
Zynga's Going Down. - dkrich
http://silencedgood.tumblr.com/post/22547672461/zyngas-going-down
======
nextstep
Tech stocks (in aggregate) have declined about 32% in the same time period.
What this article fails to mention is that Zynga's stock price was at an all-
time high when Zynga acquired OMGPOP. The stock has since floated around it's
post-IPO price. OMGPOP is most likely unrelated to these fluctuations.

What is relevant is Facebook. Zynga's stock grew rapidly once Facebook's S-1
filings revealed that Facebook derives 12% of it's revenue from Zynga. This
news cause a flurry of interest in Zynga, but the excitement has since waned,
and both Facebook and Zynga have been scrutinized heavily since. This is to be
expected, but I also expect that both company's stocks will perform well after
May 18 and into next quarter.

Last, and possibly most important, is the misconception about how easy it is
to launch a profitable mobile app to millions of users. Zynga now hosts about
80% of their games on their private cloud (the zCloud). This infrastructure
separates Zynga from a group of 15 hackers who want to make the next Angry
Birds. Zynga releases games in dozens of foreign languages; they have games on
every social network and in dozens of countries, as well as in many emerging
markets. The point is, it's easy to take pot-shots at Zynga's business model
and claim it's a house of cards, but I think the reality is that Zynga is a
well established company, with far vaster resources than many of their
competitors. Mobile and social games are a clear-cut example of economies of
scale.

~~~
sehugg
> Last, and possibly most important, is the misconception about how easy it is
> to launch a profitable mobile app to millions of users. Zynga now hosts
> about 80% of their games on their private cloud (the zCloud). This
> infrastructure separates Zynga from a group of 15 hackers who want to make
> the next Angry Birds.

Sorry, I don't buy it. You don't need to host your own infrastructure to
schlep virtual cows around. Zynga probably saves some money in self-hosting
but that isn't going to make or break a title.

~~~
whopa
Yeah, zCloud only came into fruition late last year. Before that they were
using AWS, and handling the same scale they do now. Private cloud is saving
them money, but some other company could use AWS just as Zynga did before and
handle millions of users absolutely fine.

------
mattmaroon
"It takes nothing to produce a hot game. You merely need somebody with a
computer, a good idea, and the ability to make a game. Making a game is not
rocket science. Making matters worse for Zynga is that it does not and never
will control the distribution channels."

Yes, that's why everyone with a CS degree has made millions of dollars. This
is offensive to everyone that makes games.

~~~
learc83
His point isn't that everyone can do it, obviously that's not true, but that
there is nothing about it that requires a multi-billion dollar company. To
wit, the barrier to entry is low.

>You merely need somebody with a computer, a _good idea_ , and the _ability to
make a game_

~~~
bad_user
The barrier to entry is low from the perspective of sunken costs other than
development time, being a purely creative endeavor that you can work on with
mostly free software tools.

However, the talent required to pull off a quality game and the time it takes
are huge and only grow exponentially. That in recent years we've got a couple
of indie games that were successful, that's only because on mobile devices the
expectations for CGI quality are for the moment low. Plus, with these app
stores, the budget required for marketing has decreased, if you're lucky
enough to have your app featured.

And while you can create indie games for the desktop and be successful, as
Minecraft shows, the expectations for quality CGI are much higher and so it
takes an insane amount of creativity to fill the blanks.

Now, of course, Zynga games are not really on the same level as what id
Software or Blizzard are releasing and you can certainly picture yourself
pulling off games of the same quality, as Zynga games are nothing special,
except for the social-network effects.

However you shouldn't underestimate the effort required to build a game from
scratch. I consider it to be by far one of the most challenging fields in
software development, as not only it requires great feats of engineering, but
it also requires creativity and design. E.g. developers by themselves can
barely pull it off without the help of a good artist that can draw.

