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Zynga: Is this the start of a turnaround?
Zynga: Is this the start of a turnaround? Exclusive
October 24, 2012 | By Chris Morris

October 24, 2012 | By Chris Morris
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    8 comments
More: Console/PC, Business/Marketing, Exclusive



I'm about to say something that's likely to make me unpopular around these parts: Zynga may actually know what it's doing.

I know… I know… But after months of seemingly drifting aimlessly and taking no steps to correct its ongoing free-fall in the markets, the company has made a few intelligent moves this week that have finally turned heads – and it's done that as its biggest partner has tried to bury it.

Wednesday's earnings surprise, while it still presented numbers that were a lot lower than anyone wanted, gave the company a bounce as high as 15 percent in after-hours trading. And it was a page straight out of the Activision playbook.

Love 'em or hate 'em, Activision knows how to manage investor expectations. They consistently guide Wall Street to the low end of expectations and often breeze right past those. That's something Zynga managed to do with these earnings, by pre-announcing a shortfall, but still topping those revised expectations.

In early October, Zynga said it expected revenue would come in between $300 million to $305 million. Analysts, fearing the worst, had an average projection of $256 million. The actually revenue total was $317 million.

It's a play that can be used too often, but when it's run correctly, investor angst can be soothed (at least temporarily).

More important was Zynga's decision to buy back $200 million worth of its stock. It's common for publicly traded companies to take this sort of action when their stock falls, since it signals to investors that the company thinks the shares are undervalued. But Zynga has consistently neglected to do so, giving the impression that it agreed with the Street. That doesn't do much to boost the confidence of anyone – whether they're investing in the company or going to work there.

It'd be an even bigger boost to see Mark Pincus invest some of his own money to buy shares as an even stronger show of faith, but for now, we'll take what we can get.

Tuesday's layoffs, though painful, were also the right move. The timing of them was certainly questionable and the reported two-hour window for people to clear out their desks and vacate the premises was, if accurate, pretty nasty. That said, few have ever described the working conditions at Zynga for the rank and file to be a nirvana.

The fact is Zynga was (and still is) a bloated company. While it's never a happy occasion when someone loses their job, the move was long overdue. And frankly, the bloodletting still has a ways to go. Don't be surprised if the company continues to pare down its staff in the coming months, whether by attrition or another painful round of belt-tightening.

Closing studios, shelving games that are unprofitable and reducing headcount to adjust for the changing needs of the company are difficult, but essential, steps for Zynga to survive as a public company.

So, too, is preparing for the future. While I've pointed out my concerns about Zynga's plans in the "real money game space" (what the rest of us refer to as online casinos), the company took a big step forward with its partnership with bwin.party to launch online poker and casino games in the U.K.

Building the international market is a good stopgap as lobbying for online gambling in the U.S. continues. And it's particularly smart to leverage the Farmville name in the games (though exactly how that will work is still a bit confusing). It's the first territory-marking move for new chief operating officer Maytal Ginzburg. And it will be interesting to see what else she has in store.

Fortifying itself for the challenges of the future is especially important, given the growing hurdles the company must face. Earlier this week, Facebook founder Mark Zuckerberg stung Zynga with a mighty pimp slap during the social media giant's earnings call, saying:

"Now, I want to talk specifically about games for a bit, because I think the story here is a little misunderstood as well. Overall, gaming on Facebook isn't doing as well as I'd like, but the reality is that there are actually two different stories playing out here. On the one hand, our payments revenue from Zynga decreased by 20 percent this quarter compared to last year. But the interesting thing is that the rest of the games ecosystem has actually been growing. Our monthly payments revenue from the rest of the ecosystem increased 40% over the past year since payments has been adopted. This evolution is pretty encouraging."

Put another way, he continues to believe in games, but is losing faith in Zynga. Ouch.

Zynga has a long way to go. And it's still imploding at a rate we haven't seen since the days of Pets.com. But with this week's series of actions, there just might be a glimmer of hope that it can pull out of its nosedive.

