Why Zynga Failed
techcrunch.com
techcrunch.com
Instead of going with innovation, Zynga decided to go with extraction, and they are now paying a heavy price. Farmville, Cityville, etc, are all essentially just the same game. They add clicks and beeps to get middle-aged housewives to pay $5/month for virtual items and I guess it's simply not sustainable.
As a side note, I've been to Zynga's headquarters in SF. The offices are beautiful, and spacious. My friend pointed out a human-sized statue of the Zynga's dog that was repainted for something like $10-20k because apparently the CEO didn't like the color. You can walk around and see a lot of dot-com waste everywhere. We went to one of the snack areas, and there were opened bags of organic chips just laying around. Apparently, they have an office-supply vending machine filled with $100 wireless keyboards, mice, etc, that people just take whenever they want.
As an (unhappy) investor, it certainly looks like there is a lot of room to cut the fat at that company, so maybe they can slash their costs relative to their revenues and turn it back into a viable business.
His job was to research, audit and credit check companies in developing economies. He told me how within a few minutes of walking to the lobby of a company headquarters he could with some accuracy judge how the business was operated.
Lavish spending on insignificant things was a sign that there were inefficiencies or problems elsewhere. for eg. in one case a Russian investment fund had a large 3-level high marble lobby with a large bronze statue of the founder. Turned out that they were hundreds of millions in debt rather than wildly profitable as they had mis-priced assets.
The other anecdote he shared was that there seemed to be a high correlation between businesses that hired young, attractive secretaries in short skits and accounting fraud.
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That's not why I'm downvoting you though. I'm downvoting you because you used the phrase "past her best" to refer to women that you don't find attractive. The time when that kind of language was acceptable in our industry has long passed (actually it was never acceptable, only tolerated.) This is a topic that is frequently discussed on HN, and as a HN reader of over a year, you have no excuse for not being on notice.
PE and "family offices" is the only place I've seen "almost exclusively young, attractive, inexperienced" support staff who were probably selected for reasons other than professional competence (attractiveness or nepotism).
What is not a matter of opinion and is incontrovertibly true is that those two things have nothing to do with each other.
That's now what he said though. He just mentioned his observation that not so good VCs have less good-looking admins. Correlation != causation yada yada.
Think about this -- how much does a competent IT person cost per hour? How much does an engineer cost per hour? Some engineers cost up to $100 per hour once you add all the incentives and incidental costs.
Now what happens when an engineer has a broken keyboard in an old fashioned "frugal" company? He has to call tech support and he has to wait and he gets the perfect excuse not to do work. Tech support will not show up immediately, because this is a "frugal" company, so they do not have people in tech support just sitting around waiting for someone to get a broken keyboard. Oh no, they are frugal and have their support people's schedules full, which means that $100 an hour engineer gets to wait a couple of hours till the support person comes.
But in "wasteful" Zynga, that same engineer can go and replace his own keyboard for 5 minutes. That office supply vebding machine seems like a brilliant idea to me. Of course it is a vending machine, so it presumably keeps track of who takes what, so nobody can just take a bunch of stuff and resell it on the street.
The thing about the organic chips is a great idea too. It takes so much longer for anybody to go somewhere and buy something. And if a programmer goes out of the office he loses context, which means it may take him another hour to soak up the context of everything he was doing. Oh and if you eat unhealthy food or drink sugary drinks you can easily spend an entire afternoon in food/sugar coma. Of course one should not waste food regardless of how much they paid for this, but that can be solved by social measures.
I do not know why investors get their hearts warmed up by the suffering of their companies' employees but this is usually very counterproductive.
Google is very successful and is famous for their perks. Outsiders make fun of them, but Google management knows better. The better the perks, the more likely your valuable employees will stay in the office, avoid distractions and get more work done.
It's about time we drop this whole mumbo-jumbo "software developer laser-focus work hours increase productivity through the roof".
At the end of the day, all of us are human being that is limited by something somehow.
I'd estimate the median to be somewhere in the range of $110-120k. So, $55-60/hr for salary alone. Now add employment taxes (even higher in SF city limits) and benefits and equity.
If the borrow costs are incredibly low, its much cheaper to hold onto a short position for a month or two than it is to buy long-dated puts.
The other advantage is that its easier to take profits sooner. The bid/ask spread is much larger on the options than on the equity.
