7 ms·

Zynga's Going Down.

175 points by dkrich 14y ago

pan69 14y ago
"It takes nothing to produce a hot game. You merely need somebody with a computer, a good idea, and the ability to make a game. Making a game is not rocket science." Actually. Making a game that makes money IS rocket science (or at least as close as it can get to it).
- incongruity 14y ago
  I completely agree that it's a lot harder than the author makes it sound – but is the comparison apt in at least one way? Namely – most rocket science out there requires the work of a reasonably large number of contributors to actually produce a working, reliable end-product... whereas a winning game really can be made by a small number of people (or even one person) who either have the right stroke of genius, luck or skill to pull it all together. That, of course, doesn't mean it's easy, but instead it means that the law of large numbers comes into play and more winning games will be produced because it takes fewer people/resources to make a gaming company than a rocket company. Ergo, gaming is an industry that is inherently much more difficult in which to establish a defensible competitive advantage. Or, maybe the author really is just minimizing it all to make their point...
- suby 14y ago
  I think it doesn't matter how hard it is. The barrier to entry is very low, and the social game market is already crowded and extremely competitive. You're going to have a varied number of people releasing hits, so the point is that you can't possibly buy out every shop that gets lucky with a hit, nor should you.
- jfoutz 14y ago
  Making a game is sort of like making music. It's so much fun, people do it for free. It's not a big deal if you have a few dozen programmers making some roguelike. If you have 10k college sophomores making games, chances are pretty good one of them will be pretty fun, and take off. The key here is, they would do it anyway. there is not free carwashing service because someone likes washing cars. there are however tons of free games, because making games is fun.
  - forrestthewoods 14y ago
    That statement couldn't possibly be more wrong. The majority of games are created by large teams of highly talented and well paid individuals. There are certain types of games that could be created by a single college sophomore or a teeny tiny team. Most games can not. A team size of 20 is considered quite small. Both your statement and the link's author's is incredibly wrong and incredibly insulting.
    - mdonahoe 14y ago
      Do you work in games? (me too)
    - jbri 14y ago
      There's a difference between the triple-A mass-market games you see at Gamestop, and the social games you see on Facebook. Pointing out that AAA-games are expensive to develop in a discussion about social games is missing the point a little, I think.
      - forrestthewoods 14y ago
        If you think social games are easy or cheap to make then you don't know very much. That goes for both facebook and mobile.
      - mrhyperpenguin 14y ago
        I think forrestthewoods is pointing out that making games, even social games, is hard. Sure it's possible for one person to develop a successful social game. But how many of those people can develop two successful social games? 5? 10+? The only name that comes to my mind is Zynga.
        jfoutz 14y ago
        That's the issue though. Zynga's whole business model depends on this being false: "Sure it's possible for one person to develop a successful social game." One dedicated guy can soak up some ridiculously large fraction of their 2015 revenue if you believe your own statement is true. Because the popular fall 2015 game will be by That One Guy Studios and not Zynga.
RobAtticus 14y ago
I actually do think it's a coincidence that the stock price is down 38% since purchasing OMGPOP. It had a nice run up based on positive news related to the Facebook IPO, so when the market began to contract in late March/April, people took their profits. There hasn't been much positive news since then, so it hasn't rebounded. In fact, the whole technology sector is down about 32% since late March (it was +20% on the year, now its only +13.9%)[1]. Basically, I don't think the OMGPOP acquisition has had much of an effect on the stock price. [1] http://www.google.com/finance?catid=66529330 http://www.google.com/finance?catid=66529330
dsirijus 14y ago
Zynga's decline has nothing to do with purchases they made and everything with Facebook killing viral channels - a year and a half ago!
cletus 14y ago
This story (Draw Something losing ~5M customers/month) annoys me. It's an example of not knowing the difference between causation, correlation and coincidence. In at least some cases people are making that "mistake" for link-bait reasons and to push an agenda (eg they hate Zynga). The idea that 5M/month Draw Something care about the Zynga purchase is ludicrous. It seems Zynga has made some annoying changes to the game, at least for those that use Facebook to login, but even so. I think the only story here is that Zynga overpaid for something that was peaking. They may purchased OMGPOP just in case it turned into something huge. There's plenty of that going on (cough Instragram cough). I've tried Draw Something. It's amusing and I can see the appeal but from all usage patterns I've seen the game has a pretty short shelf life. A game with a short shelf life is going to lose lots of customers once it peaks. It's inevitable. As for how easy it is to make a game, that's actually hard. I believe you should also separate "normal" games from "social" games here as both are radically different. Normal games are like blockbuster movies. You want people to buy up big. You deliberately build up the hype. There is very little in the way of long tail in revenue in most cases (other than sequels). I consider this a fairly "honest" or ethical practice because you pay the sticker price and you have your fun. Social games are more like TV shows. You're trying to build a persistent audience and you're all about the long tail. The part that bothers me is the psychological trickery that goes into this. Social games are really about manipulating the psychological triggers for addiction and I don't really see a distinction between this and, say, gambling addiction. Some people spend an awful lot on these games (I believe Zynga calls people who spend over $10k "whales" [1]). Zynga and similar companies like to whitewash this with "maybe they're just rich". I believe they know better. They are (IMHO) preying on the weak and those arguably with mental health problems ("it's not unethical, it's funethical!"). Successful social games are all about Big Data. Figuring out what works, what doesn't, analyzing your customer usage and adjusting to maximize revenue and retention. They're not even "games" really. They're just exercises in repetition. Anyway, rant aside, I don't like Zynga either but please don't confuse the OMGPOP purchase with a short shelf-life peaking purchase. [1]: http://www.businessweek.com/magazine/zyngas-quest-for-bigspending-whales-07072011.html http://www.businessweek.com/magazine/zyngas-quest-for-bigspe...
