find a new growth driver. The company seems to just have hit a ceiling. The new growth could come from a number of things: a new kind of social games that appeals to a brand-new demographics; mobile games; games off Facebook. Zynga has bets on all these, but so far they haven’t moved the needle. If Zynga wants to go public as a “growth story” it needs to explain to investors exactly where the growth will come from.

In other news…

Google is reportedly looking at buying Daum, South Korea’s second biggest search engine. Google has consistently trailed behind Naver (#1) and Daum in South Korea in the search market, though Android is doing very well. Given the protectionism of South Korean authorities, the deal looks unlikely, but anything could happen.

Twitter sharing is slowly but surely growing in importance in the social media ecosystem, writes Monday Note’s Frédéric Filloux.

Today Barnes & Noble is introducing a Nook tablet. According to reports, it will cost $249 and come with media apps like Pandora and Hulu. It seems dead on arrival to us: underfeatured and more expensive relative to Amazon’s Kindle Fire.

Hugely popular photo-sharing app Instagram is working on video-sharing. We’re a bit obsessed with the startup, because Instagram’s extreme capital and distribution efficiency represents the future of startups →

O.co shuts down three businesses: fashion flash sales, auctions and travel. The company formerly known as Overstock is trying to expand beyond, well, overstock goods, and it doesn’t seem to be working out. 

Disney and Google will co-produce a web series for YouTube. It’s a small, experimental deal but it’s exemplary of Google’s new video strategy, which is to fund and organise professional content in a bid to make YouTube into the new cable. 

SEE ALSO: Our Explainer Of Rackspace’s Business →

DON’T MISS OUR REPORT: The Way Companies Are Getting Financed Is Completely Changing →

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