Finally, notice how the options have .50 cent increments. When dealing with the equity directly, you can capture as small as a cent profit.
(I looked at the options chains for ZNGA. Doesn't seem like there is much activity, perhaps because everyone now expects the stock to tank.)
We'll say I think ZNGA will be $1.25 on 11/17, which is rather ambitious but let's go with it since their games are so spammy.
So, I sell 1000 shares of ZNGA for $2420. Right now, I can close my position by buying the shares back for $2450, so I'm already down about $50 because of commission and ask/bid spread. (My brokerage charges $8.95 for trades, but you can get them cheaper than that, so you might only be down $30 if you can trade for free.) Let's imagine the stock stays flat until 11/17: the scenario remains the same except I've paid interest on the stock I borrowed (probably about $30). So the result is a loss of $80. The stock has been flat since their last earning's announcement, so this seems the most likely scenario.
Except, they have an earnings announcement on 10/26, and at their last earnings announcement, their stock lost almost 50% of its value. So if that happens again, their stock could drop to $1.25. In that case, you'd be short only $1250, for a profit of about $1135 after interest and commissions. That's fine, but you have to admit that this is highly speculative.
Let's imagine that they issue a healthy earnings report (they fired the office equipment thieves), and their shares go up to $3.00. (Remember, they were at almost $5 before their last earnings report a quarter ago.) Now you are down about $570.
So realistically speaking, you stand to make $1000 for $500 of risk. Now let's consider what the options route would buy us. There are many routes so let's explore buying in-the-money puts, out-of-the-money puts, and at-the-money puts. (We'll avoid selling uncovered calls because I am lazy and my brokerage wouldn't let me anyway.)
A $2.50 strike 11/17 expiration put is $30 per contract ($300 for 10 contracts or 1000 shares) and has $50 of intrinsic value (for the 1000 shares). So if ZNGA stays flat until expiration, you can sell the put for those $50 (minus $20 in commission). If the stock goes up, you lose all $310 (but only have to pay the commission once, what a deal!) If the stock goes down to $1.25, however, you have $1.25 per share of intrinsic value at expiration (less before expiration because delta != 1), making this best-case upside worth $1230 after commissions. That's better than the upside for the short sell, since you're paying the option seller interest at a lower rate than you'd be paying your brokerage interest. Absolute worst case downside: -$310, stock stays flat: -$270, best case upside: ~$2200, expected case: $1230. That ends up better than the short sell if you're sure about the timeframe. If you're not sure you could sell somewhere in the middle but you'd not get $1 for every $1 ZNGA lost because delta is probably not 1 yet.
If we buy an in-the-money $3.00 option, it costs $670, but both the delta and intrinsic value are higher. If the stock stays flat, we can sell for $500 and only lose $190 (commissions included). If the stock goes down to our target price of $1.25 at expiration, we can sell the option for $1750 and make $1060. Worst case: -$670, flat case: -$190, best case: ~$300, expected case: $1060. We limited our profits, in this case, for less risk if the stock stays flat. (Our total risk is higher, though.)
Finally, what if we buy a dirt-cheap out-of-the money option? The $1.50 strike put is $70 for 10 contracts and commission is $10. If the stock stays flat or goes up, the option expires worthless and we are out $80. If the stock hits $1.25 at expiration, then we get $250 of intrinsic value at the end for $160 in profit. Those options are cheap for a reason. (But hey, if you buy 100 contracts for $700, you could make $1780, which is not too bad. But that's more risk than I think we have on the short stock strategy.)
Anyway, what I've learned from all this is that I think ZNGA is down about as far as it will go and it's just going to die a slow death from here. YMMV but I'm not buying any options or selling any of its stock short :)
Aside: In your example, if you buy the puts for 30 cents per share, you are paying 24 cents in theta. Now, if you plan on selling before then, you don't pay the full penalty. However, If you plan on holding till expiration, your breakeven is 2.20 (just to get back the premium you paid). Now, if the equity fell to 2.20 and you shorted directly, you'd do far better than breakeven.
The people buying 2.50 weekly options that expired last Saturday would have lost all of their money. They may have been correct in their general directional prediction, but the contracts expired worthless.
I did not have a timeframe and I only had a rough price target. All I knew was that it was going to have to fall hard (2.40 price target) at one point before earnings. I could have bought long-dated puts, but at that time they were far more expensive and even the $3.00 puts were more than .60 cents per share (which would mean I'd just barely show a profit).
