Zynga Inc (NASDAQ:ZNGA), according to news released today, will no longer receive special treatment on Facebook. The market responded poorly to the news, the firm’s shares dropped by around 13% before recovering later on in the day. Zynga Inc (NASDAQ:ZNGA) stock now stands at around $2.50, down just 5%.
Zynga Inc (NASDAQ:ZNGA) share price as of morning of December 3, 2012 - Google Finance (Click Image To Enlarge)
So is the announcement really that bad for Zynga? Our own analysis published earlier, framed the announcement as a move by Facebook Inc (NASDAQ:FB) to distance itself from Zynga as the firm’s fortunes change. Zynga Inc (NASDAQ:ZNGA) was not always seen as Facebook’s little brother, however. A look at the history of the relationship between the firm’s is certainly worth the effort for investors.
Zynga Inc (NASDAQ:ZNGA) released its first Facebook game, Zynga Poker, in July of 2007. It wasn’t until 2009 that the firm’s fortunes, and its relationship with Facebook Inc (NASDAQ:FB) really took off. In April of that year Zynga became the social networking site’s top developer. In June it released Farmville.
That game, and those related to it, have been the real jewels in Zynga’s crown. The company has relied on the freemium model perfected in those applications to supply it with revenue. In June of 2012, Facebook saw the advantages of social gaming and laid out a five year partnership with Zynga Inc (NASDAQ:ZNGA). That partnership was dissolved today.
It was just weeks before that deal was signed that Zynga threatened to leave Facebook altogether. The firm had set itself against the Facebook credits model of monetization, but after negotiations in which it was guaranteed a competitive advantage over other game developers, the company joined hand in hand with Facebook Inc (NASDAQ:FB).
During that conflict, Zynga CEO Mark Pincus announced that Zynga Inc (NASDAQ:ZNGA) would launch its own social network dedicated to gaming. The terms of today’s deal would allow them to do just that. It gives them the same freedom as any other application developer on Facebook’s platform.
The deal announced today is a preliminary decoupling of Zynga’s fortunes from Facebook’s and vice versa. The companies are still highly connected, however. Zynga Inc (NASDAQ:ZNGA) provided Facebook Inc (NASDAQ:FB) with around 14% of its revenue in 2011. There are no other social networks with the ability and user base to give Zynga a strategic impetus to leave Facebook.
There are several ways to interpret the deal.
- This is an attempt by Facebook Inc (NASDAQ:FB) to distance itself from a dying company.
- This is an attempt by Zynga Inc (NASDAQ:ZNGA) to protect its future plans from Facebook’s control.
The company’s first game, Zynga Poker, is being touted as the company’s saving grace by some analysts. If Internet poker is legalized in the United States, the company could begin to multiply its revenue in a very short period of time. If Zynga Inc (NASDAQ:ZNGA) were to take full advantage, Facebook Inc (NASDAQ:FB) might be an impediment.
Denying Facebook Inc (NASDAQ:FB) control over the firm’s activities is a sensible move in the current atmosphere. Allowing exclusive hosting of the company’s games to the social network would leave online poker revenue taxed, and might result in other obstacles.
Today’s agreement will be viewed differently depending on the company’s future success. It could be the day the firm began to die, or it might be the day the firm finally threw off the shackles of Facebook. The interpretation will depend on the company’s management, and the decisions they make.
COMMENTARY: It's about time that Zynga permanently cut its ties from Facebook. Facebook exercised just too much control over Zynga, and takes a 30% commission from every dollar spent on virtual goods by Zynga game players. This has always been a bone of contention for Zynga CEO Mark Pincus. For the nine month period ending September 30, 2012, Zynga has coughed up approximately $275 million in commissions to Facebook. For the calendar year ending December 31, 2011, Zynga paid Facebook $330 million in commissions. If Zynga hosted all its games on its own social network, Zynga would've generated a profit of $114.22 after-taxes.
In my opinion, this is a win for Zynga for the reasons given above. Zynga will also be able to retain all of the ad revenues running within its social games, and not have to share anything wth Facebook.
On the negative side of the ledger, cutting its ties from Facebook carries numerous risks. It no longer has access to those 1 billion users. It will have to find a way to get its users to switch over to its new social network where the games will be hosted. Social gaming has peaked and Zynga has failed to create new big winning games like Farmville and Mafia Wars. Like Facebook, Zynga has to switch all of its games for use on mobile devices so that it can game back users lost from the desktop. In previous blog posts dated June 12, 2012.and July 18, 2012, I described in great detail how Zynga's users are ditching it for other online gaming destinations, and that monthly active usage has plummeted to record lows. Zynga will probably make the transition from hosting its games on Facebook to its own social network over several months (probably well into 2013).
Monthly active users are up year-on-year by 37 percent with 311 million compared to 228 million in Q3 of 2011 and up 2.3 percent from Q2 2012′s 304 million MAU. Daily active users are up 10 percent at 60 million from 54 million from this same quarter last year, but down 16 percent from Q2 2012′s 72 million and down 3.3 percent from Q1 2012′s 62 million. Meanwhile, monthly unique users are up 27 percent year-on-year from 151 million to 192 million, up 5 percent from Q1′s 182 million. Monthly unique users are up 17 percent year-on-year from 151 million to 177 million; this is down 7.8 percent from Q2 2012 and 2.7 percent from Q1 2012. Monthly unique paying players were down from 4.1 million in Q2 2012 to 3 million in Q3 2012.
Zynga Monthly Active Users, Daily Active Users and Monthly Unique Users - Q1 2010 through Q3 2012 - Zynga (Click Image To Enlarge)
Zynga will have to wait until the individual states legislate legalized online gambling before it will ever make a significant amount of revenues from its Poker game. Zynga will probably need to partner with another major player in the gambling sector, and this is going to take sometime to negotiate, plus it may have to pay another commission. Zynga will also have a lot of competition to deal with in the legalize online gambling market, so there is no guarantee that it will make buckets of cash from legalized online gambling.
In a blog post dated October 8, 2012, I reported that Wall Street differs on how the collapse of Zynga will affect Facebook's share price. It certainly will affect Facebook's revenues beginning in 2013, when it is anticipated that Zynga will begin hosting its games on its own social network. In 2011, social games represented 14% of Facebook's total revenues. The effect will be a lot less in 2013, but it remains to be seen whether Facebook can succeed in fully maximizing the potential from monetizing mobile. So far Facebook's stock has rallied from a record low of 17.72 on September 4, 2012 and has climbed back to 27.85 as of today (10:30 am PST).
Courtesy of an article dated November 30, 2012 appearing in ValueWalk and an article dated November 30, 2012 appearing in ValueWalk and an article dated October 24, 2012 appearing in Inside Social Games
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Posted by: J Honlokal | 03/13/2013 at 05:31 AM
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Posted by: Rake-Whore | 12/26/2012 at 11:19 AM