Zynga gambles - and loses.

Jul 29, 2013

Zynga, the provider of once highly-popular games such as Farmville, ousted its founder and long-time CEO Mark Pincus on July 1 and replaced him with the sometime chief executive of Xbox, Don Mattrick, in an effort to stem player desertion and falling revenues. To date the strategy shows no signs of working - perhaps because of, or maybe despite the fact that Mark Pincus remains company chairman and Chief Product Officer. He's been knifed, but not to death and the bloodstains on the walls show that he still stalks the corridors of the executive suite.

Zynga is a classic case study of the fickleness of users (who pick up on a trend for a while and then move on to another "latest thing") and the volatility of the online gaming market. It can be exciting and lucrative but also very short-lived.

Zynga first sprang to prominence with Farmville in 2009 and had three or four great years before the inevitable happened, novelty waned and users churned away elsewhere.

Take a look at the figures: Monthly average users (as at the end of June this year) are down 40 per cent on the same period in 2012. To make matters worse, those playing Zynga games on a daily basis are down by 45 per cent to 39 million and falling. It would be a business miracle if churn at these levels can be steadied and stabilised, never mind reversed.

Revenues for Q2 2013 are down on Q2, 2012 by 38 per cent to US$230.7 million. Last month the company cut 20 per cent of its workforce (that's 520 people) and Zynga's share price fell by 19 per cent in after hours trading on Friday evening when the new figures were released.

Having been faced with irrefutable evidence that Zynga has probably had its day in the sun, and casting around for a strategy to boost income, the company lighted on a cunning wheeze - to get punters to cough up real cash in exchange for virtual benefits. It has been tried before, of course, and usually ends in tears. However, Zynga's notion was to turn some of its products into games of chance with cash prizes and payouts, and, in most parts of the world that requires a gambling licence.

Zynga started its new approach to business in the UK. Here we have betting shops galore (often several per High Street) and more casinos than you can shake a set of dice at, so it was no problem for Zynga to get a licence to operate games of chance and skill n Britain.

However, the UK is a small market and the US is where the real potential lies. Unfortunately though, the US federal legislature and states authorities are incredibly puritanical about gambling in general and Internet-based gambling in particular - and not just for socially altuistic reasons. It's difficult to collect taxes on web-based gambling and thus easier to ban it than see the putative tax dollars going offshore to somewhere the US government doesn't approve of.

Th upshot is that Zynga failed in its efforts to convince the powers-that-be that it should be allowed to charge real money in some of its games and has been made aware that it won't get a licence. "Oh Dear! There's a major strategic plank falling into the briny. Now what?"

Having been decisively knocked back, Zynga came out with this gem of ratiocination, announcing that "Zynga believes its biggest opportunity is to focus on free-to-play social games." As if it has any choice...

The statement continues; "While the company continues to evaluate its real-money gaming products in the United Kingdom test, Zynga is making the focused choice not to pursue a license for real money gaming in the United States." As if it has any choice...

Meanwhile, the new CEO, Don Mattrick, says "We need to get back to basics and take a longer term view on our products and business, develop more efficient processes and tighten up execution all across the company." As if he has any choice...

The trouble is that many investors put money into Zynga in the expectation that a gambling licence would be approved and cash would flow in never-ending streams. Will they stay now? Care to place a bet on it?

The new CEO says that Zynga faces a year of "volatility" (for that read further falls in revenues and more deserting customers). Mr Mattrick himself is going into close and closed conclave with his senior management team and will be "heads-down with them for 90 days while we re-set". The mind boggles.

Zynga was yet another Internet-dependent company that went to IPO in November 2011 in a thunder of drums and to a fanfare of trumpets. In the heady early hours and days Zynga shares stood at $10 each. The company then failed to make the necessary transition of its products over to mobile devices, continues to rely very heavily on Facebook and has paid the price. Zynga shares are currently trading at about $3 - and it will be a hell of a job to drag them up from that level by their bootstraps.

Do say: "Your luck is sure to change sir. Fancy another flutter? Only $20 a pop"

Don't say: "We did tell you that the value of your investment can go down as well as up".

Email Newsletters

Sign up to receive TelecomTV's top news and videos, plus exclusive subscriber-only content direct to your inbox.