What Does Life After IPO Look Like For Zynga?
With shares dipping 5%, Zynga’s $1 billion initial public offering Friday shows that there’s still a long way to go for the company that legitimized free-to-play social games in Western markets.
Following South Korea’s Nexon, Zynga is the second initial public offering from a gaming company in the last week that has seen its shares dip below the initial price. Unlike coupon site Groupon, which is still trading above its offer price, both Zynga and Nexon have comparable publicly-traded companies like video game publishers Activision, EA, and Ubisoft, against which revenue and profit multiples can be benchmarked. (Nevermind the fact that Zynga is profitable and Groupon is not.) Given that those companies have struggled to maintain investor in the last three years as confidence as mortar-and-brick retail sales dip, it’s easier to understand how Zynga is facing skepticism over more than just its free-to-play model. On top of that, uncertainty about the stability of the European Union has rattled investors in broader equity markets.
The consolation from Zynga’s day-one performance may be that the developer and its underwriters priced the offering effectively enough that the company didn’t leave money on the table for investors to pocket by immediately turning around and selling shares.
The real question is, where to next? The key to life after IPO for Zynga will be growth — on mobile, in international markets, and on alternative social game platforms outside of Facebook.
Mobile: Will There Be a Zynga of iOS or Android?
The most promising opportunity for independence from Facebook lies on iOS and Android, where Google and Apple have built attractive, fast-growing ecosystems for the same kind of games that are the heart of Zynga’s original business. Zynga started the year as an underdog with Storm8′s Farm Story and Playforge’s Zombie Farm beating the companion to its blowout hit FarmVille and a group of Siberian developers running circles around their poker app.
But with gradual optimization, a savvy and cheap acquisition of Words With Friends-maker Newtoy, and a promising launch in Dream Zoo have helped Zynga come around. It has 13 million daily actives on Android and iOS — a number that is sure to grow with the fracas around Alec Baldwin’s addiction to Words With Friends. Although there is no data to know for sure, Zynga probably has more daily active users on mobile devices than any other developer except for Rovio Mobile, which says it has 30 million daily actives across all platforms.
In 2012, we’ll find out if that becomes a big enough business to help the company diversify outside of Facebook in a meaningful way.
Ballpark figures have us putting high-grossing iOS games at between $1 and 3 million a month and there are several publicly traded mobile gaming companies that pulled in between $7 and 19 million in the quarter ending in September. That gives us a handful of privately-held companies with similarly-ranked games that are likely bringing in between $50 and 100 million in annualized revenue.
At this point with six titles in the iOS top grossing 100 in the U.S., Zynga is probably one of those. Then you have to consider that Android and iOS may be poised to have a larger combined footprint than Facebook in the next 12 months. The two platforms have 450 million cumulative device activations or sales behind them. (That number doesn’t deduplicate consumers who have replacement devices.)
One drawback, however, with mobile platforms is that neither Android or iOS seems structured to produce a winner-take-all environment in the way that Facebook has been. Apple certainly isn’t going to sign a five-year agreement guaranteeing Zynga the same kinds of advantages and growth targets that Facebook has. Plus, a variety of games can flourish on the iPhone from casual, resource management games to console-quality RPGs and first-person shooters.
International: Looking Toward Asia
Zynga is also starting to experiment with pushing its titles abroad into Asia. But those markets are extraordinarily competitive with homegrown incumbents and very different rules and regulations. This is especially true in China, where Facebook is banned and Zynga has had to go with Tencent instead. (Not that Tencent is unattractive – its network of platforms boasts 700 million monthly actives to Facebook’s 850 million and the company told us in September that its top title is earning $1.6 million per month.) Sina Weibo, the new social networking darling that has quickly captured China’s white collar and college educated class the way Facebook originally did, is only just beginning to build its third-party platform.
