The continuing disappointment investors are expressing in both Zynga and Facebook's earnings is indicative of how poorly investors understand their Facebook and Zynga investments. It is just dawning on analysts now how symbiotic the relationship between these two companies really is. I see simplistic, almost, child like presentations created for investors in these stocks explaining how Zynga, virtual currency and social media actually works. Sad really with a deserving outcome for the investors that obviously had no idea what they had invested in.
When Zynga and Facebook were steaming to their IPO's I wrote an analysis of both the Facebook and Zynga S1's showing how close these companies were aligned.. The S1 of Facebook did reveal a 12% dependence on Zynga for virtual currency and virtual goods sales through the Facebook transaction platform. It did not mention the advertising dependence it also has on Zynga. Zynga generates plenty of ads in its games as well. So is the revenue dependence more like 15% or perhaps even higher?
Conversely Zynga is almost 100% dependent on the Facebook community for its revenue. If Facebook falters in their growth so does Zynga.
So what do both of these companies have to do to continue their expected population growth and revenue per individual?
Mobile - All of the analysts Facebook and Zynga themselves are saying that mobile is the place to be to sustain their growth. However, the mobile environment is very different than the Facebook environment and not a place either company spend enough time on during the early growth years of mobile platforms. Jumping in late is not going to be easy. Yes people are accessing their Facebook accounts on their mobile devices. However, the experience in mobile needs to be different from the Facebook web version. Navigation, invites and the very limited time people will spend in a Facebook mobile app will be less then the web version.
Zynga's challenge is that their massive games such as Farmville and Cityville will be hard to convert to a mobile environment. Interface, play time, player navigation through the game environment are all different. Smaller and easier to understand games that clearly and intuitively guide the player through the experience is required. The tablets may be the saving grace for Zynga providing a larger playing surface enabling MMO type game play and a differentiation for Zynga.
So what do both of these companies have to do to continue their expected population growth and revenue per individual?
Mobile - All of the analysts Facebook and Zynga themselves are saying that mobile is the place to be to sustain their growth. However, the mobile environment is very different than the Facebook environment and not a place either company spend enough time on during the early growth years of mobile platforms. Jumping in late is not going to be easy. Yes people are accessing their Facebook accounts on their mobile devices. However, the experience in mobile needs to be different from the Facebook web version. Navigation, invites and the very limited time people will spend in a Facebook mobile app will be less then the web version.
Zynga's challenge is that their massive games such as Farmville and Cityville will be hard to convert to a mobile environment. Interface, play time, player navigation through the game environment are all different. Smaller and easier to understand games that clearly and intuitively guide the player through the experience is required. The tablets may be the saving grace for Zynga providing a larger playing surface enabling MMO type game play and a differentiation for Zynga.
So where are these companies headed with a stalling revenue model in the Facebook environment and a very late start into the mobile world for Zynga?
Clearly, in the short run(next 2 quarter)s not likely a pleasant outcome. Sure they both have big cash reserves based on their IPO's and could buy their way into the mobile space. However, in the end they really have to have organizations that understand the mobile universe. Facebook has to continue to be "interesting" to existing members and they have to somehow continue to add more people to Facebook then are dropping off. We have seen social platform fatigue before with Friendster, MySpace, etc. Are we seeing this in Facebook now? I am not sure myself. I believe the Facebook platform is more flexible then their predecessor platforms and therefore provides Facebook with more options on how to retain and grow its community. Depending primarily on advertising revenue as its main source of revenue is very risky. Their virtual currency move was very clever and has contributed good revenue to the bottom line. However, in mobile there are many other virtual currency options for gamers do they really need Facebook.
In the coming months look for Facebook to create a "true" mobile platform and see how Zynga games are converted over or if they embark on en entirely new game strategy for mobile. This will give us all a better picture of what future earning will look like for these companies.
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