Zynga earnings miss, FB also falling | Hacker News Reader

Zynga earnings miss, FB also falling

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118 pointsveyron43 comments

This was a very well written comment on ZNGA nearly 2 months earlier : http://news.ycombinator.com/item?id=4101906 I kept it in my bookmarks to go back to.

The essence is that Zynga makes its revenue selling fake stuff, and the size of its market for its stuff is its users, and if they lose users their 'value' has to go down because their total available market got smaller.

This struck me as potentially a very durable way of measuring value for 'information goods' type businesses. I don't see anything in Zynga's latest results to contradict this analysis.

This struck me as potentially a very durable way of measuring value for 'information goods' type businesses

Not to sound snarky, but was there ever another way?

Not snarky at all, there are lots of ways you might choose to measure information goods. One would be to apply a loaded cost model to a product and then figure out gross margins on units. You can could equate product releases to inventory 'turns' and then craft a valuation factor which develops some sort of freshness metric. These all toy with the question of whether the user population is an independent or dependent variable in the valuation. If the user population is strongly influenced the rate of new game introduction for example, you would discount a decline of current users against the value created by the new titles. So in that case freshness would be the valuation metric not user population. Or you could say the population of casual game users is fixed, and the only ones who would consider a new Zynga game already have a relationship with the company (independent value). So if people stop playing Zynga games then have they stopped being casual gamers ?

I think there is a lot of new territory here that is just being explored now.

Ah, so that must be how they come up with billion dollar valuations for photo apps...

Chuck I read very smart comment as well, although cannot point to the source now.

It basically said that you cannot look at it as "selling fake stuff", but rather look as "selling something users like". This approach, I think, made Zynga (at least initially) successful where others couldnt believe you would spend money on "buying fake stuff".

Same way you can say about many other things. Going to the cinema. Its fake. You can't eat the picture, you can't take it with you, you cannot even record it for later. You pay for the ticket and that ticket buys you pleasure and happiness for 90 minutes, hopefully. But other than that, 90 minutes later you have nothing. Once could say: this is fake.

Therefore, people that buy "fake" pigs and harvest "fake" fields, would still pay real money for doing so, because Zynga made it look and feel so great that the result (pleasure) is worth paying real money.

The true reason why Zynga is falling through cracks, I believe, is because having fake farms that you pay with real money was a fashionable moment; something cool to do, but at some point, people got tired and it stopped being popular/trendy. That's it. Now its up to Zynga to figure whether they can keep users busy some other ways (and spend money), or they won't until they get delisted from Nasdaq and subsequently file for Chapter 11.

I believe in the latter.

I use the term 'fake' here in the context of a product made entirely out of information, and your cinema example is a good one. The experience is the sale, not the asset. That said, the other company I'm watching in this space is Blizzard which recently opened up their real money 'auctions' for items in Diablo III. This legitimizes what has been an underground industry for years and recognizes that there is some business value in trading "products" made out of bits instead of materials. Unlike Zynga the Blizzard scheme has users selling to users and Blizzard just takes a percentage. If the model generates any serious revenue at all for Blizzard I would expect Zynga to follow suit, allowing Farmville users whose cow births a gold medal calf or something to trade that for Zyngian currency or even real money. These businesses have to be careful not to create an actual currency because the government will shut that down, but trading virtual goods has so far passed muster on that score.[1]

That said, the analysis I've seen on Zynga games relates the pleasure not from the virtual farming, so much as the chance to get more out than you put in (the gambling rush as it is known in Las Vegas). You plant your farm and you get a golden bean or something that is now 'valuable' as opposed to all those other times you planted and got regular beans. Its a powerful tool, wielded well by Zynga and others.

[1] You will know you are trouble when your customer wants to pay you with rare gear from Diablo or extra egg laying chickens or something.

"I use the term 'fake' here in the context of a product made entirely out of information, and your cinema example is a good one."

I understand the points being made here but using something like cinema isn't the best thing when you think about it.

The reason is cinema has been around a long time. It's something that started at a different time and also you are doing it the presence of other people and it's a cultural thing.

Things that are legacy are different in people's minds. So using it to either make or break an argument as to human behavior can be problematic.

You could use, as an example, people's behavior with attending sporting events pointing to why people spend money to see a team win. And then why they will or will not do "x" activity. But as we all know the chance of starting a new sports league and getting the same type of attendance and devotion simply hasn't and most likely won't happen. (Professional soccer in the US is an example. It's big in the rest of the world but it doesn't make the nightly news in the US and there is very little attention payed to it relative to Football, Baseball, Ice Hockey, Basketball. And even Ice Hockey is much bigger in Canada.)