------
cletus
This story (Draw Something losing ~5M customers/month) annoys me. It's an
example of not knowing the difference between causation, correlation and
coincidence. In at least some cases people are making that "mistake" for link-
bait reasons and to push an agenda (eg they hate Zynga).

The idea that 5M/month Draw Something care about the Zynga purchase is
ludicrous. It seems Zynga has made some annoying changes to the game, at least
for those that use Facebook to login, but even so.

I think the only story here is that Zynga overpaid for something that was
peaking. They may purchased OMGPOP just in case it turned into something huge.
There's plenty of that going on ( _cough_ Instragram _cough_ ).

I've tried Draw Something. It's amusing and I can see the appeal but from all
usage patterns I've seen the game has a pretty short shelf life. A game with a
short shelf life is going to lose lots of customers once it peaks. It's
inevitable.

As for how easy it is to make a game, that's actually hard. I believe you
should also separate "normal" games from "social" games here as both are
radically different.

Normal games are like blockbuster movies. You want people to buy up big. You
deliberately build up the hype. There is very little in the way of long tail
in revenue in most cases (other than sequels). I consider this a fairly
"honest" or ethical practice because you pay the sticker price and you have
your fun.

Social games are more like TV shows. You're trying to build a persistent
audience and you're all about the long tail. The part that bothers me is the
psychological trickery that goes into this. Social games are really about
manipulating the psychological triggers for addiction and I don't really see a
distinction between this and, say, gambling addiction.

Some people spend an awful lot on these games (I believe Zynga calls people
who spend over $10k "whales" [1]). Zynga and similar companies like to
whitewash this with "maybe they're just rich". I believe they know better.
They are (IMHO) preying on the weak and those arguably with mental health
problems ("it's not unethical, it's funethical!").

Successful social games are all about Big Data. Figuring out what works, what
doesn't, analyzing your customer usage and adjusting to maximize revenue and
retention.

They're not even "games" really. They're just exercises in repetition.

Anyway, rant aside, I don't like Zynga either but please don't confuse the
OMGPOP purchase with a short shelf-life peaking purchase.

[1]: [http://www.businessweek.com/magazine/zyngas-quest-for-
bigspe...](http://www.businessweek.com/magazine/zyngas-quest-for-bigspending-
whales-07072011.html)

~~~
benihana
_The part that bothers me is the psychological trickery that goes into this.
Social games are really about manipulating the psychological triggers for
addiction and I don't really see a distinction between this and, say, gambling
addiction._

Calling the reward systems in games psychological trickery is a bit much.
Gameplay have long been based on the psychologically rewarding system of 'do
something good, get positive feedback; do something bad, get negative
feedback.'

The first arcade games had theses reward systems - do well and put your
initials on the leaderboard; do poorly, pay another quarter to keep playing.
The fact that it's psychologically enjoyable to play these games isn't
trickery - it's basic human-environment interaction. That _some_ people have
addictive responses to these mechanisms doesn't mean it's insidious trickery,
it just means some people are more likely to become dependent on the rewards
these games offer.

~~~
wpietri
You misunderstand the experience.

Go to Vegas sometime. Watch the people who are playing the slots for hours at
a time. They are not enjoying anything. What you're seeing is compulsion and
addiction, not fun. That those people are there is not some wacky accident.
It's the point.

I believe that Zynga is pursuing exactly that cycle of addiction. They're a
metrics and viral marketing company, not a games company.

~~~
franticpedantic
Many people actually really enjoy playing slots. It's fun to win money, and
it's fun to enjoy the dramatic moment before you know if you've won money.
Some people get addicted to it, just like some people have gotten addicted to
immersive PC games or really anything enjoyable. The distinction you're trying
to draw is basically non-existent, except perhaps that social games and slots
are simpler and revolve entirely around the unknown-reward mechanic.

~~~
wpietri
That you can't perceive a distinction does not mean that it doesn't exist.
People don't get addicted to everything fun in equal measure; some things are
more compelling than others.