- kiba 14y ago
  Remind me of The Curse of the Cow Clicker at http://wired.com/magazine/2011/12/ff_cowclicker/all/1 http://wired.com/magazine/2011/12/ff_cowclicker/all/1
oellegaard 14y ago
Good indication that the social media bubble won't last forener. Maybe a .com bubble 2.0?
moocow01 14y ago
I'd say Zynga's problem is that they are a big fish competing in an environment that is much better suited to lots of nimble little fish. With fickle customers and increasing offerings in their segment, its going to be increasingly difficult and expensive to produce sure fire hits. The alternative is to acquire the small fish when they have a hit but that can be an equally dangerous game as proven by the OMGPOP acquisition. I just don't think being in the app/casual game business is a great spot for large public companies - there is not a lot you can leverage or ability to lock down revenue streams in any long term manner by being big. I'd be much more positive on Zynga if they had a core product that the whole company was iterating on but from what I can see that is not their model.
- deleted 14y ago
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- potatolicious 14y ago
  I'd venture that Zynga's problems are more critical than that - and not unique to Zynga. IMO social gaming (in its current format and incarnation) is a space that exists only temporarily while consumers figure things out. Notice the explosion of FarmVille when it first came out, how everyone was playing it, and its subsequent death. It exploded into the mainstream very suddenly, and faded into niche obscurity just as quickly. The "glorified slot machine" format of social gaming (which IMO is a perversion of the word, there's nothing social about this sort of gaming) does not have a permanent, mass-market future. It will fade and become a niche (profitable, perhaps), but it will not justify the market cap that investors have saw fit to pour into Zynga et al. If anything, the industry in which Zynga plays has more in common with the Tamagotchi than it does with WoW.
  - justinhj 14y ago
    Farmville is the number 7 game on facebook in May with 5 million daily users.You can buy Farmville yhemed cups in 7/11. A level of obscurity to dream of.
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gallerytungsten 14y ago
Which companies will be the most spectacular flameouts of internet boom, 2.0? I don't think it's much of a stretch to predict Zynga has a good chance of making the list.
- uptown 14y ago
  Groupon
underwater 14y ago
> And yes, it is completely ridiculous for a company that is losing close to a billion dollars a year to occupy a multimillion dollar office building that looks like a children’s museum. Where does a billion dollars a year come from? They lost 86 million last quarter. Is he equating operating costs or reduced market capital with loses?
- moocow01 14y ago
  He gets it probably from extrapolating the average of this past quarter and and the quarter before. In the quarter before the last, net income was around -435 million although I doubt their annual net will be -1B
  - underwater 14y ago
    That makes sense. You can't extrapolate from two data points though. I could just as easily claim that their profit is gaining 350 million a quarter an they'll end up with half a billion in profit for the year.
    - moocow01 14y ago
      I agree thats its not sound and their is unfortunately a tendency to cherry pick data to support one's story. I'm not bullish on Zynga but I'd agree that using 2 quarters of data (if thats what is being used by the author) is unfair especially for a relatively new company like Zynga.
nextstep 14y ago
Tech stocks (in aggregate) have declined about 32% in the same time period. What this article fails to mention is that Zynga's stock price was at an all-time high when Zynga acquired OMGPOP. The stock has since floated around it's post-IPO price. OMGPOP is most likely unrelated to these fluctuations. What is relevant is Facebook. Zynga's stock grew rapidly once Facebook's S-1 filings revealed that Facebook derives 12% of it's revenue from Zynga. This news cause a flurry of interest in Zynga, but the excitement has since waned, and both Facebook and Zynga have been scrutinized heavily since. This is to be expected, but I also expect that both company's stocks will perform well after May 18 and into next quarter. Last, and possibly most important, is the misconception about how easy it is to launch a profitable mobile app to millions of users. Zynga now hosts about 80% of their games on their private cloud (the zCloud). This infrastructure separates Zynga from a group of 15 hackers who want to make the next Angry Birds. Zynga releases games in dozens of foreign languages; they have games on every social network and in dozens of countries, as well as in many emerging markets. The point is, it's easy to take pot-shots at Zynga's business model and claim it's a house of cards, but I think the reality is that Zynga is a well established company, with far vaster resources than many of their competitors. Mobile and social games are a clear-cut example of economies of scale.
- primatology 14y ago
  Fair. But Zynga's games still suck. Perhaps their infrastructure is sound, but I run screaming every time I see their latest badly-programmed, ad-infested game take over my newsfeed. A skilled independent dev actually puts time and effort into a beautiful UX. Zynga seems more concerned with churning out the next addictive rip-off, since they know their games have no staying power.
- moocow01 14y ago
  I don't think mobile and social games/apps are clear-cut examples of economies of scale. Accessibility to the cloud and scalable computing resources isn't exclusive to large companies but it may indeed be somewhat cheaper according to size. But even if it is cheaper, it doesn't automatically make mobile and social games more competitive according to the size of their creator's resources. Most economies of scale apply to segments where competitors are all selling equivalent products and can only compete on price or in markets that require extremely expensive infrastructures (billions). Most of the mobile and social games market is defined by small shops climbing to the top of the charts for a short lived but huge shot of revenue. Honestly the whole mobile and social app market strikes me as the furthest thing from an economy of scale IMHO.