So you could say "this would work because look what people do with respect to Football" or "this wouldn't work because look what people do with Football" and you are comparing something that has a huge advantage because it's so entrenched in the way we all think at this point. (And High School Football in small towns vs. big cities even bigger difference.)

I enjoyed Zynga games for a while, but there was a change at some point along the line where you could no longer play the game as it was designed without spending money. That's when I stopped playing.

It's fine to have the spend-money parts as fun add-ons. I might even spend a dollar or two here or there on such things.

But I will not play a game that tries to hook me in for free but then requires me to purchase pieces of it just to play it as it is designed.

That's a tricky line, of course. I'll play WoW sometimes, and I pay for that. But I'm not paying real money to give my character some spell that's required for basic play. For a funny hat or a cool mount (that's functionally the same as a free one), sure.

Greed, for lack of a better word, killed Zynga. They pushed it too far.

I think this captures a very common sentiment. Certainly folks I know have expressed it as well, which is that its one thing to have 'bonus' items cost real money but its another thing entirely to feel 'duped' into investing in something without knowing the costs. Its a challenging line in the freemium world because on the one hand you can 'dial in the amount of money you want' and on the other hand folks defect. There is an interesting corollary in taxation [1].

With Blizzard, one wonders if they will begin to compete with their customers by creating and then selling through their auction system rare or unique, and by definition game changing, items. The temptation will always be there of course, a company has to choose not to step over that line.

[1] I worry about using that example because it sounds like a troll, it is not.

Zynga has like $1.6B in cash/equivalents. It's gonna take a long long long time to "file for Chapter 11".

(http://www.marketwatch.com/investing/stock/znga/financials/b...)

A few more OMGPOPs and they'll get there faster!

I wonder what the cash/stock ratio was for this acquisition.

I agree with you. Numbers of DS falling and it seems like even almighty Zynga cannot fix it.

Shameless plug: couple months ago I built an "adult" version that got little traction but nothing significant, and since I am not a marketing wiz, but a simple programmer, it ended up here: https://flippa.com/2765466

A problem with some 'viral' models is that eventually the herd develops an immunity.

Brilliant.

Some are immune prior, some become immune, and others will always get sick...

This is the business model.

Spike, Plateau, drop....

I'd like to hink that those of us on HN are fairly immune...

You know what would be an interesting model: figure out the ratio of users on a site to users on HN for given things to determine a prediction of stupid adopters to smart adopters.

Then take that ration and apply it to the total adoption, and determine the real profit margin a site could get.

I am not sure how this would work, but I think we can derive the number of people that will do stupid investments of time vs those who see through the scam...

(I am positive this is what quants are masters at...)

The New York Times reporting on this issue,

http://www.nytimes.com/reuters/2012/07/25/business/25reuters...

kindly shared to HN by iProject,

http://news.ycombinator.com/item?id=4293713

includes this amazing statement: "The company blamed the poor performance of its established, money-making games - Facebook-based titles like 'Cityville' - on changes to Facebook's algorithm, which Zynga said spurred users to discover new games rather than repeatedly play existing Zynga offerings." So Zynga is saying it was hosed by the algorithms of the site that made its games famous--the site that derives a lot of its own revenue from a cut of Zynga's revenue. It looks like Facebook has a rather odd idea of how to be a "partner" with another business that uses its platform. No wonder the stock of both companies went down when Zynga's results were announced. This should increase interest in Facebook's results and Facebook's spin on its results, including any response Facebook has to what Zynga's excuse for its performance is.

I'm confident Zynga will succeed, and this is just a temporary setback. They are incredibly smart and have a solid business model. I don't think social games are going out of fashion any time soon, although I do think they are moving toward the mobile realm. Zynga also has an amazing track record of growing companies it acquires. After the purchase of Words with Friends from Newtoy for $53M, they doubled their daily active users in 6 months. I do think they may have to focus more of an effort on figuring out new avenues of driving revenue for the company. Because ultimately that's what investors are looking for.

I think Zynga will be a very hard stock for wall street to understand for some time. Since it's revenue is so tied to usage (meaning unpredictable after hockey stick growth flattens) and since usage is so tied to external factors (e.g., Facebook Open Graph changes), I think it will be a very difficult company to forecast. In general, it's tough to be a public company if you can't have some predictability to your financial results.

I don't think the two points you make: tied to usage and external factors, equate to difficult forecasts. Look at airlines, they are definitely tied to usage, empty planes and bad routes impact revenues; and external factors come into play with things like fuel costs and union negotiations (at least in the US). The things you list as making them a "hard stock for wall street to understand" are actually what make the sharks see right through zynga's value proposition/bullshit.

