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MAFIA SPIRIT

Wednesday, April 17, 2013

Analysis On The Direction Of Zynga

Trying to decipher the direction of Zynga is kinda like wishing you had an umbrella on a warm summer day.

The warm summer rain feels nice but you’re getting wet and you wish you had that umbrella.

Zynga has a lot of potential and very easily could sprout growth in it’s stocks and people love many of Zynga’s games and anticipate more from Zynga. Yet, at the same time many of Zynga’s players feel over-burdened by event after event and demand for in-game purchase after demand for in-game purchase.

On beta.fool.com (The Motley Fool) Ishfaque Faruk gives his version of  ‘An Analysis of Zynga's Business’ using the SWOT (Strength, Weakness, Opportunity, Threat)analysis structure.

 
 

 

An Analysis of Zynga's Business

 
 

By Ishfaque Faruk - April 15, 2013 | Tickers: FB, ZNGA | 0 Comments

Ishfaque is a member of The Motley Fool Blog Network

 
 

We will break-down and cross examine Ishfaque Faruk’s Analysis of Zynga's Business section by section. Here goes;

 
 


Strengths

 
 

Sticky User Base: Zynga has a huge number of sticky users. The company's user base of 298 million users is spending a lot of time on its platform. The 'Freemium' business model has worked as a good bait to add more customers and enhance the company's brand value and positioned it as a leading gaming platform on a social setting. 

Partnership with bwin.party: Zynga's partnership with a top real money gaming company, bwin.party is a major positive for the company. The company just unveiled its first offerings of games in the United Kingdom on the web and as well as a downloadable format. This foray into online gambling marks a strong upside potential for the company and also diversifies Zynga's revenue base of making money mostly from online social games.

Reduced Dependence on Facebook: Zynga doesn't have to pay revenue sharing fees for gaming in non-Facebook platforms anymore. After building its user base, Zynga's altered contract with Facebook (NASDAQ: FB) will allow it to keep the 30% fees that it had to previously share with Facebook even for gaming payments received on non-Facebook platforms. Revenue bookings from Facebook made up the lion’s share of Zynga’s revenues and going forward, this should decline substantially. 

Mobile Usage and Monetization: Zynga has managed to its grow presence on mobile rapidly with active users on mobile growing 75% on a Y/Y basis and ended 2012 with 72 million MAUs. And monetization on mobile is stellar as well with sizable revenue bookings on mobile which represents 21% of total bookings in Q4 2012. Zynga is also the 5th largest mobile platform for time spent on mobile, and for the daily audience on mobile, according to comScore.

 
 

Sticky User Base: We agree, because it’s obvious, that Zynga has acquired a massive player base across it’s games and platforms. It is the ‘Freemium’ business model that has helped Zynga to grow such a large following. In conjunction, Zynga has also provided extremely appealing graphics to the majority of their games. In addition, Zynga’s partnership with the largest Social Networking site (Facebook) has provided tremendous exposure for Zynga and may be the single most reason for Zynga’s growth.

Partnership with bwin.party: I don’t know if I agree that this is a strength. Since bwin is already a top ‘real-money’ gaming company it will certainly help Zynga establish itself in the ‘real-money’ gaming industry. However, Zynga is partnered with bwin which means that profits from any Zynga ‘real-money’ games will likely be split with bwin. Similar to Zynga’s partnership with facebook. At some point Zynga will either want to or need to distance itself from bwin much like they are trying to do with Facebook.

In addition, Zynga is new to ‘real-money’ gaming. They are untested in that market. Many players may not have enough confidence in Zynga if they have played any of Zynga’s ‘Freemium’ games. Those who have played a Zynga game has an insight into how Zynga operates and how Zynga treats its customers and player base (which is not good). 

Reduced Dependence on Facebook: Yes, a reduced dependency on Facebook should, in theory, lead to higher revenue since profits will not be split with Facebook.

However, you contradict this theory in your Weaknesses section of your analysis when you talk about Zynga’s ‘Declining Traffic’ and ‘Weakened Ties With Facebook’. You show that Zynga lost 16 million daily users and 13 million monthly users in 2012.

As you also explained in your Weakness section you said; “Facebook's importance for Zynga is paramount, and even more so because Facebook is directly responsible for driving a lot of user traffic to Zynga's platform.”

