ImaginativePRO Blog

ZYNGA'S FUTURE LOOKS BLEAK, REVENUES FLAT-LINE, BOOKINGS SLOWING DOWN, STOCK PRICE PLUNGES NEARLY 50% SINCE EARLY MARCH

 

Two months have passed since I first outlined the premises of my bearish thesis on Zynga (ZNGA), and since then the stock has declined about 45% from $14.48 to $8.00 per share. This sharp decline can be attributed to the market rationalizing the limited potential of Project Z, and a realization of a serious slowdown in revenue growth.

Zynga CEO and Founder Mark Pincus

To outline the recent significant slowdown in Zynga's growth, here is a quick look at sequential quarter over quarter revenue increases.

Zynga Revenues by Quarter - Q4 2010 through Q1 2012 (Click Image To Enlarge)

As you can see, in each of the past two quarters Zynga's growth has come to a screeching halt. Forget the massive year over year growth Zynga reports in its press releases ("Q1 revenue up 32% year over year"), what matters is the serious slowdown in sequential quarterly revenue.

Zynga Chief Operating Officer John Schappert

Current analyst estimates are pegging sequential revenue growth for the next two quarters as follows:  

• Q1 2012-Q2 2012:  +7.1%
• Q2 2012-Q3 2012:  +9.7%

These numbers would indicate a serious reversal of the current trend, and a continuation of 20-30% year over year growth. But I believe these expectations will be very hard to meet. Let me explain:

Zynga has a history of reporting excellent Monthly Unique User (MUU) numbers since going public. In Q4 2011 Zynga reported 153 million MUUs, in Q1 2012 that number jumped to 182 million, an increase of almost 19%.

Ironically, as shown in the chart above, revenue only climbed 3.1%. The explanation behind this is most likely due to a drastic quarter over quarter decline, in average daily bookings per active user. Average daily bookings rose 8% year over year, but fell about 10% quarter over quarter. This reiterates my thesis from Part I about Zynga's core business declining.

Another interesting thing to note from Zynga's Q1 report is the serious slowdown in daily active user growth. Zynga's daily active users grew just 6% year over year in Q1, far slower than Facebook's (FB) user growth. What is particularly worrisome about this, is that Zynga derives almost all of its revenue from a very select and active group of users. Daily active users is probably the most correlated statistic to this select group of revenue generating users (because people who play Zynga's games daily are the ones who are most likely to buy coins). Thus, if daily active user growth is slowing, we should assume average daily bookings are slowing as well. Interestingly enough, as previously stated, average daily bookings aren't just slowing, they are declining.

With Zynga's crucial group of paying users declining, I expect we will see a continuation of declining revenue growth and share price as well. Analyst estimates of much higher growth starkly contradict the trend of declining average daily bookings.

Although the bearish argument encapsulating Zynga remains very strong, the upcoming Facebook IPO could provide renewed exuberance in shares. Shorting Zynga will remain a very speculative play until after Facebook's IPO is done and the buzz surrounding it has significantly died down.

COMMENTARY:  Zhong Kuizhen of the Pick Stocks blog supports Seeking Alpha's Galileo Russell's contention that Zynga's future looks bleak by explaining the numerous ways that Zynga tracks its user base:  

• Daily Active Users (DAUs). 
• Monthly Active users (MAUs). 
• Monthly Unique Users (MUUs). 
• Average Daily Bookings Per Daily Active User (ABPU). 

Zuizhen charted Zynga's DAUS, MAUs, MUUs and APBUs by quarter beginning for the period between Q3 2009 and Q4 2011, and some interesting trends start to emerge.

Zynga DAUs, MAUs, MUUs and APBUs by Quarter - Q3 2009 through Q4 2011  (Click Image To Enlarge)

Zuizhen does a miticulous job of analyzing Zynga's growth and valution trends.  He said.  

"Looking at these figures, the trends appear reasonably healthy on the surface.

"With no glaring dropoffs and increasing ABPU, especially in the context of no blockbuster game releases, why are investors so disappointed with Zynga's digits?  Two words: growth and valuation." 

Zuizhen points out that on February 17, 2012, Zynga was trading at a price-earnings multiple of 164 times earnings.  He said.  

"That's a massively premium valuation, partially spawned from all the Facebook hype, that needs to be justified by similarly sky-high growth. This is where the story starts to unravel, as Zynga's revenue and bookings growth have been plummeting on a sequential basis." 

Zynga Revenues and Bookings by Quarter - Q1 2009 through Q4 2011  (Click Image To Enlarge)

Zuizhen doesn't mince any words by severely criticizing how investors have over-hyped Zynga shares and set it up for a fall.  He said.  

"While it's entirely natural and expected for any up-and-coming growth stock to show some signs of slowing growth as they grow their revenue base, it's also entirely natural and expected for short-sighted investors to bid up one of the most overhyped IPOs in recent months in the face of the mother of all hyped-up IPOs for a related company in the pipeline."

Zuizhen does a great job of explaining how Zynga recognizes revenue:  

"Bookings represent the total revenue that is brought in from the sale of virtual goods and is a proxy for what Zynga would see as revenue if it was all recognized immediately at the time of sale.  Instead, revenue is deferred and recognized over the life of those virtual goods as they're consumed, so bookings are an incredibly important precursor to revenue."

Zuizhen makes a great observation that throws up an immediate red flag as to Zynga's future revenue potential.  

"You'll notice in that previous chart (see above) that revenue was starting to catch up with bookings as it was recognized, and revenue recently outpaced bookings in dollar terms, casting doubts on how much Zynga's top line can keep growing."

Notice how the gap between the sequential bookings growth line (pink) and sequential revenue growth line (blue) begins to really narrow after Q3 2010.   This should tipoff stock analysts and investors that Zynga is unable to maintain sufficient bookings to maintain future revenue growth. 

Zynga shares skyrocketed from 10.49 on January 31, 2012 to 14.352 on February 14, 2012.  Zynga shares were 13.17 at the end of February, then hit a high of 14.69 on March 2, 2012.  Zuizhen said>

"The recent rally was hardly justified, and shares had reached unsustainable premiums, so it's hardly a shocker when the prospects of slowing growth question the company's ability to monetize its user base."

Zuizhen makes a prophetic prediction when he said.    

"I still think Zynga has even more downside from here, because of its still-sky-high valuation and shrinking growth prospects. The company's market cap is about $8.5 billion right now (February 17, 2012), higher than game stalwart Electronic Arts (Nasdaq: EA  ) at $5.9 billion, a game maker that's been around for nearly three decades and has much greater brand strength with its franchises.   Fellow freemium social-game maker Glu Mobile (Nasdaq: GLUU  ) is also on my bad side, since I don't think it's a sustainable business model for the industry. Glu is also seeing a separation from reality."

Zuizhen points out a potential big future plus for Zynga.  He said.  

"I'll give Zynga one potentially major growth catalyst: the possible legalization of online gaming (the gambling type). Zynga Poker is incredibly popular on iOS, and the prospect of converting all those players into real cash cows could be juicy. That said, if online gaming is legalized, there would be a gold rush of companies wanting to cash in, including capable gaming heavyweights like Wynn Resorts (Nasdaq: WYNN  ) and MGM (NYSE: MGM  ) , both of which have already been looking for potential partnerships if the light turns green. It's an interesting possibility, but one that's too far away and uncertain to start banking on."