Irishsteve 14y ago
The author gives the game away at the end of his post. That is he's been predicting the demise of Zynga for years. So really the fact that the stock price has dropped gives the author some belief that they were correct. Id imagine the drop in price is linked to the FB IPO. Not sure if anyone remembered when FB announced their plans, anything in that space increased.
ckdarby 14y ago
Find it priceless this guy talks about knowing that the company was going down in flames but didn't sell short at all on the stock.
- micahgoulart 14y ago
  Exactly. Put your money where you mouth is. Especially if you'd make a lot of profit out of it. But of course, he didn't.
extesy 14y ago
"I have been predicting Zynga’s descent for a couple of years" Oh, I know this trick. I also can predict descent of any company, but just not the timeframe. Eventually I will be right.
- steve-howard 14y ago
  How does that saying go? "Anyone can predict rain, but the real prophet builds an ark."
- capsule_toy 14y ago
  With these types of predictions, I think the reasoning must be included and evaluated. Timing is incredibly difficult to nail down even if your analysis is completely correct.
jda285 14y ago
Don't want to get into Zynga's business model but it's one sided to reference this "failed" acquisition without referencing the "with friends" franchise which has been a pretty incredible acquisition for them.
dave1619 14y ago
It's hard to bet against Zynga with Marc Pincus still in charge. Pincus is a smart cookie. :)
mattmaroon 14y ago
"It takes nothing to produce a hot game. You merely need somebody with a computer, a good idea, and the ability to make a game. Making a game is not rocket science. Making matters worse for Zynga is that it does not and never will control the distribution channels." Yes, that's why everyone with a CS degree has made millions of dollars. This is offensive to everyone that makes games.
- StavrosK 14y ago
  "It takes nothing to win the lottery. You merely need to buy a lottery ticket."
- learc83 14y ago
  His point isn't that everyone can do it, obviously that's not true, but that there is nothing about it that requires a multi-billion dollar company. To wit, the barrier to entry is low. >You merely need somebody with a computer, a good idea, and the ability to make a game
  - jdkilby 14y ago
    > To wit, the barrier to entry is low. ... but the barrier to success on the scale of FarmVille or Draw Something is very high. That's when a company with massive amounts of money that can be spent to hire game developers and market to users has a distinct advantage.
  - bad_user 14y ago
    The barrier to entry is low from the perspective of sunken costs other than development time, being a purely creative endeavor that you can work on with mostly free software tools. However, the talent required to pull off a quality game and the time it takes are huge and only grow exponentially. That in recent years we've got a couple of indie games that were successful, that's only because on mobile devices the expectations for CGI quality are for the moment low. Plus, with these app stores, the budget required for marketing has decreased, if you're lucky enough to have your app featured. And while you can create indie games for the desktop and be successful, as Minecraft shows, the expectations for quality CGI are much higher and so it takes an insane amount of creativity to fill the blanks. Now, of course, Zynga games are not really on the same level as what id Software or Blizzard are releasing and you can certainly picture yourself pulling off games of the same quality, as Zynga games are nothing special, except for the social-network effects. However you shouldn't underestimate the effort required to build a game from scratch. I consider it to be by far one of the most challenging fields in software development, as not only it requires great feats of engineering, but it also requires creativity and design. E.g. developers by themselves can barely pull it off without the help of a good artist that can draw.
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drawkbox 14y ago
Not to defend Zynga much but please take into account the broader market when doing any kind of stock analysis, all stocks have been shaky since late March/April. Also it is typical for stocks to lose value after large acquisitions. Zynga could have even timed this more or known that the market would be going on a typical late spring/summer correction (from lower volume) and bought during that (Facebook launching in a low volume window is strange but that is another story). OMGPOP wasn't just Draw Something. They have actually been around for a while since 2008 at least. They have had decently successful web games before and probably have a fair amount of assets that Zynga could use with Draw Something being the big icing. Take a gander at OMGPOP.com and see what they have. They used to be called 'iminlikewithyou' http://www.crunchbase.com/company/omgpop http://www.crunchbase.com/company/omgpop This wasn't really a one hit wonder, it was a one BIG hit wonder but a pretty solid gaming community before and the people and tech created Draw Something. So there was something there... It is hard enough finding good developers, then there harder to find good teams, then harder to find good teams that can make hits, when you find one or the systems used to build it then it is valuable. Let's face it there were plenty of pictionary like games available before (isketch.net comes to mind, or Doodle or Flipbook at Benetton Play have been around for ages: http://www.benettonplay.com/toybox.php http://www.benettonplay.com/toybox.php), but they got the right juice. That might be what they bought.
- tatsuke95 14y ago
  The NASDAQ is down 4%, the past month. Zynga is down 30%. The social gaming space has plateaued. It got incredibly big incredibly fast, but those days of growth are over. Zynga has built a dominant position, but isn't making money yet. I'm not sure what that means, but it isn't good.
cocoalovethax 14y ago
"Videogame development is not rocket science." These people obviously have no idea what it takes to make a game.
- jlgreco 14y ago
  Let's be fair though, there are far more organizations capable of building games than can build rockets. Teenagers in basements can and do kick-start game companies but so far it seems as though rocket building is still in the domain of governments and dot-com millionaires. That is the difference that is relevant; barrier to entry.
