Social and casual game developer
) recently announced a bunch of new games and a whole new network
aimed at boosting its user base and share price. However, the
announcements did not help the stock, as the share price slid
approximately 5.0% to close at $5.77 on June 26, 2012.
The significant fall in the share price reflects investor
skepticism over the new network, "Zynga with Friends" which seems
to be another attempt by Zynga to reduce reliance on
). The social networking company has been hailed as the primary
driving factor behind Zynga's success over the last five years.
Currently, Facebook contributes 85.0% of Zynga"s traffic and 92.0%
of its revenue.
The new network will bring all Zynga gamers, whether playing on
personal computers, mobile phones or tablets on one platform, where
they can play against each other and share game information. The
network provides a host of new features such as player profiles,
activity logs and chat facility that is hoped to make the platform
attractive. Zynga said that gaming-related friendship will induce
people to spend more time on games, which will boost the sale of
Zynga's dependence on Facebook stems from an agreement between
the two companies signed in May 2010. As per the agreement,
Facebook helps Zynga in meeting active user targets and shares
advertising revenue. In exchange, Zynga gamers are required to use
their Facebook accounts to play Zynga games.
Facebook enjoys exclusivity not only in terms of the existing
games on its platform but also on upcoming new games that include
Facebook integration data for the duration of the agreement.
Further, Zynga is committed to use Facebook credits as the
exclusive virtual currency for the sale of in-house game items
Facebook charges 30% of this revenue for the services it
renders. More importantly, Zynga is prohibited from launching games
on rival social platforms.
These strict terms have been a major concern for Zynga lately,
particularly after the much criticized initial public offering
(IPO) of Facebook which suffered due to the lack of visibility
around monetization of mobile platforms.
Moreover, rising concerns over the effectiveness of Facebook ads
as compared to
) AdSense also added to the concern. Zynga earns approximately 9.0%
of its total revenue from advertising, most of which is contributed
by Facebook. Most recently, Facebook began to show ads in Zynga
games, played by approximately 290 million gamers.
In such a scenario, the new network is expected to be a major
strategic booster for Zynga. However, we note that Zynga's earlier
attempts at creating its own platform (Farmville.com, Project Z)
did not gain material success, which makes us more cautious about
the new platform.
Zynga also announced that it will provide programming tools to
third party developers to publish online mobile games. The company
also announced partnerships with
) and Atari. Mobile is the only platform where Zynga is allowed to
publish games without involving Facebook. We believe that mobile
initiatives such as partnerships and acquisitions (OMGPOP in March
2012) will expand Zynga's user base beyond Facebook over the long
Lately Zynga has been criticized over the lack of new and
diversified gaming content which is failing to attract new users.
Moreover, demand for social games is also seeing some deceleration
particularly due to stiff competition from video gaming companies
) which has a more diversified gaming (social, casual,
In order to combat this threat, Zynga announced a number of new
smartphone games including
Matching with Friends
along with a couple of new additions to the Ville platform and a
sequel to Farmville. However, these games are yet to prove their
monetization capability which keeps us on the sidelines for the
We remain Neutral on Zynga over the long term (6-12 months).
Currently, Zynga has a Zacks #3 Rank, which implies a Hold rating
in the short-term (1-3 months).
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