If Zynga’s revenue and player base being connected to Facebook is paramount and it is declining as a direct result of Zynga breaking ties to Facebook then this is a weakness and NOT a strength.

Mobile Usage and Monetization: Yes, the Mobile Gaming Industry is fairly new and will grow in popularity in the short term. There are many companies vying to break into the Mobile gaming market and monetize it. It is an expanding market. 

There are, however, many problems with games on mobile devices. Such as, these mobile devices run on batteries which have a limited time of usage. They also are required to be turned off in certain businesses and on airplanes. The screens are small so graphics could potentially be lost in games on these mobile devices.

Therefore, how many people will want to play and pay for games on their mobile devices and be tied to them as much as Zynga has tied players to it’s online Social Games?

 
 

 

Weaknesses

 
 

Declining Traffic: Zynga’s daily users came trickling down to 56 million at the end of 2012, from a high of 72 million. The decline can also be seen from the monthly active base, which declined to 298 million active users from a high of 311 million users.

Weakened ties with Facebook: Facebook's importance for Zynga is paramount, and even more so because Facebook is directly responsible for driving a lot of user traffic to Zynga's platform, as well as a major outlet for revenues. Zynga is a leading developer on Facebook with 5 of the top 10 games, and going forward, weakened ties with Facebook, might impact user eyeballs as well as negatively impact the amount users spend on online gaming and also in gaining newer customers.

Lack of Recurring Purchases: The business model of Zynga revolves around engaging and stimulating the large pool of users to play the games, and to make these customers purchase social gaming products. Often times, users are likely to be reluctant to purchase such social gaming goods on a recurring basis, which is a negative for the company.

Persistent Losses: While the company's losses have narrowed substantially, the company is still losing money. Zynga's net loss for 2012 stood at $209 million on revenues of $1.28 Billion. And in 2011, Zynga's net loss was a whopping $404 million.

 
 

Declining Traffic: Games are cyclical and do not last forever. Essentially, they are a fad. The lucky ones become popular for a while then fade away.

Retaining a player base is quite possibly the biggest challenge of any gaming company. Zynga has been lucky to have hit games, such as Mafia Wars, FarmVille, and Zynga’s pride and joy Texas Hold’em Poker. 

Zynga is facing that point in many of it’s games (especially Mafia Wars) where the player base is declining to such a point that Zynga either needs to consider closing the games down (which they have done to many of their games) or sell them or revamp them. In the case of Mafia Wars Zynga appears to have decided to milk the players for every cent the players are willing to surrender unto Zynga before Zynga ultimately will close it down.

The only option for a gaming company (if they are losing players in their games) is to come up with the next big hit game. There are no guarantees that any specific game will become a hit. Zynga has tried, but Zynga has acquired such a bad reputation among many of its gamers (current and former) that many players have decided to never play another Zynga game.

Zynga can still recover from a declining MAU and DAU within its games if Zynga would stop acting like a company that is in desperation mode. If Zynga would make the games playable (and bug free) and make the in-game purchases special and not a must-do then more players might be tempted to buy the occasional advantage. As long as Zynga’s focus is about how to make their next dime and not so much about making quality games the players will be turned off and reluctant to spend any money on Zynga’s games. The high-pressure sales tactics that Zynga makes the focal point of it’s games is not the way to retain players. It’s more the way to kill the game off. It paints an image of greed and self preservation.   

Weakened ties with Facebook: As stated above; “Facebook's importance for Zynga is paramount, and even more so because Facebook is directly responsible for driving a lot of user traffic to Zynga's platform.”

This is clearly Zynga’s weakness. Zynga needs to stay on Facebook and utilize what Facebook has to offer.

Yes, Zynga may need to break it’s ties to Facebook (for financial reasons) but at the same time the players of games almost see Facebook and Zynga as one in the same. Players may be reluctant to play their games solely on Zynga.com (where not every Zynga game is available for play) because they don’t trust Zynga. Zynga has also developed a bad reputation for it’s inability to fix bugs within it’s games.

The problem, however, isn’t just a Zynga problem. It is also Facebook itself.

Facebook has made it necessary for Zynga and Facebook to break the ‘friends with benefits’ relationship that they have enjoyed for years. Consider that the games on Facebook are supposed to be social. The games on Facebook have players constantly begging for parts or items to help them within the players respected games. Facebook in turn has made it difficult for many players by releasing the Time-Line (That EVERYONE who plays games on Faebook HATE!). Facebook has made group chats a complication, which are somewhat necessary for players to communicate their gaming needs and issues with each other. Facebook even punishes players for asking others to be their gaming friend and/or for posting too many requests of a similar type.