If nothing else, it seems like someone has finally stuck their head back into the cockpit, at least.


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Comments


Michael Joseph
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I don't think it's fair to compare Zynga to Activision.

Activision makes games.

Zynga makes one armed bandits in game clothing... and now they're looking to ditch the clothing.

Zynga is a company that has slashed and burned it's way from Wall Street darling to dog in record time.

Zynga has been bleeding executives for months.

Zynga's underwater stock is not too far from reaching one of the NASDAQ delisting marks. Pincus talking about taking the company private sounds a lot more like quitting your job the day before you know you're to be given the sack. Buying back 200 million in stock also sounds like an effort to stabilize the stock's freefall more than a belief that the stock is undervalued. Pincus hasn't bought back any shares using his own money.

NOBODY expects Zynga to recover from their current situation. Even if online gaming does take off a year, 2 years, 5 years down the line, what makes you think Zynga is going to still have the capability to capitalize on it? Their ability to steer the ship away from the rocks is declining every month.

Zynga has one of the worst reputations amongst gamers and peers in the industry. What steps have they taken to repair this? There answer seems to be "screw the haters, let's just go make real casino games so we avoid the criticism and don't have to lie about who we are and how we operate. Let's just drop the pretense of making games."

So here's the question. If online gaming is this 100 billion dollar industry looming over the horizon, how is Zynga going to ensure it's getting their fair share of the pie? I don't see how it can. I think a company could sit on the sidelines and wait until the eve of legalized online gaming and then put forward a really trusted name and do far better than a "Zynga" could ever do.

EDIT:
Facebook itself could do far better if it were allowed for example to set up private ring poker games between family members and friends. This way the avoid the entire strange "online casino full of strangers and possibly colluders and house players" feel and the game feels more like a social experience between people you know... except real money is actually on the table and facebook collects the rake. That would be a very natural way to introduce people to games like poker and warm them up to the experience.

And that would be the edge for a company like Facebook to beat all competitors. And they could do it without outwardly transforming into an online casino experience. They could keep the feeling of just being on Facebook and socializing and playing these ancillary experiences that are merely apart of facebook but which don't define facebook.

BOTTOM LINE: Quit drinking the "future is bright" kool-aid being pumped out of a deperate Zynga PR.

Michael Joseph
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This type of "Hey we are going into the online casino business" forecasting of future business strategy would never be done were they not trying to keep the stock from bottoming out.

TC Weidner
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people who hate Zynga dont matter? Huh who knew. Zynga was selling at 16, now at 2.50. I kinda think people who dont care for Zynga kinda do matter.

Jason French
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Really? No other comments on this article? Figured there'd be a bunch of stuff by now. Here's my comment:

"Roadhouse."

I just like seeing that word and thinking of Peter Griffin kicking the steering wheel as he drives through Quahog. It makes me smile.

Oh yeah, and "Zynga sucks/rules/{insert troll bait here}".

Roadhouse.

Saul Gonzalez
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Does online gambling qualify as "video games"? Will Gamasutra cover it?

Steve Fulton
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The line has to be drawn some place, right? I may be wrong, but Replay magazine never covered coin-operated gambling games, did they? As far as I can recall, Electronic Games never talked about video poker. It seems to me that when social games "cross that line" they are in another business entirely.

Frank Cifaldi
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We will cover it in areas where there is direct crossover with the video game industry (market share on social networks, etc.) but for the immediate future we consider it a separate cousin industry that we just kind of check up on once in a while to see if any of its trends can give us any insight into ours.

Vin St John
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Facebook has always emphasized the growth of companies smaller than the top 10 developers, whenever there is a loss of MAU in the Zynga/EA/Wooga/King.com/Disney games. Last year they were saying the same thing when people were pointing to an across-the-board drop and suggesting the "end of Facebook games." Zuckerberg isn't hating on Zynga, he's trying to highlight the positives for small developers so they continue coming to their platform and trying to become the next big thing.


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