Not Global, Not Mobile: The Botched Japan Deal That Left Zynga Screwed Overseas

Mark Pincus and Masayoshi Son

In a bid to cut costs and stem its losses, Zynga has announced plans to close its studio in Japan, a disappointing pullback for a company with global ambitions to transform the world of play.

But Business Insider has learned that this closure isn’t just another studio shutdown: It’s a remnant of a failed partnership that could have put Zynga in a far stronger position today, had it worked as intended.

In mid-2010, Zynga, flying high on the strength of Zynga Poker and FarmVille, announced it would form a joint venture with SoftBank in Japan, with SoftBank investing $150 million in Zynga as part of the deal. SoftBank CEO Masayoshi Son said that he was “delighted” to partner with Zynga, and Zynga’s Mark Pincus said he was “excited.”

In a presentation about its earnings that year, SoftBank devoted several pages about the growth potential of its latest investment and billed it as “the world’s largest social gaming alliance.” The company implicitly compared it to SoftBank’s very successful investment in Yahoo in the first dotcom boom. 

A couple of months later, the companies announced that Zynga had acquired Unoh, a Japanese gamesmaker, with the intent of making that studio part of the unformed-but-announced joint venture.

Nothing was ever heard about Zynga Japan again.

Even in 2010, people questioned Zynga’s dependence on Facebook and desktop gameplay. The SoftBank deal was an effort by Pincus and his team to show the company’s independence and potential for international growth.

Zynga would help SoftBank, a major Japanese wireless carrier, expand into social gaming and possibly bring more content to the smartphones it sold, while SoftBank would bring its expertise with the mobile Internet and Asian markets.

We now know this: The joint venture never happened.

Zynga Japan—the business it’s shutting down—is a wholly owned subsidiary.

And Zynga went on to struggle to shift its games to mobile play—an area where SoftBank’s advice, developed in Japan’s sophisticated mobile market, could have been sorely needed.

When Zynga filed to go public, the Zynga Japan joint venture went unmentioned.

There was one cryptic hint at a sticking point: SoftBank had invested in RockYou, then a rival to Zynga in Facebook games. SoftBank would not have the right to get a look at Zynga’s financials until Zynga and SoftBank reached an agreement about that investment, according to a Zynga filing referencing an investors’ rights agreement dated February 18, 2011. 

Nine months later, a Zynga filing shortly before the IPO did not include SoftBank on its list of principal shareholders.

It’s not clear what SoftBank did with its stake. There was an active secondary market in Zynga’s shares at the time, with mutual funds and venture-capital firms racing to establish positions ahead of Zynga’s initial public offering, so it’s possible SoftBank sold them off.

SoftBank Capital, the company’s U.S.-based venture-capital arm, lists Zynga in its portfolio. Josh Lubov, VP of finance and operations at SoftBank Capital, who oversees SoftBank’s strategic investments and corporate affairs in the US, declined to comment on its stake in Zynga. SoftBank corporate PR did not respond to an emailed request for comment, and Zynga declined to comment.

SoftBank and Zynga did complete one transaction: SoftBank was an investor in OMGPOP, a New York-based social-games startup. In March 2012, Zynga bought the company for $200 million after Draw Something became a surprise hit on mobile devices.

That acquisition helped boost Zynga’s mobile-user numbers but got the blame for Zynga’s third-quarter earnings disaster as Draw Something users disappeared. Zynga took a $95 million writeoff.

As part of the cost-cutting plan Zynga unveiled this week—a logical if painful move to placate Wall Street in the wake of the earnings disaster—it proposed the closure of its Japanese studio.

So SoftBank never did end up helping Zynga break into the Japanese market. But in a circuitous way, it had a hand in Zynga’s exit.

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