And seriously, go to Vegas and spend a couple of hours watching people play
slots. Craps players are visibly having fun. The people who spend hours at the
slot machines visibly aren't.

~~~
ssharp
Craps, and to a lesser extent Blackjack, have some shared experiences between
the players. In craps, many of the players will be betting the same, or at
least very similar, way. Since there is only one dice roll for the entire
table, there is a lot of shared excitement. With Blackjack, say the dealer is
showing a 6, it's most likely that nobody on the table will bust, so if the
dealer busts, everyone is excited. A slot machine, on the other hand, is an
entirely solo experience.

I rarely play any floor games, but one time I was waiting for some friends to
wake up and I wandered down to the casino to play some video poker. I ended up
winning $1500 on a royal flush at a nickel machine. What am I supposed to do,
start running around the casino in excitement? It was around 8:30 in the
morning and the places was pretty quite. Had my friends been there, I'm sure
we would have had some hi-fives or something like that, but if I'm just
sitting there playing by myself, I'm not going to have any sort of substantial
showcase of emotion.

I think you're correct in that a lot of people sit at the slot machines for
hours, losing their paychecks in the process, and it's destructive for them.
They may be looking miserable at the machines. The people playing craps who
are in the process of losing their paychecks are equally as miserable, they're
just showing different outward emotions. The addiction isn't any healthier
because the person appears to be having fun.

~~~
wpietri
I agree with this, but I'm not sure what your point is relative to the rest of
the discussion. I'm pointing out that "fun" and "compelling" are distinct. You
can engineer for either, or both. If you watch people playing slots, it's
pretty obvious that most people who play slots for a long time are not having
fun.

------
pan69
"It takes nothing to produce a hot game. You merely need somebody with a
computer, a good idea, and the ability to make a game. Making a game is not
rocket science."

Actually. Making a game that makes money IS rocket science (or at least as
close as it can get to it).

~~~
jfoutz
Making a game is sort of like making music. It's so much fun, people do it for
free. It's not a big deal if you have a few dozen programmers making some
roguelike. If you have 10k college sophomores making games, chances are pretty
good one of them will be pretty fun, and take off. The key here is, they would
do it anyway. there is not free carwashing service because someone likes
washing cars. there are however tons of free games, because making games is
fun.

~~~
forrestthewoods
That statement couldn't possibly be more wrong.

The majority of games are created by large teams of highly talented and well
paid individuals. There are certain types of games that could be created by a
single college sophomore or a teeny tiny team. Most games can not. A team size
of 20 is considered quite small.

Both your statement and the link's author's is incredibly wrong and incredibly
insulting.

~~~
jbri
There's a difference between the triple-A mass-market games you see at
Gamestop, and the social games you see on Facebook.

Pointing out that AAA-games are expensive to develop in a discussion about
social games is missing the point a little, I think.

~~~
mrhyperpenguin
I think forrestthewoods is pointing out that making games, even social games,
is hard.

Sure it's possible for one person to develop a successful social game. But how
many of those people can develop two successful social games? 5? 10+? The only
name that comes to my mind is Zynga.

~~~
fusiongyro
It's only a problem if Zynga chooses to purchase other people's winning games
at huge rates. You can't throw half a billion at every kid who writes a
successful game and expect in-app cash upgrades to offset it. Making a
successful game is hard, but at the scale of the market, there will always be
another kid next month with an unexpected hit on his hands.

Zynga can make it work either by continuing to develop successful games on
their own, or by backing down from Instagram silly money on their buyout
offers. But they can't make it work by pretending to be the gateway middleman
for a distribution network they simply don't own.

------
moocow01
I'd say Zynga's problem is that they are a big fish competing in an
environment that is much better suited to lots of nimble little fish. With
fickle customers and increasing offerings in their segment, its going to be
increasingly difficult and expensive to produce sure fire hits. The
alternative is to acquire the small fish when they have a hit but that can be
an equally dangerous game as proven by the OMGPOP acquisition. I just don't
think being in the app/casual game business is a great spot for large public
companies - there is not a lot you can leverage or ability to lock down
revenue streams in any long term manner by being big. I'd be much more
positive on Zynga if they had a core product that the whole company was
iterating on but from what I can see that is not their model.

