I don't know what's happening this quarter, but at least previously, Zynga used to put some some 90% of their revenue towards acquiring new customers.
I've heard from a friend in the gambling industry (which is still legal and thriving outside the US), that it's all a market: There are "affiliates", which can provide you with the right kind of cusotmers, with an average lifetime value of (say) $1500 to you (if you keep them engaged over 6 months and don't piss them off). The "affiliate" would get paid half of that in the long run, or $200 one-time-fee.
There are multiple buyers, multiple sellers, and relationships play a big part, so it's not really efficient, but it is not too far off.
I wouldn't be surprised if that's the case for Zynga-esqe customers as well, although I have no one to verify that with. Alternatively, Zynga might be in the business of bringing in the customers themselves. Either way, it costs a lot of money to bring in a customer who spends money. The same order of magnitude, in an efficient market.
The cost of acquisition for new players has grown so dramatically that to keep up their user numbers they must spend a large amount on advertising. Not to mention they are acquiring companies left and right.
Other users made good points that for a company like Zynga advertising is a significant expense. There is another thing causing losses though -- depreciation of goodwill and other intangibles.
It is an issue for companies that do a lot of buyouts, especially if those buyouts are at high prices and the purchased assets do not perform as well as expected. I do not have time to explain in depth, but to put it simply -- when you buy a company you initially get to pretend that it is worth the purchase price for accounting purposes. But, later on, accountants have to evaluate how the purchased assets perform and record a loss if they are not as valuable as initially recorded.
This is often a reason losses appear for companies with positive cash flow (I believe Zynga has a positive cash flow). The issue appeared in the recent Microsoft earnings as well.
This is exactly what happened with their OMGPOP (Draw Something) acquisition. It was an obvious hit but not one that was very monetizable and the popularity has declined after paying a ridiculous sum for it.
Beagle3, James33 are you saying their model is not sustainable? Do you think they would be afloat or keep loosing money were they cut their marketing expenses significantly?
I'd say it's not sustainable since there is a limited lifetime value of a user in their game space. In order to continue increasing revenue you must grow new users at a rate that exceeds the loss of existing or prior users that have aged out of that phase of "spend money in game."
I suspect that Zynga IPO'd near the top of their possible revenue and without the ability to constantly acquire new users and/or re-engage previous users who have moved past spending money in-game they are going to decline over time. Even if they establish a stasis between loss of user revenue vs new revenue their share price will have to drop since the P/E multiplier would be that of a matured company rather than a growth stock. Share price would be discounted accordingly.
At least one big reason is Facebook.. it requires Zynga use its payment processing system that takes 30% of sales. So there's 100+ million right there.
Honestly, it couldn't happen to a more deserving guy (Mark Pincus). I say this after his extortion racket last year [1]. These kinds of antics (and I include the Skype clawback scandal [2] in this) threaten to undermine the tech industry as a whole.
But as far as Zynga goes, I see these "social games" as largely parasitic and should be regulated in much the same way that gambling is for much the same reasons. Zynga is struggling in a world where such gamers are going increasingly mobile.
Zynga is a proxy for Facebook because Facebook's near-term revenue sources are essentially:
1. Facebook credits; and
2. Display advertising.
(1) explains the correlation with Zynga. Apple is really drinking Facebook's milkshake here.
And I remain skeptical about the value of (2). I continue to believe that people's behaviour builds a better profile of what they want than what they tell you (ie look at what they do rather than listen to what they say). Facebook profiles reflect the human predilection for lying--to oneself and to others--about who they are and who they appear to be.
Don't get me wrong: Facebook could be a valuable display ad property. That just doesn't, by itself, make a $100B company.
You can count me as one of those that'll dance on the grave of Zynga however. The same goes for Groupon.
EDIT: regarding "parasitic", I refer you to Zynga's notion of "whales" [3] [4]. As much as Zynga might publicly state that these people might just be rich, I think they well know they're preying on those who are largely without self-control, intentionally cultivating addictive behaviour.
Some are OK with this. I am not. I see this as no different to encouraging gambling or drug addicts. YMMV.
I wonder if the United States will pass legislation against particular elements of social games, much like how Japan passed legislation designed solely to regulate social gaming companies like GREE and DeNA [1].
"I see these "social games" as largely parasitic and should be regulated in much the same way that gambling is for much the same reasons. "
Do you mean to say "addictive" or do you really mean parasitic?
Both "social games" and "gambling" are addictive. In both you can loose money.
But there are other things that are addictive that you can loose money in as well (stamp collecting, art collecting, buying and building model helicopters (great fun btw)).
Where do you draw the line with this?
In any case if you did mean parasitic could you explain further?
