Zynga (NASDAQ:ZNGA) almost followed the path of so many other Internet companies -- huge success quickly then almost burning out entirely when it could not sustain its initial growth. Now the company has a new CEO and a bold plan to break away from its reliance upon Facebook (NASDAQ:FB).
The company has launched FarmVille 2: Country Escape for Apple's (NASDAQ: AAPL) iPhone and iPad and Google's (NASDAQ: GOOG) Play store -- a move that's part of new CEO Don Mattrick's strategy to untangle the company from Facebook. The move is not without risks, but being totally dependent upon Facebook to bring it an audience led to huge losses and founder and one-time CEO Mark Pincus being forced out.
It's probably fair to say that Mattrick's success or failure as CEO will be determined by Zynga's ability to bring users to its apps. The original FarmVille has been played by over 400 million people so the potential audience is huge. But it remains to be seen whether part of the draw in playing was how integrated it was with Facebook, which players were visiting anyway.
The new game can also be played on Facebook and interaction between the mobile/app version of the game and the Facebook version is being offered.
"FarmVille pioneered social gaming on the web, and with FarmVille 2: Country Escape we've reimagined the franchise as a mobile experience to match how players want to connect with their farm and with their friends," said Jonathan Knight, vice president of games at Zynga. "The foundation of the mobile game was built on listening to player feedback, so we've added features such as giving players the choice to play with friends or on their own, connectivity between the mobile game and FarmVille 2 on Facebook, and the ability to play offline."
Things started really well for Zynga
The Facebook arrangement made sense at first, but not also pursuing an aggressive stand-alone strategy led to Pincus being ousted and almost led to the death of the company.
"Because they were attached to Facebook, they had almost that built-in growth right there on their doorstep," Gartner analyst Brian Blau told USA Today. "They just had to take advantage of it."
Pincus took advantage of it but he did not see the deal for what it was -- basing a business model on access to digital real estate somebody else controlled. Zynga had strong early success but it was always vulnerable to Facebook making changes and the company not having its own pipeline to users.
Things turned ugly for Zynga pretty quickly
ARSTechnica.com looked at the company's wild history in September 2013 detailing its initial Facebook-driven surge followed by the comedown that led to Pincus being shown the door. In 2010 the company turned profit of $90.5 million, but that is the the only year it made any money. Zynga has racked up nearly $600 million in losses since 2008.
Part of that can be blamed be blamed on Pincus not having the long-range vision to see why developing apps and a stand-alone portal of its own; one of Mattrick's first moves was building out Zynga.com into a proper portal.
In the early days Facebook was good for Zynga and Zynga was good for Facebook. In February 2010, Facebook introduced Facebook Credits, a micropayment system that could be used to buy in-game items, of which Facebook took a 30% cut. Zynga pushed a lot of users into using Facebook credits and for a time the gaming company was responsible for a significant portion of the social media company's revenues.
The whole deal worked however because Zynga's messages -- those annoying requests from friends to buy/do things in various Zynga games -- were given the same priority as any other Facebook message, according to ARS Technica. When Facebook changed its policy in March 2010, making Zynga's messages lower priority, traffic to the company's games fell with FarmVille play dropping by 26% to 61 million monthly users, according to AppData.
It was a nice ride while it lasted but Pincus -- who was a genius to spot the opportunity offered by Facebook -- did not see that it wouldn't last forever.
Mattrick may be fixing things
Zynga had lower revenues in 2013 ($873 million) versus nearly $1.3 billion in 2012, but the company had a smaller loss of $36.9 million in 2013 versus $209 million in 2012. The company also announced plans to save $33 million to $35 million in 2014. That plan includes eliminating the jobs of 314 employees or approximately 15% of its current workforce, and implement additional cost reduction measures, including lowering its spend on datacenter infrastructure.
Mattrick expressed optimism in the company's press release announcing its fourth-quarter and full-year results that better things are ahead.
"We finished 2013 in a strong position and expect 2014 to be a growth year," he said.
Whether that happens likely depends heavily on whether Zynga's users are willing to download the company's new app and ones that come after it.
A bold plan for Zynga
Mattrick is making the changes that need to be made while cutting expenses to give the company more runway. What remains to be seen is if the company's user base is loyal enough to its games to follow them off of Facebook. Games can be fads and having previous hits does not guarantee future success.
Part of the appeal of the Zynga titles was their integration with Facebook. While that gameplay option still exists, it's not where the company wants its user base. To prosper Zynga has to prove that it can compete in the very crowded app space. Still Mattrick really had no choice -- Facebook needs Zynga less each and every day. In fact you could argue that Facebook doesn't need the games company at all anymore.
Building out apps and the Zynga.com portal was really the only direction possible aside from slashing costs to the bone and attempting to wring every last dime out of the Facebook platform while the company's games slowly (or maybe not so slowly) faded into irrelevancy.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, and Google-Class C Shares. The Motley Fool owns shares of Apple, Facebook, and Google-Class C Shares. 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.