History of Zynga
Zynga is a social video game services developer founded in 2007 by Mark Pincus. The timing of the company’s inception coincided greatly with the rapidly growing trend of videos games being played in web browsers as well as Facebook’s release of Facebook Platform in 2007. Facebook Platform gave a set of a tools to third-party developers so they could build apps on Facebook, an implementation that would see Facebook emerge as one of the most popular websites for social video games. Zynga was one of the first adopters of the service releasing its first game, Zynga Poker, in July 2007. Zynga followed its first game’s initial success with releases such as Mafia Wars, a multiplayer game having players manage their own virtual crime syndicates, and Words with Friends, a multiplayer game similar to the classic board game Scrabble. However, it wasn’t until the release of FarmVille that Zynga cemented itself as the clear leader in the social gaming industry.
The FarmVille Phenomenon – Zynga’s Rise
In June 2009, Zynga released FarmVille, a farming simulation game revolving around players managing farmland, harvesting crops, and raising livestock. The game was met with immediate success and quickly became the most popular game on Facebook, a distinction it held for over two years. At its peak in 2010 the game had 83 million monthly active users and 34 million daily active users. While the game was a success in itself, it also laid much of the framework for many of Zynga’s future games. Releases such as CityVille and ChefVille had very similar gameplay masked by different settings. Despite the games being similar, these future releases continued to be very successful and profitable. At this point Zynga was undoubtably the most successful app developer on Facebook with a wide ranging collection of popular games. Their success was seemingly inevitable as their timing and early business decisions were undeniably ideal. Much of their success stemmed from them strategically tapping into the market of casual gamers – i.e. Aunt Susan, who never would have owned a Playstation, but found a lot of fun in the simpleness of FarmVille. Zynga also took advantage of the early days of Facebook when ads and generating traffic was generally cheap allowing them to easily market to the hundreds of millions of Facebook users. However as we are all too aware, the tech industry is always evolving, and Zynga’s inability to adapt quickly led to its fall from social gaming dominance.
A wide variety of factors led to Zynga’s decline in both revenue and standing in the social gaming industry.
Much of Zynga’s decline was directly from the actions of Facebook. As stated earlier, Zynga benefited greatly from Facebook’s low ad costs. However, as we read in our Facebook case study, Facebook soon figured out how to show their users better ads allowing them to charge more. Facebook also took a page out of Apple’s App Store playbook and began taking a 30% cut from developers on its platform. All of these actions by Facebook deeply cut into Zynga’s net income. While prices of ads were increasing, Zynga still had the opportunity to market their games through players posting updates about their games on their Facebook timelines. We all remember how annoying it could be when Aunt Susan would post daily updates about her games, and Facebook recognized that this annoyance could be detrimental to its platform. This situation led to Facebook reworking its algorithms so these posts would be shown far less frequently, significantly hurting Zynga’s marketing scheme.
Most importantly, the social gaming market transition from desktops to mobile devices significantly effected Zynga. As the popularity and power of smart phones rose, the mobile market soon became the go to spot for casual social gaming. Apps like King’s Candy Crush and Supercell’s Clash of Clans soon became the leaders in the industry with Zynga unable to adjust to the mobile market.
Lets Talk Money
Zynga chose to adopt a free-to-play model in which anyone can play their games for free, although spending money made the experience a whole lot more enjoyable. Zynga’s primary source of revenue is from direct credit card payments made for digital items as well as partnerships with other businesses. Most of Zynga’s games revolve around the user’s “energy,” which is depleted as the user completes tasks in the game. When the player uses all of his or hers energy, they essentially cannot play the game anymore until their energy replenishes, a task that typically takes a few hours. Players have a few options in which they can replenish their energy without waiting. The first, and most profitable for Zynga, is players simply buying more with real currency. Besides energy, the players can also purchase in-game currency which can be used to buy virtual goods. Because all of these goods are digital, and thus have no marginal cost, Zynga makes great profits off of these sales. Players also have the option to obtain energy and in-game currency by completing offers from Zynga’s partnered businesses. These offers typically included filling out a survey, watching an ad, downloading an app, or signing up for a service. An additional way players could earn energy is through posting about the game on their Facebook News Feed or inviting people to play the game, often serving as free marketing for Zynga.
IPO and Stock History
In December 2011 Zynga listed ten million shares at $10 each in its initial public offering making it the largest tech IPO since Google. Zynga’s stock climbed to a price of $13.39 per share in February 2012 after Facebook’s IPO filing, largely because Facebook had stated that 12% of their revenue comes from Zynga. However, because of Zynga’s decline in revenue as well as Facebook’s poor IPO, the stock fell dramatically to $2.27 by October 2012, and now hovers around $3.50 to $4 per share.
Just a few years ago Zynga was one of the biggest and most profitable companies in video games, but inability to adapt caused the company to lose much of its success as quickly as it came. However, recent changes in the leadership team as well as a full transition to the mobile market show much promise for the company in the future – the main focus of my presentation on Zynga next week!
Questions I’d ask Zynga:
- Have their been any plans to develop larger scale games, potentially ones not involving the free-to-play model?
- Do you believe that the simplicity of your games – the attribute that initially drew users to them – is now pushing them away as the style has been oversaturated?
- Is Zynga pursuing any endeavors outside of developing games, similar to the partnership with Hasbro to create board games inspired by Zynga games?