As another stark example of the quirks of pricing, check out the Oct20 AAPL puts. Many of the deep out of the money puts lost MTM value because its become less likely that the price will fall far enough. So especially if you come into the trade early, you end up paying quite a bit in theta.
The only way you make money with puts on stocks like GOOG or AAPL with huge premium is if you hit a home run, ie. a massive move on the part of the stock. Sure, theoretically there is "unbounded" risk, but in reality, that's impossible, unless you're a fool. Overnight gap ups and gap downs mayb occur, and a good trader will account for this.
If you knew you could just go to a vending machine and get equipment, what would stop you from just requesting extra for your personal use? Since any new equipment comes out of my personal returns, I don't get a new keyboard just because the keyboard doesnt feel like it did out of the box -- I clean it.
If you knew that you could request a new keyboard every time you spilled coffee on your keyboard, what would keep you from carelessly placing drinks on your desk? I know that my desk was paid for with my money, so I'm very careful with regards to stuff like coasters and tall cups.
If you have to look a person in the face, you feel a greater sense of accountability (as if that person knows you requested it) and you will be less likely to frivolously request stuff.
Look the person in the face? If you're in any company over a hundred employees, you email IT to ask for your equipment and it appears. There is no face to face.
In small companies like mine, we just have a cabinet. You walk over and take out what you need. We don't worry about people reselling equipment because we don't hire thieves.
It's very hard to scale that. It's easy when you have 5 or 10 people, all of whose incentives are aligned, but its much harder when you have many more.
My point, though, gets back to a general sense of wastefulness. In my experience, people who are wasteful in one area tend to be wasteful or not particularly rigorous elsewhere.
I work at a small company--we don't have vending machines or IT departments. Instead, each employee has a company credit card and we submit receipts for our IT purchases. I'll admit that, knowing I can buy new stuff as needed, I'm less careful about my equipment. However, I also know that someone's looking at the receipts I submit & that knowledge has kept me from being wasteful. I'd imagine that the vending machine tracking motivates similarly.
[1] http://tech.fortune.cnn.com/2011/07/06/facebooks-vending-mac...
Now, if they presented a bill to each employee with each item they've taken, then I'd agree that the vending machine tracking is similar.
You are also conveniently forgetting the cost of somebody who did accidentally spill coffee on their keyboard. Every hour they cannot work because there isn't a functioning input device to accept their keystrokes is just productivity being wasted. Obviously I don't think the fact that Zynga has these vending machines makes them a great company, but I can certainly say that having them doesn't make Zynga a bad company.
That person also keeps up with the latest technologies and, ideally, would be able to advise on the appropriate type of keyboard or mouse or whatever.
"You are also conveniently forgetting the cost of somebody who did accidentally spill coffee on their keyboard."
If the spilt coffee results in keyboard damage, no qualm there. I'm referring to cases where you have a slight drop and decide to get a new keyboard rather than wiping it.
" I can certainly say that having them doesn't make Zynga a bad company."
I don't think the vending machine by itself impugns a company but it certainly matches a sense of wastefulness from other anecdotes.
First, having vending machines for hardware doesn't mean that an IT department doesn't have any say on what gets ordered to go inside.
And really, is there any measurable amount of theft by employees who get a drop of coffee on their keyboard, and either just throw it away and get a new one, or go home and sell it? And would this in any way cost more than what the company saves by streamlining the basic IT hardware procurement that goes with any large company?
Quite far-fetched scenarios you're tossing out at this point.
You may think it's trivial, but the same behaviors are reflected in software development (wastefulness of resources) and from what I've seen there's a strong correlation between wastefulness in life and wastefulness in work output.
(We have self-service supply cabinets at Google for things like laptop chargers or cables. The sign on the cabinet says "don't be evil" and I think most people treat it that way.
A recent change is that laptop chargers no longer come in boxes, so you can just return yours to the bin if you don't need it anymore and it will look the same as the "new" ones. Clever!)
The best programmers I have had the pleasure of working with maintained a very orderly desk and were very disciplined with use of resources in real life. Interestingly enough, you could gleam that from the style of their codes.
Einstein's desk was this messy :-)
I had the great honor of working with Brian Kernighan (I would personally consider him one of the greatest programmers that the world has seen) and was taken aback by his organization skills. My conclusion is clearly based on my experiences.
