The third issue revolves around the company’s business moat. To say that Zynga doesn’t have an economic moat is the understatement of the year. Every micro company with a bunch of programmers can bring the next best game to the world. In fact, this is actually happening right now. A private company named King.com is coming out with blockbuster games like “Candy Crush Saga.” This little darling is played by a startling 15 million people on Facebook each day, making it the most popular application on the social network. It’s also the top-grossing app in Apple’s and Google’s stores. So that’s a the first lesson in economic moat for Zynga. But competition can also come from within. Facebook, whose vast online platform helped propel Zynga to the top of the casual-gaming leader-board, is exploring how to boost the number of companies developing games for it. I have a feeling that at some point, Facebook will run Zynga to the ground only to buy it later for pennies and use its gaming platform in-house.
Possible solutions
As to the earnings dilemma, I have no doubt in my mind that at some point Zynga will have to transform to a ‘pay-and-play’ model. It can’t just go on offering its games for free. I’m sure that at least part of its many gaming addicts won’t mind forking over a couple of dollars for a monthly subscription. There’s nothing wrong with that. In addition, Zynga must implement what has worked so well for Facebook and Microsoft Corporation (NASDAQ:MSFT). Facebook has built a great advertising-based business model that’s highly successful because it has gathered significant information about their users. Microsoft has built great advertising through its Kinect–through Kinect 2.0 you will be able to see and hear what is going on in front of the camera. If two friends are talking about where to get some food, a Domino’s Pizza advertisement might appear in their game in real-time.
Zynga must penetrate the advertising segment and add flashy advertising to its games. I can think of a dozen different companies that would love to target Zynga’s gaming youth.
As for the economic moat, gaming companies don’t and never will have an economic moat in the traditional sense. Their “moat” is their ability to come out with new blockbuster games, and to maintain older ones. If Zynga is able to come out with a single blockbuster game once a year, it will do just fine. Perhaps Mr Mattrick, who helped increase the number of Microsoft’s Xboxes in homes from 10 million to 80 million, will help to add that spice of innovation.
The Fool looks ahead
With massive layoffs, over-dependency on Facebook, and no net income to talk about, Zynga is between a rock and a hard place. Nevertheless, if its new CEO is able to amend its business model for the better, it will be the turnaround of the century. With many disappointed investors, the burden of proof is solely on Zynga’s shoulders.
Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook and Microsoft. Shmulik is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Will Zynga Transform Itself Into a Profitable Company? originally appeared on Fool.com is written by Shmulik Karpf.
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