~~~
potatolicious
I'd venture that Zynga's problems are more critical than that - and not unique
to Zynga. IMO social gaming (in its current format and incarnation) is a space
that exists only temporarily while consumers figure things out.

Notice the explosion of FarmVille when it first came out, how _everyone_ was
playing it, and its subsequent death. It exploded into the mainstream very
suddenly, and faded into niche obscurity just as quickly.

The "glorified slot machine" format of social gaming (which IMO is a
perversion of the word, there's nothing social about this sort of gaming) does
not have a permanent, mass-market future. It will fade and become a niche
(profitable, perhaps), but it will not justify the market cap that investors
have saw fit to pour into Zynga et al.

If anything, the industry in which Zynga plays has more in common with the
Tamagotchi than it does with WoW.

~~~
justinhj
Farmville is the number 7 game on facebook in May with 5 million daily
users.You can buy Farmville yhemed cups in 7/11. A level of obscurity to dream
of.

------
Irishsteve
The author gives the game away at the end of his post. That is he's been
predicting the demise of Zynga for years. So really the fact that the stock
price has dropped gives the author some belief that they were correct.

Id imagine the drop in price is linked to the FB IPO. Not sure if anyone
remembered when FB announced their plans, anything in that space increased.

------
RobAtticus
I actually do think it's a coincidence that the stock price is down 38% since
purchasing OMGPOP. It had a nice run up based on positive news related to the
Facebook IPO, so when the market began to contract in late March/April, people
took their profits. There hasn't been much positive news since then, so it
hasn't rebounded. In fact, the whole technology sector is down about 32% since
late March (it was +20% on the year, now its only +13.9%)[1]. Basically, I
don't think the OMGPOP acquisition has had much of an effect on the stock
price.

[1] <http://www.google.com/finance?catid=66529330>

------
extesy
"I have been predicting Zynga’s descent for a couple of years"

Oh, I know this trick. I also can predict descent of any company, but just not
the timeframe. Eventually I will be right.

~~~
steve-howard
How does that saying go? "Anyone can predict rain, but the real prophet builds
an ark."

------
kin
The story is too easy to write about and I'm going to have to disagree here. I
think it was pretty obvious that Draw Something wasn't going to last forever.
And Zynga, with extremely similar games like Words With Friends, Hanging With
Friends, and Scramble, knew that Draw Something was going to have the same
fate.

Yes, the purchase was a little steep, but it had to happen. It had to happen
because the game was formatted and structured EXACTLY like Zynga's games. With
its popularity, Zynga did not want Draw Something to threaten the Zynga brand
of social mobile games.

So here we are and Draw Something lost 5M users. You think Zynga didn't see
that coming? Is someone really surprised? It makes sense that the drop in
stock reflects the loss. I wouldn't say it's fact but it's highly probable.
But, they're not dumb. The way the company works, I expect another amusing
addicting social mobile game to be released in the near future to silence
these stories and like other stocks it'll go where it goes, but not rock
bottom.

~~~
srslythink
Surprised no one has figured out why they paid so much. 20m dau at the time of
acquisition means they had 20m+ user accounts (likely 3x that). All of these
people are "socially obligated" to stay connected for some amount of time. How
much would your company pay to acquire ~60m customers? That's not including
the revenue they were bringing in. I don't dispute they paid too much, but
apparently it was worth it to them.

------
underwater
> And yes, it is completely ridiculous for a company that is losing close to a
> billion dollars a year to occupy a multimillion dollar office building that
> looks like a children’s museum.

Where does a billion dollars a year come from? They lost 86 million last
quarter. Is he equating operating costs or reduced market capital with loses?

