Zynga set to leave the Mothership. Can it survive on its own?

I had constantly gotten invitations on Facebook for those online social games such as Farmville, Cityville, and Mafia Wars. I’m not really into the social gaming scene so I eventually had to block those applications. So I never really paid much attention to them and had never really learned about Zynga and the influence of its games until about a year ago when I read an article in the Canadian Business magazine. Zynga, the power source behind the massively popular games, is all set to create a firm footing of its own rather than depending on social media giant, Facebook, for its 200 million unique monthly players, as is reported in a news article by BBC News.

  Well, for those of you who aren’t in the know as I wasn’t, let me explain: Facebook users have access to a large number of addictive online games accessible through their Facebook profiles. What makes many of these games different from those you play on Addicting Games is that they have a huge number of users playing with/against each other, kind of like World of Warcraft, I suppose. So I’ve stated a lot of facts and used a lot of words… but what does all this mean for Zynga, its users, and most importantly, stakeholders? The way I see it, there are two final outcomes contingent mainly on one variable – the variable being the Zynga user’s behaviour:

1. The migration is a success: Assuming that Zynga’s games command a strong enough following, enough users will frequent the new, independent Zynga platform in order to play the games they love so much. This is great for Zynga as it attracts a large number of players to its website, where it does not have to pay a fee to Facebook for using the social network’s platform, thus, widening its profit margin – shareholders of ZNGA grin in satisfaction.QUESTION: what happens when you get a bunch of people with similar interests interacting and responding to each other? Social network, anyone? CNN already reports that Zynga.com is “an independent game-focused social network that will allow users to play games like CityVille, CastleVille, and Hidden Chronicles outside of Facebook.” And voila! Zynga is a social network in its own right! Now, lets assume that out of 200 million, Zynga gets, say, up to 100 million users to “migrate” to Zynga.com to consume their share of its games. What does that mean? That means that Facebook has 100 million individuals spending less time on its website! That means that Facebook’s advertisements are less effective as there is a smaller audience – which means that Facebook’s revenue drops – which means that Facebook will have to find another way to keep their stakeholders happy (more so if they issue their IPO by then) – which means that they will likely raise their fees for users who still play Zynga games on Facebook. So, Zynga’s profit margin’s shrinking down again. If Facebook doesn’t increase Zynga’s fees, it may continue to host Zynga, but instead choose to promote other games to discourage Zynga use. Zynga may then have to resort to a major promotion strategy, but even if they don’t the lack of people playing Zynga games will probably flatline their usage and, thus, their stock.

Ultimately, it’s very possible that the increase in revenue for Zynga may be very momentary and that its earnings may likely normalize or erode in the longer run.

2. The migration is NOT a success: This is the more simplistic scenario of the two. A key point to remember is that Zynga has 200 million unique monthly users. Where did they get these 200 million users from? You guessed it – Facebook. Now that we have understood that, the next question to ask is “why?” – Why did Zynga gather a following of 200 million? The answer I can see standing plainly in front of me smiling is: Because it was simply convenient for the Facebook user to play Zynga games while continuing their regular socializing. If this is true (and I can’t guarantee it is), then that means that the common Zynga users will either find other ways to entertain themselves or simply avoid playing games while on Facebook. It is a widely accepted fact that Facebook is the website on which the average internet user spends most of their online time. Should that rule still hold, we might have a much larger number of people simply spending time doing something else. There likely are those hardcore gamers out there, I’m sure. So let’s take about 25 million of them globally and say that they will be the archetypal users that Zynga is looking for. Based on stats found online, about 30% of Zynga’s users live in North America, about 17% live in South Asia, and the rest are scattered globally in small pockets. Therefore, I could realistically expect about 7-9 million users (30-35% of the expected 25 million) being online simultaneously. Furthermore, the users will get a game-centric social networking experience. Does that create enough of an incentive to spend as much time on Zynga.com? I’m not so optimistic about that.

This may, in fact, turn out to be a huge disaster for Zynga tanking its stock and uprooting it from top position for social games.

Frankly, I feel that scenario #1 is likely, but feel that it is too optimistic. I think that a result between scenario #1  and #2, but leaning towards #1 is most likely. I feel that Zynga’s independence is not only premature, it is perhaps not strategically the right decision for the nature of the game maker. Maybe a better decision for them would be to invest in something that involves migrating not their users, but their games to other gaming platforms such as the Nintendo Wii, Nintendo DS, and the Sony PSP which are already home to similar games and are linked to online leaderboards through their networks. Zynga’s brand power, along with some possible help from a mammoth like Facebook, could help propel Zynga up into more than what it is now on those platforms. I wish Zynga all the very best, but if I owned ZNGA stock, I wouldn’t be too optimistic.

Until the next blog.


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