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Zynga: Turning The Tables
1. Turning the Tables for Zynga
IM661 Entertainment Industry Analysis – KAIST Business School
Team: Inseok Kim, Noksil Kwon, Anggriawan Sugianto
2. Turning the Tables for Zynga
Outline
1. Environment
2. Company Profile
3. Problem
4. Alternative Solutions
5. Recommendation
turn the tables
• (idiomatic) To reverse a situation, such that the advantage has shifted to the party which was
previously disadvantaged.
4. Game Industry
1980 2010
1990
1970
2000
Boom
Arcade & Console Crisis DDR Wii, Kinect,
Arcade: Live move
Space Famicom
Galaxy
Invader
Boom Distribution, Subscription,
Ad, Freemium, Social
PC & Web Web
Space
Game
War
Boom
Tetris, N-Gage
Snake
Mobile & Handy Nintendo DS
Touch Screen
iPhone,
App
6. Zynga Inc.
From 2007 to 2012
Founded in 2007,
Trading on NASDAQ since 2011,
Acquired around 25 companies including video game maker, board game company
and online poker tracker company,
Opened over 18 satellite offices and international studios in Japan, China, German, U.K. and India,
Operating 27 games of arcade, casino, simulation genres.
1400 1400 100%
90%
1200 1200
80%
1000 1000 70%
Ad. 60%
800 DAU 800
Pokers 50% Inter.
600 MAU 600
Others 40% US
MUU
400 400 Ville 30%
20%
200 200
10%
0 0 0%
2011 2012 2011 2012 2011 2012
Users Revenues Revenues by Geography
8. Symptoms
Bearish Stock Price
• Dec 16, 2011: IPO at $10
• Mar 2012: Highest price ever at $14.5 (+45%, 2 month after IPO)
• Nov 2012: Lowest price ever at $2.09 (-79%, 11 month after IPO)
• Mar 2013: $3.42 (still -65.8% since IPO)
Employment Termination
• Feb 2013: Zynga closes 4 offices: New York, Baltimore, Austin (TX), McKinney (TX)
– All four of the offices had recently lost their leaders, and many were associated with big flops for the
struggling maker of social games.
• Dan Porter, GM of Zynga NY (and ex OMGPOP CEO) felt its employees are not happy
– Ex-engineers also felt dissatisfied with company direction
• Mass layoff in several offices, while executives and creative talents have already resigned before
Out of Competition
• Zynga closed PetVille, Mafia Wars 2 and nine other games
• Zynga‟s games even are not listed in the top-10 most profitable mobile games (2013)
9. Causes
Over-reliance to Facebook
• “Mutual” relationship
• 12% of Facebook‟s revenue (2011) came from partnership with Zynga
– It was $445 million of $3.71 billion in sale
– Payment: Facebook takes 30% virtual goods transaction
– Advertising: Zynga spent on Facebook advertising
• Zynga users also increase Facebook pageview Good for Facebook advertisers
• 94% of Zynga‟s revenue (2011) came from Facebook
– Facebook accounted for 81% of Zynga‟s accounts receivable
Unprofitable Users
• Zynga relies on a small percentage of users for nearly all of its revenue (whales)
– Less than 10% of users spend money
– Less than 1% of users are responsible for between 25-50% of the company‟s revenue
10. External Factors
Opportunity Threat
Game Industry Facebook’s Growth
• Game industry is growing fast, especially in • Zynga and Facebook revised their long-
online multiplayer games and social/casual term partnership by changing their
games. agreement.
• Zynga has the resource to develop more • Now Facebook is free to develop their own
games. games.
Online Gambling Competition
• The future of online gambling seems good • Barrier to entry for social network-based
for Zynga‟s current financial games in general is relatively low.
situation, although it‟s not good for their • This situation can distract Zynga‟s potential
reputation. new users to other options.
Mobile Games Mobile Games
• Mobile game industry is growing fast. • Zynga has limited killer apps in mobile
• Zynga‟s games are well-matched with games compared to the competitors.
mobile and Zynga has resources to
develop.
