Reason #3 shows that the author does not understand even the basics of virtual goods and facebook platform monetization. The other points are nearly as non-sensical.
I'll take a crack at it. Here the author seems to be claiming that to remain popular and grow, Zynga and other Facebook-platform-users will need to have razor thin profit margins like Walmart in order to reach as many people with the lowest-common-denominator:
But here's the disconnect: if Facebook's future success depends on aiming for the lowest common denominator with the most people possible, that implies pretty slim margins a la Wal-Mart. You think they're going to justify a $50 billion market capitalization through banner ads? Are you kidding me?
How does selling virtual goods - which are all profit - relate at all to selling actual physical goods to consumers? Walmart drives the price down on what it sells based on it's huge presence in the market. This analogy barely makes any sense, and I have no idea what banner ads have to do with the comparison.
Frankly I would say that Reason #3 reveals that the author has a hard time making an argument in a concise or clear way.
He's clearly talking about the software and not the "virtual goods". Zynga's games require all the engineering expertise required from WalMart's 2.99 gallon jars of pickles. Any other company that can deliver pickles in an acceptable way can get right into that market. By contrast, try making a WoW or Call of Duty clone. Huge, huge undertakings.
If you don't believe me, actually play some of Zynga's games. 50 percent of the random shit on Kongregate is better by far. The difference is marketing only.
Eh. Zynga is social games at scale. The engineering talent isn't in the games part, it's in the scale part. Getting to that scale isn't any easy feat either.
What you've basically just said is that any idiot could clone facebook. Yes, they could. Except they still have everything to do.
Any idiot can clone Facebook, getting users to use Facebook was the hard part.
Scaling is vastly overrated. Yes it requires knowledge, but (a) you don't have to do it from the start (unless you're Blizzard and everything you do is an instant hit) and (b) users don't fucking care about your infrastructure that scales (that's not why they are playing your game).
"The gallon jar reshaped Vlasic's pickle business: It chewed up the profit margin of the business with Wal-Mart, and of pickles generally. Procurement had to scramble to find enough pickles to fill the gallons, but the volume gave Vlasic strong sales numbers, strong growth numbers, and a powerful place in the world of pickles at Wal-Mart. Which accounted for 30% of Vlasic's business. But the company's profits from pickles had shriveled 25% or more, Young says--millions of dollars.
Young remembers begging Wal-Mart for relief. "They said, 'No way,' " says Young. "We said we'll increase the price"--even $3.49 would have helped tremendously--"and they said, 'If you do that, all the other products of yours we buy, we'll stop buying.' It was a clear threat." Hunn recalls things a little differently, if just as ominously: "They said, 'We want the $2.97 gallon of pickles. If you don't do it, we'll see if someone else might.' I knew our competitors were saying to Wal-Mart, 'We'll do the $2.97 gallons if you give us your other business.' " Wal-Mart's business was so indispensable to Vlasic, and the gallon so central to the Wal-Mart relationship, that decisions about the future of the gallon were made at the CEO level.
Finally, Wal-Mart let Vlasic up for air. "The Wal-Mart guy's response was classic," Young recalls. "He said, 'Well, we've done to pickles what we did to orange juice. We've killed it. We can back off.' " Vlasic got to take it down to just over half a gallon of pickles, for $2.79. Not long after that, in January 2001, Vlasic filed for bankruptcy--although the gallon jar of pickles, everyone agrees, wasn't a critical factor."
(Fascinating article over all, well worth the full read.)
So is he saying that he is unsure of the capability and valuation of Facebook based on Zynga's business model?
This point still doesn't make sense in regards to investing in Facebook if he is talking about the product being sold is software rather than virtual goods. One company that uses the platform has an unsustainable (according to the author) business model - therefore the company hosting the platform has a problem as well?
And if the point does make sense, the author is certainly leaving a whole lot of his reasoning and explanation out of the actual article.
There is no reason, in a virtual goods model, that larger audience sizes require thinner margins. Players choose games based on how much fun they are having and what they can play socially with their friends - not the pricing on individual items.
Also, the author states "You think they're going to justify a $50 billion market capitalization through banner ads? Are you kidding me?".
This has nothing to do with Zynga and ignores Facebook Credits, which give Facebook a 30% cut of all the revenue on the platform. I'm pretty sure this author has never heard of them.