~~~
moocow01
He gets it probably from extrapolating the average of this past quarter and
and the quarter before. In the quarter before the last, net income was around
-435 million although I doubt their annual net will be -1B

~~~
underwater
That makes sense. You can't extrapolate from two data points though. I could
just as easily claim that their profit is gaining 350 million a quarter an
they'll end up with half a billion in profit for the year.

~~~
moocow01
I agree thats its not sound and their is unfortunately a tendency to cherry
pick data to support one's story. I'm not bullish on Zynga but I'd agree that
using 2 quarters of data (if thats what is being used by the author) is unfair
especially for a relatively new company like Zynga.

------
varelse
When I think of Zynga, I think of two words: options clawback.

Gordon Pincus is obviously very smart or he wouldn't have taken Zynga as far
as it has come, but I can't see myself ever working for a company willing to
confiscate options from at-will employees.

As for Zynga going down: maybe, but not anytime soon. Their business model is
easy to replicate on the surface, but underneath is an awful lot of solid
engineering to keep it from collapsing in on itself.

------
majani
Sometimes I suspect many hackers of being anarchists. It's not always that a
big company is going down, or that a certain industry needs to be disrupted
from behind. It's like some of you secretly want to see the world as we know
it, burning down in flames around you!

------
drawkbox
Not to defend Zynga much but please take into account the broader market when
doing any kind of stock analysis, all stocks have been shaky since late
March/April. Also it is typical for stocks to lose value after large
acquisitions. Zynga could have even timed this more or known that the market
would be going on a typical late spring/summer correction (from lower volume)
and bought during that (Facebook launching in a low volume window is strange
but that is another story).

OMGPOP wasn't just Draw Something. They have actually been around for a while
since 2008 at least. They have had decently successful web games before and
probably have a fair amount of assets that Zynga could use with Draw Something
being the big icing.

Take a gander at OMGPOP.com and see what they have. They used to be called
'iminlikewithyou' <http://www.crunchbase.com/company/omgpop> This wasn't
really a one hit wonder, it was a one BIG hit wonder but a pretty solid gaming
community before and the people and tech created Draw Something. So there was
something there... It is hard enough finding good developers, then there
harder to find good teams, then harder to find good teams that can make hits,
when you find one or the systems used to build it then it is valuable.

Let's face it there were plenty of pictionary like games available before
(isketch.net comes to mind, or Doodle or Flipbook at Benetton Play have been
around for ages: <http://www.benettonplay.com/toybox.php>), but they got the
right juice. That might be what they bought.

~~~
tatsuke95
The NASDAQ is down 4%, the past month. Zynga is down 30%.

The social gaming space has plateaued. It got incredibly big incredibly fast,
but those days of growth are over. Zynga has built a dominant position, but
isn't making money yet. I'm not sure what that means, but it isn't good.

------
byrneseyeview
_I reasoned that there is no greater strategy at play by the Zynga geniuses in
the war room of their ridiculous company headquarters._

Whenever I find myself thinking this way, the klaxons start going off. I'm
basically saying "My mental model of a clearly smart person, surrounded by
clearly smart people, who has made more money than I have and raised money
from other smart people who have _also_ made more money than I have--is that
he's an idiot."

And then we get to:

 _So here Zynga finds itself, sitting atop a group of popular games and
bracing itself for the next Draw Something to come onto the market so it can
swallow it up...So the matchup is Zynga against the field, the field being
every person in the world who knows how to, and has the will to create a
social game._

Another way of looking at this is that Zynga is building a competitive
advantage in social game monetization: if you have a given audience, Zynga can
do more with it than you can. Meanwhile, giant deals like OMGPOP create a
tournament dynamic, where everyone wants to build the next Draw Something. If
Zynga is making their raw material cheap while putting their competitive
advantage at a relative premium, that's great for their future.

It's also a more solid theory than just assuming that Pincus doesn't know what
he's doing.

------
richardw
Zynga's fine. They correctly figured out that once you're the biggest on
Facebook, it's very easy to stay there. It'd take a competitor insane money to
buy up the advertising necessary to introduce a game, whereas it takes Zynga
an intro to their 'try these games' bar. When a smaller competitor happens to
beat the odds and get to the top for one game, Zynga must make a copy-or-buy
decision. Copy if you think the competitor can't leverage (or be used as
leverage by a bigger competitor) the game's temporary eyeballs, or buy if you
can make good use of those temporary eyeballs to cross-sell your other games.

Draw something is a fad on fire. So rather than build (and cross-sell existing
Zynga users who you 'own' already), buy the fad, cross-sell hopefully new
users, cut off anybody who could have done the same. Extra points if those new
users are a different type of user who wouldn't normally be caught playing
X-ville junk.

 _Now if in six months Zynga is raking in tens of millions of dollars a month
on Draw Something I will eat crow. I have a feeling that isn’t going to
happen._

Zynga don't have to. Zynga doesn't care which if their games you play once
you're in the system. They care about the total customer lifetime value of
each user, not the 1-game value.

------
gallerytungsten
Which companies will be the most spectacular flameouts of internet boom, 2.0?
I don't think it's much of a stretch to predict Zynga has a good chance of
making the list.

