Zynga (NASDAQ:ZNGA), the games company that went from Internet darling to cautionary tale, has stabilized and is now making strong moves to, if not break away from Facebook (NASDAQ:FB), at least be less reliant on the social media site. The company, which saw founder Mark Pincus hand over the CEO chair to Microsoft xBox chief Don Matttrick after his own failures to move into mobile, has purchased mobile game and technology developer NaturalMotion for around $500 million.
NaturalMotion, which makes the popular Clumsy Ninja, as well as the CSR Racing Series, not only brings more hit properties to the Zynga fold, it also gives the company hits that are stand-alone games not in any way reliant on Facebook.
Zynga grew its business with games including Words with Friends and Farmville that are played inside Facebook. Revenue for those games faltered as Facebook's customers have left its website for its mobile products. In its 2013 year-end results. Facebook reported that it had 556 million mobile daily active users on average for December 2013, almost as many as the 757 million daily active users on its website.
This movement of users away from the Facebook website into its mobile platforms coincided with Zynga's business collapsing, leading to layoffs involving more than 500 employees and the company's Boston, New York, Los Angeles, and Dallas offices being shuttered. "The scale that served us so well in building and delivering the leading social gaming service on the web is now making it hard to successfully lead across mobile and multi-platform, which is where social games are going to be played," then-CEO Pincus said in a June 2013 statement.
At the time, the company reported losses in the range of $28.5 million to $39 million.
Time to be more than stable
Since those layoffs and losses, Zynga brought in Mattrick and largely stabilized its business. In the fourth quarter of 2013, the company reported $147 million in revenue and adjusted EBITDA of $3 million. Zynga also announced plans for a 15% global workforce reduction and an expanded cost savings plan expected to generate approximately $33 million to $35 million in pre-tax savings for 2014. Cost saving and small profits might be better than a large loss, but they highlight that stability is doing nothing to move the company away from its reliance on Facebook.
The acquisition of NaturalMotion is a half-billion-dollar step toward declaring Zynga's independence.
Can it work?
Video game companies have historically not done well with platform transitions. Early leader Atari faltered in following up its 2600 game system. The same happened with Sega after it failed to transition away from the Genesis. So far Sony and Microsoft have escaped that fate with xBox and PlayStation, but neither is solely (or even primarily) a video game company. Even the once-mighty Nintendo, which had successfully moved from its early generation consoles to Wii, has faltered with its new WiiU.
Still, Zynga has stabilized its business model and Mattrick, with his background at Xbox, seems well-positioned to help the company leverage not just NaturalMotion's games, but also the underlying technology it creates for them (which can be licensed to other game creators).
"NaturalMotion expands Zynga's creative pipeline, accelerates our mobile growth, and brings next-generation technology and tools to Zynga that will fast-track our ability to deliver consumers more hit games," Mattrick wrote on Zynga's blog. "Over the last 10 years, [NatrualMotion's leaders] have proven their ability to blend their breakthrough technologies like Euphoria, with high-fidelity animation, to create delightful mobile hits. Combining NaturalMotion's strengths with Zynga's ability to develop breakthrough social features while sustaining live games over time, offers us a huge opportunity to redefine the gaming industry and deliver consumers blockbuster entertainment experiences."
Is it worth it?
A joint market analysis by mobile games marketing platform AppLift and global games market research firm Newzoo, released in October 2013, predicts the global mobile games market will grow 27.3% annually to double in 2016 and reach $23.9 billion. This growth is fueled by an increase in the number of players, as well as a higher average spend per paying mobile gamer.
If those numbers pan out, it bodes well for Zynga's ability to reinvent itself powered by its new acquisition. Even if Facebook revenues decline, or somehow Facebook kicks Zynga off its platform, an exploding appetite for mobile games -- an area that NaturalMotion is already very successful in -- should leave Zynga with room to grow.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.