11. Key Question
How should Zynga grow its business
to turn the table and regain its credibility
from the shareholders ?
13. Alt1: Farm! New Location Ville!
Zynga should expand its business to Asia market, especially China
• Based on Q4/2012 report, 59% of Zynga‟s revenue came from US market, while the remaining 41% were from
International market.
• Meanwhile, there is a significant growth in online/mobile video games industry in Asia, especially in China. The growth of
online/mobile game in China is 266% larger than in US.
• Therefore, business expansion to Asia/China market is a great alternative.
Strategy 2007–2011 growth in online/mobile
PARTNERSHIP WITH RENREN video games (US$ millions)
Russia 687
• Renren is one of the biggest social networking services in China, with
United States 1286
162 millions of registered users (2012). Japan 1376
• Renren is strong in MMORPG & casual gaming, but not in social South Korea 1750
gaming. China 4707
• Why Zynga-Renren partnership is beneficial to both: 0 1000 2000 3000 4000 5000
1. Zynga can expand its user base to Asia, especially China as the
biggest market, and generate more revenue. Online Game Market (US$ billions)
2. By enhancing their game portal with Zynga‟s successful 35
1
2
games, Renren can increase its MAU rate. (it was just 26.5% in 30 1
2 4
2011). 25 1 4
4
3
1 4
20 1 3
3
3 11
15 1
Additional Strategy 1
2
3 9
0
1 7
• Build the localized version of Zynga’s game platform: zynga.cn 10 2 3 6
2
• Build partnership with local game developers to distribute their games 5 3
4
10 11
7 8
into Zynga‟s platform, or do acquisitions of local game company. 4 5
0
• Fork existing Zynga games into local language 2009 2010 2011 2012 (E) 2013 (E) 2014 (E)
China Korea Europe N. America Japan Others
14. Alt1: Farm! New Location Ville!
Zynga should expand its business to Asia market, especially China
PARTNERSHIP WITH RENREN
Benefits Costs
China Internet growth Cultural difference
• Increasing Internet usage & online game market • Cultural discount for non-casual games
• Increasing spend on gaming industry • Language barrier
• Growth in mobile Internet users • Adaptation on various Chinese App-stores
Future prospect Regulation issue
• China‟s population is over 1.3 billion, the largest in the • Anti-addiction or fatigue system government program
world • Low intellectual property right enforcement
Lock-in Effect High competition
• Social games with social networking service can grab • Native-China companies & big foreign companies
the users consistently
Competition
Tencent‟s QQ game portal, Shanda, Netease, The9, ChangYou, Weibo Games, Rovio
15. Alt2: Farm! New Education Ville!
Zynga should develop & publish social educational games
Strategy
Characteristics Of Zynga games
B2B PARTNERSHIP WITH AMAZON • Social
• Games with friends
• Bundle Zynga games with Digital Textbooks
• Educational
• Using educational characteristics of Zynga • Construction and Management Simulation
games, cooperate with Amazon and plant Zynga‟s (Farmville, CityVille)
games on Digital Textbooks or service them through • Mathematic Puzzle
Digital Textbook platform „Whispercast‟ (Drop7)
• Linguistic Puzzle
(Words with Friends)
Backgrounds of Digital Textbooks
• Estimated revenues of Digital Textbooks: $1.1 billion
by 2014, $2.5 billion by 2017
• The number of US students under 18: 55 million
• Government policy: Bring digital textbooks to all US
students by 2017
• Main participants of device and platform:
Apple, Amazon
16. Alt2: Farm! New Education Ville!
Zynga should develop & publish social educational games
B2B PARTNERSHIP WITH AMAZON
Benefits Costs
Take advantages of characteristics High development cost
• Using social interaction from all around the world users • Modify existing games to educational games
to classmates
• Develop more various types of games
• Utilizing the educational aspects of games
• Adopting window effects
Company brand image
Follow changes of environment
• Improve company image to become education-friendly
• Proliferation of Digital Textbooks
• US government announced to bring digital textbooks to
all US students by 2017 and Amazon launched Competitive advantage
„Whispercast‟ as a platform. • Amazon is less competitive than Apple in digital
Get stable revenue stream textbook market
• Hardly changeable curriculums
Take Prior occupation of the Market
• Target the new market of digital textbooks and new
industry of gamification
Competition
Apple‟s iBooks textbooks for iPad
17. Alt3: Farm! New Monetization Ville!
Zynga should enhance its business in mobile platform
• Sales of Smartphones overtake those of PCs since 2011.