Q4 Earnings Grapgh Zynga Games

Mafia Wars Generates Less Than 10% Of Online Game Revenue

Lack of Recurring Purchases: It’s not that there is a lack of recurring purchases within Zynga’s games. The issue is a lack of new or an expanding number of players who make purchases within Zynga’s games.

In Mafia Wars, for example, the players who make those purchases are the ones who make them repetitively. They are the VIP players who pay the $25 monthly fee to acquire those loots and skill points and reallocations that keep them ahead of the free players. They are the collector’s (ok, not so much anymore) that must have at least one of every loot. They are the over-achievers that have to have the highest attack, defense, energy, health, and stamina.

In Mafia Wars it IS NOT recommended for ANY new player to spend a dime on the game AT ALL!! Even if you buy into the VIP program you still may not catch up in your loots Attack Strength and Defense Strength. You WILL NOT catch up in personal Attack and Defense Strengths without making further purchases that give your character those stats. Since many players have personal Attack and Defense scores that are reaching toward 100,000 of each the cost to compete with these players IS NOT WORTH the expenditure.

Zynga needs to learn to not just chase the whales. Many upon many ‘free’ players would be willing to spend some cash if they felt they could be competitive in Mafia Wars. But, who wants to go to a movie and buy the popcorn and drinks to leave the theatre disappointed because the movie sucked? In Mafia Wars that movie outing will suck for months on end.

Therefore, in the game of Mafia Wars it IS the recurring purchases that IS keeping this game afloat. Not the lack thereof.

Persistent Losses: Persistent Losses?? Remember that Zynga (ZNGA) has only been on NASDAQ since mid December of 2011. You also show a positive in that Zynga's net loss for 2012 was $209 million whereas in 2011, Zynga's net loss was  $404 million. This is a positive in that Zynga’s net loss from 2011 was cut in half by 2012. It shows that Zynga is moving toward the green. 

You also have to consider that Zynga has recently ventured into online ‘real-money’ gambling in the UK. Zynga also still has it’s ‘Draw Something/ Draw It (UK)’ TV shows that should begin airing soon.

If either, or both, the ‘real-money’ gambling sites or the TV series become hits then a $200 million net loss last year and the $400 million net loss in 2011 could both be recouped and overshadowed by a profit margin that has the potential to make $600 million look like chump change.

Zynga is also venturing into making revenue just for becoming a game hosting platform (similar to what Facebook has been for gaming companies) with Zynga.com for other online gaming companies. Zynga made up 15% of Facebooks revenue in 2011 according to TechCrunch. If Zynga is charging these gaming companies 30% of their in-game transactions and if any of these games become a hit then Zynga could make millions in profits from hosting other companies games.

When a company is in transition one should expect losses. Zynga has been in transition for at least 3 years. They are, however, setting themselves up for a huge turn-around or a huge bust.

 
 


Opportunities

 
 

Expand Real Money Gaming: A major opportunity for the company lies in its ability to enter the real money gaming market in the U.S. Zynga is hoping to build up an online ecosystem for real money gaming and has already applied for a license in the state of Nevada. Zynga can use its technical know-how and adopt a similar playbook from its UK launch for the U.S. market and position itself for longer term success. 

Grow Advertising Business: In addition, to selling social gaming goods, Zynga makes a decent amount of revenues by showing advertisements on its platform. And the company's advertising revenue in 2012 was $137 million, which represents a year-over-year growth of 85%. And going forward, Zynga can grow its ad revenues substantially by tapping more brand advertisers, who command huge advertising budgets.

Third-party Gaming Publishers: Zynga has been working with a number of third party developers to publish the games of these third parties on Zynga's large ecosystem of 298 million users. A few successful franchises and the offering of newer and fresher games from third parties should lead to a lot of revenues for Zynga. 

Introduction of 3D Games: Zynga has introduced a 3D version of its popular game, FarmVille in the last quarter of 2012. As FarmVille was a big hit for the company, it generated total player purchases of more than $1 billion, including partner fees. If Zynga can introduce more 3D Gaming experiences on its existing franchises as well as build newer franchises, the enhanced user experience will lead to more gaming revenues, as well as pave the way for more advertising revenue. 

