It always looked like a desperate move to me. When online gaming pro Zynga (NASDAQ: ZNGA ) decided online gambling was a better bet, I thought it was more of a roll of the dice, a gambler betting the month's rent at the tables to be able to pay his other bills. Monday's news that Zynga was gutting its employee rolls by nearly 20% shows me it's on its way out.
The game maker was always too reliant upon Facebook for its survival, and having to transition away from that platform to live on its own meant it needed to come up with new ways to make money. I've also never been much of a fan of the "freemium" business model, either, and the failure of Glu Mobile (NASDAQ: GLUU ) to get the "free to play, pay to play more" model to work suggests there's a lot of resistance among gamers to being nickel-and-dimed to death.
Of course, Electronic Arts (NASDAQ: EA ) is one that thinks the free-to-play model is the future in gaming and it has no plans to introduce anything but that this year. It points to its Real Racing 3 game as proof that's what the market wants and as a result doesn't plan on offering any premium games in 2013.
Still, there's intense competition in the field, and gamers can blithely move from one game to the next. It takes a special kind of game experience to create loyalty and developers are constantly having to come up with new games just to keep player interest high while at the same time hoping to hit the next big one. There's a reason Glu is also jumping into the netherworld of online gambling, and I'm betting it's going to have just as much success.
Zynga said it expects to report a second quarter net loss of between $28.5 million and $39 million, and it hopes that by kneecapping its workforce it will save between $70 million and $80 million annually, pre-tax. Beyond FarmVille, its games business is underperforming and bookings will come at the bottom end of its guidance.
The hope now is that it can string itself along long enough to have its online gambling partnership with Bwin.party kick in and the high-rollers will save it. That's a risky bet, to say the least.
Competition will be even more fierce than it is in the gaming market, and it will be going up against bigger, more established players in the space. Caesars Entertainment, for example, already owns the World Series of Poker, operates 37 casinos globally, and anticipates having a big online gambling presence. Also, because online gambling will be tightly regulated, the nuances of the market will be more difficult to navigate.
Can Zynga, which has failed to successfully sail through the more timid waters of online gaming, now transform itself into a gambling powerhouse? Odds are that it won't, and this desperate makeover will leave investors who went all-in on the change regretting their decision to let it ride.
Zynga's post-IPO performance has been dreadful, and investors are beginning to wonder if it's "game over" for this newly public company. Being so closely tied to the world's largest social network can be a blessing and a curse. You can learn everything you need to know about Zynga and whether it's a buy or a sell in our premium research report. Don't even think about picking up shares before you read what our top analysts have to say about Zynga. Click here to access your copy.