Several social media and stock analysts including yours truly have made similar observations about Zynga's potential in legalized online gambling, but legalized gambling is at least a year away (if at all) and Zynga will face some touch competition from existing offshore gambling sites which are in a better position to quickly setup "shop" in the U.S. once online gambling is legalized. Furthermore, states have different requirements, and the background checks are quite extensive, so Zynga will probably need to partner without somone to capitalize on this new market opportunity.

Admittedly, I have never been bullish on Zynga from the start.  In a blog post dated July 1, 2011, I reported that Zynga had filed for an IPO and for the first time the public became aware of its actual revenues and earnings.   I said at that time,

"It should be worth nothing that several internet analysts had estimated Zynga's revenues for 2009 and 2010 to be $280 and $850 million respectively.   According to Zynga's preliminary prospectus, the actual revenues were $121.5 million and $597.5 million respectively.  Zynga also reported that revenues for the quarter ending March 31, 2011 were $235.4 million, putting it on track to do at least $1 billion, but let's not get too carried away."

"If you do the math, Zynga's average revenue per user for the year ended 2010 is only $2.57. This is below Facebook's $3.10 and above LinkedIn's $2.43."    

"Zynga's profits for the years 2009 and 2010 were ($52.8) million loss and $27.9 million profit respectively.  So, in essence we have another startup that hasn't made a profit yet.  They join LinkedIn and Groupon, two recent IPO bigee's which had lost a bunch of money before they filed their IPO."

Here's a great video of Charlie Rose interviewing Zynga CEO and Founder Mark Pincus about his imputus to start Zynga and its business model:

 

Here's what I said in the above blog post,  

"Notice that Pincus claims that his revenue model has made it possible for Zynga to be"profitable for eight straight quarters".   We now know from its IPO filing that this is not true because Zynga lost nearly $53 million for the year ending 2009.   A great example of the successful use of hype (or lies, take your pick) in order to paint a far rosier picture of Zynga so as to not scare off investor's." 

As the saying goes, "Liars lie about numbers, but numbers don't lie."  In short, we are now seeing a pattern of dramatic declines in quarterly bookings and revenues, so its no wonder that Zynga's shares have slid from 14.69 on March 2, 2012 to 7.48 as of today, May 11, 2012.  

Zynga Stock Price As of May 11, 2012 (Click Image To Enlarge)

In a blog post dated December 18, 2012, the day that Zynga finally had its IPO, I said,

"Zynga IPO is a flop, investors expected a pop, but all they got was poop."

 Zynga shares came out of the gate at $10.00 per share, but instead of getting a big "pop" in the market price, they flopped badly, ending the day at $9.50, or 5% below the issuing price.  Not a good result for a startup that had been hyped into the stratosphere by John Doerr of Kleiner Perkins Caufield & Byers.  He said.  

"Zynga is the most-profitable, fastest-growing, and has the happiest customers of any company that Kleiner Perkins has invested in." 

During today’s earnings call, Zynga revealed it had grown to 21 million mobile daily active users, compared to the 12 million DAU it had in Q4 2011.   That 21 million mobile DAUs is rapidly approaching 50% of total DAUs.   However, mobile daily active users historically do not pay for games, purchasing less Facebook Credits that can be used to buy virtual goods, and this will negatively impact Zynga's future revenues and earnings, if the trend continues.  

Zynga is eschewing a repeat of 2011′s game release schedule, which saw user numbers sag because the company launched a majority of new games in the latter half of the year. Zynga released two new web titles and four mobile games this quarter.  Zynga Chief Operating Officer John Schappert revealed a second arcade game is coming next quarter, as are an unspecified number of new mobile titles. Zynga Bingo is also going to receive a marketing push. 

Zynga CEO Mark Pincus said during the April 26, 2012 earnings call.

“As we get better at driving our related cross-promotion on mobile, we should see better efficiencies on customer acquisition on the web as well.” 

Pincus and Schappert were vague on specifics but they did reveal that part of the increase in bookings was due to CastleVille, which showed comparable bookings to those of CityVille from Q1 2011.  Zynga games more than a year old remained fairly strong with bookings around 80 percent of what they were in 2011.

Another major factor behind Zynga’s Q1 2012 revenue boost was the international market. International revenue was up by 50 percent year over year and 8 percent quarter over quarter. This was credited to improved international payment mechanics and improved localization. Zynga’s titles are now available in over 28 countries and in 18 different languages. The company says that its games will receive more region-specific content in the future.

Zynga's attempt to maintain higher year-over-year revenue growth has also increased its expenses. A lot of this has to do with the release of the six new games (two web and for mobile) in Q1 2012 which resulted in higher game development costs and marketing costs related to those games, and costs related to its Asian market expansion. Never mind that Zynga still has a billion in cash and marketable securities from the IPO,  it cannot rest on its laurels.  Zynga must continue to develop new, winning games.   I also have a feeling that Zynga will find the going gets a lot tougher in Asia where local games cater to the cultural tastes of those Asian markets.     

Courtesy of an article dated May 10, 2012 appearing in Seeking Alpha and an article dated March 2, 2012 appearing in Seeking Alpha and an article dated April 26, 2012 appearing in InsideSocialGames

VIRTUAL GOODS SALES HIT $2.3 BILLION IN 2011, BUT GROWTH TO SLOW DOWN IN 2012

Paying for all those virtual tractors and fences on FarmVille ads up. Spending on virtual goods in the U.S. rose 28% to $2.3 billion in 2011, per Visa-owned e-commerce company PlaySpan and Frank N. Magid Associates.

Among consumers, seven in 10 can be classified as gamers. Half of U.S. gamers bought virtual items last year, and one-third of the 600 gamers surveyed overall for the study. The average spent was $64 in 2011. U.S. male gamers were almost twice as likely as their female counterparts to purchase these virtual goods.

Players typically bought virtual goods to be able to advance a level in a game, to have a better in-game experience or create an avatar. Among those who haven’t made purchases, it was because they don’t play games where virtual items are needed or add to the enjoyment of game play.

Nearly half (48%) of gamers that made purchases did so through games played on a console, such as Xbox Live or PlayStation, 42% directly within a game application and 40% from a pre-paid card from a retail store. Only 16% did so through an online store and 13% from a game publisher’s own site.

Among other findings, only 26% have bought virtual goods as gifts, suggesting a bigger opportunity in that area. Key factors affecting purchases included price, the genre of the game, friends’ recommendations, user reviews and if a game can be played with friends.

COMMENTARY:   In a blog post dated August 4, 2011, I reported on a survey by PlaySpan that projected virtual goods sales would exceed $2 billion 2011.  

That projection appears to be deadon. However, according to PlaySpan, casual and social network-based games were the two categories which saw average spending on virtual goods fall. Average spending on casual games fell from $40 to $25 over the same period, while average spending on social network games fell from $50 to $20.  This does not bode well for social gamemaker Zynga which reported it generated $574 million from online games in 2010 when it filed its IPO.  This will also affect Facebook, since it keeps 30% of all virtual goods sales. 

The overall market for virtual goods in the US is headed towards $2.9 billion for 2012, according to the Inside Virtual Goods report. That’s up from $2.3 billion in 2011, and $1.6 billion in 2010.

Virtual goods on Facebook are continuing to comprise more than half of that, going from $835 million in 2010 to $1.2 billion in 2011 to $1.6 billion in 2012.  The gains each year are around $400 million, which means growth is going from 50% down to around 35%. While the report doesn’t break out company-specific numbers publicly, Zynga’s pre-IPO filings indicate it made more than $300 million in Q3 2011. Assuming that number stays around the same, look for Zynga to continue to its historical dominance with about 75% of the Facebook virtual goods market.

