Will the sins of Groupon be visited upon Zynga? Even after slashing its marketing expenses ahead of its IPO, Groupon is now under pressure to do so again. Meanwhile, it looks like the same challenge is coming to the social gaming sector. According to the San Francisco Chronicle marketing costs are climbing for the social gaming sector.
And the timing couldn’t be worse for Zynga.
There’s a lot of money in social gaming – and not just the $1 bn in fresh capital Zynga hopes to nab when it goes public. The San Francisco Chronicle reports that social gaming will generate as much as $14.2 bn in revenue in 2015, more than twice the 2011 forecast of $6.1 bn. Meanwhile, increased competition within the sector, especially to retain users through a challenging ‘blockbuster’ model, will translate to higher marketing expenses, which inevitably means narrower margins.
Among the challenges the sector faces is end-user attention span: when a game is mastered (or simply becomes boring), the user needs something new. Doubtless, this feeds into the blockbuster dynamic, in which most revenue comes from a new game launch. Unfortunately, the Chronicle continues, ‘hits are harder to come by.’ This puts the entire business model at risk.
What makes matters worse, according to Michael Pachter, research analyst at Wedbush Securities, ‘I think they are learning that the sequel doesn’t work.’
Translation: social gaming companies need to have a huge pipeline of truly fresh ideas.
This leads to higher R&D costs on top of higher marketing costs. Obviously, this is pretty ugly for profitability.
For Zynga, of course, this turns into the expectation of added pressure on its income statement at a time when investors are likely gauging the company’s future. Valuation hinges on expected future performance: increased expenses will play a role in the action around Zynga’s IPO.
The question now becomes whether Zynga’s investors will buy into the company for the long haul or, as with Zynga, take a short ride, cash out and make the company someone else’s problem.