kin 14y ago
The story is too easy to write about and I'm going to have to disagree here. I think it was pretty obvious that Draw Something wasn't going to last forever. And Zynga, with extremely similar games like Words With Friends, Hanging With Friends, and Scramble, knew that Draw Something was going to have the same fate. Yes, the purchase was a little steep, but it had to happen. It had to happen because the game was formatted and structured EXACTLY like Zynga's games. With its popularity, Zynga did not want Draw Something to threaten the Zynga brand of social mobile games. So here we are and Draw Something lost 5M users. You think Zynga didn't see that coming? Is someone really surprised? It makes sense that the drop in stock reflects the loss. I wouldn't say it's fact but it's highly probable. But, they're not dumb. The way the company works, I expect another amusing addicting social mobile game to be released in the near future to silence these stories and like other stocks it'll go where it goes, but not rock bottom.
- srslythink 14y ago
  Surprised no one has figured out why they paid so much. 20m dau at the time of acquisition means they had 20m+ user accounts (likely 3x that). All of these people are "socially obligated" to stay connected for some amount of time. How much would your company pay to acquire ~60m customers? That's not including the revenue they were bringing in. I don't dispute they paid too much, but apparently it was worth it to them.
dudeguy999 14y ago
I view Zynga's economics like a tv network. Their primary asset is their audience, and acquisition is a way for them to increase that. There are two different kinds of acquisitions they can do: shows that already have a following (low risk, low payoff, high cost) and promising small shows, which have opposite characteristics. The stuff they produce in-house tends to be highly targeted, less innovative stuff.
ayu2 14y ago
Zynga is making a gaming platform. I'm pretty sure Pincus is aware simply churning out social games isn't a good long term vision.
richardw 14y ago
Zynga's fine. They correctly figured out that once you're the biggest on Facebook, it's very easy to stay there. It'd take a competitor insane money to buy up the advertising necessary to introduce a game, whereas it takes Zynga an intro to their 'try these games' bar. When a smaller competitor happens to beat the odds and get to the top for one game, Zynga must make a copy-or-buy decision. Copy if you think the competitor can't leverage (or be used as leverage by a bigger competitor) the game's temporary eyeballs, or buy if you can make good use of those temporary eyeballs to cross-sell your other games. Draw something is a fad on fire. So rather than build (and cross-sell existing Zynga users who you 'own' already), buy the fad, cross-sell hopefully new users, cut off anybody who could have done the same. Extra points if those new users are a different type of user who wouldn't normally be caught playing X-ville junk. Now if in six months Zynga is raking in tens of millions of dollars a month on Draw Something I will eat crow. I have a feeling that isn’t going to happen. Zynga don't have to. Zynga doesn't care which if their games you play once you're in the system. They care about the total customer lifetime value of each user, not the 1-game value.
dutchbrit 14y ago
It wouldn't surprise me if Facebook snaps up Zynga eventually. But Zynga is definately heading in the wrong direction.. But basing this off Draw Something is silly. It's one game, and people could of seen this coming a mile away. People get bored of games eventually.
varelse 14y ago
When I think of Zynga, I think of two words: options clawback. Gordon Pincus is obviously very smart or he wouldn't have taken Zynga as far as it has come, but I can't see myself ever working for a company willing to confiscate options from at-will employees. As for Zynga going down: maybe, but not anytime soon. Their business model is easy to replicate on the surface, but underneath is an awful lot of solid engineering to keep it from collapsing in on itself.
byrneseyeview 14y ago
I reasoned that there is no greater strategy at play by the Zynga geniuses in the war room of their ridiculous company headquarters. Whenever I find myself thinking this way, the klaxons start going off. I'm basically saying "My mental model of a clearly smart person, surrounded by clearly smart people, who has made more money than I have and raised money from other smart people who have also made more money than I have--is that he's an idiot." And then we get to: So here Zynga finds itself, sitting atop a group of popular games and bracing itself for the next Draw Something to come onto the market so it can swallow it up...So the matchup is Zynga against the field, the field being every person in the world who knows how to, and has the will to create a social game. Another way of looking at this is that Zynga is building a competitive advantage in social game monetization: if you have a given audience, Zynga can do more with it than you can. Meanwhile, giant deals like OMGPOP create a tournament dynamic, where everyone wants to build the next Draw Something. If Zynga is making their raw material cheap while putting their competitive advantage at a relative premium, that's great for their future. It's also a more solid theory than just assuming that Pincus doesn't know what he's doing.
majani 14y ago
Sometimes I suspect many hackers of being anarchists. It's not always that a big company is going down, or that a certain industry needs to be disrupted from behind. It's like some of you secretly want to see the world as we know it, burning down in flames around you!
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TomGullen 14y ago
Once they convert Zynga Poker into an actual online paid poker site they will make an absolutely phenomenal amount of money.
sabat 14y ago
Buying up games as they become hot is not a sustainable strategy. It takes nothing to produce a hot game. I'm no fan of Zynga, maybe, but this statement is false. It's typical for large companies to begin doing corporate buyouts as a strategy as they transition out of the growth-company phase. (Think Oracle.) If it took "nothing" to produce a hot game, then we'd be flooded with new gaming millionaires. Certainly there are a few, but how many social games that your aunt plays are coming from tiny shops? And, if they're actually making money, how many of those shops would turn down a big buy-out offer from Zynga?