Courtesy of an article dated February 29, 2012 appearing in MediaPost Publications Online Media Daily and an article dated December 7, 2011 appearing in TechCrunch

TRANSCENDENZ'S AUGMENTED REALITY GLASSES HELP YOU TAP INTO YOUR INNER SELF AND INFORMS US ABOUT OUR SURROUNDINGS

As difficult as we make it sound, self-improvement can be a straightforward thing. It’s relatively easy to become more fit (diet and exercise) or even to become smarter (read more and attend classes on a topic). But how do you possibly approach making yourself a better person?

For his thesis project, Michaël Harboun, now a designer at Ideo, tackled that question through a concept called Transcendenz.

 

His vision was for an augmented reality interface that wouldn’t just tell you where the nearest burrito joint could be found in the city, but to help you discover something inside of yourself.

Click Images To Enlarge

Harboun writes us. 

“Regular AR applications add a layer of objective data, informing us about our surroundings. They give us an instant answer, so that we immediately know what we see.  Transcendenz doesn’t give answers, it asks questions. It believes in the user’s ability to put the world around him into question, and to not content himself eating instant available data.”

Click Images To Enlarge

The application builds empathy through a mature gamification. It tracks, not just your eyes, but your emotions and actions in the real world. As the user takes actions that are empathetic, they level up. But they’re also constantly challenged by the application to broaden their worldview.

Watch the embedded clip from 6:45 in, and you’ll see Transcendenz alter the worldview of someone who puts out their cigarettes on a tree.  Writes Harboun.  

“By transforming the perception of the user, Transcendenz points out to an invisible philosophy, hidden behind the everyday world.  The application encourages us to leverage our consciousness of things and to transcend what we see.”

Click Images To Enlarge

And in doing so, Transcendenz functions differently from most technology we use in our lives. Rather than ignoring one’s spouse to play Angry Birds, Harboun’s app forces the user out of technology, to be “fully immersed into the present moment.”

Harboun writes.  

“My hope for AR glasses is that it will make people look away from their screens.  My fear is that it will make us see what’s overlaid, and not the underlaid anymore.”

Well put.

Click Image To Enlarge

COMMENTARY:   Thankfully, an AR application and pair of bio-sensory glasses that doesn't try to sell you something or violate your privacy or someone else's.   I love how Transcendenz puts you kinetically, emotionally and physically in better "touch" with the physical world in which you live. It uses input from your mental or kinetic energy to help you balance your emotions, by explaining what you are thinking and how you are reacting to a certain stimuli.   I would love to wear a pair of those cool AR Transcendenz glasses to a party or social gathering to see if what I am feeling emotionally and psychologically actually registers that way using Transcendenz.  This is truly a great way to improve your social skills and keep yourself in a meditative state of mind.  Quite a concept.  I wonder much Transcendenz will cost when it hits the stores.

Courtesy of an article dated February 28, 2012 appearing in Fast Company Design 

WALL STREET TURNS BEARISH ON ZYNGA, STOCK TUMBLES DUE TO POOR Q4 2011 EARNINGS RESULTS AND SLUGGISH PAYING PLAYERS

(Reuters) - Zynga Inc (ZNGA.O) shares fell 7 percent in premarket trade, suggesting investors were wary of the social game maker's weak bookings outlook and expensive valuations, and at least three brokerages downgraded the stock.

A lackluster fourth-quarter showing -- Zynga's first as a publicly traded company -- and expectations of sequentially slowing bookings in the first half of 2012, may rattle bullish industry watchers who have driven up the company's valuations.

Bookings is the metric Zynga uses to measure the cash it gets upfront when people spend money on virtual items in its games such as tractors, houses or poker chips.

Evercore Partners said the company's stock -- trading at 31 times the brokerage's 2013 estimate for earnings before interest taxes depreciation and amortization (EBITDA) -- bears risk, and downgraded it to "under weight" from "equal weight."

The company, which went public in December, trades nearly 67 times forward earnings, compared with the sector average of 12, according to Thomson Reuters data.

"Core game monetization is slowing more rapidly than expected," Macquaries Equities Research said in research note.

Zynga said its games are designed to gain popularity and make money in the longer term, adding that it still has the six-most played games on Facebook.

The owner of the popular Farmville and Cityville games does not disclose the number of its unique payers on Facebook, making it difficult to gauge any possible deceleration trends.

The company's Words with Friends, a Scrabble-like game, was recently in news after actor Alec Baldwin got kicked off an American Airlines flight for playing the game on his iPhone while the plane was parked at the gate.

While filing its IPO last year, Zynga said it gets almost all its revenue from Facebook. Investors are closely watching its strategy to diversify and make money from games on smartphones and tablets.

Analysts, however, remain convinced that Zynga is well positioned for longer-term growth.

"Zynga was one of the key developers that turned Facebook from a relatively passive communications medium to a more active and engaged social platform," Robert W. Baird & Co wrote in a research note, and downgraded the stock.

"While growth has slowed for both Facebook and Zynga, long-term secular shifts in content consumption, along with significant growth opportunities on smart devices from Apple (AAPL.O) and Google (GOOG.O) are too compelling to ignore."

The gamemaker's shares, were trading at $13.42 in trading before the bell. The stock, which has jumped more than 30 percent since its December 16 debut, closed at $14.35 Tuesday on theNasdaq.

COMMENTARY:    In a blog post dated December 15, 2011, I commented on an article by Lou Basenese appearing in Seeking Alpha in which he gave seven reasons to ignore all the hype surrounding Zynga prior to their IPO.   

In a blog post dated December 18, 2011, I commented that Zynga's IPO was a flop, that investors expected a pop, but all they got was poop. It appears that Mr. Basenese's warnings about Zynga were dead on.  Zynga's IPO stock price was $10.00 per share, but it ended its first day of trading at $9.50 or 5% below the issuing price.  This was not a very good performance for a startup that many analysts thought would become an instant hit with investors.  Here's what I said in my post:

"It's obvious that the "Facebook Halo Effect," did not help Zynga very much at the end of the day.  Instead, the market views Zynga's dependency on Facebook as a negative, rather than a positive.  Zynga pays Facebook 30% right off the top for all virtual goods purchased by gameplayers.   This should send a strong signal for other social networks if they are thinking about an IPO."

"Zynga is a hit-driven business, and it has been able to create games that became hits the last two years, but has also incurred very high costs in the process, and this has negatively impacted its earnings as noted above, even though the company has increased revenues significantly on a nine-month basis between September 2010 and September 2011.  That's not a good thing."

"Zynga's revenue model has also been brought into question.  96.7% of its users are freeriders.  Only 3.3% or 7.7 million users out of 227 million total monthly active users pay to play.  Sophisticated investors would undoubtedly question how long you can continue maintain steady growth in revenues when only 3 out of 100 people are actually paying to play Zynga games."

The Facebook Halo Effect Boosts Zynga Stock

On February 1, 2012, after the markets had closed, Facebook filed its S-1 Registration Statement for its IPO with the SEC.  On February 2, 2012, several social media stocks received an immediate pop from the news of Facebook's IPO filing.  Zynga's stock went from $10.60 on February 1, 2012 to $12.385 on February 2, 2012--an increase of 1.785 or 16.84% solely on the news of Facebook's IPO filing, something that I often refer to as the "Facebook Halo Effect."   