Thanks for the response and I think I probably should have been clearer. Zynga is fundamentally tied (today) to factors outside of its control (like airlines) but that are (a) controlled largely by one entity (facebook) and (b) opaque to the outside world. By comparison, airlines are tied to factors (GDP, fuel cost, etc.) that are not controlled by any single entity and that are more transparent (e.g., real-time markets for fuel, widely available forecasts for GDP). Regardless, I wasn't defending the stock - on the contrary I was saying this is going to be a very tough public company in general.

"Last week, Zynga expanded its board as it named former Yahoo! Inc. executive Ellen Siminoff its first female director."

Shouldn't this just be "Zynga earnings miss".

I don't see where the FB also failing comes into the picture.

Zynga is mainly based on Facebook's platform. They also explicitly said that getting revenue on that platform is harder than expected. That makes investors very nervous about FB's outlook. We'll know more tomorrow when FB releases their own performance and expectation numbers.

Which doesn't change that we don't know yet and there is nothing in the article that indicates what it writes.

I am not a big fan of the revisionists that are roaming HN but the title is flat out wrong.

FB is down 7% after hours, and the most likely culprit is this news, as the two companies' outlooks and stock performance have been tightly coupled after past quarterly reports.

The title looks factually accurate to me.

From the article: "Shares slumped as much as 42 percent in extended trading, dragging Facebook’s stock down as much as 9.7 percent."

The title seems pretty accurate to me.

FWIW it says "falling" not "failing," although FB actually rose +0.89 today.

FB is also down after hours, about 7% so far. https://www.google.com/finance?q=NASDAQ%3AFB

Zynga Contributed 15% of Facebook’s Revenue In Q1

http://www.techcrunch.com/2012/04/23/zynga-made-up-15-of-fac...

I wrote "FALLING" not "FAILING". The title is accurate.

Falling is due to the fact that it's 26.99 after hours now:

http://cl.ly/image/1F3b1f3x3W1q

As Zynga copies games with some success, why has it been able to copy the Japanese model of social gaming? Gree and DeNA have been able to make money for several years now and it appears are growing sustainably.

Gree's most recent quarterly results: http://v3.eir-parts.net/EIR/View.aspx?template=ir_material&#...

With all this recent talk of paid vs defense of free vs freemium, at the end of the day, certain basic principles apply. Revenues still matter, a lot.

As soon as Zynga starts offering real money poker they will become the biggest and most profitable poker room in the world.

MGM or LVS are better equipped to take advantage of a loosening of the internet gaming acts

But Zynga already operates the largest poker site in the world. They just need to add real money play and they're set.

Adding "real money" isn't as simple as it sounds. Internet gambling in the US, if it returns, will be highly regulated.

Which just means that the regulations will be written for (and likely, by) the best-capitalized players in the market.

What's happening now is that all the old stalwarts in the poker world (Partypoker, PokerStars, and Full Tilt) are being sued by the federal government while, at the same time, the brick and mortar casinos and Indian tribes are ghostwriting gambling legislation to heavily favor themselves.

So, you're right, but it's an even shittier situation, because there already was an online poker marketplace, and it's being stolen from the original players in the industry.

Zynga will team up with or aquire some already established company. http://www.pokerlistings.com/zynga-looks-to-acquire-real-mon...

Why?

If there is a loosening of internet gambling and gaming acts, I fully expect the process to be highly regulated. MGM and Las Vegas Sands are equipped to handle the gaming requirements, but more importantly they have a core gambling business to fall back on. ZNGA's core business is shaky.

Well, if TechCrunch is right, already-public companies missing the mark leads to smaller valuations which leads to cheaper rent in the Valley. I'll take the smaller valuations in exchange for the cheaper rent. </selfishness>

Zynga is (with some collaboration; to call it the singular reason would be a massive oversimplification) the reason Google+ Games failed, and the mediocrity of Google+ Games is one of the major reasons Google+ is seen as a "Me, too" product and will probably never have break-out success. Huge missed opportunity.

Given this, I can't say I'm upset to watch Zynga fail. Although much of this loss was indirect, they probably cost Google billions of dollars.

I predicted this in August 2011. I was at Google and wrote an internal missive on how social network fatigue, led by these shitty "social games", was about to evolve into outright brand damage and that it had the potential to ruin Google+ from the start. We had to differentiate ourselves from Facebook on the things that were causing SN fatigue. If we were going to do Games (which was a risky decision) we had to do them right.

To its credit, Google+ seems to have managed to avoid a persistent association. Google+ isn't associated with Zynga shit-games. In fact, I'd bet that 99% of the people reading this have no idea there ever was a Google Games. Google did a good job of hiding that one under the rug. But if they had engaged independent developers and built a real community (I suggested starting with the German-style board games, then moving into 2D RPGs and decent casual games) then they could have had something massively successful and important.

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