While Facebook games-maker Zynga’s Treasure Isle continued its ascent last week, adding over 4.2mm Monthly Active Users (MAUs) to pass 25mm total, every other major Zynga title lost MAUs for the week.
As a result, Zynga’s total MAUs across all its properties declined by more then 3mm to finish the week at 248mm.
As we always point out in our weekly updates, we don’t put too much weight on what happens with MAUs in any one week, but potential changes to come on Facebook portend some additional tough days down the road for Zynga.
Everyone following Facebook is aware of the Facebook’s continued interest in cutting down on noise in the newsfeed and increasing revenue. This played out in Facebook’s elimination of application notifications which took effect on March 1. While many in social gaming feared the worst, the impact has proven to be pretty minimal.
However, when the notification announcement was made, Facebook stated that they were also going to change how requests function. It appears now as though Facebook is going to make some major changes to the gift channels and how gift requests function. Facebook perceives that the Facebook channel is polluted by gift requests. While the pending changes aren’t exactly clear yet, the gift channels are a major driver of traffic to social games. In fact, many game players struggle to navigate to games outside of the gift channels. So this change will likely force the game companies to spend an even greater percentage of revenue on advertising, which is of course is what Facebook wants.
On one hand, Zynga, as the largest company in the space, has the most resources to pour in to advertising. On the other hand, companies like CrowdStar that have put more resources in to viral channels they control, like forums, may be better positioned to weather the change.
With the pending changes to requests, Zynga is likely going to advertise even more, and thus experience lower margins than the 40% long term margins we have modelled. While this may ultimately have a negative impact on our $5 billion valuation of Zynga, the company is tracking ahead of the $529 million in 2010 revenue we forecasted.
For the moment, we are maintaining our price target. We further understand that since our initial Zynga research report was published on April 6th, Zynga’s shares have risen about 50% in the private market, to a high of $14 in a meaningful transaction last week. However, the rising share price may not be great news to Zynga employees as the company considers limiting employees ability to sell their shares.
Lou Kerner is a cofounder at SecondShares.com, a blog for news, commentary, and Wall Street style research covering the companies driving the social media revolution. For the last 10 years Lou has been a serial entrepreneur with previous ventures including Bolt Media, one of the original social networks which grew to over 20 million monthly uniques in its suite of youth focused web sites, and The .tv Corporation, which licensed the top level domain .tv from the tiny island nation of Tuvalu. Lou spent the first seven years of his career on Wall Street as an equity analyst following media companies at Merrill Lynch and Goldman Sachs.