The Facebook Halo Effect and "investor fever" over Zynga increased its stock price to an incredible $14.352 at the close of trading on Tuesday, February 14, 2012--an increase of 3.752 or 35.4%.   All of this happened prior to Zynga's earnings call, which did not come until after trading closed.  

Zynga Reports Disappointing Q4 2011 Earnings Call

Late Tuesday, February 14, 2012, Zynga reported its first earnings call as a public company for Q4 2011. Although Zynga Inc (ZNGA.O) reported better than expected Q4 2011 revenue, the social game developer of games like FarmVille and Mafia Wars failed to add new daily players compared with Q3 2011.  Here are a few of the highlights, or if you prefer, lowlights of Zynga's Q4 2011 earnings call report:

• Q4 2011 Revenues:  $311.2 million. Analysts, on average, had expected revenue of $301.08 million, according to Thomson Reuters.
• Q4 2011 Operating Loss:  Net loss of $435 million, or $1.22 cents a share, compared with net income of $42 million, or 5 cents share, a year ago. 
• Q4 2011 Earnings-Per-Share:  Zynga's earnings per share of 5 cents beat analysts' average estimate of 3 cents per share.
• No of Daily Active Users:  54 million in the three months ended December 31, flat from the previous quarter.  The fact that Zynga is not adding new players at a high click each quarter is a concern to investors, analysts said.

Zynga Stock Tumbles On Bad News

Yesterday's earnings call brought sanity to bullish and over-zealous Zynga investors who had been taken in by the Facebook Halo Effect and driven up Zynga's stop price.  As of 9:30 a.m. PST, Zynga's stock price is $12.76 per share--a drop of 1.62 or 11.34% from Tuesday's closing price.   

The above clearly illustrates that Zynga's stock price is not guided by any resemblance to sound business fundamentals or prudent investor judgement, but driven solely by investor hype, speculation and the Facebook Halo Effect, and nothing else.  That's a dangerous combination.  

Wall Street Turns Bearish On Zynga

Most stock analysts have now turned cold on Zynga, reducing the stocks ratings from "buy" or "hold" to "sell."   Seeking Alpha flat-out said, "Stay away from Zynga."  

Here's what 24/7 Wall Street just said about Zynga:

"Zynga Inc. (NASDAQ: ZNGA) is getting shelled after the social gaming company’s first earnings report as a public company.  This sell-off is actually one that is deserved.  We also wonder just how much the earnings and guidance would have had to be to generate another round of buying."

"At issues is that ad revenues basically tripled while its active users grew, but sales were barely up overall from the quarter before.  The company made $37.1 million in adjusted earnings as sales grew 26% on a year-over-year basis to $307 million."

"The biggest issue is that the Facebook halo-effect was the key driver in the recent two weeks.  Before word came out that Facebook was going to formally file for its IPO, this was a $9.50 or so stock and technically a busted IPO because it was under the $10 IPO price.  Before today’s drop of 14% to $12.31, the stock had hit a new high of $14.55 and the market value was nearing the $10 billion mark."

"$10 billion?  So what if ‘social gaming is becoming the new television’ as the company suggested?  Will it have the same revenues from advertisers?  What happens if and when consumers lose their interest in social gaming?  What happens when one of the large game publishing houses overpowers Zynga with a cooler game?  And what happens when investors realize that they effectively have no vote whatsoever with the multi-class share structure, even if the entire floated class is out in the market?"

Could Online Gambling Be Zynga's Savior?

Now we keep hearing that Zynga's savior will be online gambling.   However, only Nevada currently allows online gambling, which is limited to poker.  The state has yet to license a company to run such services.

On January 21, 2012, The Wall Street Journal reported that Zynga was exploring a potential entry into the Internet gambling business, possibly in partnership with another company.  Zynga said demand for online gambling amongs its social game users had motivated it to explore a potential move in the business.

Zynga said in a statement to the media.  

"We know from listening to our players that there's an interest in the real money gambling market.  We're in active conversations with potential partners to better understand and explore this new opportunity."

Zynga's exploration of online gambling comes amid growing belief that individual states will allow some forms of Internet betting. Last month, the Justice Department said no federal law prevents states from creating their own regulations for online gambling.

Major casino companies, such as Caesars Entertainment Inc. and MGM Resorts International, are driving efforts to change federal laws that would create a national system for online poker. Other gambling interests, like Indian tribes and lotteries, are pushing the efforts at the state level

However, most of the changes under consideration would prevent non-gambling companies, like Zynga, from becoming primary license holders. They could, however, become a partner with a license holder under some bills being considered. 

Zynga will be at the mercy of online gambling laws passed by each state, and this will take sometime.  Zynga will also need a suitable licensed gambling partner.  All of this will take time, since the online gambling laws need to be legislated.   Consequently, I don't see Zynga generating much in the form of revenues from online gambling until at least 2013.  Until then, Zynga must concentrate on creating new hit games, increasing paid game participation, increasing sales of virtual goods, and creating new hit games.   

If you were one of the lucky investors who manged to make some money off of Zynga or were able to cut your losses, good for you, next time listen to Tommy.

Courtesy of an article dated February 15, 2012 appearing in Reuters

ZYNGA CEO MARK PINCUS TALKS ABOUT THE IPO, MISTAKES MADE, LESSONS LEARNED, CORPORATE CULTURE AND ONLINE GAMBLING

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

DISTIMO'S MOBILE APP REPORT FOR 2011 IS OUT, APPLE STILL NO 1, ANDROID NO 2, "ANGRY BIRDS" MOST DOWNLOADED APP

APP STORE SIZES

2011 has been a turbulent year for mobile app stores. Nearly all stores showed impressive growth, and all stores (with the exception of the Apple App Store for iPhone) have at least doubled in size over the course of 2011.  Combined, the stores have over one million apps (not necessarily unique) currently available –when the Apple App Store for iPad and the Apple App Store for iPhone are viewed as two separate stores.  The developments are quite interesting in particular for Microsoft who ran two stores this year: one store for the old Windows Mobile 6.x devices, and a new store for Windows Phone 7 devices that launched in November 2010. The old store for Windows Mobile 6.x devices never saw more than 2,500 available apps, and it was not possible to add any new apps after July 15, 2011. The new store for Windows Phone 7 devices grew by more than 400% during 2011 to 35,269 total apps available for download by the end of November 2011.The order of the stores in terms of available apps remained the same across all stores,with the exception of BlackBerry App World which is now slightly larger than the NokiaOvi Store in the US.

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FREE APPS

The Google Android Market is now the largest store for free apps, surpassing the Apple App Store for iPhone in June 2011.  Windows Phone 7 Marketplace passed BlackBerry App World in terms of free apps just a month prior to that in May.
 

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GAME APPS

The games category is the single largest app category in most stores, and also generates the most downloads as well.  Currently,the three largest stores for games are the Apple App Store for iPhone (79,077 games), the Google Android Market (46,045 games), and the Apple App Store for iPad (28,683 games). The ranking order of these three stores in terms of size has remained the same during 2011. 

 

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PROPORTION OF IPHONE FREE APPS GENERATING REVENUES

There has been a significant rise of in-app purchases (IAP) being utilized as a successful business model. The graph below depicts the share of revenue of the 200 highest grossing iPhone apps that are generated by free apps with IAP (freemium apps). This number was just 29% in January, however it rose to its peak height of 53% in September, and grew steadily month-on-month in the months in between. There was a slight decline during October and November, and the freemium model now generates slightly less than half of all revenue again at 48%.