175 points by dkrich 14y ago

pan69 14y ago

"It takes nothing to produce a hot game. You merely need somebody with a computer, a good idea, and the ability to make a game. Making a game is not rocket science." Actually. Making a game that makes money IS rocket science (or at least as close as it can get to it).

incongruity 14y ago
I completely agree that it's a lot harder than the author makes it sound – but is the comparison apt in at least one way? Namely – most rocket science out there requires the work of a reasonably large number of contributors to actually produce a working, reliable end-product... whereas a winning game really can be made by a small number of people (or even one person) who either have the right stroke of genius, luck or skill to pull it all together. That, of course, doesn't mean it's easy, but instead it means that the law of large numbers comes into play and more winning games will be produced because it takes fewer people/resources to make a gaming company than a rocket company. Ergo, gaming is an industry that is inherently much more difficult in which to establish a defensible competitive advantage. Or, maybe the author really is just minimizing it all to make their point...
suby 14y ago
I think it doesn't matter how hard it is. The barrier to entry is very low, and the social game market is already crowded and extremely competitive. You're going to have a varied number of people releasing hits, so the point is that you can't possibly buy out every shop that gets lucky with a hit, nor should you.
jfoutz 14y ago
Making a game is sort of like making music. It's so much fun, people do it for free. It's not a big deal if you have a few dozen programmers making some roguelike. If you have 10k college sophomores making games, chances are pretty good one of them will be pretty fun, and take off. The key here is, they would do it anyway. there is not free carwashing service because someone likes washing cars. there are however tons of free games, because making games is fun.
- forrestthewoods 14y ago
  That statement couldn't possibly be more wrong. The majority of games are created by large teams of highly talented and well paid individuals. There are certain types of games that could be created by a single college sophomore or a teeny tiny team. Most games can not. A team size of 20 is considered quite small. Both your statement and the link's author's is incredibly wrong and incredibly insulting.
  - mdonahoe 14y ago
    Do you work in games? (me too)
  - jbri 14y ago
    There's a difference between the triple-A mass-market games you see at Gamestop, and the social games you see on Facebook. Pointing out that AAA-games are expensive to develop in a discussion about social games is missing the point a little, I think.
    - forrestthewoods 14y ago
      If you think social games are easy or cheap to make then you don't know very much. That goes for both facebook and mobile.
    - mrhyperpenguin 14y ago
      I think forrestthewoods is pointing out that making games, even social games, is hard. Sure it's possible for one person to develop a successful social game. But how many of those people can develop two successful social games? 5? 10+? The only name that comes to my mind is Zynga.
      - jfoutz 14y ago
        That's the issue though. Zynga's whole business model depends on this being false: "Sure it's possible for one person to develop a successful social game." One dedicated guy can soak up some ridiculously large fraction of their 2015 revenue if you believe your own statement is true. Because the popular fall 2015 game will be by That One Guy Studios and not Zynga.

RobAtticus 14y ago

I actually do think it's a coincidence that the stock price is down 38% since purchasing OMGPOP. It had a nice run up based on positive news related to the Facebook IPO, so when the market began to contract in late March/April, people took their profits. There hasn't been much positive news since then, so it hasn't rebounded. In fact, the whole technology sector is down about 32% since late March (it was +20% on the year, now its only +13.9%)[1]. Basically, I don't think the OMGPOP acquisition has had much of an effect on the stock price. [1] http://www.google.com/finance?catid=66529330 http://www.google.com/finance?catid=66529330

dsirijus 14y ago

Zynga's decline has nothing to do with purchases they made and everything with Facebook killing viral channels - a year and a half ago!

cletus 14y ago

This story (Draw Something losing ~5M customers/month) annoys me. It's an example of not knowing the difference between causation, correlation and coincidence. In at least some cases people are making that "mistake" for link-bait reasons and to push an agenda (eg they hate Zynga). The idea that 5M/month Draw Something care about the Zynga purchase is ludicrous. It seems Zynga has made some annoying changes to the game, at least for those that use Facebook to login, but even so. I think the only story here is that Zynga overpaid for something that was peaking. They may purchased OMGPOP just in case it turned into something huge. There's plenty of that going on (cough Instragram cough). I've tried Draw Something. It's amusing and I can see the appeal but from all usage patterns I've seen the game has a pretty short shelf life. A game with a short shelf life is going to lose lots of customers once it peaks. It's inevitable. As for how easy it is to make a game, that's actually hard. I believe you should also separate "normal" games from "social" games here as both are radically different. Normal games are like blockbuster movies. You want people to buy up big. You deliberately build up the hype. There is very little in the way of long tail in revenue in most cases (other than sequels). I consider this a fairly "honest" or ethical practice because you pay the sticker price and you have your fun. Social games are more like TV shows. You're trying to build a persistent audience and you're all about the long tail. The part that bothers me is the psychological trickery that goes into this. Social games are really about manipulating the psychological triggers for addiction and I don't really see a distinction between this and, say, gambling addiction. Some people spend an awful lot on these games (I believe Zynga calls people who spend over $10k "whales" [1]). Zynga and similar companies like to whitewash this with "maybe they're just rich". I believe they know better. They are (IMHO) preying on the weak and those arguably with mental health problems ("it's not unethical, it's funethical!"). Successful social games are all about Big Data. Figuring out what works, what doesn't, analyzing your customer usage and adjusting to maximize revenue and retention. They're not even "games" really. They're just exercises in repetition. Anyway, rant aside, I don't like Zynga either but please don't confuse the OMGPOP purchase with a short shelf-life peaking purchase. [1]: http://www.businessweek.com/magazine/zyngas-quest-for-bigspending-whales-07072011.html http://www.businessweek.com/magazine/zyngas-quest-for-bigspe...

