Is Zynga in Terminal Decline?
The commercial affairs of Facebook and Zynga seem intrinsically linked, with the social games developer earning a large chunk of its revenue from the games people play while on Facebook, and Facebook themselves benefiting from a decent sized sideline to their main ad based revenues.
So it should be of concern to both parties that Zynga appears to be struggling quite so badly. Reports today reveal that the latest financial results for the company were pretty underwhelming. What's more, expectations for the remainder of the year painted a gloomy outlook for the gaming company, sending stock down in late trading.
Such is the close relationship between Facebook and Zynga, Facebook shares also closed down 8% ahead of their first ever earnings report today.
So what went wrong for Zynga?
Well, pretty much everything. Facebook changed their gaming platform (for the worse). Their latest blockbuster game was delayed. Mafia Wars II was panned by gamers, with other mainstays of their stable losing their popularity.
“Facebook made a number of changes in the quarter,” John Schappert, chief operating officer, said in a conference call with analysts. “These changes favored new games. Our users did not remain as engaged and did not come back as often.”
Revenue for the second quarter was $332 million, below analysts’ expectations of $343 million. And the company lost $22.8 million, or 3 cents a share in the quarter, although excluding one-time items it had a profit of 1 cent a share — still below expectations.
Which is bad enough news, but more worrying is the $300 million or so that Zynga have slashed from their yearly forecasted revenue for 2012.
Zynga makes money from the hardcore users that buy upgrades and virtual goods to help them in the games. Unfortunately for Zynga these players are becoming harder to find. Over the last year, the average daily amount of money Zynga took in from these core users dropped 10 percent even as the overall number of users expanded.
“Zynga’s challenge has been to drive up efforts to keep their attention and broaden their user base — which they did — but now they need to get them to pay,” said Michael Gartenberg of Gartner. “Increasing the number of players doesn’t mean you’re making money off them.”
This news will be equally worrying for Facebook as they look for new ways to make money post IPO. Facebook earn 30% of all money users spend on virtual goods in games played on Facebook, and this channel is their largest source of income outside of advertising.