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PROPORTION OF TOP 200 APPS FOR THE IPAD, IPHONE AND ANDROID GENERATING REVENUES IN NOVEMBER 2011

The success of the freemium model isn’t unique to the Apple App Store for iPhone.  Performing the same analysis on the Apple App Store for iPad and the Google Android Market reveals that the freemium model is even more successful on the Google Android Market than it is in the Apple App Store. 65% of the revenue from the highest grossing apps is generated by free apps featuring IAP.

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TOTAL REVENUE GENERATED BY THE TOP 200 GROSSING IPAD, IPHONE AND ANDROID APPS IN NOVEMBER 2011

Despite Android’s growing app market share, the revenue generated in its app store still lags far behind the revenue generated in the Apple App Store. The Apple App Store for iPad generates more than double the revenue of Google Android Market, while the Apple App Store for iPhone generates nearly four times the revenue of Google Android Market.

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MOST DOWNLOADED APP IS ANGRY BIRDS!!

The most downloaded app of 2011 – when looking at the total free and paid download volumes of these matched apps combined – is Angry Birds.   Available in all stores except BlackBerry App World, this is the app that generated by far the most downloads in 2011. Facebook is the runner up, with a native app available for all of the major operating systems.

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COMMENTARY:   I'm amazed how much more revenues iPhone and iPad apps generate over Android apps, considering that there are more Android phones out in the universe.  On the other hand, for some reason, which I could never understand, a higher percentage of iPad and iPhone apps are not free. Jobs has legions of Apple evangelists sold on paying for their apps.  Apple mobile device owners do tend to be more affluent than Android owners, so that this clould help to explain why they don't mind paying. 

Courtesy of the Distimo App Report for the Year 2011

THE 2012 FACEBOOK IPO, BUT HUGE QUESTIONS REMAIN, AND WHY FACEBOOK NEEDS A BIG, NEW SOURCE OF REVENUES

We all know that when Facebook goes public this year, Mark Zuckerberg will become very, very rich. But what else is going on here?

If you haven’t heard, all signs are pointing to a Facebook IPO in 2012. And if you have heard, I bet you know exactly two things about that fact:

1. Mark Zuckerberg will become very, very rich.
2. Facebook is HUGE!

True enough. But let’s look into the whole situation a little more deeply with an infographic created by AccountingDegreeOnline. The first bit isn’t totally surprising--but when you see the numbers laid out, it’s rather breathtaking.  It’s thought that Facebook’s IPO will raise $10 billion and place Facebook’s value at $100 billion. To put that in perspective, only companies such as Visa and GM have ever raised so much in an IPO. And the $100 billion valuation will make Facebook a more valuable company than McDonald’s:

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Now, you might chalk this up to untreated Internet madness, a la 1999. But the thing is, the Facebook IPO becomes more astonishing when you consider the merits of the business. This isn’t like Pets.com. If anything, it’s surprising that the company isn’t thought to be worth more. Just consider: By the end of 2012, Facebook will have signed up more than 1/10th of the human population. The. Human. Population. I’m not sure that any business has ever had such a vast audience of users. Moreover, it will already control 28% of the ads seen online and 1/6th of display-ad revenue in the U.S.:

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Take a step back and consider Facebook’s growth prospects. When you use the service, it’s actually surprising that the ads remain as unobtrusive--and as limited--as they are. It’s not gummed up with blinking exhortations. And the ads they do have seem relatively well targeted. The point I’m trying to make is that Facebook hasn’t even begun to test what it can really do with ads--and I have no doubt there are fleets of designers and programmers busily working all that out as I type. (Sure, it’s 4 a.m. right now in Palo Alto, but you know what? No one ever made a billion dollars by being lazy.)

The business analysts who tout the IPO will all tell you that the biggest risk to Facebook’s business model is continuing growth in their ad business. But that’s not it at all: It’s that they’ll constantly need to fight against their own ad-free history, while trying to make more and more ad money. They have to balance giving us, the audience, a good enough service that we’ll put up with more ads. But it’s up to them to figure out how many ads--and what kind of ads--they want to risk.

Thus, companies such as Facebook and Google are in a position quite unlike any other business out there: In some sense, it’s up to them to determine how big they want to get, and how much money is enough. What a hell of a fortunate position to be in.

COMMENTARY:   In spite of the tremendous hype surrounding Facebook, Mark Zuckerberg, and the mega-IPO scheduled for early 2012, I am not 100% convinced that Facebook is the Holy Grail of online advertising that so many analysts have predicted.  There are many reasons why I say this, but I am not the only one.  The fact of the matter is this: 

• In a blog post dated January 4, 2012, I described in great detail why Facebook is running out of eyeballs, is quickly reaching saturation in many areas of the world, and its growth in users will dramatically slowdown and eventually peak.  Advertisers pay for ads based on the number of impressions, and Facebook's ad impressions will eventually peak, and so will its ad revenues.    
• In a blog post dated March 20, 2011, I explained to you in great detail why the ad-supported revenue model of Facebook (and social networks in general) is deeply flawed and that the social media giant reached a Critical Inflection Point sometime towards the end of 2010, and its growth is no longer exponential, and growth rates will continue to decline until user growth peaks.  The ad-supported revenue model was a "quick and dirty" way for social networks, beginning with Friendster, then MySpace, and now Facebook, to monetize their sites, and has remained relatively unchanged since then.
• In a blog post dated November 27, 2011, I provided some very good reasons why I thought that Facebook would eventually have to charge its users.  Think about it, if Facebook is running out of eyeballs, it's potential for generating advertising revenues is also limited. 

Although Facebook has developed a successful business model, and will generated an estimated $4 billion in ad revenues in 2011, I can't think of many companies with so much of a potential downside.  Facebook is having its IPO when its eyeballs are drying up and its advertising revenues are quickly coming to a peak.  Unless it can gain entry into China, something that is very unlikely, I can't see how it will continue to grow users to push its peak growth into the future.

Facebook can no longer rely strictly on advertising revenues, but must diversify, and will probably use some of that $10 billion it will raise from a successful IPO to make strategic acquisitions that will allow it to rely less on advertising.  

To its credit, Facebook generates 7% of its revenues from social game giant Zynga, which relies exclusively on Facebook for its gamers.   Zynga had its IPO on December 16, 2011, but instead of an expected pop from its $10.00 IPO price, ended the trading day at $9.50.  Analysts blamed Zynga's disappointing IPO on its reliance on Facebook, weakness in its revenue model (only about 3% of its gamers actually pay, the rest of them are freeriders), and a continuing drop in earnings due to high operating expenses and the cost of developing its games.  Zynga pays Facebook 30% for sales of virtual goods, the key source of its revenues, but Zynga has plans to develop its own site, has $1 billion from its IPO to do so, and may cut the cord with Facebook.  Stay tuned for future developments.        

For its part, Facebook has been a failure in generating significant revenues from other sources besides social games. 

• In a blog post dated August 26, 2011, Facebook announced that it had shutdown Facebook Places, its location-based check-in service, effectively turning over the LBS market to foursquare.   In a blog post dated December 5, 2011, Facebook announced that it had acquired Gowalla, a location-based social network.  This acquisition came three months after it shutdown Facebook Places, but Gowalla lags well behind foursquare, and is probably not generating much in revenues, so the reasons for the acquisition remain a mystery.
• In a blog post dated August 29, 2011, Facebook announced that it had shutdown Facebook Deals, its daily deals service, effectively surrendering the daily deals market to industry leaders Groupon, LivingSocial and Google Offers.