South Korea and Japan also have a very mature social and mobile games industry. To succeed there, Zynga will need local studios and hyper-localized versions of its core franchises. It may even need to launch completely new franchises, as Zynga’s current wheelhouse of games covers genres that are already saturated on Asian networks like city-building and farming. Other Zynga games, like FrontierVille (a.k.a. Pioneer Trail) or CastleVille, would probably be too hard to adapt to an Asian audience given the heavy Western cultural influences in both games.
So far, Zynga has established studios in Europe and Asia but we still see the company relying primarily on Facebook for distribution. For example, the developer’s last three major launches — CastleVille, Mafia Wars 2, Empires & Allies — were all localized in more than 10 languages on Facebook from day one. Meanwhile, social networks in Asia are only just now getting releases of older Zynga games and in some cases, those games are failing.
Case in point: Zynga Japan — currently led by former Tecmo Koei CEO Kenji Matsubara — reportedly sunsetted both FarmVille (Farmvillage) and Treasure Isle (Treasure Island) on Japan’s Mixi social network and has yet to make any major game announcements for networks other than Facebook. In China, where Zynga has a studio in Beijing, the developer launched a version of CityVille called Zynga City on Tencent’s Open Platform, first with the Pengyou and Q-Zone game networks. But this game is one among many city-building games. Zynga’s Beijing studio, formed through the acquisition of XPD Media, is also more Western-facing for now.
As far as we know, Zynga has made no moves onto other international social game networks like Orkut or VK.net. The developer has made acquisitions in Europe, but hasn’t formally announced a regional office to oversee expansion in the region.
Alternative Platforms: Will Google+ Work?
The third area of new growth could be on alternative platforms like Google+. While early Facebook rivals like MySpace have declined so much so that Zynga has pulled its games off those platforms, other networks have been gaining traction. For example, Google+ already has two of Zynga’s larger franchises — Texas HoldEm Poker and CityVille. We don’t have any data though on how well those games are actually doing compared to Facebook, but the increasing number of social game developers launching on the platform suggests that G+ may be viable.
Zynga is also trying to grow its own platform off Facebook by launching a games platform, Zynga Direct (also called Project Z or Z-Live). But we see Facebook’s influence there too, as Zynga made an effort to point out the service’s integration with Facebook Connect at its Unleashed event this fall. However, it may be possible to play Zynga games on Zynga Direct without a Facebook account, which would be another step toward independence. The success of an independent Zynga platform depends on how much of its existing Facebook and mobile audience the developer can take with it when the service launches — and we don’t even know if that will be in 2012.
Facebook: Is it Still Possible to Grow?
Facebook — Zynga’s greatest ally and number one weakness — is the one place where future growth is largely out of Zynga’s control. As a games platform, the social network no longer provides developers an ecosystem that can consistently sustain rapid growth. Though new social games still continue to launch on the platform, we’re not seeing the kinds of traffic Zynga enjoyed on Facebook in 2008 and 2009. Rising costs in development and user acquisition have led some to believe that the platform is no longer a place where new developers can find success by copying what Zynga has done in the past.
Developers’ strategies on the platform are starting to adapt to these changes, which could open up new growth areas. For example, Zynga rivals EA and Ubisoft have used it to leverage major video game franchises by creating companion and standalone social games married to those franchises (e.g. The Sims Social, Ghost Recon Commander, etc.). Ubisoft and others are exploring licensed media properties like TV shows as means of generating traction for new social games. Lastly, mid-market and small developers are producing niche genre social games with very loyal audiences and much higher monetization rates than Zynga’s games.
Zynga has explored all three of these areas with its game releases in the last year: The company has used the Words With Friends franchise to launch a growing companion social game. It also experimented with content releases for major media brands and celebrities to drive engagement in its existing games. Zynga has also launched some games in new genres, like strategy combat game Empires & Allies. Zynga will likely experiment more with these approaches in 2012, perhaps even migrating new users gained in mobile and international markets back to Facebook or onto its own games platform.