Social gaming company
) recently came up with its spanking new gaming platform, putting
an end to earlier rumors. With the break of this news, shares of
Zynga soared approximately 10.0% to close at $14.48. The new
platform is seen as an attempt on Zynga's part to reduce its
dependence on Facebook.
The platform called Zynga.com is expected to be launched later
this month on a trial basis. On one hand, Zynga.com will allow
third party developers to showcase their games and advertise, and
on the other, through a new service called zFriends, it will allow
users to play with friends irrespective of whether they are
connected through Facebook or not.
Zynga primarily generates revenue through the in-game sale of
virtual goods in exchange of Facebook credits, which is a form of
virtual currency. Much of Zynga's success is attributed to the
massive popularity of Facebook, which generates more than 90% of
Zynga's gross revenue.
However, Facebook charges a hefty 30% of its revenue, which has
been a bone of contention for Zynga over the last couple of years.
It is rumored that in light of such a scenario, Zynga launched its
standalone portal Farmville.com in an attempt to distance itself
The new platform is somewhat similar to Zynga's
direct-to-customer platform "Zynga Live" or Project Z, which was
unveiled in October last year. Zynga Live allows customers to play
games from anywhere (web or mobile) without accessing Facebook or
any other social networking site.
It may seem that with the launch of the new platform, Zynga is
trying to curb its dependence on Facebook, particularly for the
sale of virtual goods. However, this is not possible in the near
term owing to a five-year exclusive agreement signed by both the
companies back in 2009.
Under the terms of the agreement, Zynga is bound to use Facebook
credits in any games or service it launches on the web. As such, on
the new platform, users will have to use their current Facebook
logins and credits for buying virtual goods for the time being.
Although the new platform will not significantly lessen Zynga's
dependence on Facebook in the near term, we believe that the idea
of foraying into the publishing arena will diversify its revenue
base going forward. Zynga will charge third party developers a
percentage of sales for its services, which is expected to drive
its top-line growth over the long term.
Further, through the new platform, Zynga will be able to expand
its existing game portfolio, without incurring significant in-house
game development costs, which will further boost its subscriber
base and profitability going forward.
The new platform will also consolidate Zynga's position in the
social gaming market over the long term, especially after the
expiry of its exclusive five-year deal with Facebook. Other than
subscriber expansion and portfolio enhancement, we think that the
company will also be able to better monetize its services through
the launch of its own virtual currency, over the long term.
However, we believe that publishing is an uncharted area for
Zynga and the company will face stiff competition from
), which is already a dominant player in the publishing space.
Moreover, we believe that Zynga needs to monetize its services and
games faster in order to remain competitive going forward.
Until this happens, we remain Neutral on the stock over the long
term (6-12 months). Currently, Zynga has a Zacks #2 Rank in the
near term, implying a Buy rating.
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