ZNGA down 35% on surprise loss.
blogs.wsj.com
blogs.wsj.com
I've heard from a friend in the gambling industry (which is still legal and thriving outside the US), that it's all a market: There are "affiliates", which can provide you with the right kind of cusotmers, with an average lifetime value of (say) $1500 to you (if you keep them engaged over 6 months and don't piss them off). The "affiliate" would get paid half of that in the long run, or $200 one-time-fee.
There are multiple buyers, multiple sellers, and relationships play a big part, so it's not really efficient, but it is not too far off.
I wouldn't be surprised if that's the case for Zynga-esqe customers as well, although I have no one to verify that with. Alternatively, Zynga might be in the business of bringing in the customers themselves. Either way, it costs a lot of money to bring in a customer who spends money. The same order of magnitude, in an efficient market.
I think it would be tough to build a profitable business spending that much for something so basic.
I suspect that Zynga IPO'd near the top of their possible revenue and without the ability to constantly acquire new users and/or re-engage previous users who have moved past spending money in-game they are going to decline over time. Even if they establish a stasis between loss of user revenue vs new revenue their share price will have to drop since the P/E multiplier would be that of a matured company rather than a growth stock. Share price would be discounted accordingly.
It is an issue for companies that do a lot of buyouts, especially if those buyouts are at high prices and the purchased assets do not perform as well as expected. I do not have time to explain in depth, but to put it simply -- when you buy a company you initially get to pretend that it is worth the purchase price for accounting purposes. But, later on, accountants have to evaluate how the purchased assets perform and record a loss if they are not as valuable as initially recorded.
This is often a reason losses appear for companies with positive cash flow (I believe Zynga has a positive cash flow). The issue appeared in the recent Microsoft earnings as well.
This is all explained better here: http://www.forbes.com/sites/terokuittinen/2012/07/25/oh-zyng...
But as far as Zynga goes, I see these "social games" as largely parasitic and should be regulated in much the same way that gambling is for much the same reasons. Zynga is struggling in a world where such gamers are going increasingly mobile.
Zynga is a proxy for Facebook because Facebook's near-term revenue sources are essentially:
1. Facebook credits; and
2. Display advertising.
(1) explains the correlation with Zynga. Apple is really drinking Facebook's milkshake here.
And I remain skeptical about the value of (2). I continue to believe that people's behaviour builds a better profile of what they want than what they tell you (ie look at what they do rather than listen to what they say). Facebook profiles reflect the human predilection for lying--to oneself and to others--about who they are and who they appear to be.
Don't get me wrong: Facebook could be a valuable display ad property. That just doesn't, by itself, make a $100B company.
You can count me as one of those that'll dance on the grave of Zynga however. The same goes for Groupon.
EDIT: regarding "parasitic", I refer you to Zynga's notion of "whales" [3] [4]. As much as Zynga might publicly state that these people might just be rich, I think they well know they're preying on those who are largely without self-control, intentionally cultivating addictive behaviour.
Some are OK with this. I am not. I see this as no different to encouraging gambling or drug addicts. YMMV.
[1]: http://online.wsj.com/article_email/SB1000142405297020462190...
[2]: http://www.businessweek.com/technology/silicon-valley-wakes-...
[3]: http://articles.businessinsider.com/2012-02-06/tech/31028725...
[4]: http://articles.businessinsider.com/2012-03-05/tech/31123148...
Do you mean to say "addictive" or do you really mean parasitic?
Both "social games" and "gambling" are addictive. In both you can loose money.
But there are other things that are addictive that you can loose money in as well (stamp collecting, art collecting, buying and building model helicopters (great fun btw)).
Where do you draw the line with this?
In any case if you did mean parasitic could you explain further?
Pushing into actual gambling is going to be a tough fight.
But the truth is companies make many products to separate "addicts" from their money. Women's clothing, electronics, fancy cars, women's shoes. Or take QVC or HSN. You don't think that the nature of business in general (or food marketing I mean the list is endless) is engineered to separate people from their money? (Food obviously is really addicting no question about that).
All off these things share the same thing in common. They engineered and perfected to get you to spend money or something that gives you enjoyment. (It's not food though it's a certain type of food. Nobody is getting addicted to broccoli or boiled potatoes. Fried chicken or Lay's potato chips or things with MSG? Very possibly.
Obviously not every example I've given has the same degree of addiction.
KFC does not seek to prey on the (hypothetical) few who are so addicted to fried chicken that they lose their families, sell their valuables, lose their careers, and sell their bodies to get another fix. They "prey" on people who like their product.
Real addiction (not your perverted sense of "addiction" being merely liking something intensely) is a hypothetical side effect of the businesses you give as examples. For the gambling industry and companies like Zynga, it is the business model.
[1] http://www.insidemobileapps.com/2012/05/08/how-japans-social...
Zynga is in the best position to profit from the rise of social/casual gaming. It may take 10 years but they could quietly grow into the behemoth of gaming the way that Amazon did in shopping.
Well, that's a terrible strategy if that's what he's doing. Zynga has almost been entirely dependent on acquisition throughout their history in order to grow their gaming lineup. Without a strong stock, they won't be able to make those deals without paying out cash. They have a bunch of cash right now, but that's only sustainable for so long for them.
Zynga, in comparison, does not. A 10-person team can execute just as well as their behemoth of a company, and that makes their market a hell of a lot more competitive than online retail.
> "Zynga is in the best position to profit from the rise of social/casual gaming. "
Zynga is not casual gaming. PopCap is casual gaming. Nintendo is casual gaming. Rovio is casual gaming. Zynga is gambling under a thin veneer. Zynga is "social gaming" in the way we've redefined it in the last couple of years.
And even there, I'd argue the "rise" of social gaming is already behind us. Remember when everyone was playing Farmville? Like, everyone. Now, it's completely dropped off the mainstream consciousness. Sure, they have plenty of players still, but it's a sharp decline in mindshare from just two years ago.
The world had its turn at the "glorified slot machine" formula, and most people have moved on. I heartily argue that Zynga's best days are already behind them, short of pivoting into a wildly different formula for social gaming.
I must be really out of touch. Don't know anybody who plays or has played Farmville.
It just got old. You can't spend that kind of time on a single game forever, and since a significant part of its value was social, once friends stopped playing, everyone stopped playing.
They were right to buy Draw Something and WWF, because that is truly what everyone is now playing. But that's all it is—that's just what they're playing right now. Unless they can innovate and come up with or buy a new concept and monetize on it quickly, they're truly screwed. The popularity cycles of these things are measured in weeks or months at most. And it's hard to keep doing the same thing over and over again—it's not a business model I would bet on. The stock price reflects my opinions quite nicely here.
There's always another hot game trend. It's Zynga's job to catch it.
This is out of their current market cap of ~2.5B. Facebook down 7% after hours too. Honestly looks like an over-reaction that shows investor worries about new business models.
Dangerous time trying to exit a social gaming company methinks.
Alternatively, one could argue "hey, I knew that a large loss was possible, but consider that a large unexpected gain was also possible, so the price I paid last week as fair". In any case, the loss was not certain.