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Zynga Needs This Big Gamble

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Zynga (NASDAQ: ZNGA  ) shares fell over 14% this month following warnings about the forthcoming fourth quarter earnings report. The social gaming company has hit a number of obstacles in its post-IPO launch that have included problems monetizing, an over reliance on Facebook, and an overpriced acquisition. And the company still faces stiff competition from gaming companies including King and Electronic Arts (NASDAQ: EA  ) . But there's a short-term risk that Zynga could pursue for long-term results: focus more on gambling games. 

And Zynga's future strength could ride on replicating the success of a game that launched seven years ago. 

Betting on Poker
Zynga Poker
 accounted for 19% of Zynga's online game revenue in the third quarter, which makes Poker Zynga's most financially successful game after Farmville 2. Poker also stands toe-to-toe with Farmville 2 and other newer releases with about 10 million MAU. 

What's the secret behind Poker's success? The answer has proven harder than churning out more gambling games. In the past year, Zynga has shuttered its slots games Slingo and Mobile Slots so not all gambling titles were created equal.  

What makes Poker different? It could boil down to a combination of poker's ongoing popularity and the game's relatively unobtrusive design. 

Free-to-play gaming companies make most of their money through in-game transactions with a dash of advertising revenue on the side. So the game designs have increasingly morphed around the purpose of microtransactions. Game progression tends to hit a wall soon after starting unless the player asks for help from friends or ponies up some real world money for special privileges. Need an example? Compare the gameplay of King's Candy Crush Saga to that of Bejeweled, a similar predecessor from Electronic Arts that isn't a free-to-play game. Both games have short bursts of levels, but Candy Crush has a hyperactive insistence in reminding players of the social nature of the game.  

Zynga Poker has the incentives to ask for help from friends and offers its own microtransactions, but the process is much less obtrusive than in Candy Crush or even Farmville. It's a poker game accented with microtransactions, not a microtransaction designed as a game. 

Creating more games that can hold player attention for longer period of times could also help improve the company's key metric. 

Improving the key metric 
Zynga's reliance on in-game purchases makes the average bookings per daily user, or ABPU, a key metric for the company's overall health. And ABPU has shown improvements over the past few quarters. 

Source: Company filings 

But DAU has slipped as ABPU has improved. So players have shown a willingness to spend more money in-game but the current batch of titles aren't doing a great job at user retention. Designing more games that connect with users on a long-term basis would help stabilize that DAU metric.  

Real money gambling potential?
Focusing on Poker siblings also leans toward real money gaming, or RMG, which many hoped Zynga would focus on if legislation allowed. But RMG games haven't worked out the way Zynga had hoped so far and the company might end up ditching the idea altogether. 

In the second quarter of last year, Zynga launched two RMG titles in the United Kingdom: ZyngaPlusPoker and ZyngaPlusCasino. But the third quarter report included a mention that the company was evaluating whether to continue with those projects. And the company also withdrew its application to the Nevada Gaming Council last summer and has no plans to refile.  

The lack of RMG titles coming to save the day makes it even more clear that Zynga should focus on creating more casino-style games involving microtransactions. It's a different, simpler way to skin the same cat.  

What to watch in the fourth quarter
Zynga's scheduled to report fourth quarter results on Feb. 6. The company forecasted revenue between $175 million-$185 million and loss per share of $0.04-$0.03. Analysts estimate $186 million in revenue and a loss per share of $0.04. But it's important to watch those DAU and ABPU numbers to see whether they continue the current trends. 

The main disadvantage Zynga has against its publicly traded gaming competition is size. Electronic Arts has a social gaming presence but most of the company's revenue comes from traditional video games. Electronic Arts will report its third quarter results tomorrow and analysts expect revenue of $1.7 billion and EPS of $1.24.

Foolish final thoughts
Zynga Poker
excels largely due to its unobtrusive nature and the fact that the microtransactions compliment gameplay, not vice versa. The company should develop more games with that framework in mind to compliment the microtransaction-driven, short-term blockbuster games that can't sustain DAU levels over time. 

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 29, 2014, at 4:19 AM, benh57 wrote:

    The rise in ABPU with a concurrent drop in DAU does not necessarily mean users are spending more. It can also mean that the non-payers are leaving, which is bringing up the average bookings per user.

    This would make sense, if you understand zynga games. Once you've paid, you're much less likely to leave.

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Brandy Betz

Brandy Betz has written for The Motley Fool since 2011 and primarily covers health care, ETFs, and dividend stocks. You can follow her on Twitter @BrandyBetz.

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