Psychologists have reasonably standardized measures of addiction. I wonder if there's a place for regulations that apply to "any product that turns out addictive for more than x% of buyers"; that would also solve the "designer drugs" problem (where a chemist can tweak a molecule to produce a slightly distinct one with the same effects faster than legislation can catch up)
But the truth is companies make many products to separate "addicts" from their money. Women's clothing, electronics, fancy cars, women's shoes. Or take QVC or HSN. You don't think that the nature of business in general (or food marketing I mean the list is endless) is engineered to separate people from their money? (Food obviously is really addicting no question about that).
All off these things share the same thing in common. They engineered and perfected to get you to spend money or something that gives you enjoyment. (It's not food though it's a certain type of food. Nobody is getting addicted to broccoli or boiled potatoes. Fried chicken or Lay's potato chips or things with MSG? Very possibly.
Obviously not every example I've given has the same degree of addiction.
I hope you realize that there is quite a difference between simply wanting or liking something a whole lot, and being addicted to something.
KFC does not seek to prey on the (hypothetical) few who are so addicted to fried chicken that they lose their families, sell their valuables, lose their careers, and sell their bodies to get another fix. They "prey" on people who like their product.
Real addiction (not your perverted sense of "addiction" being merely liking something intensely) is a hypothetical side effect of the businesses you give as examples. For the gambling industry and companies like Zynga, it is the business model.
It's a crowded space with a lot of big players, with possibly more money than Zynga. They just don't have plush offices in San Francisco and don't like to make it into the papers much.
Pushing into actual gambling is going to be a tough fight.
They don't need to out-compete the other players in internet gambling to make the "real money". They merely need to join them. I would be very surprised if they were actually unable to accomplish that, given that they already have the public's trust and attention. If they can't leverage that to at least some success, I'm not sure they could do anything.
Our main weapon is facebook users and dedicated social gamers. Our two main weapons are facebook users, dedicated social gamers and micropayments. Our three main weapons are... I'll come in again.
I think they may turn out to be a very good long term bet. Pincus is quite directly attempting to mimic Bezos' strategy with Amazon. He's in control and he doesn't care (much) about the short term stock price.
Zynga is in the best position to profit from the rise of social/casual gaming. It may take 10 years but they could quietly grow into the behemoth of gaming the way that Amazon did in shopping.
Bezos has a product that has incredible staying power and enormous infrastructure and capital-intensive advantages over its competitors, making it very, very hard to clone. Many have tried, all have failed.
Zynga, in comparison, does not. A 10-person team can execute just as well as their behemoth of a company, and that makes their market a hell of a lot more competitive than online retail.
> "Zynga is in the best position to profit from the rise of social/casual gaming. "
Zynga is not casual gaming. PopCap is casual gaming. Nintendo is casual gaming. Rovio is casual gaming. Zynga is gambling under a thin veneer. Zynga is "social gaming" in the way we've redefined it in the last couple of years.
And even there, I'd argue the "rise" of social gaming is already behind us. Remember when everyone was playing Farmville? Like, everyone. Now, it's completely dropped off the mainstream consciousness. Sure, they have plenty of players still, but it's a sharp decline in mindshare from just two years ago.
The world had its turn at the "glorified slot machine" formula, and most people have moved on. I heartily argue that Zynga's best days are already behind them, short of pivoting into a wildly different formula for social gaming.
There was a time when it was actually popular on Facebook, and many people were playing it, including myself for a time.
It just got old. You can't spend that kind of time on a single game forever, and since a significant part of its value was social, once friends stopped playing, everyone stopped playing.
They were right to buy Draw Something and WWF, because that is truly what everyone is now playing. But that's all it is—that's just what they're playing right now. Unless they can innovate and come up with or buy a new concept and monetize on it quickly, they're truly screwed. The popularity cycles of these things are measured in weeks or months at most. And it's hard to keep doing the same thing over and over again—it's not a business model I would bet on. The stock price reflects my opinions quite nicely here.
> Pincus is quite directly attempting to mimic Bezos' strategy with Amazon
Well, that's a terrible strategy if that's what he's doing. Zynga has almost been entirely dependent on acquisition throughout their history in order to grow their gaming lineup. Without a strong stock, they won't be able to make those deals without paying out cash. They have a bunch of cash right now, but that's only sustainable for so long for them.
From quarterly report:
As of June 30, 2012, cash, cash equivalents and marketable securities were $1.6 billion
This is out of their current market cap of ~2.5B. Facebook down 7% after hours too. Honestly looks like an over-reaction that shows investor worries about new business models.
Dangerous time trying to exit a social gaming company methinks.
"surprise" loss? I guess a lot of people are surprised by things that seemed obvious to me. Zynga's userbase consists of fossilized shut-ins who don't know they're wasting money buying virtual trinkets online. As they die off, their revenue stream will too.
As far as Zynga stock owners and traders are concerned, it is by definition a surprise. If the loss had been expected then the price would have gone down earlier.
Alternatively, one could argue "hey, I knew that a large loss was possible, but consider that a large unexpected gain was also possible, so the price I paid last week as fair". In any case, the loss was not certain.
