Zynga falters in debut, sheds doubt on IPO market
reuters.com
reuters.com
"Zynga's near $9 billion valuation is less than videogame maker Activision Blizzard Inc's $13.6 billion and higher than Electronic Arts Inc's $6.7 billion. In the last four quarters, Activision and Electronic Arts generated more revenue than Zynga."
Activision just brought in $1 billion for one game, and EA Just sold 10 million of it's flagship title, while both their markets are expanding.
I think the value of social network based games has been somewhat inflated.
(I don't know the numbers behind what Zynga is doing well enough to make any judgement on their IPO in general)
RIM was financially extremely successful for years, even though they were no longer building competitive products. It takes time for the books to catch up to reality.
Looking at Zynga's products, and looking at Activision's products, I know who my money is on for still existing in five years. The only thing I hear about Zynga outside of startup-IPO talk is about people quitting their games. Social gaming, in its current incarnation (that dastardly, insidious, vampiric incarnation) experienced a surge of novel popularity, and is quickly fading.
Contrast with Activision (and EA, and any of the major publishers) who seem to be selling more and more copies and gathering more and more fans with every iteration of their major franchises.
One company stands atop products with increasing popularity and mass-market appeal. The other has ridden past the highs of a fad and is on a slow spiral to irrelevancy.
Who else here feels like there are parallels to be drawn between this and Groupon? Companies past their prime, products with dubious futures... and overall widely criticized by industry insiders for being poor bets. Yet IPOed anyways, all smelling like just a way for people to cash out while they still can.
They take a long time to release a game. I'm still waiting for Diablo 3. It's a long wait but it will probably be awesome.
Generally I'd agree. Although you get companies like Blizzard who (counter to usual advice) seem to put all their eggs in a couple of baskets, and other companies spread themselves way too thin. Titus' destruction of Interplay and Black Isles speaks of this; I don't think anyone has a clue of why Titus managed to pitch a profitable company into the dirt inside months.
Although again it speaks worlds that one IP (Fallout) was of enough value to resurrect a company from the brink of bankruptcy.
If you're interested; Modern Warfare 2 cost around $200 million including marketing and has brought in around $1 billion. Not sure how much MW3 cost but it's bringing in even more than MW2.
The flip side to this is that Activision and EA's franchises are a lot more protectable. Put it this way, 5 guys in a garage (or more importantly 100 guys in 20 garages) aren't likely making the next Modern Warfare or WOW. But they very well could make the next Farmville.
I think it sheds doubt on Zynga.
But it doesn't necessarily shed doubt on Zynga either. What happened here is not that the IPO failed, it's "only" that the price went down from the initial offer. Predicting a "good" initial price is hard. I think people commenting here aren't taking that into account.
Besides, I bet every pre-IPO investor is still making a lot of money on this.
They could have priced it 40% lower, and seen a big runup. But this way the company gets more working capital. That's good.
Maybe that's a positive consequence of Zynga's CEO's need to hang on to so much control and equity.
I'm very skeptical that all participants of this IPO, from the VCs to the CEO and board to the underwriter, weren't on the same page regarding how the system works and how IPOs work in this system.
You could say that this indicates that the bankers did a good job at maximizing the value for the company, and not leaving money on the table for an opening jump in price.
To put it nicely, Zynga or anyone else in their shoes, doesn't really decide how much money is "left on the table." The adults are in the room, and they are making the decisions.
Zynga didn't really "pop" like it was set up to. The banks who had rigged the horse race to be a surefire bet, watched their horse break a leg around the first turn. Sure they still made some money, but nobody involved in inking the deal is looking forward to going into work on Monday.
Investment bank clients are gonna be pissed that their P/L is already negative, day one, because of Pincus offloading.
"Empires & Allies, which was launched in June 2011, peaked soon after its launch at about 48 million monthly active users and has seen a big decline since. Currently, it has around 18 million monthly active users."
As andrewfelix said, none of the games Zynga makes has the same lasting potential as World of Warcraft or Call of Duty. When each new COD title is released, a large mass of gamers shift from one title to the next. There isn't the same transition for Zynga, so none of the same virality.
Financially, this needs to be adjusted for cost of production. I'll go out on a limb and say that a Call of Duty costs vastly more to produce than Words With Friends. It's entirely possible that launching 4 titles annually, where each drops off to 18 million users is a good business. In another genre, id Software was able to make a good business releasing essentially a single title every 2-4 years, targeted at a small subset of male computer nerds. So comparing e.g. WoW to Words with Friends may not be a valid direct comparison.
Without making a big judgement about Zynga one way or the other, I can say that the social/Facebook aspect is just about distribution of their games. That's just the channel, which also happens to be a good buzzword for pricing the IPO at the top of the range. Zynga's business is casual games, which has been a good business for quite some time. Remember all the pre-Facebook articules on how casual gaming is letting companies make money by including women in gaming? The Sims was often cited in this genre of coverage. But again, I'd put hard money down that The Sims cost vastly more to produce than Words With Friends.
I'm not saying Zynga is a clear winner, but what I am saying is, they are not a clear loser.
Zynga, to me, is like Groupon. Businesses with no clear foundation. Investing in them is like investing in tulips in Holland in the 1630's.
I feel that if Facebook goes public, that will be successful. They offer something very real, in connecting hundreds of millions of people and, eventually, billions. If you're looking at growing markets, there's at least 3-4 billion more on the way in the next few decades. There's lots of ways to build businesses around that.
Myspace would never have been successful in an IPO. On the surface, they seem like they did the same thing. But the focus of Myspace was always wrong. They weren't really about connecting people at the core. Facebook has been.
Overall you seem very down on Zynga and Groupon. Note that they have both IPO'd and have far from tanked. They are both in business with no apparent sign of bankruptcy etc.
You make them look bad by comparing them to the biggest tech successes(such as Google). The thing is, you can make vast majority of companies look bad in comparison to Google. But that misses an important point about public markets: there is plenty of room for non-googles in the stock market.
It's not about bankruptcy. As you say, both Groupon and Zynga will likely continue as profitable businesses for the foreseeable future. But the IPO valuation isn't determined by their ability to stay in business; it's based off their ability to grow. The P/E ratio is close to 80 (Google's is ~20). That means the company is expected to increase earnings dramatically. Do you see that happening? All the data looks like they're plateauing or even trending down. Unless they have something innovative in the pipe, the stock isn't worth the money.
I think you are right, but for the wrong reasons. Facebook will ultimately be only marginally profitable for the same reasons as Zynga. I value Facebook at $20B.
But, yeah, overall it's not really surprising. I'm a reasonably young man, but I don't recall another IPO with so much hype and disdain over the company behind it. True, they're printing money at the moment, but that's slowing. The obsession with "social gaming" will not disappear, but it will diminish. No one knows what will happen with Zynga's relationship to Facebook. Combine all that with the fact that Mr. Pincus doesn't come off as a very likable guy but still controls the company, and, well...
The clear question is how closely Zynga's and Facebook's fates are tied. There is no doubt that Zynga's social gaming really fueled Facebook's expansion in the past several years.
If Facebook's valuation is based on continued exponential growth over their ability monetize their existing base, the foundation is not solid... Zynga's faltering IPO in that case would just be a leading indicator.