Facebook needs a significant new source of revenues with the potential to become a home run, but the only source of revenues with that type of potential is social commerce or f-commerce (short for Facebook commerce).  However, in a blog posts dated July 4, 2011 and July 9, 2011, strong evidence was presented that refutes social commerce may experience the explosive growth that has been predicted.      

I have always been suspicious of startups that don't make anything, and the only thing of value for Facebook is its large user base.  For the last two years, Facebook has been selling "bigness" or the Facebook Halo Effect as I often refer to it, but even large national advertisers are not convinced that Facebook can generate the type of ROI's they can get from traditional advertising.  Many of them have become freeriders, preferring to acquire followers, then when they reach critical mass, rely on WOM to drive engagement and brand loyalty, and if they can generate revenues, its a big plus.  

It is obvious that Facebook must generate big, new sources of revenues to justify the $100 billion valuation predicted after its IPO.  If anyone can tell me where those revenues will be coming from post a comment.  

Courtesy of an article dated January 13, 2012 appearing in Fast Company Design   

EX-PIXAR DESIGNER MOONBOT STUDIOS UNVEILS A NEW IPAD APP TITLED "THE NUMBERLYS," AND ITS A MASTERPIECE

Moonbot Studios, which astounded us with "The Fantastic Flying Books of Morris Lessmore," avoids the sophomore slump with its latest story-app.

I wrote about an iPad app last summer called "The Fantastic Flying Books of Morris Lessmore", which was basically the acme of interactive storytelling on the iPad to date. In November, I visted the company that created it, Moonbot Studios, and saw what they were working on as a follow-up: a story-app called "The Numberlys," about a group of cute misfits who invent the alphabet in a gray, stern world inhabited only by numbers.

The Numberlys App Teaser from Moonbot Studios on Vimeo.

 

It’s better than "Lessmore." A complete mother*$#&ing delight.  Moonbot gave me a preview of the full app, which is available today, and it’s amazing. Better than "Lessmore." A complete mother*$#&ing delight. (Moonbot co-founder William Joyce, who wrote and co-directed the app, swears like a sailor.) People like to compare Moonbot to Pixar, not only because Joyce used to work there, but because their commitment to quality storytelling is just as fierce. Now it looks like they might be following in Pixar’s footsteps as a back-to-back hitmaker, as well.

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"Numberlys" is essentially a bedtime story whose punny prose style and simple interactive games will appeal to very small children. But like the best children’s books, "Numberlys" is stuffed full of so much sumptous art and witty design (Joyce conceived the experience as a stylistic homage to Fritz Lang’s black-and-white sci-fi classic Metropolis, of all things) that parents will end up just as entranced as their kids. There’s even an emotional payoff at the end that made this new dad very nearly tear up.

The story unfolds in a silent-film-esque series of animated vignettes and title cards. Joyce and his co-director, Brandon Oldenburg, wanted to shake up the traditional wide-screen view of most "cinematic" apps, so "Numberlys" only plays in portrait orientation. But that suited Joyce and Oldenburg’s vision for the Numberlys’ vertically emphasized world, which is full of belching smokestacks, heaving pistons, art deco skyscrapers, and of course, the letters of the alphabet themselves. Film buffs will appreciate subtle nods to Metropolis like the glowing rings that surround newly-minted letters of the alphabet. The animation even has a constantly flickering "grain" to it, as if it were shot on film from Fritz Lang’s day.

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Once the plot gets going (five Numberlys revolt against their mechanistic drudgery and sneak off to manufacture each letter of the alphabet, using numeric characters as raw material), the app intercuts a brief, very simple interactive game for each new letter of the alphabet. This creates a momentum that will be very appealing to anyone under the age of five, but I found it surprisingly effective myself--I went through the entire story twice and only very rarely skipped any chapters or games. The games are more like interactive diversions--there’s no way to "lose" them, and most of them are over in a matter of seconds--which is a good thing, because the flow of the story could easily feel too choppy otherwise.

The emotional payoff at the end made this new dad very nearly tear up.

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Still, some games are better than others. I could never really get the hang of (or discern the point of) a game involving springing a fat Numberly on a trampoline over and over again, and unfortunately this dud of a game is one that the app often repeats. (There are a lot of letters in the alphabet--even with clustering letters into groups. "The Numberlys" reprises certain games more often than I expected.) But other games sparkle with narrative and interactive cleverness. "W" was one of my favorites: by frenetically spinning a platter with the letter "V" on it faster and faster, the "V" flickers and doubles on itself to form the "W". It’s easy to imagine a pre-schooler squealing with glee during this particular interlude.

The whole book takes about 15 minutes to get through, and the ending is as pitch-perfect a payoff as any of Pixar’s best. I don’t want to ruin it, but it’s a brilliant bit of design that any parent reading "The Numberlys" alongside their little one at bedtime will truly appreciate. As for the Moonbot crew, they can sleep easy too: "The Numberlys" is a bona fide work of art.

COMMENTARY:  I love the near 3D HD graphics of Numberly's.  It's a Disney-like film in a game app.  Wow!!  That's going to impress a lot of people.   Beats those ridiculous Angry Birds by a country mile.

Courtesy of an article dated January 12, 2012 appearing in Fast Company Design

ZYNGA LAUNCHES NEW HIDDEN OBJECTS SOCIAL GAME "HIDDEN CHRONICLES," COMPETES WITH DISNEY'S "GARDENS OF TIME"

It was a surprise when the top Facebook game of 2011 wasn’t a title from market-leading Zynga. But this year, it has plans to change that.

Today it is launching Hidden Chronicles, the company’s first-ever “hidden objects” game on Facebook.

Zynga's Hiden Chronicles (Click Image To Enlarge)

So far, the casual game genre, which challenges players to find wineglasses or candlesticks in a crowded and messy illustration, has not had a major presence on Facebook.

That is, with one exception: Facebook deemed Gardens of Time by Disney’s Playdom division the most popular game of 2011.

Disney's Playdom Gardens of Time (Click Image To Enlarge)

In many regards, Zynga’s Hidden Chronicles is a copycat of the game or others found on the PC. The launch is important to Zynga since it marks one of the first times it is branching out from creating ’Ville games. Such hits as FarmVille and CityVille laid the foundation for Zynga’s $1 billion public offering in December.

Cara Ely, creative director of Hidden Chronicles, said the category is popular on the computer, but today the games are single-player experiences.

 

Cara Ely, creative director for Hidden Chronicles, shows off the game in an interview with VentureBeat's Dean Takahashi 

She said.  

“Zynga has so much knowledge about social play.  People who already like hidden object games will have this new twist, and then people who have been playing ’Villes will enjoy them if you are a puzzle solver and like that completion-ist feeling.”

The premise of the game is that your Uncle Geoffrey has died under suspicious circumstances, and he’s left behind a number of clues to solve the mystery.

After arriving on the estate, the game feels like a scavenger hunt, where you search the uncle’s home and its grounds, including tree houses or secret gardens that you gain access to over time.

And, because it is a social game, you will need friends for some components of the game.

Challenge your friends to a contest of who can find the most hidden objects in a particular scene within 60 seconds, or earn “reputation points” by interacting with friends to unlock new content and scenes. If you don’t want to interact with friends, you can always pay to unlock these new scenes.

After all, Zynga’s got to have a way to make money.