• More Facebook users connect the service via the mobile. However, FB doesn‟t provide mobile game platform and
Zynga‟s high reliance on FB may affect its growth negatively.
• In mobile area, freemium (in-app-purchase) model is growing fast.
!
Strategy
ACQUISITION OF WHATSAPP
• Zynga can secure additional revenue stream in mobile gaming area
through WhatsApp.
• Mobile is the most fast growing and WhatsApp is the largest Mobile
Messaging Service.
What about WhatsApp?
• World largest Social Network Messaging service with over 300M Src:Gartner,2012
active users
• However, revenue model is limited to subscription ($0.99/year with 1
year free, other OS) and pay-per-download($0.99, iOS) for
messaging App
• Recently they announce that WhatsApp for iOS will change to
subscription with 1 year free for improving their revenue stream
• Many competitors with other values are existing:
Vibe, LINE, Facebook Messenger, MessageMe, KakaoTalk
18. Alt3: Farm! New Monetization Ville!
Zynga should enhance its business in mobile platform
ACQUISITION OF WHATSAPP
Benefits Costs
Zynga’s game is well matched with Mobile WhatsApp has been focusing only on messaging
• Zynga‟s specialty is casual and social games which are service
popular game genre for mobile
• Currently WhatsApp want to keep their service simple
• Zynga already launched several popular games and
and clean
they can re-utilize for converting to new mobile platform
• WhatsApp API which is necessary for developing
WhatsApp is the largest mobile messaging
games for WhatsApp Platform are not ready
• Zynga can secure a number of gamers in a short period
of time through the WhatsApp users
Freemium gaming market is growing fast WhatsApp may be overvalued
• Freemium game and In-app purchase revenue • Many companies, except Zynga, have eyes on
generating (39% 65%, AppStore) WhatsApp
• Zynga‟s games are basically free-to-play and in-app-
purchase model. So they don‟t have to change their
No Killer contents for mobile, Zynga may need
revenue model
new promotion and marketing investment
Zynga can get a game promoting tool and can give
networking tool for users
Competition
KakaoTalk, LINE Messenger
20. Recommendation:
Farm! New Location Ville!
Zynga should expand its business to Asia market, especially China
• Asia is the largest video game market at $24 bn. in 2011, and projected to grow 10.3% on CAGR to $40 bn. in 2016.
• Three of the top four video game markets in the world are in Asia: China, Japan, Korea.
• Online & wireless games, which are part of Zynga‟s core competences, contributes a larger share of total spending in
Asia than in other regions.
• Partnership with RENREN will give Zynga new large user base as well as new revenue source from China market.
Competitive Analysis Alt 1 Alt 2 Alt 3 Number of Users
Number of Users H ML MH
Brand Profit Margin per
Profit Margin per User ML MH M
Awareness User
Game Quality M MH M
Cost Efficiency H MH M
Brand Awareness MH ML H
Cost Efficiency Game Quality
Avg. Score (L=1, ML=2, M=3, MH=4, H=5) 3.8 3.2 3.6
Alt-1 Alt-2 Alt-3
Quantitative Analysis Qualitative Analysis Future Consideration
Zynga will have > 162 million NEW Partnership with Renren is the most • Partnership or acquisitions of
potential users efficient alternative in term of local game companies
development since it can be started
40 million (est. active users) * $10 soon by just forking and translating • Localized version of Zynga game
(avg. revenue per user) * 0.7 existing games. portal: zynga.cn
(sharing) = $280 million