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Friday, August 16, 2013

Is Zynga Relevant Any More?

At the recent Casual Connect conference in San Francisco there was much discussion about Zynga’s  past, present and future influence on the social/freemium game market, US Internet gambling, gaming related IPO’s and funding of social game companies. The question at hand is how relevant is Zynga at this time in respect to these associations?

The answer to this question requires an understanding of how Zynga rose to prominence in the social gaming and casino space and why  they have recently struggled to maintain that position.

Zynga was the first application to be launched within the Facebook environment in 2007. The fact that the first application to be released in Facebook was a game and an inherently social game outside of the Facebook environment is quite significant because of the  unfettered virality that Facebook provided Zynga in the early roll-out of application content within Facebook. Poker was an  especially interesting first Facebook application because poker is “social” outside of the context of a social network.  This perfect storm of the first Facebook application launched, poker being a naturally social game, combined with unfettered access to Facebook members( virality) and no competition in the environment for months resulted in Zynga acquiring a high percentage of the Facebook community in a very short time. This situation made it difficult for other game publishers to release games and even social games like bingo and poker in Facebook to match the Zynga lead.

Zynga continued to leverage this lead by introducing a series of games such as Farmville  and Cityville into the existing network of players that had and were playing Zynga poker. This further reinforced the dominance of Zynga as a social game publisher and perhaps the only “relevant” game publisher in Facebook that mattered in the early days of Facebook.

Facebook and subsequently Zynga went public riding the Facebook popularity craze. Post IPO, financial analysts and purchasers of Facebook stock realized that “monetizing” in Facebook via advertisement revenue was not as easy as expected and at the same time Zynga began to struggle keeping their MAU(monthly active users)  and revenue to the growth expectations of the market.

Facebook reacted to the advertising revenue challenge  by further restricting  application”virality” to only a few connects per member and eventually to a meager single referral. The purpose of this restriction was to force application providers to “advertise” their properties to attract players as opposed to obtaining them through  free virality referrals.

This change had a significant impact on Zynga. Prior to this change Zynga was paying virtually nothing for players and generating revenue from them through virtual currency transactions and in game “branding” deals. Zynga began to advertise increasing their cost of acquisition. Competitors with new and more interesting game content emerged  out flanking Zynga in terms of game popularity. More importantly  player attrition began to exceed player acquisition decreasing Zynga’s MAU’s.

Mobile Strategy – It is no secret that Zynga was late to mobile because they were concentrating on games within Facebook and attempted to leverage Goggle+ as a new emerging social platform to grow a game community instead of entering the new and emerging mobile game market. Again Zynga poker  was the first game in Google+. However, Google+ failed as a truly social platform undermining Zynga’s growth strategy .  Meanwhile other game content providers rushed into mobile and have dominated the mobile game market ever since. For the first time in Zynga’s history they had to compete on a new platform without a strategic advantage and no early lead. Clearly, this has been a struggle for them and it remains to be seen how well they will do in this environment.

Given Zynga’s history, the evolution of Facebook and the importance of mobile gaming should we still be looking at Zynga as a bell weather for social/freemium gaming and for the emerging introduction of Internet gambling in the United States?

Certainly from a generic investment in social/freemium gaming as a category probably not. Zynga does not represent the current crop of game companies within Facebook or in a mobile environment.  There are a number of very successful social/freemium game companies that are worth investing in and there are new start-ups cropping-up all the time that compete head to head with Zynga and are winning.

Internet Gambling – Zynga has never invested a tremendous amount of resources in Internet gambling.  Despite this they have been viewed as a big threat to existing European Internet gambling poker rooms and have scared away a number of US based social casino game publishers from considering entering the Internet gambling space.   Zynga recently announced a new internet gambling strategy that indicates they are more interested in fixing their social/freemium game business. This is a wise   decision because it is becoming more evident that social/freemium players have different motivations for playing relative to “real” poker players. Gaming platforms that are truly “gambling” centric are much better suited for “real” gamblers. Sorting all of this out and getting current Zynga poker players to “convert” to real money play will require more work to Zynga’s freemium game content and sophisticated player profiling.

So should we count  Zynga out all together from a investment perspective or as a reinvented game company that can compete in the brave new world of social, mobile and US internet gambling?

I would suggest that we should not count them out for a number of reasons.

Cash War Chest – The IPO brought in a significant amount of working capital for Zynga  giving them resources to re-invent themselves and once again develop new and interesting games that players will engage with on a number of gaming platforms and environments.

Branding – Zynga’s brand is still very strong and attracts players to their games and sponsors that want players to experience their products and services. The Zynga brand itself will drive revenue and continued sponsorships from well known consumer oriented companies.

Active Players And Dormant  Players – Despite Zynga’s sagging MAU’s it  still has access to a large pool of existing and dormant players( if properly farmed) to offer  new and interesting games too. Mining these players will require more effort then they are currently investing in the recapture effort. However, there are a number of clever ways they can employee that should help them to regain player market share.

There are headwinds that Zynga must face and overcome to reassert themselves as a leader in the space.

Build Creative Innovative Games – Historically, Zynga has not focused on building new and creative game content. They have copied existing and successful game content models and moved them into a truly viral Facebook environment. This is not going to work anymore and they need to create a game development environment that fosters a creative license to experiment and take risks in game design. Creating successful mobile games should be their primary focus.

Marketing/Advertising Differentiation – Zynga has never been a great marketing company. Instead, they have leveraged their first mover status in Facebook to acquire players and to leverage them over a number of Zynga games.   This methodology for acquiring players must change quickly giving rise to an organizations that deeply understands marketing and brand identity outside of a viral context.

Overall, Zynga is far from being irrelevant in the game space given time and a reinvention of their organization they could once again return to prominence. However, they are certainly not the leader in social/freemium game space that they once were and other game publishers/developers should not be judged based on Zynga’s performance. This is especially true in the mobile space.  Zynga does not have a “mobile platform culture” and needs to reinvent themselves in a mobile contextual world.   Savvy investor should evaluate the gaming space at a macro level for growth, revenue and innovation trends before making any substantive  investments in this space.  The international popularity of social/freemium games should be taken seriously especially in Asia and South American countries. These markets are potentially better places to invest gaming directed capital if an investor really understands the dynamics of those environments.  Internet gambling is still an interesting area providing the US legalizes internet gambling on a much broader scale then its current roll-out in the US is trending. Zynga holds some strategic advantage in the sector because of its brand awareness. However, their brand will most likely will be exploited by established  third party Internet gambling operators as Zynga tries to regain momentum in the social/freemium game space.

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes  about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.

Is Zynga Relevant Any More?

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