kiba 14y ago
Remind me of The Curse of the Cow Clicker at http://wired.com/magazine/2011/12/ff_cowclicker/all/1 http://wired.com/magazine/2011/12/ff_cowclicker/all/1

oellegaard 14y ago

Good indication that the social media bubble won't last forener. Maybe a .com bubble 2.0?

moocow01 14y ago

I'd say Zynga's problem is that they are a big fish competing in an environment that is much better suited to lots of nimble little fish. With fickle customers and increasing offerings in their segment, its going to be increasingly difficult and expensive to produce sure fire hits. The alternative is to acquire the small fish when they have a hit but that can be an equally dangerous game as proven by the OMGPOP acquisition. I just don't think being in the app/casual game business is a great spot for large public companies - there is not a lot you can leverage or ability to lock down revenue streams in any long term manner by being big. I'd be much more positive on Zynga if they had a core product that the whole company was iterating on but from what I can see that is not their model.

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potatolicious 14y ago
I'd venture that Zynga's problems are more critical than that - and not unique to Zynga. IMO social gaming (in its current format and incarnation) is a space that exists only temporarily while consumers figure things out. Notice the explosion of FarmVille when it first came out, how everyone was playing it, and its subsequent death. It exploded into the mainstream very suddenly, and faded into niche obscurity just as quickly. The "glorified slot machine" format of social gaming (which IMO is a perversion of the word, there's nothing social about this sort of gaming) does not have a permanent, mass-market future. It will fade and become a niche (profitable, perhaps), but it will not justify the market cap that investors have saw fit to pour into Zynga et al. If anything, the industry in which Zynga plays has more in common with the Tamagotchi than it does with WoW.
- justinhj 14y ago
  Farmville is the number 7 game on facebook in May with 5 million daily users.You can buy Farmville yhemed cups in 7/11. A level of obscurity to dream of.

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gallerytungsten 14y ago

Which companies will be the most spectacular flameouts of internet boom, 2.0? I don't think it's much of a stretch to predict Zynga has a good chance of making the list.

uptown 14y ago
Groupon

underwater 14y ago

> And yes, it is completely ridiculous for a company that is losing close to a billion dollars a year to occupy a multimillion dollar office building that looks like a children’s museum. Where does a billion dollars a year come from? They lost 86 million last quarter. Is he equating operating costs or reduced market capital with loses?

moocow01 14y ago
He gets it probably from extrapolating the average of this past quarter and and the quarter before. In the quarter before the last, net income was around -435 million although I doubt their annual net will be -1B
- underwater 14y ago
  That makes sense. You can't extrapolate from two data points though. I could just as easily claim that their profit is gaining 350 million a quarter an they'll end up with half a billion in profit for the year.
  - moocow01 14y ago
    I agree thats its not sound and their is unfortunately a tendency to cherry pick data to support one's story. I'm not bullish on Zynga but I'd agree that using 2 quarters of data (if thats what is being used by the author) is unfair especially for a relatively new company like Zynga.

nextstep 14y ago

Tech stocks (in aggregate) have declined about 32% in the same time period. What this article fails to mention is that Zynga's stock price was at an all-time high when Zynga acquired OMGPOP. The stock has since floated around it's post-IPO price. OMGPOP is most likely unrelated to these fluctuations. What is relevant is Facebook. Zynga's stock grew rapidly once Facebook's S-1 filings revealed that Facebook derives 12% of it's revenue from Zynga. This news cause a flurry of interest in Zynga, but the excitement has since waned, and both Facebook and Zynga have been scrutinized heavily since. This is to be expected, but I also expect that both company's stocks will perform well after May 18 and into next quarter. Last, and possibly most important, is the misconception about how easy it is to launch a profitable mobile app to millions of users. Zynga now hosts about 80% of their games on their private cloud (the zCloud). This infrastructure separates Zynga from a group of 15 hackers who want to make the next Angry Birds. Zynga releases games in dozens of foreign languages; they have games on every social network and in dozens of countries, as well as in many emerging markets. The point is, it's easy to take pot-shots at Zynga's business model and claim it's a house of cards, but I think the reality is that Zynga is a well established company, with far vaster resources than many of their competitors. Mobile and social games are a clear-cut example of economies of scale.

primatology 14y ago
Fair. But Zynga's games still suck. Perhaps their infrastructure is sound, but I run screaming every time I see their latest badly-programmed, ad-infested game take over my newsfeed. A skilled independent dev actually puts time and effort into a beautiful UX. Zynga seems more concerned with churning out the next addictive rip-off, since they know their games have no staying power.
moocow01 14y ago
I don't think mobile and social games/apps are clear-cut examples of economies of scale. Accessibility to the cloud and scalable computing resources isn't exclusive to large companies but it may indeed be somewhat cheaper according to size. But even if it is cheaper, it doesn't automatically make mobile and social games more competitive according to the size of their creator's resources. Most economies of scale apply to segments where competitors are all selling equivalent products and can only compete on price or in markets that require extremely expensive infrastructures (billions). Most of the mobile and social games market is defined by small shops climbing to the top of the charts for a short lived but huge shot of revenue. Honestly the whole mobile and social app market strikes me as the furthest thing from an economy of scale IMHO.