~~~
uptown
Groupon

------
dudeguy999
I view Zynga's economics like a tv network. Their primary asset is their
audience, and acquisition is a way for them to increase that. There are two
different kinds of acquisitions they can do: shows that already have a
following (low risk, low payoff, high cost) and promising small shows, which
have opposite characteristics. The stuff they produce in-house tends to be
highly targeted, less innovative stuff.

------
dsirijus
Zynga's decline has nothing to do with purchases they made and everything with
Facebook killing viral channels - a year and a half ago!

------
ckdarby
Find it priceless this guy talks about knowing that the company was going down
in flames but didn't sell short at all on the stock.

~~~
micahgoulart
Exactly. Put your money where you mouth is. Especially if you'd make a lot of
profit out of it. But of course, he didn't.

------
dutchbrit
It wouldn't surprise me if Facebook snaps up Zynga eventually. But Zynga is
definately heading in the wrong direction.. But basing this off Draw Something
is silly. It's one game, and people could of seen this coming a mile away.
People get bored of games eventually.

------
oellegaard
Good indication that the social media bubble won't last forener. Maybe a .com
bubble 2.0?

------
jda285
Don't want to get into Zynga's business model but it's one sided to reference
this "failed" acquisition without referencing the "with friends" franchise
which has been a pretty incredible acquisition for them.

------
ayu2
Zynga is making a gaming platform. I'm pretty sure Pincus is aware simply
churning out social games isn't a good long term vision.

------
TomGullen
Once they convert Zynga Poker into an actual online paid poker site they will
make an absolutely phenomenal amount of money.

------
cocoalovethax
"Videogame development is not rocket science." These people obviously have no
idea what it takes to make a game.

~~~
jlgreco
Let's be fair though, there are _far_ more organizations capable of building
games than can build rockets. Teenagers in basements can and do kick-start
game companies but so far it seems as though rocket building is still in the
domain of governments and dot-com millionaires. _That_ is the difference that
is relevant; barrier to entry.

------
sabat
_Buying up games as they become hot is not a sustainable strategy. It takes
nothing to produce a hot game._

I'm no fan of Zynga, maybe, but this statement is false. It's typical for
large companies to begin doing corporate buyouts as a strategy as they
transition out of the growth-company phase. (Think Oracle.)

If it took "nothing" to produce a hot game, then we'd be flooded with new
gaming millionaires. Certainly there are a few, but how many social games that
your aunt plays are coming from tiny shops? And, if they're actually making
money, how many of those shops would turn down a big buy-out offer from Zynga?

------
dave1619
It's hard to bet against Zynga with Marc Pincus still in charge. Pincus is a
smart cookie. :)

