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Yesterday, Zynga (Nasdaq: ZNGA ) shares traded up in anticipation of its "Zynga Unleashed" event, where it announced several new games and strategies. After the event, shares closed the day down 5%. There could not have been a better example of what supports Zynga's price: pure hype.
Unfortunately for shareholders, the market's hype was all used up for Facebook's (Nasdaq: FB ) IPO.
A popularity game
When discussing Zynga and Facebook's insane valuations, I wrote that "Zynga, like a teenager, craves popularity and needs it to survive." It tried to buy this popularity when it purchased game developer OMGPOP in March for its hit game Draw Something, which had 15 million daily active users. Today, Draw Something has less than 5 million daily active users, according to AppData. It seems that buying popularity did not work for Zynga.
For a broader look at Zynga's social standing, it gained about 5.7 million monthly active users since the beginning of June, for a total of 253 million. The scary part for Zynga? One game, Bubble Safari, that was released May 9, added more than 23 million monthly active users to June's total -- so without this new release that is at the height of its popularity, Zynga would have lost more than 17 million monthly active users -- a theoretical decline of about 7%. Even scarier? Daily active users for Bubble Safari topped out at 7.4 million last week and saw its first decline on Monday.
Time for more hype
With its recent hit game showing some user fatigue, Zynga showed off four new games yesterday. And while it's a roll of the dice as to whether any of the games will be hits, it seems likely that no matter how popular they become, they'll begin to bleed users as they lose that new-game shimmer. After that, new games must be rolled out to further bolster its user base in a never-ending battle with popularity.
Traditional companies must also roll out new products and services to stay relevant -- the difference is that Zynga must constantly push out new titles because its games have such a short shelf life. And for the past month, Zynga has demonstrated that it can only maintain, and not grow, its user base.
So if purchasing popular games like Draw Something doesn't work, and Zynga can't pump out enough games itself, how does it expect to grow its user base?
Third-party Hail Mary
Zynga hopes to grow by allowing other game developers to leverage its network and release Zynga Partner games. Just as Zynga used Facebook's platform to reach users, Zynga hopes other developers will use its platform to reach mobile and Web users. The problem is, a developer could just use the already-in-place networks of Apple's (Nasdaq: AAPL ) App Store, Google's (Nasdaq: GOOG ) Play market, or Microsoft's (Nasdaq: MSFT ) Windows Phone Marketplace.
While Zynga realizes the power of being a platform, and that it needs the support of outside developers, the platforms are unfortunately already in place. Game developers don't need another middleman scraping off a percentage of their revenue. As it stands, the current app marketplaces I mentioned take 30% of a developer's revenue. And, of the 106 million smartphone owners in the U.S. according to comScore, 51% used Google's Android, 30% used Apple's iOS, and about 4% used Microsoft's Windows Phone. This shows that tens of millions of mobile users are accessible to developers without Zynga's help, not to mention Facebook's 900 million users on the Web. To me, any attempt by Zynga to sign on outside developers is like building a dirt road when there's already a paved one.
Prove me wrong
For Zynga employees and investors, I hope the business can succeed. But the way the business model currently operates, I don't see much hope in the future of a continuous string of one-hit-wonder games. There are plenty of better investing options than Zynga to reap returns from trends in social media and technology.
For an example of such a company, read our free report: "Forget Facebook -- Here's the Tech IPO You Should Be Buying." This report highlights a social-media company that doesn't heavily depend on advertising revenue, and best of all, the report is free.