Irishsteve 14y ago

The author gives the game away at the end of his post. That is he's been predicting the demise of Zynga for years. So really the fact that the stock price has dropped gives the author some belief that they were correct. Id imagine the drop in price is linked to the FB IPO. Not sure if anyone remembered when FB announced their plans, anything in that space increased.

ckdarby 14y ago

Find it priceless this guy talks about knowing that the company was going down in flames but didn't sell short at all on the stock.

micahgoulart 14y ago
Exactly. Put your money where you mouth is. Especially if you'd make a lot of profit out of it. But of course, he didn't.

extesy 14y ago

"I have been predicting Zynga’s descent for a couple of years" Oh, I know this trick. I also can predict descent of any company, but just not the timeframe. Eventually I will be right.

steve-howard 14y ago
How does that saying go? "Anyone can predict rain, but the real prophet builds an ark."
capsule_toy 14y ago
With these types of predictions, I think the reasoning must be included and evaluated. Timing is incredibly difficult to nail down even if your analysis is completely correct.

jda285 14y ago

Don't want to get into Zynga's business model but it's one sided to reference this "failed" acquisition without referencing the "with friends" franchise which has been a pretty incredible acquisition for them.

dave1619 14y ago

It's hard to bet against Zynga with Marc Pincus still in charge. Pincus is a smart cookie. :)

mattmaroon 14y ago

"It takes nothing to produce a hot game. You merely need somebody with a computer, a good idea, and the ability to make a game. Making a game is not rocket science. Making matters worse for Zynga is that it does not and never will control the distribution channels." Yes, that's why everyone with a CS degree has made millions of dollars. This is offensive to everyone that makes games.

StavrosK 14y ago
"It takes nothing to win the lottery. You merely need to buy a lottery ticket."
learc83 14y ago
His point isn't that everyone can do it, obviously that's not true, but that there is nothing about it that requires a multi-billion dollar company. To wit, the barrier to entry is low. >You merely need somebody with a computer, a good idea, and the ability to make a game
- jdkilby 14y ago
  > To wit, the barrier to entry is low. ... but the barrier to success on the scale of FarmVille or Draw Something is very high. That's when a company with massive amounts of money that can be spent to hire game developers and market to users has a distinct advantage.
- bad_user 14y ago
  The barrier to entry is low from the perspective of sunken costs other than development time, being a purely creative endeavor that you can work on with mostly free software tools. However, the talent required to pull off a quality game and the time it takes are huge and only grow exponentially. That in recent years we've got a couple of indie games that were successful, that's only because on mobile devices the expectations for CGI quality are for the moment low. Plus, with these app stores, the budget required for marketing has decreased, if you're lucky enough to have your app featured. And while you can create indie games for the desktop and be successful, as Minecraft shows, the expectations for quality CGI are much higher and so it takes an insane amount of creativity to fill the blanks. Now, of course, Zynga games are not really on the same level as what id Software or Blizzard are releasing and you can certainly picture yourself pulling off games of the same quality, as Zynga games are nothing special, except for the social-network effects. However you shouldn't underestimate the effort required to build a game from scratch. I consider it to be by far one of the most challenging fields in software development, as not only it requires great feats of engineering, but it also requires creativity and design. E.g. developers by themselves can barely pull it off without the help of a good artist that can draw.

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drawkbox 14y ago

Not to defend Zynga much but please take into account the broader market when doing any kind of stock analysis, all stocks have been shaky since late March/April. Also it is typical for stocks to lose value after large acquisitions. Zynga could have even timed this more or known that the market would be going on a typical late spring/summer correction (from lower volume) and bought during that (Facebook launching in a low volume window is strange but that is another story). OMGPOP wasn't just Draw Something. They have actually been around for a while since 2008 at least. They have had decently successful web games before and probably have a fair amount of assets that Zynga could use with Draw Something being the big icing. Take a gander at OMGPOP.com and see what they have. They used to be called 'iminlikewithyou' http://www.crunchbase.com/company/omgpop http://www.crunchbase.com/company/omgpop This wasn't really a one hit wonder, it was a one BIG hit wonder but a pretty solid gaming community before and the people and tech created Draw Something. So there was something there... It is hard enough finding good developers, then there harder to find good teams, then harder to find good teams that can make hits, when you find one or the systems used to build it then it is valuable. Let's face it there were plenty of pictionary like games available before (isketch.net comes to mind, or Doodle or Flipbook at Benetton Play have been around for ages: http://www.benettonplay.com/toybox.php http://www.benettonplay.com/toybox.php), but they got the right juice. That might be what they bought.

tatsuke95 14y ago
The NASDAQ is down 4%, the past month. Zynga is down 30%. The social gaming space has plateaued. It got incredibly big incredibly fast, but those days of growth are over. Zynga has built a dominant position, but isn't making money yet. I'm not sure what that means, but it isn't good.

cocoalovethax 14y ago

"Videogame development is not rocket science." These people obviously have no idea what it takes to make a game.

jlgreco 14y ago
Let's be fair though, there are far more organizations capable of building games than can build rockets. Teenagers in basements can and do kick-start game companies but so far it seems as though rocket building is still in the domain of governments and dot-com millionaires. That is the difference that is relevant; barrier to entry.