This whole conversation sounds like one gigantic bundle of cognitive bias to me. People will naturally notice the companies that strictly ration their equipment and are also frugal where it counts, and the companies that give equipment away freely and also spend tens of thousands of dollars on statue repainting, while not noticing the companies that waste money that matters while also maintaining a tight regimen of equipment oversight, or the companies that are frugal where it matters but don't try to strictly control the dispensing of trivial office equipment.
I don't abuse my equipment. But if I spilled something on my MBP, oh well, accidents happen. IT will replace it, probably with a Retina. There isn't any "stigma" about requesting equipment. Nor should there be. Your penny-pinching concerns seem a) quaint and b) short-sighted.
I'm not concerned about the cost of keyboards and mice, but I think it's endemic of wastefulness. In some sense, it's akin to the Van Halen brown M&Ms sentiment
In the M&Ms case, it was to ensure the contracts were read. There were dangerous things going on, and attention to detail is very important. It's not that the bowl itself matters, but if a trivial detail like that is overlooked then it's not known what else is overlooked.
Likewise, you are a programmer. If you are careless in resource usage in some parts of your life, it's likely that you will be careless in your coding.
The analogy is apt, and i highly recommend you read that site you mentioned because it clearly explains the overarching philosophy.
> The analogy is apt,
No man, I'm sorry, that analogy is shit. The fact that I don't think twice about getting new / upgraded / better equipment means that I care about not having my ability inhibited by something as absurdly cheap compared to my salary as peripherals and a new macbook.
I think you really are looking at the Van Halen analogy backwards: If you, the employer, are reluctant to spend a few more bucks to ensure your investment in my time is as enjoyable as possible, then what other corners are you willing to cut?
I don't think I'm the only one here that would love to hear that story!
I figured they are getting close to book value, and they couldn't drop much further (always the worst reason to buy a stock). And I thought that given they have real revenues, that someone might be willing to step in and buy them for their customers. Maybe YHOO or AOL, or even FB. Now, with their revenues dropping, it could be that NO ONE wants to buy them for fear of overpaying (like they did with OMGPOP), so I could be up the creek on this one.
Fundamentally, Zynga's business model and products did not line up with the interests of either its host platform (Facebook) or its end users. Its revenue model was also, at its core, coercive and failed to provide real value to its customers.
All of the points listed in the article, while accurate, are IMO only symptoms/manifestations of this very core failing. This is also the general case that we can learn from - short of having a government-granted monopoly, if you fail to provide real value to your customers, you will fail.
Zynga was a casino. The games offered no real value to their consumers but neither do casinos. The only reason why you continue to play and pay for in game purchases is to get back the high of doing something well; you want to feel the rush of winning.
Their main fault wasn't that they did this, it was that they couldn't do it well enough. Addiction's downside is that gains are subjected to the law of diminishing returns. Basically, that your happiness is logarithmic. In a casino, they've overcome this logarithmic challenge naturally, by allowing you to put in an infinite amount of money. The gains are still logarithmic, hence why people can go from gambling $20 to losing their house in short order but Zynga could never figure out how to replicate this in their casino.
I think this wont be the last time we see this model in gaming, but the next business will first need to solve this problem: if you make money through addiction simulated behavior, how do you overcome the log returns associated with it?
Slot machines (especially electronic ones) are fascinating in their ability to have their payout 'tuned'. And slots typically pay out 98 - 99% of the money they take in. But what is also true is that there is a sharp 'knee' in the curve between where people sit and play slot machines for hours, and where they leave immediately after they lose their money.
The weird not immediately obvious thing, is that slots that let you 'win' a lot encourage play. When someone is sitting there and 'winning' and up 50% on their night, and then lose back to being 50% down will keep playing to 'get back' to that winning state. But people who just win enough to slow their exhaustion of cash stop when they run out. They never had a time when they felt like they were 'ahead' they just watched their cash get smaller and smaller.
New Casino owners who would get scared about big slot payouts would worry, "What if everyone takes their winnings and just leaves?" which is a legitimate worry, but you have to believe the statistics are legit and the payout is 98%, not 100+%. As it turns out those winners brag which brings in more people. And as Steve Wynn once said, "Slots make money on the quantity of the players not the quality." Meaning that the more money that goes through them the more his cut of the output.
