Who's afraid of the big, bad Zynga
Creative differences
Let's start with one big warning sign my colleagues point to as evidence of the Zynga tide sweeping over the MMO landscape: subscriber losses in flagship MMOs. Activision's World of Warcraft has lost nearly two million subscribers since its pre-Cataclysm peak, and EA's highly anticipated Star Wars game is already enduring major subscriber losses less than half a year after the game's release. On the other hand, Zynga's user base continues to grow. While the Star Wars subscriber losses might be partly attributable to WoW's dominance, I don't think Zynga had anything to do with either game losing steam.
Consider the following: Let's say you enjoy watching the HBO series Game of Thrones. You get your fix in hour-long blocks throughout the year and pay a monthly subscription fee to do so. You might also go see Disney's
A serious gamer probably doesn't have time to play both WoW and The Old Republic, as MMOs can be quite time-consuming. Think of WoW (or The Old Republic) as your Game of Thrones fix, a recurring swords-and-sorcery epic that's worth a bit extra to get a richer experience on a regular basis. Serious MMO players can still step back and enjoy a blockbuster title, something like EA's Mass Effect or Ubisoft's Assassin's Creed. These are story-driven games that you can finish decisively in a relatively short period of time. And then there's Zynga, the YouTube cat video of digital gaming.
Casually explosive
EA competes with Zynga when it comes to Facebook titles like The Sims Social, or in mobile games by its PopCap or PlayFish subsidiaries. But these small-scale games appeal to different gamers than those who enjoy serious MMOs like The Old Republic, as a McKinsey survey found. "Players of casual games," the study says, "skew older (nearly half are 35+ years old, versus 31 percent for MMO) and female (54 percent versus 34 percent for MMO)." The survey also noted marked upticks in mobile gaming and casual social gaming since 2008 to go along with slight MMO user declines, but a critical disclaimer is missing: Both mobile games and casual social games have come a long way since then.
In late 2008, the top Facebook game by monthly active users (MAUs) was Lil Green Patch, one of the last non-Zynga games to top the charts. It had just over 6 million MAUs. Zynga's top title, Texas HoldEm Poker, had about 5.2 million MAUs, and no other Zynga title had more than 2 million MAUs. The most recent top Facebook games list is dominated by Zynga titles. Its leader, CityVille, has about 41 million MAUs, and the company controls the top five spots. Those five games together draw 151 million MAUs, which is more than were playing every single Facebook game back in 2008. Heck, CityVille alone now has about as many users as were playing the top 20 Facebook games of late 2008. As for mobile games, I shouldn't have to tell you what happened in 2007 that really helped that segment take off. Hint: It starts with an "i" and ends in "Phone."
Same Olympics, different events
With that kind of fast-growing competition, you'd think Activision and EA would be in rapid decline, but that's not the case. Revenues for both companies are mostly flat since 2008, and earnings have actually improved:
ATVI Revenues TTM data by YCharts
Activision's stemmed its WoW subscriber decline with sales-record-breaking releases from its Call of Duty and Starcraft franchises, as well as a growing variety of in-game items for WoW players to buy with real money. EA's expansion into mobile and social games may have helped its return to profitability, but the company has long been known for its huge and expanding stable of games.
Why are WoW's subscribers declining? Let's try a really obvious answer that has nothing to do with Zynga or EA. The game is almost eight years old. Its designers have done a fantastic job at innovating atop a really, really old game engine by industry standards, and there are certainly positive network effects to having the world's most popular MMO, but it takes most people less time to graduate college than some have spent slaying dragons in Azeroth.
Why has The Old Republic's subscriber numbers dropped so quickly? According to EA's latest conference call, many of those leaving were "casual and trial players" that might not have expected MMO-style gameplay from a Star Wars title. The remaining 1.3 million active subscribers, less than half a year from launch, are actually more than WoW had at a similar point in its history. However, time will tell if The Old Republic's number grows or shrinks.
Foolish final thoughts
Until Zynga's games graduate from "occasional time-waster" to "immersive experience" it makes no sense to place them on the same competitive footing as Activision or EA's top-shelf titles. Those companies have tremendous competition from other top-tier titles, and the nature of this gaming segment has taken on shades of the film industry, which sees a few blockbuster releases each year carrying its studios forward. One analyst pegged The Old Republic's cost to EA at $80 million, a level of upfront expense you're not likely to see from Zynga on its next Something-Ville game.
However, that doesn't mean that EA or Activision represent better long-term investments than Zynga. Neither company is as diversified as the big studios their businesses resemble. Disney, for example, quickly papered over their John Carter failure with The Avengers' tremendous success, but the House of Mouse also has several popular television brands, a cruise line, theme parks, and a massive merchandise empire. If the next Call of Duty fails, Activision has little to fall back on besides its Blizzard-branded titles.
That lack of diversification can go a long way toward explaining why most game stocks should be avoided -- investors remain at the mercy of big gambles on fickle consumers, no matter what design direction a company chooses to take. That's why I'd rather be invested in a company that powers the trillion-dollar revolution that's brought games to the masses like never before. Find out more about the stock that benefits from every game maker's efforts in our free report. Click here to claim your copy now.