Expand on Other Platforms: The company's games are available on some of the leading platforms in the world including Google+, Zynga.com, chinese Internet powerhouse, Tencent as well as on Android and Apple's iOS devices. Zynga should harness and engage more consumers to make purchases in these global platforms including some of the mobile platforms and reduce its dependence on Facebook alone.

 
 

Expand Real Money Gaming: Zynga only recently launched ZyngaPlusPoker and ZyngaPlusCasino in the UK. These are new waters that Zynga is skipping a stone across.

Nevada, and the USA as a whole, is Zynga’s preferred market for online gambling and Zynga has been working for years to begin their online gambling franchise in the USA. Zynga’s Texas Hold’em Poker was founded July 4th, 2007.

Therefore, I’d hardly say that, if/when approved, online gambling in Nevada and the USA would be considered an expansion. It is what Zynga has been working toward from the beginning.

Grow Advertising Business: I do not believe that this is a real concern for Zynga for a few reasons.

  1. If you have an on-line presence with millions of followers or users of your service the advertisers will want to advertise on your website(s).
  2. If you reach millions of customers on mobile devices the advertisers will want to advertise on your service(s).
  3. If you reach millions of viewers from TV shows the advertisers will want to run 30 second, 45 second, or 60 second commercials during your TV show(s).
  4. The more people you reach on all your services the advertisers will be there and wanting to advertise.

Ultimately Zynga simply wants to reach as many people as possible and the advertisers will be there. Therefore, if you mean grow Zynga’s advertising business by reaching more people (customers/users) then you should be saying grow it’s advertising business by acquiring the ability to charge more for advertising on it’s services.

Think of it like the Super Bowl. How much money do advertiser spend in making their commercials and ads and then how much do they pay just to have their commercials aired during that single 4 hour event that occurs just once a year? Last I heard it was in the 10’s of millions.

Third-party Gaming Publishers: I can quote myself from above on this one.

Zynga is also venturing into making revenue just for becoming a game hosting platform (similar to what Facebook has been for gaming companies) with Zynga.com for other online gaming companies. Zynga made up 15% of Facebooks revenue in 2011 according to TechCrunch. If Zynga is charging these gaming companies 30% of their in-game transactions and if any of these games become a hit then Zynga could make millions in profits from hosting other companies games.

Zynga just needs to find a way to get users to play those games without losing it’s player base within it’s own games in addition to finding a way to attract players to Zynga.com where they are hosted. Not an easy task.

If Zynga can work-out a group chat on Zynga.com it might help to draw some players to that sight. It would also help to have ALL of Zynga’s own games on Zynga.com.

Introduction of 3D Games: I think Zynga is one step ahead of you on this one since Zynga, and the November Software team, have been working on a new mobile arcade action game called Battlestone.

Of course, it’s just another game that will either become a hit or it won’t.

In other words, introducing 3D games is NOT any more a guarantee that it will generate any more revenue than a 2D or text-based or even a mid-core game will. Any game has a risk factor and because one game was successful it does not mean another will be.

Zynga proved this with having Mafia Wars then releasing Mafia Wars 2 (a 3D version of the original). Guess which one was closed down about a year after it’s launch?

Mafia Wars 2 launched during Fall 2011 and was suspended December 30, 2012.

Expand on Other Platforms: You said, “Zynga should harness and engage more consumers to make purchases in these global platforms including some of the mobile platforms and reduce its dependence on Facebook alone.”

  1. Zynga, as are many other companies, is pushing to become the leader in mobile platform gaming.
  2. We’ve already established that Zynga NEEDS Facebook.
  3. “Zynga should harness and engage more consumers to make purchases” – That’s it in a nutshell.

The real question is how should/could Zynga harness and engage more consumers? Putting the Zynga Dog anywhere and everywhere won’t do it alone. In addition, if the leash is too long then some won’t get to pet the dog. The best way is to build up some curiosity and intrigue and not to flaunt yourself or shove the dog onto people because you never know who might be allergic.

Zynga should also ask itself; ‘Is it better to be a Jack of all trades and a master of none or to master of few and let someone else eat the other pie?’

 
 


Threats

 
 

Casual Players: A number of players on Zynga's platforms are largely casual players who don't play on a regular basis. Irregular players might stop frequenting the site altogether, as many analysts and investors have termed the social gaming industry ‘a fad.’

