Disappointing Facebook And Zynga Quarterly Earnings Not Surprising

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 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.

 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. 

How Will The Facebook IPO Impact Zynga's Stock Price?

Zynga's stock price has had a less than stellar performance post IPO late last year. However, since the announcement of Facebook's IPO and the publication of the Facebook S-1,  Zynga stock has steadily risen from about $8 per share to a high of $13 and change. This is interesting and does make sense. Prior to the Facebook S-1 publication many investors did not even know who Zynga was or what they where all about. A social game company? Also, in looking at Zynga's S-1 it is filled with more doubt about the future than hopeful optimism. It also spelled out that Zynga was heavily dependent on Facebook for their future growth. Without the benefit of seeing the Facebook S-1 Zynga was a relatively hard sell even to savvy institutional investors.

Per my analysis of the Facebook S-1, which I recommend you read if you really want a good understanding of the relationship of these two companies, 20% of Facebook's revenue is coming from Zynga's virtual currency sales. Facebook clearly states, without Zynga Facebook will be significantly challenged to keep its projected revenue growth rate. These companies are in a symbiotic relationship if they like it or not. The question is how deep does this co-dependency  go and who benefits most or gets hurt the most if this relationship thrives or deteriorates?

"According to AppData, we have more monthly active users on Facebook than the next 15 social game developers combined. Our players are also more engaged, with our games being played by more than 60 million average DAUs worldwide. According to AppData, we have more daily active users than the next 30 social game developers combined. "

This Zynga S-1 statement reveals that no other social game company comes close to contributing the amount of revenue Zynga is contributing to Facebook.

"In July 2010, we began migrating to Facebook Credits as the primary payment method for our games played through Facebook, and by April 2011, we had completed this migration. Facebook remits to us an amount equal to 70% of the face value of Facebook Credits purchased by our players for use in our games played through Facebook. We record bookings and recognize revenue net of the amounts retained by Facebook.

Facebook is the primary distribution, marketing, promotion and payment platform for our games. We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future. Any deterioration in our relationship with Facebook would harm our business and adversely affect the value of our Class A common stock."

This statement indicates that Zynga is giving 30% of its revenue to Facebook for the privilege to publish its  games within Facebook. This is a serious amount of money for using a payment platform. If Facebook increases this percentage it will hurt Zynga. If Facebook is forced to reduce this percentage for all E-commerce applications within the Facebook environment it will help Zynga. This is a real possibility if Facebook really wants to expand its payment processing to other no-social game companies. 


Zynga) have benefited from Facebook's strong brand recognition and large user base. If Facebook loses its market position or otherwise falls out of favor with Internet users, we would need to identify alternative channels for marketing, promoting and distributing our games, which would consume substantial resources and may not be effective."

The Zynga brand is not the important brand the Facebook brand is. Zynga can call itself anything it wants. Essentially, Zynga is Facebook's social gaming company.  

Reading the Facebook and Zynga S-1's reveals that at this time these companies are heavily dependent on each other. With Zynga being the most vulnerable and most co-dependent. The Facebook stock price will and should impact the Zynga stock price.This may explain why Zynga has not been particularly aggressive with adding games to Google+. I suspect they do not want to rock the Facebook boat. Facebook also has to be careful about how it treat Zynga. Having 20% of your revenue coming from a single source is non-trivial. A breakdown of this relationship will put a dent in the Facebook stock price. This also means that their fortunes and stock price will rise and fall with Facebook's performance. This also begs the question should Facebook buy Zynga with its new found IPO cash. You also wonder if Facebook can do any deals with big international social game companies like Tencent in China? Will this force Zynga out of Facebook? Google is also in play here. It is no surprise that Google's stock is slipping as the Facebook IPO becomes imminent.Google needs a boost to counter Facebook's impending big IPO cash trove. Should they buy Zynga? 


Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively 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.