Zynga appears focused early on revenue generation per player but not as function of all players it seemed, rather as a function of single players. By tuning the production of individuals through gameplay tweaks the over all experience is compromised such that they recognize they are being exploited and that takes away the 'fun' part of playing. At some level everyone knows they are funding Zynga (or a Casino) but they do it willingly because its 'fun'. A very fine line be 'fun' and 'not fun' when the value goes down.
If Zynga could recruit Pichette away from Google it would probably help their bottom line tremendously.
Looking from personal experience with casinos, my gut instinct tells me they are definitely dangerous, but the one thing that tempts me to play is the cool factor around them. You think Zynga would do well to try and create an aura of coolness and sophistication around their upcoming games?
I am sure it sounds like nitpicking, but arguments that hinge on an idea of real value are inescapably about a moral judgement of some kind.
It hardly matters whether you are cursing the rise of manufacturing in contrast to agriculture, or complaining about the growing portion of wealth and prosperity coming from the service sector.
Does the distinction draw a line between Zynga and other games, or between games and other entertainment. Where do professional sports fit in the hierarchy of products with virtue? How about art?
I think GP is getting somewhere with the idea about innovation and extraction, and maintaining focus on the utility players derive as an imperative before any extraction can be done. However, it is very easy to get off track venturing into vague notions about real or fake value. If users enjoy playing the games then theentertainment is offering value no more imaginary than any other.
Zynga was more concerned with setting up an addiction loop and reaching into your wallet than building anything that lived up to its value proposition: creating fun entertainment.
It even fails the main value proposition as a casino - the winnings aren't worth anything.
100% nailed it. They stopped being able to develop hits that could keep up with the diminishing returns they were seeing on their old games.
I always thought that had Zynga just focused on keeping their slot machines shiny, accessible and easy to use, they wouldnt be in this mess. Instead they decided to reinvent the slot machine every year or so. It worked for a while but there's only so much you can do before you have to start outright copying. In other words, fight diminishing returns by continually improving the game rather than continually building new games.
You left out: But it did line up with the interests of the investors, who then poisoned the well by bringing this POS public.
Zynga's failure is entirely its own doing.
They copied everything. They stopped even trying to think up a new idea.
Sending out emails to select users about possible future games, and counting click throughs as votes, with the idea of building the game with the most votes is probably doomed to failure. They double-downed on that strategy, brought in a bunch of MBA types (not evil people, but not great game designers either) to statistically manage game development. It can't be too surprising that great games aren't built that way, and a game company without great games can't survive forever.
Is that really the conversation you want to have whenever you talk about your livelihood? And do you want to be the only one spamming me about Farmville, because your company makes you, and because I have everyone else who ever did that turned off?
So called "mid core" games on Facebook are generally male focused war/strategy titles. Most Farmville/Cityville, etc. players are women. They haven't "moved on" to more complicated games. They've just grown tired of the same formula.
More "philosophically" speaking - I am just thinking if this is not a case of preffering short term profits - "Send as much spam as possible!" - which, however, hurts in the long term (now the game posts are essentially useless).
Be cool if Fred Wilson, or another one of the early investors, would make an appearance to explain why the hell they thought dumping this on the public was a smart and/or credible thing to do:
"Look at the list of the Zynga insiders who cashed out this quarter to the tune of $516 million, it’s chock full of A-list investors like Fred Wilson, Reid Hoffman and Silver Lake Partners. So the narrative right now is “The insiders dumped that stock at the exact right time.” I want to flip that and say “The VC’s have sent you a term sheet for an investment.” Consider the rationale for fiduciaries like Fred Wilson, who turned a $5 million investment in Zynga into almost $400 million."
http://blogs.marketwatch.com/cody/2012/07/26/the-venture-cap...
Next time someone brings up Wall Street, they need to take a step back and realize this behaviour is happening in their own back yard.
Zynga was great at marketing but I doubt that anyone that matters at Zynga has ever had an original thought about game play. If they can't buy the company that has the game idea they simply rip them off by copying game play almost down to the last detail.
Failure is such a strong word. I'm curious how many successful startups even came close to this.
Money != Value
However, the question is in exchange for what? As long as the focus is on the entertainment quotient I think these businesses do just fine. The moment the focus of business shifts to just extract every possible dollar out of its users, people get smarter & just leave. This is probably what is happening with Zynga.
Or did he? How much did he make from the Zynga "failure"?