Ely said the game will be able to live on forever with no final conclusion as to why your uncle died.

She said.  

“We have a lot of story written that goes beyond that. We’ve structured it so you solve one piece, and then you have another avenue to go down.  It’s like a TV series that goes on as long as you have new narrative and story content.”

Ely, who joined Zynga last year, was the creator of the popular Dream Day Wedding series of hidden object games on the PC and worked at Sierra Online and iPlay.

Hidden Chronicles, which is expected to go live on Facebook later this morning, will be available in 15 languages.

COMMENTARY:  It certainly appears that Zynga has a potential winner on their hands, because the new game is loaded with social features.  I do have a bone to pick with Zynga.  Only 3% of their gamers actually pay-for-play.  The rest (97%) are freeriding, not contributing to the bottomline. Let's not forget that Zynga must split the revenues from virtual products with Facebook (Facebook keeps 30%).   Zynga must find a way to increase pay-for-play or attract more advertising or both.

Zynga is no longer a private company, so they must find ways to create predictable and sustainable revenues and increased profitability.  They appear to have gamers locked into their site for hours on end, but the revenues are not sufficient to cover all the bandwidth and overhead expenses to generate the type of earnings to justify their market cap of $6.4 billion.  

Many of their "ville" games are losing monthly average users in huge numbers so Zynga must continue to create new hit games with a lot of stickiness if they are to continue to grow revenues and profits, otherwise their business model will begin to crack.

Courtesy of an article dated January 4, 2012 appearing in All Things Digital 

READWRITEWEB'S "TOP 10 STARTUPS FOR 2011" REVEALS SOME COOL INTERNET AND MOBILE APPS, BUT WHICH ONES ARE THE WINNERS?

What happened to startups in 2011? E-commerce and mobile payments continued to grow, and group buying startup Groupon went public. Facebook, the biggest social network around, expanded in a huge way, announcing Timeline, frictionless sharing and a settlement (finally) with the FTC. It also swallowed up many promising startups, including group messaging service Beluga, social network-enhancing service Friend.lyand software company WhoGlue.

The mixing of social gaming and mobile payments, social network alternatives to Facebook, consumer cloud storage and apps that actually make you feel productive (read: not like you're just wasting more time online) came out on top as just a few of the most important startups of this year.

This year's top 10 startups list is a combination of companies that launched in 2011, and others that gained considerable attention. We chose these startups based on how they've changed or disrupted their niches and how they've influenced trends this year and for the year to come. They are listed in no particular order. Take a look after the jump.

Fab.com: Social Shopping That Works

Fab.com wasn't always as glamorous as it is today. The site first launched in April 2010 as Fabulis.com as a "cross between Facebook and Yelp" specifically designed for gay male consumers. Yet by February 2011, the site had come to a serious halt with 130,000 members, only 30,000 of which were active. Co-founders Jason Goldberg and Bradford Shellhammer decided to trash it and start over, retaining only the social graph and a flash sales feature that had already been working quite well called "Gay Deal of the Day." In the wake of total mainstreamification of the gay market - Glee, Lady Gaga, gay marriage becoming legal in New York and Don't Ask Don't Tell finally being repealed - the need for gay niche sites was declining. Instead of closing down the site for good, Goldberg and Shellhammer decided to reinvent it as Fab.com, a flash sales site aimed at the design-conscious shopper (who may or may not be gay and male). The experiment worked.

By September 2011, Forbes reported that member numbers were up to 600,000 and sales were in the six-figure range. Shellhammer handpicks every product that is sold on the site. It doesn't rely on email blasts or fatigue-inducing daily deals. And unlike other flash sales sites, merchants who sell on Fab.com don't lose money on their products.

To make the e-commerce experience more social, Fab.com launched its Live Feed, which aggregates everything that the site's users are buying, liking, tweeting and sharing about on the Web. The new feature is opt-in, meaning that Fab users don't one day wake up and realize that everyone in their network knows their purchasing habits. As I said in my 2012 predictions post, this social networking-turned-flash sales site will continue to grow. Fab.com's only real competitor in the flash sales market is Gilt Groupe.

Dwolla: Mobile Payments That Act Like Cash

Apparently Des Moines, Iowa, is the mobile payments capital of the U.S. It is also the home of mobile payments platform Dwolla, which has been on the RWW radar this year. Here is how it works: Sign up for Dwolla, load up your account and then head over to a retailer that's using Dwolla for mobile payments. The company says it is working on partnerships with banks and financial institutions so that money can go right from user's bank account to the retailer.

Dwolla sees itself more like Visa than a PayPal type of mobile payments solution, except it uses cash instead of credit. Its main competitor is Square, which offers Square Card Case, except that relies on a user's smartphone and the retailer's iPad cash registers. Dwolla is much simpler.

Users benefit from Dwolla's location and social features, and that it's basically digital cash rather than credit-based money. In that way, Dwolla acts like cash in your wallet, except it's digital and your wallet is your smartphone. And at the end of the day, Dwolla wants to partner with retailers to make this concept work. Its "Grid," which launched back in June, works like Facebook Connect for payments - a user's personal information is stored on Dwolla, not the merchant's servers. If a third-party app wants to connect to Dwolla, it has to first ask permission just like Facebook Connect. That's one way Dwolla makes users feel more in control of their accounts, which are also based entirely on cash. Dwolla transactions are 25 cents regardless of the amount unless it is under than $10, in which case it's completely free. PayPal, on the other hand, always charges 30 cents per transaction plus 2.9% of the transaction.

Zaarly: Mobile Local Commerce Comes To Your Neighborhood

Zaarly is one of the few startups on our list that did in fact launch this year. It launched in May 2011, positioning itself as a mix between Craigslist "For Sale" section and an online auction house. To use it, sign up for a Zaarly account, post what it is you want to buy and how much you're willing to pay, and then sit back and wait for folks to submit bids. The kicker here is that you select the time frame for the product you want, and the distance you're willing to travel. This brings a more instantaneous element into the entire mobile local commerce experience. Zaarly shares your request to its company Facebook and Twitter pages in addition to the web and mobile versions of the site. After enough bids come in and the buyer is satisfied, they pick one and either pay with cash or the Zaarly integrated payment system.

Whereas EBay is entirely bidding based, Zaarly acts more like the local commerce facilitator. Zaarly users don't need to limit themselves to stuff, per se. They can also post about errands they need done and tasks they want someone else to do for them, from "delivering a candle" to "finding an indie music expert to make me feel cool again." The company raised $1 million in its seed round from investors such as Ashton Kutcher, Ron Conway, Paul Buchheit and Chicago's Lightbank, which also backed Groupon. In late October, it raised $14.1 million from Kleiner Perkins and Sands Capital Ventures, just to name a few.

BankSimple Finally Launches, Rebrands Itself As Just Plain "Simple"

Web-native bank BankSimple said it would launch in 2010, but waited until nearly mid-way through 2011 to send its social Web application out into the world. The idea behind BankSimple is simple: Create a Web-based bank that let users deposit checks by photographing them with its mobile app. Make cash withdrawals from ATMs anywhere without the obnoxious fees. Receive recommendations and value-added services based on the private data that you provide.

While the "location optional" feel of BankSimple seemed great, in the wake of Occupy Wall Street and people transitioning back to local credit unions, the idea of putting all of your money into the cloud felt a bit less appealing. The service finally launched in late September, but raised concerns about the security and potential sale of customer data. In November, BankSimple rebranded to just "Simple" and officially opened for business. It is not actually a bank, but it does work with FDIC-insured banks that handle a user's money.

