Looks like Zynga is jumping out ahead of some of the issues I noted in my last post. According to Bloomberg today, ZNGA plans to offer its prime game space on Facebook as an advertising medium to other game developers, a move that Bloomberg and its BusinessWeek publication are comparing to EA and Activision's roles as "publishers". It's not too mysterious why a plan like this is attractive to Zynga; with Daily Active Users shrinking from 62 million this time last year to 59m the next quarter, 54m the next and 48m in the most recent, and with R&D costs exploding eight-fold, Zynga clearly needs to get creative on growth strategies.
I'm not sure that allowing other game developers to advertise on your games, thereby tacking themselves onto your name and risking the dilution of your brand, is the best idea - what if the games suck? Will Zynga be applying quality control to the games they allow to associate with their brand, as real games publishers like SEGA and EA do, or is this merely a 'billboard' strategy, with its attendant reputation risks? Will Facebook gamers differentiate between Zynga-developed games, and games that advertise in Zynga's gamespace, or will they just lump them all together and blame Zynga for the lame funless games that pop up during their Farmville session?
Not to be too skeptical, let's note that Zynga is making some smart moves, like migrating from the Amazon cloud service to its own 'z cloud' infrastructure, thus ensuring that gamers won't be subject to slowdowns and outages that are outside of Zynga's control. With all the talk of exploding R&D, if it's a case of real investment in future blockbusters (versus the developers-run-wild scenario posited by some) this could also be a growth-sustaining move. The prospect of legalized online gambling has Zynga proponents ready to double down, as its popular Zynga Poker title could be the perfect platform for minting money. And rumors of Zynga's plans to challenge Steam, the game engine gamers love to hate, could broaden Zynga's control of gamer mindshare, if they can overcome the annoying idiosyncracies of that competitor. In short, there is a bull case to be made for Zynga, just not on the basis of the current numbers or their trajectory.
And the back-of-the-napkin calculation that says that, if Facebook is worth $100B and Zynga generates 12% of that, therefore Zynga must be worth about $12B (close to its current market cap) is just so last bubble.
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