Zynga Inc. Chief Executive Mark Pincus ended 2011 as the face of an overhyped Web initial public offering. Now he wants to show the hype was justified.
Early last year, his San Francisco company, which makes social games such as "FarmVille" that are played on Facebook, was on track for one of the hottest initial public offerings of 2011. But when Zynga finally went public last month, its stock price dropped 5% on the first day of trading and has since consistently traded below its $10 offering price.
Zynga CEO Mark Pincus, seen in an October photo, believes the company's IPO was successful.
Mr. Pincus, 45 years old, also came under scrutiny for his role in asking some early employees to renegotiate their stock compensation packages. Some saw the move as undermining Silicon Valley's long-held tradition of young entrepreneurs signing up at start-ups for low salaries but with the hope of an eventual payoff from big equity packages.
Now Zynga faces questions of whether it can keep producing new gaming hits, even as it works to move away from its dependence on Facebook.
With the quiet period surrounding Zynga's IPO now over, Mr. Pincus sat down to discuss Zynga's culture, its stock price, and the potential for future revenue growth and online gambling.
WSJ: Were you happy with how Zynga's IPO turned out?
Mr. Pincus: Our goals were we want to raise a billion dollars. Through going public, we wanted to add some more great long-term investors to the company. All of that was successful.
WSJ: But Zynga's stock price sank below the IPO price on the first day of trading. Who or what do you blame for that?
Mr. Pincus: I don't blame anybody because from our standpoint, we think it was successful. It was many times larger than the other tech IPOs that had just happened recently. We think we're now well positioned to move forward in the future.
As the company's quiet period comes to a close, Zynga CEO Mark Pincus talks about his company's reliance on Facebook as a gaming platform, his company's initial public offering and what's next for FarmVille.
WSJ: Zynga's stock price is still below $10. Did the company go public at the wrong time?
Mr. Pincus: We've never tried to time the markets, so we weren't trying to time the markets. We were trying to go public at the right point in our company growth, and we thought that was the right point.
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WSJ: Zynga has attracted criticism for how the company's focus on meritocracy creates an ultra-competitive environment that puts tremendous pressure on employees. What is the company's culture?
Mr. Pincus: The average Silicon Valley [attrition rate] is 14%, and we've run a little over 3% attrition. I think that's a good sign of employees liking the company and the culture.
The culture inside Zynga is not ultra competitive but Zynga is very competitive, and we're in a very competitive industry. We have teams that push themselves very hard, but it's driven by themselves.
We have a culture of leveling up [through promotions]. More than 60% of our work force has leveled up every year for the last three years. More than 15% of our work force has leveled up every quarter for the last 12 quarters. I think that our employees feel a great sense of career opportunity and mobility.
WSJ: What was the purpose of the "MIA list?" (The Wall Street Journal reported Mr. Pincus had a "Missing in Action" list for employees who were underperforming and held large amounts of equity.)
Mr. Pincus: What you're referring to is around two years ago, I had a list that I kept on my whiteboard of big leaders and individual contributors in the company who weren't on big missions as a reminder to me to help find them big missions.
WSJ: Why did you decide to renegotiate the stock compensation of some early employees?
Mr. Pincus: Any company, especially in Silicon Valley, that is growing quickly can outgrow the capabilities of senior leaders, and that happens all of the time. We did, especially growing as fast as we have.
In four isolated incidents, we outgrew senior leaders and we wanted to find them another position at the company versus just parting ways. They had the option to leave and have a package, as happened with some other leaders, but we in addition to that offered them other positions at the company that came with different forward compensation.
WSJ: Do you think those were the right decisions?
Mr. Pincus: It's a tough call. I'd say that in two of those four cases, those people are at the company and they're wonderful executives and contributors who have found other opportunities to lead, and so I'm really happy.
I realize that that wasn't a model that had been done in Silicon Valley, and we're always as a company trying to invent new models, and not all of them are worth keeping and repeating. That's never been a policy at our company, and probably I'd say in retrospect, given how much that blew up, and questioned traditions in the Valley, I think probably wasn't a good idea.
WSJ: How is Zynga now aiming to capitalize on changes in the videogame industry?
Mr. Pincus: We're in the early stages of a secular shift in all of gaming from a lot of upfront [cost] barriers to play, and we're moving quickly to a world where these barriers are coming down. And we're seeing that there's huge latent interest in people to play.
WSJ: How do you see free-to-play social games evolving in terms of your potential for revenue growth?
Mr. Pincus: Free to play [games were] here before 2007 and they were ad supported. The display ad model [in which ads pop up while on a website] was not a good revenue model for games. We're at the beginning of a new advertising model for the Internet, which is about engagement [through virtual goods or product placement in games], not clicks.
WSJ: The Department of Justice recently came out with a new position on online gambling. Does that open opportunities for Zynga?
Mr. Pincus: We're watching it with interest. Virtual reality is about the connection between the virtual and the real, and there's just such a close and perfect connection between the virtual and the real when you're gambling, because these chips have real world value.
COMMENTARY: I have covered Zynga CEO Mark Pincus in several blog posts, including several concerning Mark Pincus specifically on November 10, 2011 and December 13, 2011. I also covered Zynga's IPO filing and an analysis of why Zynga's IPO flopped on July 1, 2011, December 15, 2011, December 18, 2011. Check them out.