Competing Gaming Platforms: A number of smaller social gaming platforms like Kabam are coming up and many of them will likely gain more widespread consumer acceptance and might negatively impact Zynga.

RMG Is Very Competitive: The real money gaming platform is a very competitive market and faces a lot of regulatory scrutiny on a regular basis as well. Some of the leading companies have large and established audiences in their respective platforms.

 
 

Casual Players: It shouldn’t take an expert or a poll or even a genius to figure out that the overwhelming vast majority of internet gamers or even Facebook socialites are casually accessing these games and Social Networks. It’s obvious since the vast majority of people have school and jobs to attend.

You also need to define ‘regular basis’. Do you mean daily? Weekly? Monthly? Maybe you mean just at set intervals?

It is these so-called ‘Casual Players’ that companies like Zynga should be seeking. Why? Because they are the ones who have that untapped revenue that companies like Zynga are seeking. Going solely after the whales may generate a lot of money. However, if there are hundreds of thousands of smaller fish and only 1 (or a handful of whales) more money could be generated from the hundreds of thousands of smaller fish than the few whales.

It may be true that these so-called ‘Casual Players’ may not have a ton of money but if tempted in the right way with the right bait you can catch a ton of them. They’re just harder to catch than the whale is.

Zynga, as does too many companies, insults the intelligence of the fish by over-charging and over-demanding purchase of their in-game items. Only a wealthy person, or a moron, would spend $8.33 (the cost of 1 loot item for 35 RP at cost) on a single loot item in Mafia Wars.

That $8.33 is an hours wage for many Americans.

But hey, that’s America (and the world) nowadays – Overpriced and you still bought junk that will either be out-dated within a month or it’ll break and you need a new one.

Competing Gaming Platforms: Typically this should be a good thing. Without competition you have a conglomerate that has it all, does it all, and charges what it wants to charge (usually too much).

Yes, the threat of competition is that they will do it better or become more popular.

Sometimes it is because of the competition that makes you successful. And sometimes by having the competition you both become successful.

The downside to competition is that sometimes it causes saturation. Television and movies have this problem (which is why I don’t personally care for TV too much). For example, how many news channels (which don’t truly report news anymore without their underlying agenda’s) do we need anyway?

RMG Is Very Competitive: You said “The real money gaming platform is a very competitive market and faces a lot of regulatory scrutiny on a regular basis as well. Some of the leading companies have large and established audiences in their respective platforms.”

Then let me ask

  1. Why does Zynga need to buy in?
  2. Why does Zynga need to expand?
  3. Wouldn’t Zynga buying in and expanding cause saturation?

I don’t know about Las Vegas, but I do know that to prevent saturation of gambling Atlantic City has limited ownership of casinos to 3 per owner. Ohio has also limited the number of casinos to 4 statewide. Although Ohio does permit slot machines in certain establishments (like racetracks) in addition to the casinos.

 
 


TAKEAWAY 

 
 

While Zynga is still a favorite amongst many short-sellers, the company's foray into real-money gambling with casino and poker games might be a success, and might lay the foundation for greener pastures down the road.

 
 

What you Forgot: Zynga has planned to launch a ‘Draw Something’ TV show. CBS has already began casting for it’s version of the TV Show ‘Draw Something’ and Channel 4 in the UK has also been reported to have commissioned a version of the TV Show. The UK version will be called ‘Draw It’.

The advertising revenue from the TV shows, Draw Something and Draw It, should provided a pretty penny for Zynga. If The shows become a hit for CBS and Channel 4 then Zynga is a good buy now, on this alone.

Mafia Spirit’s Takeaway: With ventures into online gambling and the upcoming TV show’s ‘Draw Something’ and ‘Draw It’ and the ability to host 3rd party games on Zynga.com there is a ton of potential revenue for Zynga. With ZNGA sitting at 3.22 per share at the close of the markets today (4-17-2013) it appears that ZNGA is a great Bullish Stock. The stock appears ready to jump the gate and run in the long haul.

Zynga’s reliance on Facebook has many skeptical but may actually be a necessary evil for Zynga’s online games. You shouldn’t allow this to worry you if you are an investor. Zynga is positioning itself in many different facets that the games being played on Facebook may not matter in the future.

We could easily see ZNGA rise to the $4 – $5 –$6 range very soon. No, it’s not a sure bet and ZNGA Q1 statements are due to be released on April 22.

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