kin 14y ago

The story is too easy to write about and I'm going to have to disagree here. I think it was pretty obvious that Draw Something wasn't going to last forever. And Zynga, with extremely similar games like Words With Friends, Hanging With Friends, and Scramble, knew that Draw Something was going to have the same fate. Yes, the purchase was a little steep, but it had to happen. It had to happen because the game was formatted and structured EXACTLY like Zynga's games. With its popularity, Zynga did not want Draw Something to threaten the Zynga brand of social mobile games. So here we are and Draw Something lost 5M users. You think Zynga didn't see that coming? Is someone really surprised? It makes sense that the drop in stock reflects the loss. I wouldn't say it's fact but it's highly probable. But, they're not dumb. The way the company works, I expect another amusing addicting social mobile game to be released in the near future to silence these stories and like other stocks it'll go where it goes, but not rock bottom.

srslythink 14y ago
Surprised no one has figured out why they paid so much. 20m dau at the time of acquisition means they had 20m+ user accounts (likely 3x that). All of these people are "socially obligated" to stay connected for some amount of time. How much would your company pay to acquire ~60m customers? That's not including the revenue they were bringing in. I don't dispute they paid too much, but apparently it was worth it to them.

dudeguy999 14y ago

I view Zynga's economics like a tv network. Their primary asset is their audience, and acquisition is a way for them to increase that. There are two different kinds of acquisitions they can do: shows that already have a following (low risk, low payoff, high cost) and promising small shows, which have opposite characteristics. The stuff they produce in-house tends to be highly targeted, less innovative stuff.

ayu2 14y ago

Zynga is making a gaming platform. I'm pretty sure Pincus is aware simply churning out social games isn't a good long term vision.

richardw 14y ago

Zynga's fine. They correctly figured out that once you're the biggest on Facebook, it's very easy to stay there. It'd take a competitor insane money to buy up the advertising necessary to introduce a game, whereas it takes Zynga an intro to their 'try these games' bar. When a smaller competitor happens to beat the odds and get to the top for one game, Zynga must make a copy-or-buy decision. Copy if you think the competitor can't leverage (or be used as leverage by a bigger competitor) the game's temporary eyeballs, or buy if you can make good use of those temporary eyeballs to cross-sell your other games. Draw something is a fad on fire. So rather than build (and cross-sell existing Zynga users who you 'own' already), buy the fad, cross-sell hopefully new users, cut off anybody who could have done the same. Extra points if those new users are a different type of user who wouldn't normally be caught playing X-ville junk. Now if in six months Zynga is raking in tens of millions of dollars a month on Draw Something I will eat crow. I have a feeling that isn’t going to happen. Zynga don't have to. Zynga doesn't care which if their games you play once you're in the system. They care about the total customer lifetime value of each user, not the 1-game value.

dutchbrit 14y ago

It wouldn't surprise me if Facebook snaps up Zynga eventually. But Zynga is definately heading in the wrong direction.. But basing this off Draw Something is silly. It's one game, and people could of seen this coming a mile away. People get bored of games eventually.

varelse 14y ago

When I think of Zynga, I think of two words: options clawback. Gordon Pincus is obviously very smart or he wouldn't have taken Zynga as far as it has come, but I can't see myself ever working for a company willing to confiscate options from at-will employees. As for Zynga going down: maybe, but not anytime soon. Their business model is easy to replicate on the surface, but underneath is an awful lot of solid engineering to keep it from collapsing in on itself.

byrneseyeview 14y ago

I reasoned that there is no greater strategy at play by the Zynga geniuses in the war room of their ridiculous company headquarters. Whenever I find myself thinking this way, the klaxons start going off. I'm basically saying "My mental model of a clearly smart person, surrounded by clearly smart people, who has made more money than I have and raised money from other smart people who have also made more money than I have--is that he's an idiot." And then we get to: So here Zynga finds itself, sitting atop a group of popular games and bracing itself for the next Draw Something to come onto the market so it can swallow it up...So the matchup is Zynga against the field, the field being every person in the world who knows how to, and has the will to create a social game. Another way of looking at this is that Zynga is building a competitive advantage in social game monetization: if you have a given audience, Zynga can do more with it than you can. Meanwhile, giant deals like OMGPOP create a tournament dynamic, where everyone wants to build the next Draw Something. If Zynga is making their raw material cheap while putting their competitive advantage at a relative premium, that's great for their future. It's also a more solid theory than just assuming that Pincus doesn't know what he's doing.

majani 14y ago

Sometimes I suspect many hackers of being anarchists. It's not always that a big company is going down, or that a certain industry needs to be disrupted from behind. It's like some of you secretly want to see the world as we know it, burning down in flames around you!

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TomGullen 14y ago

Once they convert Zynga Poker into an actual online paid poker site they will make an absolutely phenomenal amount of money.

sabat 14y ago

Buying up games as they become hot is not a sustainable strategy. It takes nothing to produce a hot game. I'm no fan of Zynga, maybe, but this statement is false. It's typical for large companies to begin doing corporate buyouts as a strategy as they transition out of the growth-company phase. (Think Oracle.) If it took "nothing" to produce a hot game, then we'd be flooded with new gaming millionaires. Certainly there are a few, but how many social games that your aunt plays are coming from tiny shops? And, if they're actually making money, how many of those shops would turn down a big buy-out offer from Zynga?