Stock analysts' opinion about Zynga have varied from "overweight" to "buy" to "short." I think the free-play business model and total reliance on Facebook are too big weaknesses with the company. Zynga's total reliance on Facebook for gamers was seen as a weakness by investors buying Zynga's stock on the IPO date. If Facebook pulled the rug from underneath Zynga, the company would suffer a huge decline in gamers.
There's an even bigger problem: Only 2.5% to 3% or 7.7 million game players actually pay to play. That's a receipe for disaster. Zynga needs a regular release of new hit games to keep traffic and revenues growing. Any screwups could be catastrophic. According to Reuters, during a December 8, 2011 roadshow for Zynga IPO investors, Mark Zynga told a room of about 100 potential investors:
“We could see that doubling.”
Pincus was speaking in Boston during a roadshow event for the company’s planned initial public offering.
Pincus has never publicly stated that the company could double the number of paid subscribers and he did not specify a timeline. A Zynga spokesperson declined to comment, but an analyst contacted by VentureBeat said it was not a far-fetched prediction.
Michael Pachter, a research analyst at Wedbush Securities who specializes in games and digital media, said there are several scenarios in which Zynga could double its paid user base within the next one to two years. The two key drivers of growth will be Facebook and mobile devices.
Pachter said that if Facebook hits 1 billion users, the number of people who play Zynga games will almost certainly increase in tandem. And if this happens, Zynga could still be close to doubling the number of paid users it has without significantly shifting the total proportion of Facebook users who play its games.
Pachter also believes that Facebook will start doing more to make people use their credit cards within the social network. Buying Facebook Credits is a frustrating experience. If Facebook removes some of the friction from this process, Zynga stands to benefit, even if people are spending $1-$2 per month, which is the norm. He compared this to e-commerce sites like Amazon.com, where people make repeated one-click purchase once they grow accustomed to securely storing their credit card information online.
Pachter apparently did not read "Zynga's Unhappy Customers," an article that appeared in Seeking Alpha on December 15, 2011. Here's what Seeking Alpha said about Zynga's declining user base.
"The biggest concern for a company that is widely reported as "fast growing" is a declining user base. The most important metrics for measuring this are Daily Active Users (DAUs) and Monthly Active Users (MAUs), and if we look at Zynga's numbers from the S-1, we see that the trend for both these key metrics is negative:
Zynga reported an average of 54 million DAUs for the third quarter of 2011, 5 million less than in Q2, 8 million less than in Q1. And that number is down almost 20% from the peak of 67 million, reached in the first quarter of last year. Monthly Active Users are also down from all these periods, even though Zynga launched several new games (Empires & Allies, Adventure World, Mafia Wars 2, Castleville) this year. If we want to talk "growth" here, we have to call it negative growth."
Seeking Alpha blames Zynga's decline in users to unhappy customers due to numerous bugs in Zynga's social games and a lack of or poor technical support. Here's what they said.
"You might think that Zynga would do anything in its power to keep as many users happy and interested in its new games for as long as possible. In reality, they are doing quite the opposite, which I would identify as the biggest problem going forward. Some of the decline can safely be attributed to a plethora of bugs in Zynga's games, and additionally to increasingly disastrous customer service. Those facts have not been widely reported yet, and the vast majority of investment advisors and financial analysts won't be hardcore gamers who can talk from their own game experience."
"Zynga's basically non-existent customer support - or maybe they are just understaffed and overwhelmed with requests regarding those myriads of game bugs - is likely another major reason for users abandoning its games."
Unless Zynga is able to turnaround its declining user base by creating bug-free games, improving its customer support and creating new and exciting games like Farmville and Mafia Wars used to be, I can't see how Zynga will be able to double its pay-for-play gamers (presently 2.5% to 3.0% or 7.7 million players) to $15 million pay-for-play game players.
Another concern of mine is where is it going to get those new pay-for-play players. It relies exclusively on Facebook's 800 million users to draw game players. Let's look at a few stats and future estimates:
- Zynga had 220 million gamers at the end of 2011.
- Zynga game players represent 27.5% of total Facebook users (800 million).
- Zynga could reach 275 million gamers if Facebook's reaches 1 billion users over the next five years and that ratio stays the same.
- Zynga would max out at between 6.87 million and 8.25 million pay-for-play gamers if his pay-for-play gamer ratio remain at 2.5% to 3.0% of total gamers. Zynga would fall short about 7 to 8 million pay-for-play gamers.
Zynga needs several hit games, but he's only attracting players from Facebook, and that's the problem. Without Facebook being able to access the huge 430 million social network users in China, I don't see how Zynga can double its pay-to-play game players. Somebody show me the math.
Legalized online gambling could be Zynga's salvation, and presents a great new revenue opportunity for Zynga. If Mark Pincus was smart, he would try to acquire scalable multi-player games and run them through a separate gaming site and keep 100% of the revenue from any winnings. Facebook keeps 30% of all virtual goods sales, and that is really hurting Zynga's earnings.
Courtesy of an article dated January 17, 2012 appearing in The Wall Street Journal and an article dated December 15, 2011 appearing in SeekingAlpha
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