Path: If You're Serious About Not Being On Facebook

In the second to last month of 2010, former Facebook Platform Manager Dave Morin, Napster Co-Founder Shawn Fanning and quite a few star investors launched Path.com, the social network that isn't about size, popularity or social status. Friend lists are small and personal. Path notifies you immediately when someone looks at a photo of something you post. It is essentially a "path" of your life as you go, which is essentially what Facebook Timeline wants to be. Except on Path, things stay small. The company calls itself an app that helps you "share life with the ones you love" by streaming your life, taking you on one big ego trip.

As Jon Mitchell wrote in his smartly titled post "Path, Timeline and Worship of the Self," the big difference between Path and Facebook Timeline is that Path is closed, though you can choose to syndicate your content to Facebook or Twitter. Some have said that Path is what Facebook should be, a space for real friends not thousands of Facebook "friends" that you've met twice. In the wake of social Web overload, could Path be the way to bring some balance to your socially networked life?

Pinterest: Start Pinning Pretty Pictures And Forget About Socializing 

2011 was a big year for visual social bookmarking site Pinterest, which is growing at rapid speed. It launched in March 2010. During the week ending December 17, the site received 11 million visits, which is 40 times what it received six months prior. We first wrote about it in September 2011 just as it was gaining speed on the social Web. The concept is quite simple: Users sign up for the site and then add the Pinterest bookmarklet to the browser. Find an image on the web and then "pin it" to the site based on category and a brief description. Users with the iPhone app can snap a photo and do the same thing. Pinterest's user interface is wholly visual. Sites like Delicious and Q&A social network Quora are starting to look like Pinterest, too. Ben Silbermann, a West Des Moines native and the CEO of Pinterest, noted that the first people to understand and use the site were women in the Midwest. Pinterest is growing larger everyday. Don't be surprised if you see a steady stream of email invites continuing well into the new year.

SCVNGR: The Gamification Of Location-Based Commerce

We've been keeping a close eye on SCVNGR since 2010. A Google Ventures-backed mobile location startup launched in 2010, initially vowed to beat Facebook Places. The now 22-year-old founder Seth Priebatsch launched SCVNGR as the game layer on location. Initially, it was a consumer product, but has since changed the mobile payments game all together with its game dynamics. Earlier this year it launched LevelUp, a platform that brought together gameification and daily deals, allowing users to receive better deals so long as they keep using the system and unlock levels with merchants as they go. The LevelUp app gives its users a personalized QR code that ties to debit/credit cards that are already in the system, but not on the device itself. Bringing together mobile payments to location-based games is unique from both Foursquare and the now-defunct Gowalla. We'll keep a close eye on SCVNGR in the coming year.

Evernote: How To Organize Your Life

Evernote CEO Phil Libin said that only 13% of its users had the Evernote Web version, which indicates one thing and one thing only: It's all about the app. Initially only a product used by professionals, Evernote has expanded to many new users, including students. Evernote added ways to share with individuals over Facebook and email, the former of which felt pretty slow in coming. Evernote made its Windows app more social, updated its Chrome extension for better web clipping, added audio for Macs and greatly improved its Android app. When it scored $50 million in new funding from Sequoia Capital, Libin boldly declared that the company would be around for another 100 years. Evernote updated its iOS app with rich text editing within notes, mobile access to shared notebooks, search features and a new way to look the app using a passcode.

Everything seemed to be going well for Evernote this year until the introduction of its Evernote Hello app, which is supposed to help users remember people they meet in real life by taking their picture. Unfortunately, it's only available for iOS and it assumes that the user is willing to hand over his or her phone to a stranger. ReadWriteWeb's Joe Brockmeier notes that this could be awesome, if "Evernote is using Hello as a prelude to acing contact management features into Evernote." If it does, this could be a great way to manage contacts. Even better, it could collaborate with LinkedIn's CardMuncher iPhone app to sync everything up. Next up, Evernote wants to conquer the world of "Read Later" apps; it just added its "Clearly" clean-reading extension to Firefox. We named Evernote one of the top 10 consumer Web products of 2011. It is certainly one to watch in 2012.

Dropbox: Consumer Cloud File Sharing At Its Best

Last but not least is Dropbox. It is a concept so simple that you'd think someone else would have thought of it sooner. Basically, Dropbox is a folder that syncs to the Internet, and allows for super easy file sharing between users. Gone are the days of YouSendIt megafiles. Just go for Dropbox. BusinessInsider named it the world's 5th most valuable startup, but is it? A complaint against Dropbox was filed with the FTC, stating that Dropbox misled users about its security and privacy, which is sure to scare any startup. But despite this little roadblock, it has nailed down its place as a key player in the consumer cloud right alongside iCloud.

COMMENTARY:   All excellent choices for Top 10 startups for 2011.  I have already written about or used three of them:  Path, SCVNGR and Zaarly.

• Zaarly - I loved using Zaarly.  I was looking for something, posted what I wanted, and within just a few minutes had two responses.  Checkout my blog post dated November 28, 2011.   Watchout Craigslist.
• Path - I originally discovered Path in 2010 and in a blog post dated November 15, 2010, and found their concept of a mobile social network limited to only 50 friends a bit limiting.  I didn't think much about Path's business concept which I felt was more philosophically-based, non-sensical, didn't offer much in terms of features, and placing a limit of 50 close friends would limit their growth.  In a blog post dated February 2, 2011, I reported that Path had raised $8.5 million in venture capital from Kleiner Perkins Caufield & Byers. Still, I didn't see the need they were filling in the marketplace.  I wrote:  "John Doerr, if by the remotest chance you read my blog post, please contact me at your earliest convenience and explain to me why you invested $8.5 million into Path.  Thanks in advance."  Well, it looks like I was right about Path, because in a blog post dated December 1, 2011, I announced that Path had reinvinted itself into a "Smart Journal," that puts your news stream announcements on auto-pilot based on what you do and where you go during the day or night.  Now you can add up to 150 friends. Path still remains a lightweight, mobile-only, private social network (150 friend limit), but with added features making it more fun for its users.  They now have one million users, but I wonder how many of them are truly active, and what's their strategy to monetize the site.   Time will only tell, but let's hope that Path co-founders Morin and Mierau are on the right Path.      
• SCVNGR - In a blog post dated January 5, 2011, I wrote:  "SCVNGR has a few similarities to foursquare, but that's where the similarity ends.  SCVNGR is a gaming platform, that allows merchants, museums, schools, clubs, etc. to create their own unique games called Challenges and Treks that earn points towards Rewards.  This makes the user experience a lot more fun, interactive and varied.  User's never know what to expect next because merchants have full control over the games they create, they can add as many games as they wish, and often as they wish to keep things fresh and interesting for users."   SCVNGR founder and Princeton dropout Seth Priebatsch says he is "building game dynamics on top of the world," replacing social networks and loyalty programs, which he considers out-of-fashion and not very good. I like the business concept of a social network that uses game dynamics to effect individual behaviors.  Merchants can create their own games in the form of "challenges."  If you complete the challenge you win.  Stupid things that Millennials and teens are likely to do, "take a picture of a drunk sleeping on a sidewalk," for instance and you win a free Coke.  Anyway, there's no end to these games, and this goofy kid named Seth just might be on to something, but we will just have to see if he can change the world.  

Courtesy of an article dated December 23, 2011 appearing in ReadWriteWeb