Zynga loses Wall Street friends
By Chris Nuttall in San Francisco
July 31, 2012
Zynga with Friends is the social gaming company's latest networking innovation to connect its players ever more closely, but Zynga without Friends better represents the current state of play on Wall Street. The San Francisco company has done nothing but alienate the financial community over the past few days.
On Monday, Newman Ferrara was the first law firm to file what are expected to be a series of class-action lawsuits on behalf of investors, alleging Zynga's executives "knowingly or recklessly" made misleading statements this year about the company's performance and prospects.
That followed Zynga's radical downward revision of its outlook on an earnings call last week, which led to a 38 per cent fall in its share price on Thursday.
Zynga said its forecast reflected "a faster decline in existing web games due in part to a more challenging environment on the Facebook web platform" - a comment that has sparked debate over whether it is just Zynga that is in decline or the entire casual gaming genre of building farms and cities, and playing word games, that has thus far dominated on Facebook .
Gaming on social networking sites such as Facebook was considered a promising new market for both traditional games publishers like Electronic Arts and new entrants like Zynga. But there have been recent signs that casual gaming, on Facebook at least, is losing steam.
While roughly half of Facebook's active users were gamers at the end of 2010, that proportion fell to a quarter at end of 2011, and the absolute number of gamers on Facebook changed little, according to IHS, the research consultancy.
Analysts say Zynga's woes are outsized compared to those of the broader market for casual games, because of its dependence on Facebook, where it makes most of its sales.
"Zynga probably overestimated how evergreen its games are - CityVille and FarmVille revenues were very stable for several quarters, but they started to tail off," says Michael Pachter, games analyst at Wedbush Securities, who reduced his share-price target from $17 to $7 on Thursday.
He says this appeared to happen before the launch in June of Facebook's App Center, a store for apps such as games, video and music services that work mainly within Facebook.
Zynga, which declined to comment on the class-action lawsuit, claims the App Center was favouring new games in its promotions and recommendations, but some of its rivals dispute this.
Will Harbin, chief executive of game-maker Kixeye, says there is still room for games companies to attract gamers and make money on Facebook. Mr Harbin, whose Battle Pirates and War Commander titles are among the top grossing on Facebook, despite having only a fraction of the players of CityVille or CastleVille, says Kixeye has seen a 48 per cent increase in new users for its games since the App Center was launched.
While less than 3 per cent of Zynga's players spend money on virtual goods in its games, Kixeye claims a far higher percentage of its players spend money, because its games attract more hardcore, and predominantly male, gamers.
Zynga said last week that it too would begin to target this audience.
"Good luck to them, bring it on. . . They cannot make a quality game in the way we can," says Mr Harbin.
AJ Glasser, managing editor of Inside Network, which provides analysis of the Facebook platform, says Zynga is suffering from stagnation among its more casual gamers.
"I think they have just found their game and they are staying with it. The switching cost of going to a new one means you lose a lot of the time you invested in the game, so why bother?" she says.
Zynga is trying to become less dependent on Facebook, with its own gaming platform at Zynga.com, but analysts feel there is a bigger threat to its continuing success.
"Reduced engagement is due to a shift from PC-based social gaming to mobile gaming," say analysts at Cowen and Company.
"We think this shift is likely permanent and ongoing, threatening Zynga's largest business segment."
Analysts at Macquarie say Zynga's efforts in mobile gaming to date looked little different from "myriad other casual game companies" and it lacked the first-mover advantage it had on Facebook.
Wooga, a German rival, unveiled its mobile strategy last week. Half of its more than 200 employees are now working on mobile, a big shift from being a Facebook-only company a year ago.
"Mobile is the next big opportunity for growth," says Jens Begemann, founder and chief executive.
"We believe the big shift that's happening is mobile games that have been single-player are now becoming social."
Zynga also held out hope last week for significant revenues from real-money gaming, with versions of its poker, bingo and slot machine games under development for release in the first half of next year.
It will have to focus on international markets, though, with such gambling illegal in the US, and analysts think that here, too, betting on Zynga's success represents something of a roll of the dice.
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Inquiries about this case may be directed to Newman Ferrara attorneys, Jeff Norton or Roy Shimon, at 212-619-5400