Zynga's Going Down

May 6, 2012

My how quickly things can change. On March 21st, 2012 it was formally announced that Zynga would open its purse and buy up mobile game maker OMGPOP. Some blasted Zynga as a lost company throwing its money down the toilet and many more congratulated them for making a savvy investment in a company that could very possibly threaten their very existence. Oh my!

Well now, less than two months after the acquisition, it has been reported that OMGPOP has lost five million users.

Zynga is no longer a private company with the luxury of keeping its financials to itself, and so I think it is appropriate to bring this to light. When this acquisition was announced I thought to myself “Zynga is going down in flames.” I reasoned that there is no greater strategy at play by the Zynga geniuses in the war room of their ridiculous company headquarters. 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.

Zynga’s stock has dropped 38% since the OMGPOP acquisition. Coincidence? I hope not!

Here’s the problem with Zynga. It would be a great business for a group of about 5-10 people. The business model that Zynga has pursued does not lend itself to a publicly-traded, multibillion dollar company. They produce social games. That is not a defensible product. Buying up games as they become hot is not a sustainable strategy. 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.

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. The business model is to build and maintain games from within Zynga and be the leader in the social gaming space so it can monetize all of these freaking awesome games. 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. Who would you bet on? It seems that Zynga is pursuing an old-world (read, 90’s) video game development strategy when it seems so obvious that game development is headed the other way. Zynga wants to be a game publishing house that squashes competitors in a world that seems built for small, independent publishers. This is akin to aggressively trying to build a book publishing company right as the Kindle goes on the market, and then buying up each popular book as it goes on the ebookstore at multiples far beyond what the books are currently selling.

I have been predicting Zynga’s descent for a couple of years. I concede that that is not a wholly unpopular point of view, but it has come time to put this down in writing with some substantiation. I have no personal grievances with Zynga, but I do believe the company has spent very irresponsibly. As a public company they should be scrutinized and judged just like any other. There was a lot of debate about the merits of the OMGPOP acquisition when it occurred, so I think it is time to look back. 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.

6:36pm | URL: https://tmblr.co/ZpGqLvK-yYsD

(Notes: 60)